FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
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
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
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to the Form 10-K. [ ]
The aggregate market value of voting Common Stock held by
nonaffiliates of the registrant was $62,252,000 based on the closing price of
the Common Stock as reported by the American Stock Exchange on June 25, 1997.
The number of shares issued of the registrant's class of Common
Stock as of June 25, 1997 was 8,600,741 which includes 158,661 shares held in
treasury.
Documents incorporated by reference: Annual Report to Stockholders
for the year ended March 31, 1997--Part II; Proxy Statement for the 1997 Annual
Meeting of Stockholders--Part III.
<PAGE>
PART I
Item 1. BUSINESS
The Company
General
PolyMedica Industries, Inc. (the "Company") is a leading provider of
diabetes, compliance, and urological targeted medical products and services.
The Company's products and services are grouped within the following
businesses: Diabetes Supplies; Consumer Healthcare, which includes OTC
("over-the-counter") Medical Devices and Urinary Discomfort Products; and
Professional Products, which includes Prescription Urologicals and Dressings.
I. Diabetes Supplies
The Company entered the Diabetes Supplies business with its August 1996
acquisition of Liberty Medical Supply, Inc. ("Liberty Medical"). Liberty Medical
is among the largest patient-focused, direct-mail providers of diabetes supplies
to senior citizens covered by Medicare. It serves more than 30,000 patients
throughout the United States.
Liberty Medical is headquartered in Palm City, Florida and was founded
in 1989. Liberty Medical is a participating Medicare provider which directly
bills and is paid by Medicare and/or the patient's Medi-Gap insurer, rather than
the patient. This procedure benefits the patient by assuring automatic and
timely delivery of supplies, while avoiding the need for the patient to prepare
paperwork and pay the cost of the supplies while awaiting subsequent
reimbursement.
Approximately 16 million people, or roughly 6% of the total United
States population, are afflicted with diabetes, with about half of them having
actually been diagnosed. Approximately 1.2 million of these patients fall
within Liberty Medical's target market of senior citizens using insulin and
eligible for Medicare. This patient population is growing rapidly, with more
than 650,000 new cases diagnosed each year. Diabetes is a chronic disease in
which the body's metabolism of glucose is ineffective due to inadequate
production of insulin. Frequent monitoring of blood glucose has been documented
as an important part of managing diabetes to help avoid serious medical
complications, such as coronary artery disease, glaucoma, and circulatory
problems which can lead to limb amputation. The cost to manage diabetes is
high; the average person with diabetes spends $1,200 per year on supplies to
test and control the disease.
In addition to the above market, the Company believes that there is
significant growth potential for Liberty Medical's products if the
reimbursement market expands to include people with diabetes who are non-insulin
- -dependent. There are current proposals in Congress to people with diabetes who
are non-insulin-using under Medicare following a Congressional Budget
Office study indicating that improving diabetes coverage in this manner would
reduce Medicare expenditures. This change could add an estimated 2 million
patients who would qualify to use Liberty Medical's direct-mail system.
II. Consumer Healthcare
The Consumer Healthcare division includes OTC Medical Devices and
Urinary Discomfort Products. OTC Medical Devices include products holding the
number one private-label market position in digital thermometry and number two
overall market position. These products are sold through an extensive network
to major retailers, including most of the largest drug store chains and mass
merchandisers. Digital thermometry continues to be a growth category through
customer expansion and new product introduction.
1
<PAGE>
Urinary Discomfort Products for women include AZO-STANDARD(R), which is
currently the number one selling product in a growing market segment.
III. Professional Products
Professional Products include Prescription Urologicals and Dressings.
Prescription Urologicals include a stable line of branded products such as
URISED(R), CYSTOSPAZ(R), ANESTACON(R) and a line of suppositories. Dressings
include MITRAFLEX(R) and SPYROFLEX(R) advanced wound care products sold in the
professional and OTC markets.
Proposed Sale of Wound Care Business
The Company has experienced recent decreases in institutional wound
dressing sales, due in part to changes in product mix, new competition and
reimbursement guidelines for chronic wounds which have resulted in a switch
by healthcare providers to more frequent and less costly dressing changes
using low technology textile dressings (i.e., gauze and other cotton products).
In June 1997, the Company and PolyMedica Industries UK, Ltd, a
wholly-owned subsidiary of the Company, reported that they had entered into a
definitive Asset Purchase Agreement (the "Agreement") with Innovative
Technologies Group Plc, a United Kingdom public company ("IT") and certain
subsidiaries of IT, relating to the sale of the Company's institutional wound
care business (the "Business"). Pursuant to the Agreement, IT will purchase
certain assets from the Company for consideration consisting of (i) $9 million
in cash, (ii) a $4 million promissory note and (iii) up to $4.5 million of
additional contingent consideration. The closing of transactions contemplated by
the Agreement is contingent upon the approval of the shareholders of IT and
other customary conditions to closing.
Spinoff of CardioTech International, Inc. to the Company Shareholders
In May 1996, the Company's Board of Directors declared a stock dividend
for the purpose of making a distribution (the "Distribution") to the Company's
shareholders of all the outstanding shares held by the Company in CardioTech
International, Inc. ("CardioTech"), a former subsidiary of the Company. The
Company believes that the Distribution qualified as a "tax-free" spinoff under
Section 355 of the Internal Revenue Code of 1986, as amended. CardioTech
develops, manufactures and markets polymer products and technologies with
particular emphasis on the development of implantable synthetic grafts for a
broad variety of applications, including vascular access grafts, peripheral
grafts and coronary artery bypass grafts. Certain other technology of the
biomaterials business was retained by the Company.
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 fiscal
1996 and all previous periods presented. Net sales, operating expenses, and
other income and expense have been reclassified for amounts associated with
CardioTech's discontinued operations.
2
<PAGE>
Business Strategies
Expand leadership position in providing diabetic supplies to senior
citizens. Since the August 1996 acquisition of Liberty Medical, the Company has
begun its investment in ongoing television advertising to reach the diabetes
patient market. The Company believes that this has resulted in a significant
sales gain as Liberty Medical has shipped products to a large number of new
patients. The Company continues to seek opportunities to deliver new products
to a broader customer base by leveraging its efficient, mail-order distribution
system and software for billing and customer monitoring. To manage its growth
effectively, Liberty Medical continues to expand, upgrade and develop its
operations and information systems to continue its high level of customer
service.
Significantly grow the consumer healthcare business. Fueled by the
growth in demand for the Company's urinary discomfort products, as well as
by the strength of sales of the Company's digital thermometers, the consumer
healthcare division achieved a record level of sales in fiscal 1997. Accelerated
growth in the consumer healthcare market is a key strategic objective as the
Company seeks to leverage leading positions in its core markets of urinary
discomfort, digital thermometry and medication compliance products. Increased
investments in advertising and new product programs have been put in place to
drive growth in this area.
Acquire complementary businesses. In order to take advantage of
economies of scale in production and marketing, the Company seeks to continue to
acquire businesses and products which complement the Company's existing product
lines. In selecting and evaluating acquisition candidates, the Company examines
the potential market opportunities for products that can be distributed through
the Company's existing marketing infrastructure by utilizing its strengths in
sales, marketing, distribution and marketing.
Existing Products and Services
Diabetes Supplies. Liberty Medical ships to more than 30,000 customers
in the U.S., making it one of the largest diabetic suppliers in the country. It
is estimated that 150,000 patients currently receive supplies from mail-order
companies similar to Liberty Medical. Liberty Medical sells more than 200
major brands products supplied by Lifescan, Boehringer Mannheim, Bayer and
others which address a potential market of more than 1.2 million Medicare-
eligible seniors with diabetes. These products include glucose test strips and
monitors, lancets, insulin, syringes and other products. Sales of glucose test
strips represented 24.0% of the Company's consolidated revenues for the fiscal
year ended March 31, 1997.
Consumer Healthcare Products. The Company's consumer healthcare
products include thermometers and pediatric products, and are marketed in
conjunction with a line of non-prescription urological drugs. The Company sells
digital, basal and glass thermometers and 40 other home-use diagnostic and
compliance products. The Company custom manufactures and/or distributes its
other consumer healthcare products under the brand names of BASIS, MEDI-AID, and
PeeDee Dose.
The Company's principal non-prescription urological product is
AZO-STANDARD. In fiscal 1995, the Company introduced into the retail market,
AZO-CRANBERRY, an internally developed dietary supplement used for urinary tract
discomfort. This is the first expansion of the AZO-STANDARD family of products.
3
<PAGE>
Items in the Company's consumer healthcare product line are either
manufactured by the Company or by others to the Company's specifications or are
purchased by the Company for resale. In addition, the Company provides private
label products for many national retailers. The Company's major customers in the
United States include most of the top pharmacy chains, major supermarkets and
mass merchandisers, including CVS, Eckerd, Rite-Aid and Walgreen Co. as well as
the four largest drug wholesalers. The Company's consumer products are sold in
retail pharmacies in the beauty aid, cough and cold, baby and incontinence skin
care sections.
The Company markets a line of thermometers which includes products with
traditional mercury and digital displays. Sales of the Company's glass and
digital thermometers, both branded and private label represented 12.6%, 14.9%,
and 12.2% of the Company's consolidated revenues for the fiscal years ended
March 31, 1995, 1996 and 1997, respectively. The Company has the number one
private-label market thermometer position and number two overall market
position.
Professional Products. The Company also offers a family of
prescription products designed to treat urinary tract discomfort by
relieving pain, burning and a feeling of urgency. The Company's prescription
pharmaceuticals include analgesics, antispasmodics and antiseptics primarily
used to treat urinary tract discomfort and relieve the associated symptoms. The
Company's prescription-branded drugs include URISED, CYSTOSPAZ, ANESTACON and
B&O SUPPRETTES. The Company's retail distribution network includes the four
largest drug wholesalers in the United States.
MITRAFLEX and SPYROFLEX both provide a moist microenvironment for
healing through their moisture vapor transport capability and absorb varying
types and amounts of exudate. The Company believes that these products reduce
the formation of scabs and resultant scarring, provide a barrier against
bacteria, speed healing, reduce pain and are easy to apply and remove, and that
these attributes are beneficial to patients and attractive to healthcare
providers. As described above, the Company has signed an agreement to sell its
institutional wound care business of which these products are a part.
ChronoSphere. The Company's ChronoSphere products are microparticulate
entrapment systems containing active ingredients intended as topical control
delivery systems. In the pharmaceutical and personal care industries, entrapment
of active ingredients can have a number of beneficial effects, including
sustaining the topical effectiveness of ingredients, reducing irritation,
permitting liquids to be handled as solids, extending shelf life and overcoming
product incompatibilities. In fiscal 1994, Avon Products, Inc. ("Avon")
introduced the Company's ChronoSphere polymer technology in Avon's "ANEW Perfect
Foundation." The ChronoSphere microparticulates are used as part of a
time-release delivery system for skin moisturizers.
Products Under Development
Thermometry is a target area for growth and plans to strengthen its
branded position through new product introductions and marketing programs are
underway.
After a year of extensive investigation and patent engineering, the
Company is introducing a "Flexible-Tip Digital Thermometer with Fever Alarm(TM)"
to be available for this year's cough and cold season. This unique thermometer
offers a comfortable flat tip and soft flexible probe designed to provide
4
<PAGE>
gentle care for children and ease of reading. It also has an exclusive Fever
Alarm feature to alert parents to an elevated temperature.
Major Customers
For the fiscal year ended March 31, 1996, total revenues from Mylan
Laboratories, Inc. ("Mylan"), McKesson Drug Company ("McKesson"), Bergen
Brunswig Drug Company and Bristol-Myers Squibb were 12.9%, 11.7%, 10.8%, and
11.2%, respectively, of total consolidated revenues. In the fiscal year ended
March 31, 1995, total revenues, including certain one-time fees received from a
company formerly owned by Merck and presently owned by Bristol-Myers Squibb,
represented 16.6% of total consolidated revenues. In the fiscal year ended March
31, 1995, total revenues from McKesson and Mylan comprised 10.9% and 11.0%,
respectively, of total consolidated revenues.
Patents and Trade Secrets
With respect to the Company's wound care business described above, the
Company seeks to protect its technology through the use of patents and trade
secrets. The Company is the owner of five United States patents relating to its
wound dressing technology and controlled delivery systems and the co-owner of
one United States patent relating to biodurable polyurethane technology. The
Company has filed applications for additional patents in the United States and
European jurisdictions, which are currently pending. It is expected that these
patents and trade secrets will be assigned to the buyer in connection with the
proposed sale of the wound care business.
Manufacturing
The Company's polymer-based wound care medical devices and Chronosphere
products are manufactured at the Company's facilities. The Company's
pharmaceutical products are currently manufactured in-house and by others on
its behalf. The Company purchases a majority of its consumer healthcare products
from other manufacturers.
This year marked the culmination of several years of planning with the
launch of in-house pharmaceutical production at the Woburn facility. By April
1997, all of the steps to validate, manufacture and sell products made at the
Woburn site were completed. With receipt of an FDA Establishment
5
<PAGE>
Registration Number, in-house manufacturing is now underway for several
established products, including AQUACHLORAL(R), B&O(R) and URISED(R). The
Company's state-of-the-art automated suppository machine forms, fills and seals
automatically and the computer-controlled, hands-off equipment provides improved
manufacturing efficiency.
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 to the regulations of additional countries. 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. Products that the Company may develop in the
future may 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.
The FDA and other regulatory agency requirements for manufacturing,
product testing and marketing can vary depending upon whether the product is a
medical device or a drug. Sales of the Company's products outside of the United
States are subject to foreign regulatory requirements that may vary from country
to country. The time required to obtain clearance from a foreign country may be
longer or shorter than that required by the FDA, and clearance or approval or
other product requirements may differ. There can be no assurance that the
Company will be able to obtain necessary regulatory clearances or approvals on a
timely basis, if at all, for any of its products under development, and delays
in receipt or failure to receive such clearances or approvals, the loss of
previously received clearances or approvals, or failure to comply with existing
or future regulatory requirements could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is subject to numerous federal, state and local laws
relating to such matters as controlled drug substances, safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. For example, the Drug
Enforcement Administration ("DEA") regulates controlled drug substances, such as
narcotics, under the Controlled Substances Act and the Controlled Substances
Import and Export Act. Manufacturers, distributors and dispensers of controlled
substances must be registered and inspected by the DEA, and are subject to
inspection, labeling and packaging, export, import, security, production quota
and record keeping and reporting requirements. The Company currently markets two
prescription drug products containing controlled drug subjects, and therefore is
subject to the DEA regulatory requirements. In addition, labeling and
promotional activities relating to medical devices and drugs are, in certain
instances, subject to regulations by the Federal Trade Commission. There can be
no assurance that the Company will not be required to incur significant costs to
comply with such laws and regulations in the future or that such laws or
regulations will not have a material adverse effect upon the Company's ability
to do business.
6
<PAGE>
Competition
The Company is engaged in rapidly evolving and highly competitive
fields. Many major pharmaceutical, medical product and personal care companies
in the United States and abroad seek to develop competitive products.
Competition from medical device manufacturers, pharmaceutical companies and
others is intense and expected to increase. Many of these companies have
substantially greater capital resources, research and development staffs and
facilities and experience in obtaining regulatory approvals, as well as in the
marketing and distribution of products, than the Company.
In the diabetes supply market, Universal Self Care, Inc. and Transworld
Home Healthcare, Inc., are publicly-held companies which compete with Liberty
Medical in the mail-order supply business. There are several smaller
privately-held companies which also compete in this market.
In the consumer healthcare products market, the Company competes with
various other suppliers for retail shelf space and consumer purchase. While
there are numerous companies that manufacture and market consumer healthcare
products, the Company believes that no single company is readily identifiable by
consumers as a maker of products which attempt to detect or monitor medical
problems in the home. The Company believes that it offers consumers practical,
easy-to-use products at reasonable prices. In the urinary discomfort category,
the Company's AZO-STANDARD urinary analgesic is one of the category leaders.
Competitors include Numark Laboratories, Inc. (Cystex) and Breckenridge
Pharmaceutical, Inc. (Prodium) and Johnson & Johnson (Uristat).
In the professional market, numerous pharmaceutical companies develop
and market prescription products which compete with the Company's products on a
branded and generic basis. The Company's principal branded competitors include:
Astra USA, Inc. (Xylocaine vs. ANESTACON), G & W Labs, Inc.(chloral hydrate vs.
AQUACHLORAL), Parke-Davis, a division of Warner-Lambert Co., (Pyridium vs.
URISED), Schwarz-Pharma (Levsin line vs. CYSTOSPAZ line) and Wyeth-Ayerst
Laboratories, a division of American Home Products Corp. (belladonna and opium
vs. B&O SUPPRETTES).
Employees
As of March 31, 1997, the Company had 196 full-time employees. The
Company expects to employ additional personnel as it expands its operations. The
Company believes that its relations with its employees are good.
Item 2. PROPERTIES
The Company's facilities are located in Woburn, Massachusetts; Palm
City and Stuart, Florida; Golden, Colorado; and Tarvin, Cheshire, UK. The
Company's corporate headquarters is located in Woburn in a 60,000 square foot
facility which the Company owns. The Company also leases approximately 25,000
square feet at its facilities in Palm City and Stuart, Florida and approximately
30,000 square feet at its Golden, Colorado facility and approximately 12,000
square feet at its United Kingdom facility.
A portion of the Golden facility and the Tarvin facility relate to the
Company's wound care business and will be transferred to the proposed buyer for
that business.
The Company believes that its current and new facilities will be
adequate for its current and anticipated needs.
7
<PAGE>
Item 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company,
through solicitations of proxies or otherwise, during the last quarter of the
fiscal year ended March 31, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company are as follows:
Name Age Position
Steven J. Lee................ 50 Chairman and Chief Executive Officer
Arthur A. Siciliano, Ph.D.... 54 President; President, PolyMedica
Pharmaceuticals (U.S.A.), Inc.
Eric G. Walters.............. 45 Chief Financial Officer, Treasurer and
Clerk
Randy M. Sloan............... 40 Vice President of Marketing; Group
Executive, PolyMedica Healthcare, Inc.
and PolyMedica Wound Care Company
Mark A. Libratore............ 46 Vice President; President, Liberty Medical
Supply, Inc.
Andrew M. Reed, Ph.D......... 44 Vice President; President, PolyMedica
Wound Care Company
Robert J. Zappa.............. 53 Vice President; President, PolyMedica
Healthcare, Inc.
Mr. Lee has been Chairman of the Company since June 1996 and Chief
Executive Officer and a director of the Company since May 1990. Mr. Lee served
as President of the Company from May 1990 through June 1996. From March 1990 to
May 1990, Mr. Lee was a Manager in the Mergers and Acquisitions practice at
Coopers & Lybrand. From November 1987 to March 1990, Mr. Lee was President and a
director of Shawmut National Ventures, the venture capital division of Shawmut
Bank,N.A. From 1984 to 1986, he was President, Chief Executive Officer and a
director of RepliGen Corporation, a biotechnology company. Mr. Lee also spent
eleven years in venture capital as President of Venture Management Advisors and
at Bankers Trust Company. Mr. Lee currently serves as a director of Commonwealth
BioVentures, Inc. and Fibersense Technology Company.
Dr. Siciliano has been President of the Company since June 1996,
Executive Vice President since July 1994, Senior Vice President since January
1993, Vice President, Pharmaceutics of the Company since July 1991 and served as
Vice President, Manufacturing from June 1990 to July 1991.
8
<PAGE>
From the Company's inception until June 1990, he served as Chief Operating
Officer. From 1984 to 1986, Dr. Siciliano served as President of Microfluidics
Corporation, a high technology equipment manufacturer and a subsidiary of the
Biotechnology Development Corporation and then helped found a subsidiary,
MediControl Corporation, and served as its President from 1986 to 1989. He
served as President of the Heico Chemicals Division of the Whittaker Corporation
from 1982 to 1984, as General Manager of Reheis Chemicals (Ireland), Ltd. during
1981 and as Technical Director for Reheis Chemical Co., a division of Revlon
Inc., from 1975 to 1982. Dr. Siciliano also served as Director of Corporate
Research for Kolmar Laboratories, Inc. from 1973 to 1975 and as Senior Scientist
for The Gillette Company from 1969 to 1973.
Mr. Walters joined the Company in August 1990 as Chief Financial
Officer and Treasurer. From 1987 to 1990, Mr. Walters served in various
positions at John Hancock Capital Growth Management, Inc., most recently as
Assistant Treasurer. From 1983 to 1987, Mr. Walters served as Controller of
Venture Founders Corporation and from 1979 to 1983, he was employed at Coopers &
Lybrand, most recently as an Audit Supervisor. Mr. Walters is a Certified Public
Accountant.
Mr. Sloan has served as Vice President of Marketing of the Company
since October 1996 and Group Executive since March 1997. From 1984 to 1996, Mr.
Sloan served in various positions at Ciba Self-Medication, Inc., a division of
Ciba-Geigy, most recently as Vice President of Marketing. From 1980-1984, Mr.
Sloan was employed at Colgate Palmolive Company, most recently as a Product
Manager in their Household Products Group. Mr. Sloan holds an M.B.A. from the
University of Chicago and a B.S. in Finance and Accounting from the University
of Pennsylvania.
Mr. Libratore has served as President of Liberty Medical Supply, Inc.
since 1989. He has managed this business from its inception. Mr. Libratore has
23 years of medical experience and has been a respected member of the medical
community for many years. Mr. Libratore is a graduate of the Hartford Hospital
School of Respiratory Therapy of the University of Connecticut.
Dr. Reed has been a Vice President of the Company since June 1996 and
was named President of PolyMedica Wound Care Company in January 1993. He
previously served as General Manager, Wound Care Operations since June 1992 and
before that as Vice President, Research and Development of the Company since
September 1990. From 1982 to 1990, Dr. Reed served as the Director of Research
and Development for Matrix Membranes, Inc. Prior to 1982, Dr. Reed held various
positions with Mitral Medical, Inc., a Canadian subsidiary of Matrix Membranes,
Inc. ("Mitral Medical"), Millipore Corporation and Imperial Chemical Industries
PLC (ICI). He is the inventor of the MITRAFLEX wound dressing and co-inventor of
a family of biocompatible polyurethanes.
Mr. Zappa has been a Vice President of the Company since June 1996 and
was named President of PolyMedica Healthcare, Inc. in September 1992. He has
over 25 years of experience in all aspects of sales and distribution. Mr. Zappa
served as President, Chief Operating Officer and Director of American CDI, Inc.
from June 1991 to September 1992. From 1981 until November 1988, he was
President and Chief Executive Officer of R. J. Zappa Distributing, Inc. ("RJZ
Dist."), a distributor of home appliances, personal care products and
electronics. Mr. Zappa sold all of the shares of RJZ Dist. to JRE Holdings Co.
("JRE") in November 1988. Mr. Zappa remained as President of the wholly-owned
subsidiary, RJZ Dist., until April 1990. JRE filed a bankruptcy petition under
Chapter 11 in April 1990 and under Chapter 7 in September 1990. Prior to 1982,
Mr. Zappa was Vice President and Partner in a privately held distribution
company from 1975 to 1982.
9
<PAGE>
PART II
Items 5-8.
The information required by Items 5 through 8 in this Annual Report on
Form 10-K is incorporated by reference from certain sections of the Company's
Annual Report to Shareholders, the relevant portions of which are included in
Exhibit 13 to this Annual Report on Form 10-K. Such information is contained in
the sections of the Annual Report to Shareholders entitled "Corporate
Information", "Selected Consolidated Financial Data", "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and in the
Consolidated Financial Statements.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements on accounting and financial disclosure
matters.
10
<PAGE>
PART III
Items 10-13.
The information required for Part III in the Annual Report on Form 10-K is
incorporated by reference from the Company's definitive proxy statement for the
Company's 1997 Annual Meeting of Shareholders. Such information will be
contained in the sections of such proxy statement captioned "Election of
Directors," "Board and Committee Meetings," "Compensation of Executive
Officers," "Directors' Compensation," "Report of the Compensation Committee,"
"Compensation Committee Interlocks and Insider Participation," "Comparative
Stock Performance," "SEC Reporting," "Security Ownership and Certain Beneficial
Owners and Management," and "Certain Transactions." Information regarding
executive officers of the Company is also furnished in Part I of this Annual
Report on Form 10-K under the heading "Executive Officers of the Registrant."
11
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on
Form 10-K.
1. The following Financial Statements and other sections shown below are
filed as part of the Company's Annual Report to Shareholders.
Such Financial Statements are incorporated herein by reference.
Consolidated Balance Sheets as of
March 31, 1997 and 1996
Consolidated Statements of Operations
for the years ended March 31, 1997,
1996, and 1995
Consolidated Statements of Shareholders'
Equity for the years ended March 31, 1997,
1996, and 1995
Consolidated Statements of Cash Flows
for the years ended March 31, 1997,
1996, and 1995
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. All schedules are omitted because the required information is either
inapplicable or is presented in the consolidated financial statements
or related notes thereto.
3. The Exhibits listed in the Exhibit Index
immediately preceding such Exhibits are filed as
part of this Annual Report on Form 10-K.
(b) There were no Current Reports on Form 8-K filed by the Company
during the last quarter of the period covered by this report.
-------------------------------
12
<PAGE>
The following trademarks are used in this Annual Report on Form 10-K:
MITRAFLEX, SPYROFLEX, ChronoSphere, BASIS, PeeDee Dose, MEDI-AID, URISED,
CYSTOSPAZ, ANESTACON, AZO-STANDARD, AZO-CRANBERRY, B&O, SUPPRETTES, and
AQUACHLORAL are registered trademarks of PolyMedica Industries, Inc. Fever Alarm
is a trademark of PolyMedica Industries, Inc. WEBCON is a trademark of Alcon.
ANEW is a trademark of Avon Products, Inc. Uristat is a registered trademark
of Ortho Pharmaceutical Corp., a division of Johnson & Johnson. Xylocaine is a
registered trademark of Astra USA, Inc. Pyridium is a registered trademark of
Parke-Davis, a division of Warner-Lambert Co. Levsin is a registered trademark
of Schwarz-Pharma, Inc. Cystex is a trademark of Numark Laboratories, Inc.
Prodium is a trademark of Breckenridge Pharmaceutical, Inc.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: June 26, 1997 POLYMEDICA INDUSTRIES, INC.
By: /s/ Steven J. Lee
Steven J. Lee
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Dated: June 26, 1997 /s/ Steven J. Lee
------------------
Steven J. Lee
Chairman, Chief Executive Officer and
Director
(Principal Executive Officer)
Dated: June 26, 1997 /s/ Eric G. Walters
--------------------
Eric G. Walters
Chief Financial Officer, Treasurer and
Clerk
(Principal Financial and Accounting
Officer)
Dated: June 26, 1997 /s/ Richard H. Bard
-------------------
Richard H. Bard
Director
Dated: June 26, 1997 /s/ Frank W. LoGerfo
---------------------
Frank W. LoGerfo
Director
<PAGE>
Dated: June 26, 1997 /s/ Daniel S. Bernstein
------------------------
Daniel S. Bernstein
Director
Dated: June 26, 1997 /s/ Marcia J. Hooper
---------------------
Marcia J. Hooper
Director
Dated: June 26, 1997 /s/ Thomas S. Soltys
---------------------
Thomas S. Soltys
Director
Dated: June 26, 1997 /s/ Peter K. Hoffman
---------------------
Peter K. Hoffman
Director
<PAGE>
Exhibit Index
The following exhibits are filed as part of this Annual Report on Form 10-K.
Exhibit Description
Number
2.1 - Stock Purchase Agreement, dated as of August 30, 1996,
among the Registrant, Liberty Medical Supply, Inc., and
the Shareholders of Liberty Medical Supply, Inc. (19)
2.2 - Amendments dated March 26, 1997, to the Stock Purchase
Agreement dated as of August 30, 1996, among the
Registrant, Liberty Medical Supply, Inc. and the
Shareholders of Liberty Medical Supply, Inc.
2.3 - Asset Purchase Agreement dated as of June 23, 1997 by
and among the Registrant, PolyMedica Industries UK, Ltd.,
Innovative Technologies Limited, Innovative Technologies
(US) Inc., and Innovative Technologies
Group Plc.
3.1 - Restated Articles of Organization of the Company. (1)
3.2 - Amended and Restated By-Laws of the Company. (14)
4.1 - Specimen certificate for shares of Common Stock, $.01 par
value, of the Company. (1)
4.2 - Note and Warrant Agreement dated January 26, 1993 and
$25,000,000 10.65% Guaranteed Senior Secured Notes due
January 31, 2003 of PolyMedica Pharmaceuticals (U.S.A.),
Inc. and PolyMedica Pharmaceuticals (Puerto Rico), Inc.
and Warrant for 500,000 (subject to adjustment) shares of
Common Stock, $0.01 per value, of the Registrant. (6)
4.3 - Letter Agreement, Note Guarantee and Security Agreement,
all dated April 27, 1993, by and among the Registrant,
PolyMedica Pharmaceuticals (U.S.A.), Inc., PolyMedica
Pharmaceuticals (Puerto Rico), Inc.,PolyMedica Securities,
Inc., PolyMedica Pharmaceuticals Securities, Inc. and the
John Hancock Mutual Life Insurance Company. (9)
4.4 - Letter Agreement amending the Note and Warrant Agreement
dated June 15, 1993. (9)
4.5 - Letter Agreement amending the Note and Warrant Agreement
dated March 29, 1994. (10)
4.6 - Letter Agreement amending the Note and Warrant Agreement
dated June 17, 1994. (10)
4.7 - Letter Agreement amending the Note and Warrant Agreement
dated June 30, 1994. (11)
4.8 - Letter Agreement amending the Note and Warrant Agreement
dated October 27, 1994. (12)
4.9 - Letter Agreement amending the Note and Warrant Agreement
dated June 27, 1995. (14)
<PAGE>
Exhibit Description
Number
4.10 - Letter Agreement amending the Note and Warrant Agreement
dated October 18, 1995 (15)
4.11 - Letter Agreement amending the Note and Warrant Agreement
dated June 19, 1996. (18)
4.12 - Letter Agreement amending the Note and Warrant Agreement
dated August 2, 1996. (20)
4.13 - Letter Agreement amending the Note and Warrant Agreement
dated October 30, 1996 (20)
4.14 - Letter Agreement amending the Note and Warrant Agreement
dated January 23, 1997 (21)
10.1 - Supply-Requirements Contract and Licensing Agreement,
dated January 1, 1990, by and between Calgon Vestal
Laboratories, a division of Calgon Corporation, and Matrix
Membranes, Inc., assigned to the Company on June 15, 1991,
and December 5, 1991. (1)(22)
10.2 - Supply Requirements and Licensing Agreement dated November
30, 1992 between Calgon Vestal Laboratories and the
Registrant. (9)(22)
10.3 - Distributorship Agreement, dated as of January 1, 1992 by
and between CV Laboratories Ltd. and the Company, as
amended by letter agreement dated as of January 7, 1992.
(1)(22)
10.4 - License Agreement, dated February 9, 1990, by and between
Laboratoires de Therapeutique Moderne, S.A. and PolyMedica
Industries UK, Ltd. (formerly Beam Tech Ltd). (1)(22)
10.5 - Supply Agreement, dated March 15, 1990, by and between
Laboratoires de Therapeutique Moderne, S.A. and
PolyMedica
Industries UK, Ltd. (formerly Beam Tech Ltd). (1)(22)
10.6 - Distributorship Agreement, dated as of December 21, 1990,
by and between Cellife SRL and PolyMedica Industries UK,
Ltd. (formerly Beam Tech Ltd). (1)(22)
10.7 - Distributorship Agreement, dated as of June 25, 1991 by
and between Internationale Verbandstoff - Fabrik and
PolyMedica Industries UK, Ltd. (formerly Beam Tech Ltd).
(1)(22)
10.8 - Distributorship Agreement, dated as of January 13,1992, by
and between Rauscher & Co. and the Company. (1)(22)
10.9 - Distributorship Agreement, dated as of December 20, 1991,
by and between MicroBiomedics, Inc. and the Company. (1)
(22)
10.10 - Development Agreement, dated as of October 4, 1990, by and
between C.R. Bard, Inc. and the Company, as amended by
letter agreement dated August 12, 1991. (1)(22)
10.11 - Development Agreement dated as of November 1, 1991, by and
between Brooks Industries, Inc. and the Company. (1)(22)
10.12 - 1990 Stock Option Plan, as amended. (14)
10.13 - 1992 Employee Stock Purchase Plan, as amended. (14)
10.14 - 1992 Directors' Stock Option Plan, as amended. (10)
10.15 - Rights Agreement dated as of January 23, 1992 by and
between the Company and the First National Bank of Boston.
(3)
<PAGE>
Exhibit Description
Number
10.16 - Secured Promissory Note, dated June 11, 1991, executed by
the Company and delivered to the Flagship Bank and Trust
Company. (1)
10.17 - Employment Agreement by and between the Registrant and
Steven J. Lee dated May 16, 1990, as amended by letter
agreements dated June 1, 1991 and December 5, 1991.(1)(24)
10.18 - Letter agreement amendment by and between the Registrant
and Steven J. Lee dated April 3, 1996. (17)(24)
10.19 - Letter agreement amendment by and between the Registrant
and Dr. Andrew M. Reed dated April 3, 1996. (17)(24)
10.20 - Employment Agreement by and between the Registrant and Dr.
Arthur A. Siciliano dated September 1, 1990, as amended by
letter agreements dated June 1, 1991 and December 5, 1991.
(1)(24)
10.21 - Employment Agreement by and between the Registrant and Dr.
Andrew M. Reed dated September 1, 1990, as amended by
letter agreements dated June 1, 1991 and December 5, 1991.
(1)(24)
10.22 - Employee Stock Purchase Agreement by and between the
Registrant and Steven J. Lee dated May 16, 1990, as
amended. (1)(24)
10.23 - Letter agreement amendment by and between the Registrant
and Dr. Arthur A. Siciliano dated April 3, 1996. (17)(24)
10.24 - Letter agreement amendment by and between the Registrant
and Robert J. Zappa dated April 3, 1996. (17)(24)
10.25 - Stock Restriction Agreement by and between the Registrant
and Dr. Arthur A. Siciliano dated September 1, 1990, as
amended. (1)
10.26 - Employee Stock Purchase Agreement by and between the
Registrant and Andrew M. Reed dated September 1, 1990, as
amended. (1)
10.27 - Lease Agreement, dated June 23, 1989, by and between
Robert Andrew Chilton and a subsidiary of the Registrant,
as amended, for industrial space in Cheshire County,
England. (1)
10.28 - Option Agreement dated as of October 19, 1990 by and among
certain Shareholders of Beam Tech Ltd named therein, as
amended by supplemental Deeds dated as of December 6,
1990. (1)
10.29 - Sublease dated February 10, 1992 by and between Ampex
Corporation and the Registrant. (1)
10.30 - Supply Agreement, dated as of May 27, 1992, by and between
Medtronic, Inc. and the Company. (2)(22)
10.31 - Employment Agreement by and between the Registrant and
Eric G. Walters dated June 1, 1991 as amended by letter
agreement dated December 5, 1991. (9)(24)
10.32 - Letter agreement amendment by and between the Registrant
and Steven J. Lee dated March 18, 1993. (9)(24)
10.33 - Letter agreement amendment by and between the Registrant
and Eric G. Walters dated April 3, 1996. (17)(24)
10.34 - Letter agreement amendment by and between the Registrant
and Dr. Arthur A. Siciliano dated March 18, 1993. (9)(24)
10.35 - Letter agreement amendment by and between the Registrant
and Dr. Andrew M. Reed dated March 18, 1993. (9)(24)
<PAGE>
Exhibit Description
Number
10.36 - Letter agreement amendment by and between the Registrant
and Eric G. Walters dated March 18, 1993. (9)(24)
10.37 - License and Supply Agreement dated as of December 22, 1992
between Dow B. Hickam, Inc. and the Registrant. (9)(22)
10.38 - Exclusive Distribution Agreement dated September 28, 1992
between Hisamitsu Pharmaceutical Co., Inc. and the
Registrant. (9)(22)
10.39 - Development, Supply and License Agreement dated November
11, 1992 between Bard Access Systems, Inc. and the
Registrant. (9)(22)
10.40 - Letter Agreement dated July 15 , 1993 between Alcon
Laboratories Inc. and the Registrant. (7)
10.41 - Purchase and Sale Agreement between Allstate Life
Insurance Company as Seller and PolyMedica Industries,
Inc. as Buyer as of August 13, 1993. (8)
10.42 - Letter agreement amendment by and between the Registrant
and Steven J. Lee dated March 31, 1994. (10)(24)
10.43 - Letter agreement amendment by and between the Registrant
and Dr. Arthur A. Siciliano dated March 31, 1994.(10)(24)
10.44 - Letter agreement amendment by and between the Registrant
and Dr. Andrew M. Reed dated March 31, 1994. (10)(24)
10.45 - Letter agreement amendment by and between the Registrant
and Eric G. Walters dated March 31, 1994. (10)(24)
10.46 - Employment Agreement between the Registrant and Robert J.
Zappa dated August 23 , 1992 , as amended by letter
agreement dated March 18, 1993, and further amended by
letter agreement dated March 31, 1994. (10)(24)
10.47 - Mortgage, Assignment of Leases and Rents and Security
Agreement between PolyMedica Pharmaceuticals (U.S.A.),
Inc. and John Hancock Mutual Life Insurance Company dated
May 31, 1994. (10)
10.48 - Processing Agreement dated December 11, 1992, by and
between the Registrant and Alcon (Puerto Rico) Inc. (10)
(22)
10.49 - Processing Agreement dated December 11, 1992, by and
between the Registrant and Alcon Laboratories, Inc. (10)
(22)
10.50 - Letter Agreement dated March 25, 1994 between Alcon
(Puerto Rico) Inc. and the Registrant. (10)
10.51 - Amendment dated November 2, 1994, to Supply-Requirements
and License Agreement dated November 30, 1992, between
PolyMedica Industries, Inc. and Calgon Vestal
Laboratories, Inc. (13)
10.52 - Letter Agreement amendment by and between the Registrant
and Steven J. Lee dated April 11, 1995. (14) (24)
10.53 - Amended and Restated License Agreement between the
Registrant and CardioTech dated May 13, 1996. (17)
10.54 - Letter Agreement amendment by and between the Registrant
and Dr. Arthur A. Siciliano dated April 11, 1995. (14)(24)
10.55 - Letter Agreement amendment by and between the Registrant
and Dr. Andrew M. Reed dated April 11, 1995. (14) (24)
10.56 - Letter Agreement amendment by and between the Registrant
and Eric G. Walters dated April 11, 1995. (14) (24)
<PAGE>
Exhibit Description
Number
10.57 - Letter Agreement amendment by and between the Registrant
and Robert J. Zappa dated April 11, 1995. (14) (24)
10.58 - 1996 Executive Incentive Compensation Plan (14) (22) (24)
10.59 - Amendment to the Lease Agreement by and between Robert
Andrew Chilton and a subsidiary of the Registrant. (14)
10.60 - Letter Agreement to the Lease Agreement, dated February
16, 1995, by and between Robert W. Murray, Trustee of
Constitution Park Trust Three and the Registrant for
offices and laboratory space in Woburn, Massachusetts.(14)
10.61 - Letter Agreement dated February 2, 1995, amending the
Processing Agreement dated December 11, 1992, by and
between the Registrant and Alcon (Puerto Rico), Inc. (14)
(22)
10.62 - Letter Agreement dated May 3 , 1995 , amending the
Processing Agreement dated December 11, 1992 , by and
between the Registrant and Alcon (Puerto Rico), Inc. (14)
(22)
10.63 - Construction Agreements dated March 1, 1994, June 15,
1994, and September 28 , 1994 , by and between the
Registrant and Execuspace Construction Corp. (14)
10.64 - Construction Agreements dated June 6, 1994, and October
13, 1994, by and between the Registrant and Commercial Air
Control, Inc. (14)
10.65 - Letter Agreement, dated March 20, 1995, by and between the
Registrant and Alcon Laboratories, Inc. (15)
10.66 - License Agreement, dated March 30, 1994, between the
Registrant as Licensor and PolyMedica Industries UK, Ltd.,
as Licensee (15)
10.67 - Form of Warrant issued by the Registrant to the John
Hancock Mutual Life Insurance Company (17)
10.68 - Form of Promissory Note, dated December 13, 1994,
executed by certain officers and delivered to the
Registrant (15)
10.69 - Form of Jefferies & Company, Inc. and Rodman & Renshaw,
Inc. Warrant (15)
10.70 - Form of Promissory Note made in favor of the Company by
certain officers of the Company (21)
10.71 - Employment Agreement between the Registrant and Randy M.
Sloan dated October 1, 1996 (24)
10.72 - 1998 Executive Incentive Compensation Plan (23) (24)
10.73 - Employment Agreement between the Registrant and Mark A.
Libratore dated August 30, 1996, incorporated by
reference as Exhibit D1 to the Stock Purchase Agreement
dated August 30, 1996 among the Registrant, Liberty
Medical Supply, Inc., and the Shareholders of Liberty
Medical Supply, Inc. (19)
10.74 - Amendment No. 1 to the Employment Agreement between the
Registrant and Mark A. Libratore dated March 26, 1997,
incorporated by reference into Amendments dated as of
August 30, 1996, among the Registrant, Liberty Medical
Supply, Inc. and the Shareholders of Liberty Medical
Supply, Inc.
<PAGE>
13 - Annual Report to Shareholders for the year ended March 31,
1997, which shall not be deemed to be "filed" except to
the extent that portions thereof are expressly
incorporated by reference in this Annual Report on Form
10-K.
21 - Subsidiaries of the Registrant
23.1 - Consent of Coopers & Lybrand L.L.P.
27 - Financial Data Schedule
- ---------------------
1 Incorporated herein by reference to the Company's Registration
Statement on Form S-1 (File No. 33-45425).
2 Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended March 31, 1992 filed June 26, 1992.
3 Incorporated herein by reference to the Company's Current Report on
Form 8-K filed March 13, 1992.
4 Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1992 filed August 13,
1992
5 Incorporated herein by reference to the Company's Current Report on
Form 8-K filed December 26, 1992, as amended by Amendment No. 1 on
Form 8 filed February 24, 1993.
6 Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1992 filed February
13, 1993.
7 Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1993, filed August 13,
1993.
8 Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1993, filed
November 9, 1993
9 Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended March 31, 1993, filed June 25, 1993.
10 Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended March 31, 1994, filed June, 29, 1994.
11 Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1994, filed August 12,
1994.
12 Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1994, filed October
31, 1994.
13 Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1994, filed February
2, 1995.
<PAGE>
14 Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1995, filed June 29,
1995.
15 Incorporated herein by reference to the Company's Registration
Statement on Form S-1 (File No. 33-97872).
16 Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1995, filed February
9, 1996.
17 Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1996, filed June 26,
1996.
18 Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996, filed August 14,
1996.
19 Incorporated herein by reference to the Company's Current Report on
Form 8-K filed September 13, 1996.
20 Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996, filed
November 13, 1996.
21 Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1996, filed February
13, 1997.
22 Confidential treatment granted as to certain portions.
23 Confidential treatment requested as to certain portions, which
portions are omitted and filed separately with the Commission.
24 Management contract or compensation plan or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
<PAGE>
EXHIBIT 2.2
AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT
This Amendment No. 1 to the Stock Purchase Agreement, dated as of
August 30, 1996 (the "Agreement"), by and among PolyMedica Industries, Inc., a
Massachusetts corporation (the "Buyer"), Liberty Medical Supply, Inc., a Florida
corporation (the "Company"), and Mark A. Libratore, Edward F. Reilly and Ann E.
Royer (collectively, the "Stockholders"), is made as of this 26th day of March,
1997. Capitalized terms not otherwise defined herein shall have the meanings
ascribed to them in the Agreement.
WHEREAS, the Buyer, the Company and the Stockholders desire to amend
the Agreement in order to provide for certain changes with respect to future
payments of the purchase price thereunder; and
WHEREAS, pursuant to Section 17 of the Agreement, the Agreement may be
amended by a written instrument executed by the Buyer, the Company and the
Stockholders;
NOW, THEREFORE, for good and valuable consideration, receipt and
sufficiency of which is hereby acknowledged, the Buyer, the Company and the
Stockholders hereby agree as follows:
1. Section 1.3 of the Agreement is hereby amended by deleting
Subsection (b) thereof in its entirety and replacing it with the following:
"(b) The "Contingent Purchase Price" shall be payable
only to Messrs. Libratore and Reilly and shall be payable as follows:
(i) the Buyer shall pay to Mr. Libratore $300,000 in cash on March 26,
1997, together with a promissory note, substantially in the form
attached hereto as Exhibit A, in the original principal amount of
$50,000, bearing interest at the simple rate of 7.00% per annum (which,
for purposes of this Agreement, shall be considered one of the
Promissory Notes, as defined in Section 1.3(d)), and (ii) the Buyer
shall pay to Mr. Reilly $300,000 in cash on March 26, 1997, together
with 24,400 shares of the Buyer's Common Stock (as defined in Section
1.3(d)), which number of shares was determined by dividing $122,000 by
the average of the closing sale price per share of the Buyer's Common
Stock on the American Stock Exchange on March 24, 1997 and March 25,
1997."
2. Section 1.5 of the Agreement is hereby deleted in its entirety. The
parties hereto agree that the payments described in Section 1 of this Amendment
are in full satisfaction of any contingent payment obligations or purchase price
adjustments under the Agreement.
3. In all other respects, the Agreement is hereby ratified and
confirmed, and remains in full force and effect.
-1-
<PAGE>
This Amendment may be executed in on or more counterparts, each of
which shall be deemed to be an original, but all of which shall be one and the
same document.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
an instrument under seal as of the date first above written.
The Buyer:
POLYMEDICA INDUSTRIES, INC.
By:/s/ Steven J. Lee
Steven J. Lee
Its:Chairman and Chief
Executive Officer
The Company:
LIBERTY MEDICAL SUPPLY,INC.
By:/s/ Mark L. Libratore
Mark L. Libratore
Its:President
The Stockholders:
/s/ Mark L. Libratore
Mark A. Libratore
/s/ Edward F. Reilly
Edward F. Reilly
/s/ Ann E. Royer
Ann E. Royer
-2-
<PAGE>
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
This Amendment No. 1 to the Employment Agreement, dated as of August
30, 1996 (the "Agreement"), by and between PolyMedica Industries, Inc., a
Massachusetts corporation (the "Company"), and Mark A. Libratore (the
"Executive"), is made as of this 26th day of March, 1997.
WHEREAS, the Company and the Executive desire to amend the Agreement in
order to provide for an increase in the salary of the Executive;
NOW, THEREFORE, for good and valuable consideration, receipt and
sufficiency of which is hereby acknowledged, the Company and the Executive
hereby agree as follows:
1. Section 3.1 of the Agreement is hereby amended by adding the
following sentence thereto at the end of such section:
"Notwithstanding the foregoing, the Executive's Base Salary
shall be increased to $140,000 effective March 26, 1997."
2. In all other respects, the Agreement is hereby ratified and
confirmed and remains in full force and effect.
This Amendment may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which shall be one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
an instrument under seal as of the date first above written.
The Company:
POLYMEDICA INDUSTRIES, INC.
By:/s/ Steven J. Lee
Its:Chairman and Chief
Executive Officier
The Executive:
/s/ Mark L. Libratore
Mark A. Libratore
-3-
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED UNLESS SO REGISTERED OR UNLESS AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT IS AVAILABLE. THIS NOTE IS
NON-NEGOTIABLE.
POLYMEDICA INDUSTRIES, INC.
7.00% Subordinated Promissory Note
(this "Subordinated Note" or "Note")
$50,000 Woburn, Massachusetts
March 26, 1997
PolyMedica Industries, Inc., a Massachusetts corporation (the "Maker"),
for value received, hereby promises to pay to MARK A. LIBRATORE the principal
sum of FIFTY THOUSAND Dollars ($50,000), together with interest on the unpaid
principal balance of this Note from time to time outstanding at the rate of
7.00% per year until paid in full. Any overdue payment of principal or interest
shall bear interest at an annual rate equal to the prime rate for commercial
loans announced from time to time by The First National Bank of Boston plus 300
basis points.
Principal and interest shall be paid as follows:
Three semi-annual installments of principal (in the amounts of
$16,666.66, $16,666.66 and $16,666.67, respectively) plus
accrued interest, in arrears, on the following dates:
1. August 30, 1997;
2. February 28, 1998; and
3. August 30, 1998.
A "Business Day" is any day on which the banks in Boston, Massachusetts
are open for business. Interest on this Note shall be computed on the basis of a
year of 365 days for the actual number of days elapsed.
-4-
<PAGE>
1. Subordination.
(a) Subordination to Senior Indebtedness. The indebtedness evidenced by
this Note, and the payment of the principal hereof, and any interest hereon, is
wholly subordinated, junior and subject in right of payment, to the extent and
in the manner hereinafter provided, to the prior payment of all Senior
Indebtedness of the Maker now outstanding or hereinafter incurred. "Senior
Indebtedness" means the principal of, and premium, if any, and interest on (i)
all indebtedness of the Maker for monies borrowed from banks, trust companies,
insurance companies and other financial institutions, including commercial paper
and accounts receivable sold or assigned by the Maker to such institutions, (ii)
all indebtedness of the Maker for monies borrowed by the Maker from other
persons or entities, (iii) obligations of the Maker as lessee under leases of
real or personal property, (iv) principal of, and premium, if any, and interest
on any indebtedness or obligations of others of the kinds described in (i), (ii)
and (iii) above assumed or guaranteed in any manner by the Maker, (v) deferrals,
renewals, extensions and refundings of any such indebtedness or obligations
described in (i), (ii), (iii) and (iv) above, and (vi) any other indebtedness of
the Maker which the Maker and the holder hereof may hereafter from time to time
expressly and specifically agree in writing shall constitute Senior
Indebtedness; provided, however, that "Senior Indebtedness" shall not mean the
principal of, and premium, if any, and interest on indebtedness or obligations
described in (i), (ii), (iii) and (iv) above which in the aggregate at any point
in time exceeds $50,000,000.
(b) No Payment if Default in Senior Indebtedness. No payment on account
of principal of or interest on this Subordinated Note shall be made, and this
Subordinated Note shall not be redeemed or purchased directly or indirectly by
the Maker (or any of its subsidiaries), if at the time of such payment or
purchase or immediately after giving effect thereto, (i) there shall exist a
default in any payment with respect to any Senior Indebtedness or (ii) there
shall have occurred an event of default (other than a default in the payment of
amounts due thereon) with respect to any Senior Indebtedness, as defined in the
instrument under which the same is outstanding, permitting the holders thereof
to accelerate the maturity thereof, and such event of default shall not have
been cured or waived or shall not have ceased to exist.
(c) Payment upon Dissolution, Etc.
(i) In the event of any bankruptcy, insolvency,
reorganization, receivership, composition, assignment for benefit of creditors
or other similar proceeding initiated by or against the Maker or any dissolution
or winding up or total or partial liquidation or reorganization of the Maker
(being hereinafter referred to as a "Proceeding"), all claims of the holder of
this Subordinated Note in such Proceeding shall be deemed assigned, pro rata, to
the then holders of the Senior Indebtedness on the basis of the respective
amounts of such Senior Indebtedness held
-5-
<PAGE>
by each such holder, and the holder of this Subordinated Note hereby agrees to
execute all documents that such holders request in order to evidence such
assignment; provided, however, that such assignment shall terminate upon receipt
by such holders of payment in full of all of the Senior Indebtedness. While such
assignment is in effect, the then holders of the Senior Indebtedness shall have
the exclusive right to exercise all rights of the holder of this Subordinated
Note arising from its claims in the Proceeding, including but not limited to the
right to vote for a trustee and to accept or reject a proposed plan of
reorganization or composition, and the holder of this Subordinated Note hereby
agrees to execute all documents reasonably requested by the then holders of the
Senior Indebtedness in order to exercise any such rights whether (at the sole
discretion of such holders) in the holder's own name or in the name of the
holder of this Subordinated Note. While such assignment is in effect, any holder
of this Subordinated Note also agrees that it shall, upon request, and at its
own expense take all reasonable actions (including but not limited to the
execution and filing of documents and the giving of testimony in any Proceeding,
whether or not such testimony could have been compelled by process) necessary to
prove the full amount of all its claims in any Proceeding, and any holder of
this Subordinated Note shall not expressly, by implication or by inaction waive
any claim in any Proceeding without the written consent of such holders of
Senior Indebtedness.
(ii) Upon payment or distribution to creditors in a Proceeding
of assets of the Maker of any kind or character, whether in cash, property or
securities, all principal and interest due upon any Senior Indebtedness shall
first be paid in full, or payment thereof in full duly provided for, before any
holder of this Subordinated Note shall be entitled to receive or, if received,
to retain any payment or distribution on account of this Subordinated Note; and
upon any such Proceeding, any payment or distribution of assets of the Maker of
any kind or character, whether in cash, property or securities, to which any
holder of this Subordinated Note would be entitled except for the provisions of
this Section 1 shall be paid by the Maker or by any receiver, trustee in
bankruptcy, liquidating trustee, agent or other person making such payment or
distribution, or by any holder of this Subordinated Note who shall have received
such payment or distribution, directly to the holders of the Senior Indebtedness
(pro rata to each such holder on the basis of the respective amounts of such
Senior Indebtedness held by such holder) or their representatives to the extent
necessary to pay all such Senior Indebtedness in full after giving effect to any
concurrent payment or distribution to or for the holders of such Senior
Indebtedness, before any payment or distribution is made to any holder of this
Subordinated Note. In the event of any Proceeding, the holder of this
Subordinated Note shall be entitled to be paid one hundred percent (100%) of the
principal amount hereof and accrued interest hereon and all reasonable fees and
costs due in connection herewith before any distribution of assets shall be made
among the holders of any class of shares of the capital stock of the Maker in
their capacities as holders of such shares.
-6-
<PAGE>
(iii) For purposes of this Section 1(c), the words "assets"
and "cash, property or securities" shall not be deemed to include shares of
Common Stock of the Maker as reorganized or readjusted, or securities of the
Maker or any other person provided for by a plan of reorganization or
readjustment, the payment of which is subordinated at least to the extent
provided in this Section 1 with respect to this Subordinated Note to the payment
of all Senior Indebtedness which may at the time be outstanding, if (x) the
Senior Indebtedness is assumed by the new entity, if any, resulting from any
such reorganization or readjustment, and (y) the rights of the holders of the
Senior Indebtedness are not, without the consent of such holders, altered by
such reorganization or readjustment.
(d) Subrogation. Subject to payment in full of all Senior Indebtedness,
any holder of this Subordinated Note shall be subrogated to the rights of the
holders of Senior Indebtedness to receive payments or distributions of the
assets of the Maker made on such Senior Indebtedness until all principal and
interest on this Subordinated Note shall be paid in full; and for purposes of
such subrogation, no payments or distributions to the holders of Senior
Indebtedness of any cash, property or securities to which any holder of this
Subordinated Note would be entitled except for the subordination provisions of
this Section 1 shall, as between the holder of this Subordinated Note and the
Maker and/or its creditors other than the holders of the Senior Indebtedness, be
deemed to be a payment on account of the Senior Indebtedness.
(e) Rights of Holders Unimpaired. The provisions of this Section 1 are
and are intended solely for the purposes of defining the relative rights of the
holder of this Subordinated Note and the holders of Senior Indebtedness and
nothing in this Section 1 shall impair, as between the Maker and any holder of
this Subordinated Note, the obligation of the Maker, which is unconditional and
absolute, to pay to the holder of this Subordinated Note the principal hereof
and interest hereon and all other amounts due hereunder, in accordance with the
terms hereof, nor shall anything herein prevent any holder of this Subordinated
Note from exercising all remedies otherwise permitted by applicable law or
hereunder upon default, subject to the rights set forth above of holders of
Senior Indebtedness to receive cash, property or securities otherwise payable or
deliverable to the holder of this Subordinated Note.
(f) Holders of Senior Indebtedness. The provisions of this Section 1
regarding subordination will constitute a continuing offer to all persons who,
in reliance upon such provisions, become holders of, or continue to hold, Senior
Indebtedness; such provisions are made for the benefit of the holders of Senior
Indebtedness, and such holders are hereby made obligees under such provisions to
the same extent as if they were named therein, and they or any of them may
proceed to enforce such subordination. The holder of this Subordinated Note
shall execute and deliver to any holder of Senior Indebtedness (i) any such
instrument as such holder of Senior Indebtedness may request in order to confirm
the subordination of
-7-
<PAGE>
this Note to such Senior Indebtedness upon the terms set forth in this
Subordinated Note, and (ii) any powers of attorney specifically confirming the
rights of holders of Senior Indebtedness to enforce such subordination and all
such proofs of claim, assignments of claim and other instruments as may be
requested by the holders of Senior Indebtedness or their representatives to
enforce all claims upon or in respect of this Subordinated Note.
(g) Payments on Subordinated Note. Subject to Section 1(c), the Maker
shall make payments of the principal of, and any interest or premium on, this
Note, if at the time of payment, and immediately after giving effect thereto,
(i) there exists no default in any payment with respect to any Senior
Indebtedness and (ii) there shall not have occurred an event of default (other
than a default in the payment of amounts due thereon) with respect to any Senior
Indebtedness, as defined in the instrument under which the same is outstanding,
permitting the holders thereof to accelerate the maturity thereof, other than an
event of default which shall have been cured or waived or shall have ceased to
exist.
2. Redemption.
(a) Subject to the subordination provisions of Section 1, this Note
may, at the option of the Maker, be called for redemption, in whole or in part
at any time. The Maker shall give at least thirty (30) days prior written notice
of redemption to the registered owner at his or its address as shown in the Note
Register, and the notice of redemption shall specify the date and place
designated for redemption.
(b) On or after the redemption date fixed in the notice of redemption,
no further interest shall accrue on the principal amount so redeemed. Payment of
the redemption price shall be made to the registered holder of this Note upon
presentation and surrender of this Note accompanied by a duly executed
instrument of transfer in blank, at the principal executive office of the Maker.
In the event of a partial redemption, this Note shall be presented to the Maker
for endorsement of the amount of payment and date paid as a condition precedent
to such payment.
3. Default.
Subject to the subordination provisions of Section 1, the entire unpaid
principal of this Note and the interest then accrued on this Note and all other
amounts payable hereunder shall become and be due and payable upon written
demand of the holder of this Note, without any other notice or demand of any
kind or any presentment or protest, if any one of the following events shall
occur and be continuing at the time of such demand, whether voluntarily or
involuntarily, or, without limitation, occurring or brought about by operation
of law or pursuant to or in compliance with any judgment, decree or order of any
court or any order, rule or regulation of any governmental body:
-8-
<PAGE>
(a) If default shall be made in the payment of any installment of
principal on this Subordinated Note, or of any installment of interest on this
Subordinated Note, and if any such default shall remain unremedied for ten (10)
days; or
(b) If the Maker (i) makes a composition or an assignment for the
benefit of creditors or trust mortgage, (ii) applies for, consents to,
acquiesces in, files a petition seeking or admits (by answer, default or
otherwise) the material allegations of a petition filed against it seeking the
appointment of a trustee, receiver or liquidator, in bankruptcy or otherwise, of
itself or of all or a substantial portion of its assets, or a reorganization,
arrangement with creditors or other remedy, relief or adjudication available to
or against a bankrupt, insolvent or debtor under any bankruptcy or insolvency
law or any law affecting the rights of creditors generally, or (iii) admits in
writing its inability to pay its debts generally as they become due; or
(c) If an order for relief shall have been entered by a bankruptcy
court or if a decree, order or judgment shall have been entered adjudging the
Maker insolvent, or appointing a receiver, liquidator, custodian or trustee, in
bankruptcy or otherwise, for it or for all or a substantial portion of its
assets, or approving the winding-up or liquidation of its affairs on the grounds
of insolvency or nonpayment of debts, and such order for relief, decree, order
or judgment shall remain undischarged or unstayed for a period of sixty (60)
days; or if any substantial part of the property of the Maker is sequestered or
attached and shall not be returned to the possession of the Maker or such
subsidiary or released from such attachment within sixty (60) days.
4. Note Register.
(a) This Note is non-negotiable and may not be transferred. The Maker
shall keep at its principal executive office a register (herein sometimes
referred to as the "Note Register"), in which, subject to such reasonable
regulations as it may prescribe, but at its expense (other than transfer taxes,
if any), the Maker shall provide for the registration of this Note.
(b) Upon receipt by the Maker of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Note and of indemnity
reasonably satisfactory to it, and upon reimbursement to the Maker of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
this Note (in case of mutilation) the Maker will make and deliver in lieu of
this Note a new note of like tenor and unpaid principal amount and dated as of
the date to which interest has been paid on the unpaid principal amount of this
Note in lieu of which such new note is made and delivered.
-9-
<PAGE>
5. Set Off.
All payments of principal and interest on this Note shall be subject to
the Maker's right pursuant to the Stock Purchase Agreement, dated as of August
30, 1996, among the Maker, Liberty Medical Supply, Inc. and the Stockholders of
Liberty Medical Supply, Inc. identified therein to set off any amount due to the
Maker pursuant to such agreements against any amount payable under this Note.
6. Costs of Collection; Application of Payments.
(a) The Maker agrees to pay on demand all costs, including, without
limitation, reasonable attorneys' fees, incurred by the Holder in collecting
and/or enforcing the obligations of the Maker under this Note.
(b) All scheduled payments made pursuant to this Note shall be applied
first to the costs of collection and/or enforcement, if any, second to reduction
of accrued interest hereunder and finally to reduction of principal. Each
prepayment made pursuant to this Note shall be applied, first, to the costs of
collection and/or enforcement, if any, second to reduction of accrued interest
hereunder and finally to principal installments under this Note in inverse order
of their maturity.
7. General.
(a) Successors and Assigns. This Note, and the obligations and rights
of the Maker hereunder, shall be binding upon and inure to the benefit of the
Maker, the holder of this Note, and their respective heirs, successors and
assigns.
(b) Recourse. Recourse under this Note shall be to the general
unsecured assets of the Maker only and in no event to the officers, directors or
stockholders of the Maker.
(c) Changes. Changes in or additions to this Note may be made or
compliance with any term, covenant, agreement, condition or provision set forth
herein may be omitted or waived (either generally or in a particular instance
and either retroactively or prospectively), upon written consent of the Maker
and the holder.
(d) Currency. All payments shall be made in such coin or currency of
the United States of America as at the time of payment shall be legal tender
therein for the payment of public and private debts.
(e) Notices. All notices, requests, consents and demands shall be
made in writing and shall be mailed postage prepaid, or delivered by hand, to
the Maker or
-10-
<PAGE>
to the holder hereof at their respective addresses set forth below or to such
other address as may be furnished in writing to the other party hereto:
If to the holder: Mark A. Libratore
1023 South West Catalina
Palm City, Florida 34990
If to the Maker: PolyMedica Industries, Inc.
11 State Street
Woburn, Massachusetts 01801
Attn: Steven J. Lee
Chief Executive Officer
(f) Governing Law. This Note shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, this Note has been executed and delivered as a
sealed instrument on the date first above written by the duly authorized
representative of the Maker.
POLYMEDICA INDUSTRIES, INC.
By: /s/ Steven J. Lee
Steven J. Lee
Chairman and Chief
Executive Officer
[Corporate Seal]
ATTEST: /s/ John K.P. Stone, III
John K.P. Stone, III
Assistant Clerk
-11-
EXHIBIT 2.3
ASSET PURCHASE AGREEMENT
dated as of June 23, 1997
by and among
Innovative Technologies Limited,
Innovative Technologies (US) Inc.,
Innovative Technologies Group Plc,
PolyMedica Industries, Inc.,
and
PolyMedica Industries UK Limited
<PAGE>
TABLE OF CONTENTS
Page
Article 1: PURCHASE AND SALE 1
1.1 Acquired Assets 1
1.2 Excluded Assets 3
Article 2: PURCHASE PRICE 4
Article 3: ASSUMPTION OF CERTAIN OBLIGATIONS 4
Article 4: CLOSING 5
4.1 Time and Place 5
4.2 Transactions at Closing 5
Article 5: VALUE ADDED TAX; STAMP DUTIES 7
5.1 VAT Treatment 7
5.2 Delivery of Records 7
5.3 Payment of VAT 7
5.4 Indemnity 7
5.5 Stamp Duties 7
Article 6: REPRESENTATIONS AND WARRANTIES OF THE
SELLER 8
6.1 Organization of Seller; Authority 8
6.2 Corporate Approval; Binding Effect 8
6.3 Non-Contravention 8
6.4 Governmental Consents; Transferability of
Licenses, Etc. 9
6.5 Financial Statements 10
6.6 Absence of Certain Changes 10
6.7 Litigation, Etc. 12
6.8 Conformity to Law 12
6.9 Title to Acquired Assets 13
6.10 Real Property; Safety, Zoning and
Environmental Matters 13
6.11 Equipment 15
6.12 Inventories 16
6.13 Insurance 16
6.14 Contracts 16
6.15 Compensation of and Contracts with Employees 18
6.16 Employee Benefit Plans 18
6.17 Labor Relations 22
6.18 Trademarks, Patents, Etc. 23
6.19 Suppliers and Customers 25
6.20 Acquired Assets Complete 26
6.21 No Undisclosed Liabilities 26
6.22 Tax Returns 26
6.23 Product Liability 27
6.24 Adverse Events 27
6.25 Disclosure 27
6.26 Investment Representations 27
6.27 Broker 28
Article 7: REPRESENTATIONS AND WARRANTIES OF THE
BUYERS AND THE PARENT 28
7.1 Organization of Buyer; Authority 28
7.2 Corporate Approval; Binding Effect 28
7.3 Non-Contravention 29
7.4 Government Consents 29
7.5 Broker 29
7.6 Financing 29
Article 8: CONDUCT OF BUSINESS BY THE SELLERS PENDING CLOSING
30
8.1 Full Access 30
8.2 Carry on in Regular Course 30
8.3 No General Increases 30
8.4 Contracts and Commitments 31
8.5 Purchase and Sale of Capital Assets 31
8.6 Insurance 31
8.7 Preservation of Organization 31
8.8 No Default 31
8.9 Compliance with Laws 31
8.10 Advice of Change 32
8.11 No Shopping, Etc. 32
8.12 Consents of Third Parties 32
8.13 Satisfaction of Conditions Precedent 32
8.14 Creation of Encumbrances 32
8.15 Recruitment of Employees 32
8.16 Confidentiality 32
8.17 CardioTech Underlease 32
8.18 Perstorp Amendment 33
<PAGE>
Article 9: CERTAIN TRANSITIONAL MATTERS 33
9.1 Nonassignable Contracts 33
9.2 General Assistance 34
9.3 Hiring Employees 35
9.4 Undisclosed Contracts 37
9.5 Access to Books and Records 37
9.6 Audit Rights 38
9.7 Prepayments and Returned Products 38
9.8 Receivables and Payables 39
9.9 Chronosphere Agreement 39
Article 10: CONDITIONS PRECEDENT TO BUYERS' AND PARENT'S OBLIGATIONS
39
10.1 Representations and Warranties True at
Closing 39
10.2 Compliance with Agreement 40
10.3 Sellers' Certificate 40
10.4 Approvals 40
10.5 No Litigation 40
10.6 Opinions 40
10.7 Releases from Creditors 40
10.8 Environmental Report 40
10.9 Consents of Third Parties 41
10.10 Parent's Shareholder Approval 41
10.11 Amendments to Customer Contracts 41
10.12 Delivery of Certain Information 41
10.13 Placing Agreement 41
10.14 Proceedings and Documents Satisfactory 41
Article 11: CONDITIONS PRECEDENT TO SELLERS' OBLIGATIONS 42
11.1 Representations and Warranties True at
Closing 42
11.2 Compliance with Agreement 42
11.3 Buyer's Certificate 42
11.4 No Litigation 42
11.5 Opinions 42
11.6 Proceedings and Documents Satisfactory 43
Article 12: CERTAIN COVENANTS 43
12.1 Confidential Information 43
12.2 Noncompetition 43
Article 13: INDEMNIFICATION 45
13.1 Indemnity by the Seller 45
13.2 Indemnity by the Buyers and the Parent 47
13.3 Time Limitations 48
13.4 Materiality Standards; Dollar Thresholds 48
13.5 Claims 49
13.6 Method and Manner of Paying Claims; Set-Off 50
13.7 Straddle Claims 50
13.8 Insurance Proceeds 51
Article 14: TERMINATION 51
Article 15: DEFINITIONS 52
Article 16: GENERAL 54
16.1 Survival of Representations and Warranties 54
16.2 Survival of Covenants 54
16.3 Expenses 54
16.4 Notices 55
16.5 Entire Agreement 56
16.6 Governing Law 56
16.7 Jurisdiction 56
16.8 Exchange Rate 56
16.9 Sections and Section Headings 57
16.10 Assigns 57
16.11 Severability 57
16.12 Further Assurances 57
16.13 Tax Treatment 57
16.14 No Implied Rights or Remedies 58
16.15 Counterparts 58
16.16 Public Statements or Releases 58
16.17 Waiver of Jury Trial 58
16.18 Construction 58
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is dated as of the 23rd
day of June 1997 and is by and among Innovative Technologies Limited, a limited
liability company incorporated under the laws of England and Wales ("ITL"),
Innovative Technologies (US) Inc., a Delaware corporation ("ITUI" and
collectively with ITL, the "Buyers"), Innovative Technologies Group Plc, a
public limited liability company incorporated under the laws of England and
Wales (the "Parent"), PolyMedica Industries, Inc., a Massachusetts corporation
("PMI"), and PolyMedica Industries UK Limited, a limited liability company
incorporated under the laws of England ("PIUL" and collectively with PMI, the
"Sellers").
WHEREAS, PMI (through its Wound Care Division) and PIUL are together
engaged in the business of manufacturing, marketing and selling proprietary
wound care products (the "Wound Care Business"); and
WHEREAS, the Buyers desire to purchase certain assets owned by the
Sellers relating to the Wound Care Business and the Sellers desire to sell
certain assets relating to the Wound Care Business to the Buyers;
NOW, THEREFORE, in consideration of the mutual promises and agreements
set forth herein, the Buyers, the Parent and the Sellers agree as follows:
Article 1
Purchase And Sale
1.1. Acquired Assets. Subject to the terms and conditions set forth in
this Agreement, at the Closing referred to in Article 4 hereof the Sellers shall
sell, assign, transfer and deliver to the Buyers or their nominee(s), and the
Buyers or their nominee(s) shall purchase, acquire and take assignment and
delivery of, the following assets of the Sellers relating to the Wound Care
Business (all of which assets are hereinafter referred to collectively as the
"Acquired Assets"):
(a) All machinery, installations, equipment, furniture, tools,
spare parts, supplies, materials and other personal property described on
Schedule 1.1(a) hereto, with such additions thereto and deletions therefrom as
may hereafter arise in the ordinary course of business prior to the Closing
consistent with the Sellers' obligations under Article 8 hereof (the
"Equipment"), together with all of the Sellers' title to, interest in and rights
under all product warranties and service agreements relating to the Equipment;
(b) Any and all inventories and stock in trade relating to the
Wound Care Business, including all raw materials, work in progress and finished
goods described on Schedule 1.1(b) hereto, with such additions thereto and
deletions therefrom as may hereafter arise in the ordinary course of business
prior to the Closing consistent with the Sellers' obligations under Section 8.2
hereof (the "Inventory");
(c) All of the Sellers' title to, interest in and rights with
respect to the owned real property described on Schedule 1.1(c) hereto (the
"Owned Real Property");
(d) All of the Sellers' title to, interest in and rights under
the leases and subleases of real property described on Schedule 1.1(d) hereto
(the "Real Property Leases");
(e) All of the Sellers' title to, interest in and rights under
the hire purchase agreements and leases of personal property described on
Schedule 1.1(e) hereto (the "Personal Property Leases");
(f) All of the Sellers' rights under the agreements with
respect to employees described on Schedule 1.1(f) hereto (collectively, the
"Employee Agreements");
(g) All of the Sellers' title to, interest in and rights under
the contracts with customers listed on Schedule 1.1(g) hereto (the "Customer
Contracts"), including all rights with respect to work in process under Customer
Contracts, together with all contracts with customers entered into by the
Sellers between the date of this Agreement and the Closing Date (as hereinafter
defined) consistent with the Sellers' obligations under Section 8.4 which remain
to be performed (in whole or in part) by the Sellers on the Closing Date;
(h) All of the Sellers' rights under all outstanding purchase
orders, the service agreements relating to the Equipment and other contracts and
agreements described on Schedule 1.1(h) hereto, and under all agreements for the
purchase or sale of utilities, goods, materials and services from suppliers to
the Sellers, together with any other such contracts entered into by the Sellers
in the ordinary course of the Wound Care Business between the date of this
Agreement and the Closing Date which remain to be performed (in whole or in
part) by any supplier on the Closing Date (the contracts and agreements referred
to in this clause (h) being referred to collectively as the "Other Contracts");
(i) All of the rights of the Sellers and their Affiliates
under the licenses, permits and approvals from and applications to the United
States Food and Drug Administration (the "FDA") and equivalent non-US agencies,
clinical studies, submissions and supplements, approvals, and all
correspondence, raw data, support information and background materials related
thereto, used or obtained by the Sellers or their Affiliates in connection with
the Wound Care Business as listed on Schedule 1.1(i) hereto (collectively, the
"Permits");
(j) All of the Intellectual Property and Improvements thereto
(each as defined in Article 15 herein) of the Sellers and their Affiliates
related to the Wound Care Business, including but not limited to trademarks and
trade names and the goodwill of the business symbolized thereby, product names,
logos, lab notes, copyrights, marketing studies, manufacturing specifications,
designs, inventions (whether patentable or unpatentable), production records,
technical information, manufacturing and design know-how, processes, product and
process specifications, final designs, manufacturing processes, results of human
and animal studies and other experimentation, trade secrets, clinical data,
drawings, databases, software and related documentation, marketing studies,
marketing literature, final formulations and prior iterations of the products of
the Wound Care Business, including without limitation those described on
Schedule 1.1(j) hereto (collectively, the "Intangibles"); and
(k) All of the Sellers' accounting books, inventory and stock
in trade ledgers, other records and ledgers, local, state, and national tax
returns, employment and personnel records for all Assumed Employees (as defined
in Section 9.3(c)) of the Sellers, customer and supplier lists maintained by or
on behalf of the Sellers and all other documents and records, in each case
relating to the Acquired Assets or the Wound Care Business.
1.2. Excluded Assets. Notwithstanding the foregoing, the Sellers are
not selling and the Buyers are not purchasing, pursuant to this Agreement, and
the term "Acquired Assets" shall not include, any of the following assets (the
"Excluded Assets"):
(a) all of the Sellers' rights under the employee
benefit plans described on Schedule 1.2(a) hereto and all related plan assets
and plan sponsorships;
(b) all of the Sellers' cash, cash equivalents and
accounts receivable (or book debts) outstanding at the Closing;
(c) all of the Sellers' rights to use the word
"PolyMedica";
(d) all of the Sellers' minute books, share ledgers
and other corporate and accounting records;
(e) the consideration received by the Sellers pursuant to
this Agreement;
(f) the rights of the Sellers under this Agreement; and
(g) the assets and contracts described on Schedule 1.2(g)
hereto.
Article 2
Purchase Price
At the Closing, the Buyers shall deliver to the Sellers, as the
aggregate purchase price for the Acquired Assets, (i) Nine Million U.S. Dollars
(U.S. $9,000,000) in cash, Four Hundred Thousand U.S. Dollars (U.S. $400,000) of
which has previously been paid to the Sellers pursuant to the letter of intent
dated April 11, 1997 among the Parent, PMI and PIUL (as amended by Amendment No.
1 dated June 10, 1997, the "Letter of Intent"), (ii) a promissory note, in the
principal amount of Four Million U.S. Dollars (U.S. $4,000,000), in the form of
Exhibit A hereto (the "Note"), (iii) a note for One Million Eight Hundred
Thirty-one Thousand Five Hundred Pounds Sterling ((pound)1,831,500) nominal
amount series 1 unsecured convertible notes 1997/2000 issued by the Parent in
the form attached to the instrument attached as Exhibit B hereto, and (iv) a
note for Nine Hundred Fifteen Thousand Seven Hundred Fifty Pounds Sterling
((pound)915,750) nominal amount series 2 unsecured convertible loan notes
1997/2000 issued by the Parent in the form attached to the instrument attached
as Exhibit C hereto (together with the convertible loan notes referred to in
(iii) above, the "Loan Notes").
Article 3
Assumption Of Certain Obligations
At the Closing, the Buyers shall assume, and agree to pay, perform,
fulfill and discharge, all obligations of the Sellers (collectively, the
"Assumed Liabilities") under the Real Property Leases, Personal Property Leases,
Employee Agreements, Other Contracts and Customer Contracts (collectively, the
"Assumed Contracts") to the extent, and only to the extent, such obligations
accrue after the Closing and relate to the operation of the Wound Care Business
after the Closing. Anything in this Agreement to the contrary notwithstanding,
the Buyers shall not assume, and shall not be deemed to have assumed, any
liability or obligation of the Sellers whatsoever, known or unknown, fixed or
contingent, and including without limitation any obligations arising out of the
operation of the Wound Care Business prior to Closing, other than as
specifically set forth in this Article 3 (with all such unassumed liabilities
and obligations referred to herein as the "Excluded Liabilities").
Article 4
Closing
4.1. Time and Place. The closing of the transfer and delivery of all
documents and instruments necessary to consummate the transactions contemplated
by this Agreement (the "Closing") shall be held at the offices of Bingham, Dana
& Gould LLP, 150 Federal Street, Boston, Massachusetts (or at such other place
as the Buyers, the Parent and the Sellers may agree) at 10:00 a.m. on July 18,
1997 or such later date not later than July 31, 1997 as is the first business
day after the last of the conditions precedent to be satisfied or waived
pursuant to Articles 10 and 11 has been satisfied or waived. The date on which
the Closing is actually held hereunder is sometimes referred to herein as the
"Closing Date".
4.2. Transactions at Closing. At the Closing:
(a) The Sellers shall duly execute and deliver to the Buyers
or their nominee or nominees such deeds, certificates of title or other
instruments of assignment and transfer with respect to the Acquired Assets as
the Buyers may reasonably request and as may be necessary to vest in the Buyers
good and marketable title to all of the Acquired Assets, in each case subject to
no Encumbrance (as defined in Section 6.9) except for the Encumbrances specified
in Schedule 4.2(a) hereto (the "Permitted Encumbrances"). These transfer
instruments will include, without limitation, a Bill of Sale in the form of
Exhibit D hereto with respect to the Acquired Assets, Patent Assignments in the
form of Exhibit E-1 and E-2 hereto, Trademark Assignments in the form of
Exhibits F-1 and F-2 hereto, a sub-lease of the premises leased by PMI in
Golden, Colorado on the terms of the term sheet attached hereto as Exhibit G-1,
an assignment of the Real Property Lease with respect to PIUL's premises in
Tarvin, Cheshire in the form of Exhibit G-2 hereto and assignments of the
Permits in the form of Exhibit H hereto.
(b) The Buyers or their nominee or nominees, as the case may
be, shall duly execute and deliver to the Sellers such instruments of assumption
and other documents with respect to the Assumed Liabilities as the Sellers may
reasonably request, including an Assumption Agreement in the form of Exhibit I
hereto.
(c) The Sellers shall deliver or cause to be delivered to the
Buyers all of the Sellers' leases, contracts and agreements included in the
Acquired Assets, with such assignments thereof and consents to assignments as
are necessary to assure the Buyers of the full benefit of the same, and all of
the Sellers' business records, tax returns, books and other data relating to the
Acquired Assets. The Sellers shall take all requisite steps to put the Buyers in
actual possession and operating control of the Acquired Assets.
(d) The Buyers shall pay the net cash portion of the purchase
price in the amount of Eight Million Six Hundred Thousand US Dollars (U.S.
$8,600,000) by wire transfer to an account designated by PMI, and shall deliver
the Note to PMI.
(e) ITL and PMI will enter into a Non-Exclusive License and
Supply Agreement in the form of Exhibit J hereto (the "License and Supply
Agreement").
(f) Upon request of the Buyers at least five days prior to
Closing, the Sellers shall deliver to the Buyers (i) pay-off letters, releases
and lien discharges (or agreements therefor) from any Person with an Encumbrance
on any of the Acquired Assets and the Buyers shall pay in full the amount owed
to such Person at the Closing (to the extent such amount does not exceed the net
cash portion of the purchase price), which amount shall be deducted from the net
cash portion of the purchase price and (ii) any other consents of any of the
Sellers' lenders required by the terms of any Seller's borrowing arrangements.
(g) Two days prior to Closing, Coopers & Lybrand LLP (or an
affiliate) shall conduct a survey at the Buyers' expense of all of the Sellers'
inventories and stock in trade relating to the Wound Care Business and shall
issue a report in form and substance satisfactory to the Buyers that the levels
of inventories and stock in trade of the Sellers are not less than the levels
set out in Schedule 1.1(b).
(h) The Buyers and the Sellers will agree upon an allocation
of the purchase price among the Acquired Assets and an allocation of the
Acquired Assets and Assumed Liabilities between the Buyers, which such
allocations shall be set forth upon a certificate to be delivered by each of the
Buyers and each of the Sellers at the Closing.
(i) The Sellers will pay to the Buyers, by wire transfer to an
account designated by the Buyers, an amount equal to the aggregate amount of all
prepayments by customers of the Sellers with respect to product orders under the
Customer Contracts (including without limitation the Hisamitsu contract) to the
extent such orders have not been satisfied on or before the Closing Date.
Article 5
Value Added Tax; Stamp Duties
5.1. VAT Treatment. The parties shall use all reasonable endeavours to
procure that the purchase of that part of the Wound Care Business which is
carried on in the United Kingdom (the "UK Business") and that part of the
Acquired Assets used in the conduct of the UK Business (the "UK Assets") is
deemed to be a transfer of a business or part of a business as a going concern
for the purposes of article 5 of the United Kingdom Value Added Tax (Special
Provisions) Order 1995 (the "VAT Order") and is treated neither as a supply of
goods nor a supply of services.
5.2. Delivery of Records. The Sellers shall forthwith deliver to ITL
all the records of the UK Business for value added tax purposes which are
required to be preserved by ITL by the United Kingdom Value Added Tax Act 1994
Section 49(1)(b).
5.3. Payment of VAT. In the event that H.M. Customs and Excise
determines that value added tax is chargeable on the sale of the UK Assets or on
any part of the UK Assets ITL agrees that such value added tax shall be in
addition to the sums specified in Article 2 and that (against production of
proper tax invoices in respect of such sums) it shall pay the amount of such
value added tax (including any penalty or interest incurred by ITL for late
payment solely by reason of it having been assumed by the parties that the
purchase of the UK Business and the UK Assets fell within article 5 of the VAT
Order).
5.4. Indemnity. The Sellers shall indemnify the Buyers against any
value added tax payable in relation to goods delivered or services rendered by
the Sellers in relation to the UK Business prior to the Closing Date and against
all penalties and interest relating thereto.
5.5. Stamp Duties. All stamp duties or other transfer taxes payable
with respect to the sale of the UK Assets shall be paid by the Buyers.
<PAGE>
Article 6
Representations And Warranties Of the Seller
The Sellers jointly and severally represent and warrant to the Buyers
and the Parent as follows:
6.1. Organization of Sellers; Authority. PMI is a corporation duly
organized and validly existing under the laws of the Commonwealth of
Massachusetts. PIUL is a limited liability company duly incorporated and
registered under the laws of England. Each of the Sellers is duly qualified and
in good standing as a foreign corporation in all jurisdictions in which the
character of the properties owned or leased or the nature of the activities
conducted by it make such qualification necessary, except for those
jurisdictions where the failure to so qualify would not have a Material Adverse
Effect. Each of the Sellers has delivered to the Buyers complete and correct
copies of its charter and by-laws or other constitutional documents and all
amendments thereto. Each of the Sellers has all requisite power and authority to
own and hold the Acquired Assets owned or held by it and to carry on the Wound
Care Business as such business is now conducted. Each of the Sellers has all
requisite power and authority to execute and deliver this Agreement and the
other documents, instruments and agreements contemplated hereby (collectively,
the "Transaction Documents") to which it is a party and to carry out all actions
required of it pursuant to the terms of the Transaction Documents.
6.2. Corporate Approval; Binding Effect. Each of the Sellers has
obtained all necessary authorizations and approvals from its Board of Directors
and stockholders required for the execution and delivery of the Transaction
Documents to which it is or is to be a party and the consummation of the
transactions contemplated hereby and thereby. This Agreement has been duly
executed and delivered by each of the Sellers and constitutes, and the other
Transaction Documents when executed and delivered by the Sellers will
constitute, the legal, valid and binding obligations of the Sellers enforceable
against them in accordance with their terms, except to the extent the
enforceability thereof may be limited by any applicable bankruptcy,
reorganization, fraudulent conveyance, insolvency or other laws affecting
creditors' rights generally or by general principles of equity.
6.3. Non-Contravention. Except as set forth in Schedule 6.3 hereto and
except for any consents to transfer required in connection with the transfer to
the Buyers of the Assumed Contracts, the execution and delivery by the Sellers
of the Transaction Documents and the consummation by them of the transactions
contemplated hereby and thereby will not (a) violate or conflict with any
provision of the charter and by-laws or other constitutional documents of the
Sellers, as amended to date; or (b) constitute a violation of, or be in conflict
with, or constitute or create a default under, or result in the creation or
imposition of any Encumbrance upon any property of the Sellers (including
without limitation any of the Acquired Assets) pursuant to (i) any agreement or
instrument filed as an exhibit to (or incorporated by reference in) PMI's Annual
Report on Form 10-K for the fiscal year ended March 31, 1996 or to any of PMI's
quarterly reports on Form 10-Q filed for any fiscal period thereafter, or (ii)
any statute, judgment, decree, order, regulation or rule of any court or
governmental or regulatory authority.
6.4. Governmental Consents; Transferability of Licenses, Etc.
(a) Except as set forth on Schedule 6.4 and except for filing
and recording appropriate documents normally required in connection with
conveyance of title to real or personal property, no consent, approval or
authorization of, or registration, qualification or filing with, any
governmental agency or authority is required for the execution and delivery by
each of the Sellers of the Transaction Documents to which it is a party or for
the consummation by it of the transactions contemplated hereby or thereby. The
Sellers have and maintain, and the Permits listed on Schedule 1.1(i) hereto
include, all operating authorities, licenses, permits, approvals and other
authorizations from all governmental authorities as are necessary for the
conduct of the Wound Care Business or in connection with the ownership or use of
the Acquired Assets. Except as expressly designated on Schedule 6.4, all of the
Sellers' rights under each of the Permits is freely transferable to the Buyers,
and true and complete copies of all of the Permits have previously been
delivered to the Buyers.
(b) The Sellers and their Affiliates did not sell any products or any
prior iteration of any products relating to the Wound Care Business prior to
receiving any required or necessary approvals or consents from any federal,
state or foreign governmental authority, including the FDA or any equivalent
entity in any other jurisdiction. Except as set forth in Schedule 6.4(b) hereto,
the Sellers and their Affiliates have received all necessary approvals and
consents to sell, promote and market the products sold by the Wound Care
Business in the United States, the United Kingdom and any other jurisdiction in
which they sell, promote or market such products. Except as set forth in
Schedule 6.4(b) hereto, neither the Sellers nor any of their Affiliates have
received any notice of, or is aware of any actions, product recalls, medical
device reports, information requests or similar issues regulated by the FDA or
any equivalent entity in any other jurisdiction. All facilities operated by the
Sellers in connection with the Wound Care Business are operated in accordance
with good manufacturing practices.
(c) Set forth on Schedule 6.4(c) hereto is an accurate and complete
list of all applications, submissions, correspondence and other material
communications (including written summaries of any material oral communications)
relating to the application by the Sellers or their Affiliates for approval by
the FDA to market and sell the products sold by the Wound Care Business in the
United States (collectively, the "FDA Applications") and an accurate and
complete list of all applications, submissions, correspondence and other
material communications (including written summaries of any material oral
communications) relating to the applications by the Sellers or their Affiliates
for approval by any entities equivalent to the FDA in any other jurisdictions,
to market and sell the products sold by the Wound Care Business in such
jurisdictions (collectively, the "Non-US Applications"). Accurate and complete
copies of all such applications, submissions, correspondence and other
communications have been previously provided to the Buyers by the Sellers. All
requests for additional information and other communications with the FDA or any
equivalent entity with respect to the FDA Applications or the Non-US
Applications have been adequately responded to, and all information relating to
the products sold by the Wound Care Business, including information gathered
during clinical studies, required to be submitted or disclosed to the FDA or any
comparable entity in connection with the FDA Applications or the Non-US
Applications has been submitted or disclosed.
6.5. Financial Statements. The Sellers have delivered the following
financial statements (the "Financial Statements") to the Buyers, and there are
attached as Schedule 6.5 hereto: (a) the audited balance sheet of the Wound Care
Business as at March 31, 1997 (such balance sheet being referred to herein as
the "Audited Balance Sheet"), and the related audited statements of operations
of the Wound Care Business for the fiscal year then ended, (b) the balance
sheets of the Wound Care Business as at March 31, 1995 and March 31, 1996, and
the related statements of operations of the Wound Care Business for the fiscal
years then ended, each of which has been reviewed by the Sellers' auditors, and
(c) product sales information for each product sold by the Wound Care Business
during the three fiscal year period ending on March 31, 1997. Each of the
Financial Statements is true and correct in all material respects and has been
prepared in accordance with generally accepted accounting principles; each of
such balance sheets fairly presents the financial condition of the Wound Care
Business as of its respective date; and such statements of income, retained
earnings and cash flows fairly present the results of operations for the periods
covered thereby.
6.6. Absence of Certain Changes. Except as set forth on Schedule 6.6,
since March 31, 1997 the Sellers have carried on the Wound Care Business only in
the ordinary course, and, insofar as it relates to the Wound Care Business,
there has not been:
(a) any change in the assets, liabilities, sales, income or
average inventory levels of the Sellers or in their relationships with
suppliers, customers or lessors, other than changes which were both in the
ordinary course of business and have not had, either in any case or in the
aggregate, a Material Adverse Effect;
(b) any significant change in the financial, trading
or business position of the Wound Care Business;
(c) any acquisition or disposition by the Sellers of
any asset or property other than in the ordinary course of business;
(d) any damage, destruction or loss, whether or not covered by
insurance, or any fire, explosion, earthquake, disaster, labor trouble or
dispute, change in business organization, any action by the United States or any
other governmental authority, change in technology, obsolescence of product,
flood, drought, embargo, riot, civil disturbance, uprising, activity of armed
forces or act of God or public enemy materially and adversely affecting, either
in any case or in the aggregate, the property or business of the Sellers;
(e) notice of any adverse decisions by any regulatory
authority having jurisdiction over any of the Sellers including without
limitation the FDA or any equivalent entity;
(f) any increase in the compensation, pension or other
benefits payable or to become payable by the Sellers to any of their officers or
employees, or any bonus payments or arrangements made to or with any of them
(other than pursuant to the terms of any existing written agreement or plan of
which the Buyers have been supplied complete and correct copies);
(g) any forgiveness or cancellation of any debt or claim by
the Sellers of any waiver of any right of material value other than compromises
of accounts receivable (or book debts) in the ordinary course of business;
(h) any entry by the Sellers into any transaction
other than in the ordinary course of business;
(i) any incurrence by the Sellers of any obligations or
liabilities, whether direct or indirect, absolute or contingent, matured or
unmatured or otherwise (including, without limitation, liabilities as guarantor
or otherwise with respect to obligations of others), other than obligations and
liabilities incurred in the ordinary course of business; or
(j) any mortgage, pledge, lien, lease, security interest or
other charge or encumbrance on any of the assets, tangible or intangible, of the
Sellers.
6.7. Litigation, Etc. Except as set forth on Schedule 6.7 hereto, no
action, suit or proceeding or investigation is pending or, to the knowledge of
any of the Sellers, threatened, relating to or affecting any of the Acquired
Assets or, insofar as it relates to the Wound Care Business, the Sellers or
which question the validity of the Transaction Documents or challenges any of
the transactions contemplated hereby or thereby, except for any actions, suits,
proceedings or investigations that individually or in the aggregate will not
have a Material Adverse Effect.
6.8. Conformity to Law. (a) Except as set forth on Schedule 6.8 each of
the Sellers, insofar as it relates to the Wound Care Business, has complied in
all material respects with, and is in compliance in all material respects with:
(i) all laws, statutes, local ordinances, governmental regulations and all
judicial or administrative tribunal orders, judgments, writs, injunctions,
decrees or similar commands applicable to the Seller or any of the Acquired
Assets (including, without limitation, any labor, environmental, occupational
health, zoning or other law, regulation or ordinance), and (ii) all unwaived
terms and provisions of all contracts, agreements and indentures to which any of
the Sellers is a party set forth on Schedule 6.14, or by which any of the
Sellers or any of the Acquired Assets is subject. Except as set forth on
Schedule 6.8 hereto, the Sellers have not committed, been charged with, or to
the Sellers' knowledge been under investigation with respect to, nor does there
exist, any violation of any provision of any federal, state or local law or
administrative regulation in respect of the Sellers (insofar as it relates to
the Wound Care Business) or any of the Acquired Assets, except for any violation
that singly or in the aggregate will not have a Material Adverse Effect and will
not restrict or limit the ability of the Buyers in any material respect to own
or operate the Acquired Assets or conduct the Wound Care Business after the
Closing Date.
(b) In connection with the ownership and operation by the
Sellers of the Acquired Assets and the conduct by the Sellers of the Wound Care
Business, none of the Sellers, nor, to the knowledge of any of the Sellers, any
officer, director, employee, agent or representative of the Sellers, has made,
directly or indirectly, any bribes or kickbacks, illegal political
contributions, payments from corporate funds not recorded in the books and
records of any of the Sellers, payments from corporate funds that were falsely
recorded on the books and records of any of the Sellers, payments from corporate
funds to governmental officials in their individual capacities for the purpose
of affecting their action or the action of the government they represent to
obtain favorable treatment in securing business or to obtain special concessions
or illegal payments from corporate funds to obtain or retain business either
within or without the United States.
6.9. Title to Acquired Assets. Except as noted on Schedule 6.9, the
Sellers are the legal and beneficial owners of and have good and valid title to
all of the Acquired Assets, and have the full right to sell, convey, transfer,
assign and deliver the Acquired Assets, without the need to obtain the consent
or approval of any third party. Except for liens described on Schedule 6.9
hereto which will be discharged at Closing, and except for Permitted
Encumbrances and any Encumbrances (as defined below) arising out of Taxes (as
defined in Article 15) not in default and payable without penalty or interest or
the validity of which is being contested in good faith by appropriate
proceedings, all of the Acquired Assets are entirely free and clear of any
security interests, liens, claims, charges, options, mortgages, debts, leases
(or subleases), conditional sales agreements, title retention agreements,
encumbrances of any kind, material defects as to title or restrictions against
the transfer or assignment thereof (collectively, "Encumbrances"). At and as of
the Closing, the Buyers or their nominee(s) will have good and valid title to
all of the Acquired Assets, free and clear of all Encumbrances, except for
Permitted Encumbrances.
6.10. Real Property; Safety, Zoning and Environmental Matters.
(a) Schedule 6.10(a) hereto sets forth complete and accurate
legal descriptions of all real property presently owned, leased or operated by
the Sellers in connection with the Wound Care Business (the "Real Property").
Schedule 6.10(a) also sets forth a complete and correct description of all
leases relating to the Wound Care Business pursuant to which the Sellers hold
any such Real Property.
(b) Except as set forth on Schedule 6.10(b):
(i) neither the Sellers nor to the knowledge of the
Sellers (after due inquiry) any owner or operator of any real property
presently owned, leased or operated by any of the Sellers is in
violation or alleged violation of any judgment, decree, order, law,
license, rule or regulation pertaining to environmental matters,
including without limitation those arising under the United Kingdom
Environmental Protection Act 1990, the United States Resource
Conservation and Recovery Act ("RCRA"), the United States Comprehensive
Environmental Response, Compensation and Liability Act of 1980 as
amended ("CERCLA"), the United States Superfund Amendments and
Reauthorization Act of 1986 ("SARA"), the United States Federal Water
Pollution Control Act, the United States Solid Waste Disposal Act, as
amended, the United States Federal Clean Water Act, the United States
Federal Clean Air Act, the United States Toxic Substances Control Act,
or any other federal, state, local or non-US statute, regulation,
ordinance, order or decree relating to health, safety or the
environment (hereinafter "Environmental Laws"), except for any
violations that singly or in the aggregate will not have a Material
Adverse Effect;
(ii) no Seller has received, with respect to any of
the Real Property, written notice from any third party, including
without limitation, any federal, state, local or non-US governmental
authority, (A) that such Seller or any predecessor in interest has been
identified by the United States Environmental Protection Agency ("EPA")
as a potentially responsible party under CERCLA with respect to a site
listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B
(1986); (B) that any hazardous waste, as defined by 42 U.S.C.
ss.6903(5), any hazardous substance as defined by 42 U.S.C.
ss.9601(14), any pollutant or contaminant as defined by 42 U.S.C.
ss.9601(33) or any toxic substance, oil or hazardous material or other
chemical or substance regulated by any Environmental Laws ("Hazardous
Substances") which such Seller or any predecessor in interest has
generated, transported or disposed of has been found at any site at
which a federal, state or local agency or other third party has
conducted or has ordered that such Seller or any predecessor in
interest conduct a remedial investigation, removal or other response
action pursuant to any Environmental Law; or (C) that such Seller or
any predecessor in interest is or shall be a named party to any claim,
action, cause of action, complaint, (contingent or otherwise) legal or
administrative proceeding arising out of any third party's incurrence
of costs, expenses, losses or damages of any kind whatsoever in
connection with the release of Hazardous Substances;
(iii) to the knowledge of the Sellers after due
inquiry (A) no portion of any Real Property has been used for the
handling, manufacturing, processing, storage or disposal of Hazardous
Substances except in accordance in all material respects with
applicable Environmental Laws; and no underground tank or other
underground storage receptacle for Hazardous Substances (other than
heating oil) is located on any of the Real Property; (B) the Real
Property is free from contamination of every kind, including, without
limitation, groundwater, surface water, soil, sediment and air
contamination, and such properties do not contain asbestos in any form,
urea formaldehyde foam insulation, transformers or other equipment
containing polychlorinated biphenyls or any other chemical, material or
substance, exposure to which is prohibited, limited or regulated by any
Environmental Law, or which poses a hazard to the health and safety of
the occupants of such properties or those adjacent thereto; (C) there
have been no releases (i.e., any past or present releasing, spilling,
leaking, pumping, pouring, emitting, emptying, discharging, injecting,
escaping, disposing or dumping) of Hazardous Substances on, upon, into
or from any Real Property except in accordance in all material respects
with applicable Environmental Laws; (D) there have been no material
releases on, upon, from or into any real property in the vicinity of
any of the Real Property which, through soil or groundwater
contamination, may have come to be located on such Real Property; and
(E) any Hazardous Waste (as defined under RCRA) that has been generated
on any of the Real Property presently owned, leased or operated by the
Sellers in connection with the Wound Care Business has been transported
offsite only by carriers having identification numbers issued by the
EPA and has been treated or disposed of only by treatment or disposal
facilities maintaining valid permits as required under applicable
Environmental Laws, which transporters and facilities have been and
are, to the Sellers' knowledge, operating in compliance in all material
respects with such permits and applicable Environmental Laws, except
for any violations that singly or in the aggregate will not have a
Material Adverse Effect; and
(iv) no Real Property or equipment presently owned,
leased or operated by the Sellers in connection with the Wound Care
Business is or shall be subject to any applicable environmental cleanup
responsibility law or environmental restrictive transfer law or
regulation, by virtue of the transactions set forth herein and
contemplated hereby.
(c) Attached as part of Schedule 6.10(c) is a list of all
documents, reports, site assessments, data, communications or other materials,
in the possession of the Sellers or to which they have access, which contain any
material information with respect to potential environmental liabilities
associated with any Real Property and relating to compliance with Environmental
Laws or the environmental condition of such properties and adjacent properties.
The Sellers have furnished to the Buyers complete and accurate copies of all of
the documents, reports, site assessments, data, communications and other
materials listed on Schedule 6.10(c) hereto.
6.11. Equipment. Schedule 1.1(a) hereto sets forth a complete and
accurate list as of March 31, 1997 of all of the Sellers' machinery and
equipment relating to the Wound Care Business. The Personal Property Leases
listed on Schedule 1.1(e) hereto include all leases and hire purchase agreements
by the Sellers of all items of personal property used in the Wound Care
Business. The Equipment, and all personal property held by the Sellers under the
Personal Property Leases, are utilized by the Sellers in the ordinary course of
business and are in good operating condition and repair for their present use in
the Wound Care Business.
6.12. Inventories. Except as set forth on Schedule 6.12, the
inventories and stock in trade of the Sellers consist solely of, and the
Inventory to be purchased by the Buyers hereunder will consist solely of,
materials and goods of a quality and quantity which are usable for manufacturing
and saleable in the normal course of the Wound Care Business. The Inventory is
adequate for the present needs of the Wound Care Business, is fairly reflected
on the books of account of the Sellers, and is valued in accordance with the
normal inventory valuation policies of the Sellers of stating items of inventory
at the lower of standard cost and market value in accordance with generally
accepted accounting principles, with adequate allowance for excessive or
obsolete inventories. Except as set forth on Schedule 6.12, no item included in
the Inventory is damaged, obsolete or in poor condition and all items included
in the Inventory are capable of being sold in the ordinary course of business in
accordance with the Sellers' current price lists without rebate or allowance to
a buyer.
6.13. Insurance. Schedule 6.13 hereto lists all policies of fire,
liability, worker's compensation, life, property and casualty, product liability
and other insurance owned or held by the Sellers or maintained for the benefit
of the Sellers in connection with the Wound Care Business and the Acquired
Assets. All such policies (a) are in full force and effect, (b) are sufficient
for compliance in all material respects by the Sellers with all requirements of
law and regulation and all agreements to which the Sellers are a party and (c)
provide that they will remain in full force and effect through the respective
dates set forth in such Schedule. The Sellers are not in material default with
respect to their obligations under any of such insurance policies and have not
received any notification of cancellation of any such insurance policies.
6.14. Contracts. Schedule 6.14 sets forth a complete and accurate list
of all contracts to which any of the Sellers is a party or by which any of the
Sellers is bound or to which any of the Sellers or any of the Acquired Assets is
subject relating to the Wound Care Business. As used in this Section 6.14, the
word "contract" means and includes every agreement or understanding of any kind,
written or oral, which is legally enforceable by or against the Sellers relating
to the Wound Care Business, and specifically includes:
(a) contracts and other agreements with any current or former
officer, director, employee, consultant or shareholder or any partnership,
corporation, joint venture or any other entity in which any such person has an
interest;
(b) agreements with any labor union or association
representing any employee;
(c) contracts and other agreements for the provision of
services by any of the Sellers;
(d) bonds, guarantees or other security agreements
provided by any party in connection with the business of the Sellers;
(e) contracts and other agreements for the sale of any of the
Sellers' assets or properties other than in the ordinary course of business or
for the grant to any person of any preferential rights to purchase any of the
Sellers' assets or properties;
(f) joint venture agreements relating to the assets,
properties or business of the Sellers or by or to which they or any of their
assets or properties are bound or subject;
(g) contracts or other agreements under which the Sellers
agree to indemnify any party, to share tax liability of any party, or to refrain
from competing with any party;
(h) any contracts or other agreements with regard to
indebtedness for borrowed money; or
(i) any other contract or other agreement whether or
not made in the ordinary course of business.
The Sellers have delivered to the Buyers true, correct and complete
copies of all such contracts, together with all modifications and supplements
thereto. Each of the contracts listed on Schedule 6.14 hereto or any of the
other Schedules hereto is in full force and effect, the Sellers are not in
breach of any of the provisions of any such contract, nor, to the knowledge of
the Sellers, is any other party to any such contract in breach thereof, nor does
any event or condition exist which with notice or the passage of time or both
would constitute a breach thereunder, except for any breaches or non-compliance
that individually or in the aggregate would not have a Material Adverse Effect.
The Sellers have in all material respects performed all obligations required to
be performed by them to date under each such contract. Subject to obtaining any
necessary consents by the other party or parties to any such contract (the
requirement of any such consent being reflected on Schedule 6.14), no contract
includes any provision the effect of which may be to enlarge or accelerate any
obligations of the Buyers to be assumed thereunder or give additional rights to
any other party thereto or will in any other way be affected by, or terminate or
lapse by reason of, the transactions contemplated by this Agreement.
6.15. Compensation of and Contracts with Employees. Schedule 6.15
hereto sets forth a complete and accurate list of (a) each Employee (as defined
in Article 15 hereof) and the rate, character and amount of the compensation
paid to each such Employee for the fiscal year ended March 31, 1997, and (b) the
rate, character and amount of such compensation paid to each such Employee
annually through April 30, 1997. Except as set forth on Schedule 6.15 hereto,
there have been no changes in such compensation since such date. Except as
listed in Schedule 6.15 hereto, the Sellers have no employment agreement,
written or oral, with any currently active Employee, including any agreement to
provide any bonus or benefit to any such Employee. Except as set forth on
Schedule 6.15, since December 31, 1996, the Sellers have not made any pension,
bonus or other payment, other than base salary, or become obligated to make any
such payment, to any Employee. Except as set forth on Schedule 6.15, the Sellers
have no outstanding loans or advances to any Employee. Since April 1, 1996 no
Employee has been transferred to any other business operation controlled
directly or indirectly by any of the Sellers.
6.16. Employee Benefit Plans.
(a) Except as set forth on Schedule 6.16 hereto, neither the
Sellers nor any trade or business (whether or not incorporated) that is a member
of a group described in Section 414(b) or Section 414(c) of the United States
Internal Revenue Code of 1986, as amended (the "Code"), of which any of the
Sellers is a member (a "Related Entity") maintains or has any obligation to make
contributions to any employee benefit plan within the meaning of Section 3(3) of
the United States Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or any other retirement, profit sharing, deferred compensation, stock
option, bonus, share appreciation right, severance, group or individual health,
dental, medical, life insurance, survivor benefit or other benefit program for
officers, employees, consultants or directors, current or former. Each employee
benefit plan (within the meaning of Section 3(3) of ERISA) set forth on Schedule
6.16 hereto, other than the UK Benefits Schemes or any such plan which is a
multiemployer plan as defined at Section 3(37) or Section 4001(a)(3) (a
"Multiemployer Plan"), is hereinafter referred to as an "ERISA Plan", and each
other plan, program or arrangement set forth on Schedule 6.16 hereto (other than
the UK Benefits Schemes or any such plan, program or arrangement that is a
Multiemployer Plan) is hereinafter referred to as a "Non-ERISA Plan". The
Sellers have heretofore delivered to the Buyers true, correct and complete
copies of each ERISA Plan and of each Non-ERISA Plan and (i) any associated
trust, custodial, insurance or service agreements, (ii) any annual report,
actuarial report or disclosure materials (including any summary plan
descriptions) submitted to any governmental agency or distributed to
participants or beneficiaries thereunder in the current or any of the six (6)
preceding calendar years and (iii) the most recently delivered IRS determination
letter, and any other governmental advisory opinions or rulings applicable to
such Plan. All such ERISA Plans and Non-ERISA Plans have been maintained and
operated in accordance in all material respects with all federal, state and
local laws and regulations applicable to such plans, and the terms and
conditions of the respective plan documents.
(b) Except as otherwise noted in Schedule 6.16 hereto, no
ERISA Plan subject to Title IV of ERISA or any trust created under any such
ERISA Plan has been terminated within the current or preceding six (6) calendar
years, and any termination so noted in Schedule 6.16 hereto was accomplished in
accordance with applicable federal, state and local law. Neither Seller nor any
Related Entity has incurred, or is expected to incur, any material liability to
the United States Pension Benefit Guaranty Corporation ("PBGC"), any
Multiemployer Plan or to any other governmental authority, pension or retirement
board, or other agency, under any federal, state or local law. There has been no
"reportable event" within the meaning of Section 4043(b) of ERISA with respect
to any ERISA Plan and no event or condition that presents a material risk of
termination of any ERISA Plan by the PBGC.
(c) Full payment has been made of all amounts that any of the
Sellers or any Related Entity is required, under the terms of each ERISA Plan,
Non-ERISA Plan and Multiemployer Plan, or pursuant to applicable federal, state
or local law, to have paid as contributions to such ERISA Plan, Non-ERISA Plan
or Multiemployer Plan (as the case may be) as of the last day of the most recent
fiscal year of such ERISA Plan, Non-ERISA Plan or Multiemployer Plan (as the
case may be) ended prior to the date hereof, and no accumulated funding
deficiency (as defined in Section 302 of ERISA and Section 412 of the Code),
whether or not waived, exists with respect to any ERISA Plan.
(d) The execution of this Agreement and the consummation of
the transactions contemplated herein will not result in any payment (whether of
severance pay or otherwise) becoming due from any ERISA Plan or Non-ERISA Plan
of any of the Sellers to any current or former director, officer, consultant or
employee of such Seller or result in the vesting, acceleration of payment or
increases in the amount of any benefit payable to or in respect of any such
current or former director, officer, consultant or employee.
(e) Except for the schemes set forth with respect to the UK
Employees in Schedule 6.16 hereto (the "UK Benefits Schemes"), there are no
agreements, arrangements, customs or practices (whether legally enforceable or
not) in operation for the payment of or contribution towards any pensions,
allowances, lump sums or other like benefits on retirement or on death or during
periods of sickness or disablement for the benefit of any UK Employees or for
the benefit of dependants of any such UK Employees nor has any proposal to
establish any such agreement or arrangement been announced.
(f) Full details of each of the UK Benefits Schemes
have been given to the Buyers in the form of:
(i) copies of all trust deeds and rules governing or
relating to the UK Benefits Schemes; and
(ii) copies of all current booklets, announcements and
other explanatory literature issued to the Employees
who are members of the UK Benefits Schemes and copies
of letters or other documents relating to arrangements
for individual members or groups of members.
(g) No discretion or power has been or will before
Closing be exercised under any of the UK Benefits Schemes to:
(i) augment benefits thereunder in respect of any of the
Employees, except as set forth on Schedule 6.16
hereto;
(ii) admit to membership an Employee who would not
otherwise have been eligible for admission to
membership thereof;
(iii) provide in respect of a member who is an Employee a
benefit which would not otherwise be provided in
respect of such member; or
(iv) pay a contribution thereto in respect of an Employee
which would not otherwise have been paid.
(h) All benefits (other than refunds of contributions) payable
under the UK Benefits Schemes on the death of a member who is an Employee or
during periods of sickness or disability of such a member are fully insured
under a policy effected with an insurance company of good repute and each such
member has been covered for such insurance by such insurance company at its
normal rates and on its normal terms for persons in good health and all
insurance premiums payable have been paid.
(i) No payment or repayment of any of the assets of the
UK Benefits Schemes has been made to any employer participating in the scheme.
(j) There has been no breach of the trusts of the UK Benefits
Schemes and there are no actions, suits or claims (other than routine claims for
benefits) outstanding, pending or threatened against the trustees or
administrator of the UK Benefits Schemes or against the Sellers or any other
employer that participates in any of the UK Benefits Schemes in respect of any
act, event, omission or other matter arising out of or in connection with such
UK Benefits Schemes, and all liabilities in respect of any costs, fees and
expenses in relation to such UK Benefits Schemes (whether or not already
invoiced) incurred before the Closing will have been met by Closing.
(k) In relation to the UK Benefits Schemes:
(i) the current rates of all contributions are set out in
Schedule 6.16 and there are not at the date hereof any
contributions thereto from or in respect of Employees
or other payments which have fallen due but are
unpaid; and
(ii) each of the UK Benefits Schemes is a money purchase
scheme (as defined in section 181(l) United Kingdom
Pension Schemes Act 1993) or a personal pension scheme
(as defined in Section 630 of the United Kingdom
Income and Corporation Taxes Act 1988) and the
benefits payable under each such UK Benefits Scheme
whether immediate, prospective or contingent, are
solely the benefits which can be provided by the funds
available for each member under such UK Benefits
Scheme.
(l) Each UK Benefits Scheme is either approved by the United
Kingdom Commissioners of Inland Revenue as an exempt approved scheme for the
purposes of Part XIV Chapter I of the United Kingdom Income and Corporation
Taxes Act 1988 or Part XIV Chapter IV of the United Kingdom Income and
Corporation Taxes Act 1988 or is capable of receiving such approval and neither
Seller is aware of any circumstances which might give the United Kingdom Inland
Revenue reason to withdraw or withhold such approval.
(m) The UK Benefits Schemes are not contracted-out schemes and
have no liabilities in respect of protected rights as defined in section 10 of
the United Kingdom Pension Schemes Act 1993.
(n) The UK Benefits Schemes do not distinguish between male
and female members (except in relation to maternity) in the provision of
benefits relating to periods of pensionable service after May 17, 1990 and no
adverse alteration has been made to benefits already accrued at the date of
announcing changes designed to equalize benefits.
(o) The UK Benefits Schemes have not at any time excluded
Employees from eligibility for membership on the grounds of specified hours of
work.
(p) No further employees have become entitled to benefits
under the PolyMedica UK Limited Retirement and Death Benefits Scheme, and no
contributions have been paid by PIUL or any other company into that scheme since
December 1991 and no such contributions are currently being paid.
(q) No contributions have been paid by PIUL or any other
company into the Beam Tech Limited Executive Pension Scheme in respect of Mr.
Ian Harrison since December 1991 and no such contributions are currently being
paid.
(r) Each of the Personal Pension Schemes (as defined in
Schedule 6.16) is approved by the United Kingdom Commissioners of Inland Revenue
under Chapter IV Part XIV of the United Kingdom Income and Corporation Taxes Act
1988.
(s) Each of the Personal Pension Schemes provides only money
purchase benefits (as defined in the United Kingdom Pension Schemes Act 1993)
for the beneficiaries of such schemes.
(t) The current rate of contributions to each of the Personal
Pension Schemes are set out in Schedule 6.16 and there are not at the date
hereof any contributions thereto from or in respect of the UK Employees or other
payments which have fallen due but are unpaid.
6.17. Labor Relations. Except as set forth on Schedule 6.17, insofar as
it relates to the Wound Care Business, each of the Sellers is in full compliance
in all material respects with all United States federal and state, United
Kingdom and European Union laws respecting employment and employment practices,
terms and conditions of employment, wages and hours and nondiscrimination in
employment, and is not engaged in any unfair labor practice. Except as set forth
on Schedule 6.17, insofar as it relates to the Wound Care Business, there is no
charge pending or, to the knowledge of any of the Sellers, threatened against
any of the Sellers alleging unlawful discrimination in employment practices
before any court or agency and there is no charge of or proceeding with regard
to any unfair labor practice against any of the Sellers pending before the
United States National Labor Relations Board or any equivalent body in the
United Kingdom. Insofar as it relates to the Wound Care Business, there is no
labor strike, dispute, slow-down or work stoppage actually pending or, to the
knowledge of any of the Sellers, threatened against or involving any of the
Sellers. Except as set forth on Schedule 6.17, insofar as it relates to the
Wound Care Business, to the knowledge of any of the Sellers, no one has
petitioned within the last three (3) years, and no one is now petitioning, for
union representation of any of the Sellers' employees. Except as set forth on
Schedule 6.17 hereto, insofar as it relates to the Wound Care Business, no labor
organization, trade union or similar organization (whether certified or not)
represents or purports to represent any employees of any of the Sellers. Except
as set forth on Schedule 6.17 hereto, insofar as it relates to the Wound Care
Business, no grievance or arbitration proceeding arising out of or under any
collective bargaining agreement is pending against any of the Sellers and no
claim therefor has been asserted. Except as described on Schedule 6.17 hereto,
insofar as it relates to the Wound Care Business, none of the employees of any
of the Sellers is covered by any collective bargaining agreement, and no
collective bargaining agreement is currently being negotiated by any of the
Sellers. Except as fully described on Schedule 6.17 hereto, none of the Sellers
has experienced any work stoppage during the last five years in connection with
the Wound Care Business.
6.18. Trademarks, Patents, Etc. (a) Schedule 6.18(a) hereto sets forth
a complete and accurate list of (i) all patents, trademarks, trade names and
copyrights owned by and registered in the name of any of the Sellers or used or
proposed to be used by any of the Sellers in connection with the Wound Care
Business, all applications therefor, and all licenses and other agreements
relating thereto, and (ii) all agreements relating to Intellectual Property (as
defined in Article 15) which the Sellers have licensed or authorized for use by
others or which has been licensed or authorized for use to the Sellers in
connection with the Wound Care Business. Each of the agreements described on
Schedule 6.18(a) is binding on the Seller party thereto, and to the knowledge of
the Sellers, is binding on each other party to such agreement and any successors
and assigns, including any successors to the business of such entity through
merger, sale of all or substantially all of the stock, assets or other interest
in or of such party. Except as set forth on Schedule 6.18(a), all of the
Sellers' rights under such agreements are freely assignable. True and complete
copies of all such agreements, and any amendments thereto, have been provided to
the Buyers. All of the Sellers' patents, patent applications, trademark
registrations, trademark applications and registered copyrights listed on
Schedule 6.18(a) have been duly registered in, filed in or issued by the United
States Patent and Trademark Office, the United States Register of Copyrights, or
the equivalent offices of non-US jurisdictions as identified on Schedule
6.18(a), and have been properly maintained and renewed in accordance with all
applicable provisions of law and administrative regulations of the United States
and each other jurisdiction identified on such Schedule. The Sellers are not
aware of any reason that would prevent any pending applications listed on
Schedule 6.18(a) to register trademarks, service marks or copyrights or any
pending patent applications from being granted.
(b) Except as set forth on Schedule 6.18(b), the Sellers own
or have the sole and exclusive right to use all Intellectual Property used or
necessary for the Wound Care Business as presently conducted, and the
consummation of the transactions contemplated hereby will not alter or impair
any such right. All inventions (whether patentable or nonpatentable), trade
secrets and know-how used by the Sellers in connection with or necessary to the
development, manufacture, testing, production, use or sale of its current or
proposed products in the Wound Care Business are the sole property of the
Sellers, and the Sellers have taken all reasonable steps to protect and preserve
their rights to such inventions, trade secrets and know-how. No royalties are
paid or payable by the Sellers on or with respect to any of the Intellectual
Property, and upon the consummation of the transactions contemplated hereby, no
additional royalties shall be payable with respect to such Intellectual
Property.
(c) Except as set forth in Schedule 6.18(c) hereto, insofar as
it relates to the Wound Care Business, neither the Sellers, nor to the Sellers'
knowledge, the other party or parties thereto, is in breach of any license,
sublicense or other agreement relating to Intellectual Property, except for any
breaches that singly or in the aggregate would not cause any such Intellectual
Property listed on Schedules 6.18(a) hereto to no longer be available to the
Sellers or otherwise have a Material Adverse Effect. Insofar as it relates to
the Wound Care Business, each of the Sellers has complied with all of its
obligations of confidentiality in respect of the Intellectual Property of others
and knows of no violation of such obligations of confidentiality as are owed to
such Seller except for any non-compliance or violations that singly or in the
aggregate would not cause any such Intellectual Property listed on Schedules
6.18(a) hereto to no longer be available to the Sellers or otherwise have a
Material Adverse Effect. The Sellers have required all of their employees
engaged in research and development, quality control or marketing to execute
agreements under which such employees are required to convey to the Sellers
ownership of all inventions and developments conceived or created by them in the
course of their employment and to maintain the confidentiality of all of the
Sellers' non-public information. The Sellers have not made any such information
available to any Person other than employees of the Sellers except pursuant to
written agreements requiring the recipients to maintain the confidentiality of
such information and appropriately restricting the use thereof and in patent
applications. To the knowledge of the Sellers, no employee, agent or consultant
of the Sellers is subject to confidentiality restrictions in favor of any third
Person the breach of which could subject any of the Sellers to any material
liability or which could adversely affect the Sellers' access to Intellectual
Property previously used by it in connection with the Wound Care Business. No
claims have been asserted, and to the Sellers' knowledge no claims are pending,
by any Person regarding the manufacture, use or sale of any such Intellectual
Property, or challenging or questioning the validity or effectiveness of any
license or agreement relating to Intellectual Property, and to the Sellers'
knowledge there is no basis for such claim, except in the case of any of the
foregoing for any claims that individually or in the aggregate will not have a
Material Adverse Effect. The present and contemplated use by the Sellers of the
Intellectual Property listed in any part of Schedule 6.18 does not to the
knowledge of the Sellers conflict with or infringe on the rights of any Person
and the Sellers have not received any claim or written notice from any Person to
such effect, except for any conflicts, infringements or violations that singly
or in the aggregate will not cause any Intellectual Property listed on Schedules
6.18(a) hereto to no longer be available to the Sellers or otherwise have a
Material Adverse Effect. To the knowledge of the Sellers, no third party is
infringing, violating or otherwise using, in an unauthorized manner, any
Intellectual Property of the Sellers relating to the Wound Care Business, except
for any conflicts, infringements or violations that singly or in the aggregate
will not cause any Intellectual Property listed on Schedules 6.18(a) hereto to
no longer be available to the Sellers or otherwise have a Material Adverse
Effect.
6.19. Suppliers and Customers. Schedule 6.19 hereto sets forth the ten
(10) largest suppliers and ten (10) largest customers of the Wound Care Business
for the year ended March 31, 1997. The relationships of the Sellers with such
suppliers and customers are good commercial relationships and, except as set
forth on Schedule 6.19, no supplier or customer of material importance to the
Wound Care Business has cancelled or otherwise terminated, or threatened to
cancel or otherwise to terminate, its relationship with any of the Sellers or
has during the last twelve (12) months decreased materially, or threatened to
decrease or limit materially, its services, supplies or materials for use in the
Wound Care Business or its usage or purchase of the services or products of the
Sellers except for normal cyclical changes related to customers' businesses.
Except as set forth on Schedule 6.19 hereto, since January 1, 1996, none of the
Sellers has at any time been placed on C.O.D. terms by any supplier, and it
currently is not on C.O.D. terms with any supplier. The Sellers have no
knowledge that any such supplier or customer intends to cancel or otherwise
substantially modify its relationship with any of the Sellers or to decrease
materially or limit its services, supplies or materials to such Seller, or its
usage or purchase of the Sellers' services or products, and to the knowledge of
the Sellers, the consummation of the transactions contemplated hereby will not
adversely affect the relationship of any of the Buyers with any such supplier or
customer. The Sellers have no knowledge that any of such customers have returned
or attempted to return any products of the Sellers. On or before the Closing
Date the Sellers will have paid substantially all amounts due and owing to such
suppliers.
6.20. Acquired Assets Complete. The Acquired Assets are in a state of
good repair and in good condition, ordinary wear and tear excepted, and are
regularly maintained and fully serviceable and in particular (but without
limitation) all vehicles are road worthy and duly licensed for the purposes for
which they are used and except as set forth on Schedule 6.20 hereto all plant
and machinery and office equipment is capable of being efficiently and properly
used in connection with the Wound Care Business. The Acquired Assets, when
utilized with a labor force substantially similar to that currently employed by
the Sellers, are adequate to conduct the Wound Care Business as currently
conducted by the Sellers.
6.21. No Undisclosed Liabilities. Except to the extent (a) reflected or
reserved against in the Audited Balance Sheet or (b) incurred in the ordinary
course of business after the date of the Audited Balance Sheet and either
discharged prior to Closing or described on Schedule 6.21 hereto, none of the
Sellers has any liabilities or obligations of any nature relating to the Wound
Care Business, whether direct or indirect, absolute or contingent, matured or
unmatured or otherwise (including without limitation as guarantor or otherwise
with respect to obligations of others), other than performance obligations with
respect to the Sellers' contracts that would not be required to be reflected or
reserved against on a balance sheet prepared in accordance with GAAP or in the
footnotes thereto.
6.22. Tax Returns.
(a) Each of the Sellers has filed all tax returns and reports
which are required to be filed with any foreign, federal, state or local
governmental authority or agency as of the date of this Agreement, and has paid,
or made adequate provision for the payment of, all assessments received and all
taxes which have or may become due under applicable foreign, federal, state or
local governmental law or regulations with respect to all periods prior to the
Closing Date. None of the Sellers knows of any additional assessments since the
date of such returns and reports.
(b) PIUL is a registered and taxable person in the United
Kingdom for value added tax purposes; it has complied in all material respects
with all statutes and regulations in the United Kingdom with regard to value
added tax; it has maintained complete accurate and up-to-date records, invoices
and other documents appropriate or requisite for the purposes of such statutes
and regulations; it is not in arrears with any returns or payments thereunder or
liable to any abnormal payment or any forfeiture or penalty or to the operation
of any penal provision; and it has not been required by H.M. Commissioners of
Customs and Excise to give any security.
(c) All income tax under the United Kingdom PAYE system and
payments due in respect of National Insurance Contributions have (where
applicable) been deducted from salaries, wages and bonuses paid by PIUL and all
liabilities therefor (including the employer's contributions) have been duly
paid and all appropriate returns have been made within the requisite time limits
by PIUL and full complete and accurate records have been maintained in respect
thereof.
6.23 Product Liability. Insofar as it relates to the Wound Care
Business, none of the Sellers has any product liability (and there is no basis
for any present or future charge, complaint, action, suit, proceeding, hearing,
investigation, product recall, claim, or demand against any of the Sellers
giving rise to any liability) arising out of any injury to persons or property
as a result of the ownership, possession, or use of any product manufactured,
sold, leased or delivered by such Seller or any of its Affiliates utilizing all
or any part of the Acquired Assets.
6.24 Adverse Events. None of the Sellers has received notice of any
adverse event resulting from use of any products relating to the Wound Care
Business.
6.25. Disclosure. No representation or warranty by any of the Sellers
in this Agreement or in any exhibit, schedule, written statement, certificate or
other document delivered or to be delivered to the Buyers or the Parent pursuant
hereto or in connection with the consummation of the transactions contemplated
hereby contains or will contain any untrue statement of a material fact or omits
or will omit to state a material fact required to be stated therein or necessary
to make the statements contained therein not misleading or necessary in order to
provide the Buyers and the Parent with proper and complete information as to the
Sellers and the identity, value and usefulness of the Acquired Assets. There is
no fact relating to the Acquired Assets or the Wound Care Business which may
materially adversely affect the same and which has not been disclosed to the
Buyers and the Parent in writing. The replies to enquiries in respect of the
Real Property given by Kingsley Napsley to Wragge & Co. dated June 5, 1997 are
true and accurate in all material respects.
6.26. Investment Representations. PMI is acquiring the Note, the Loan
Notes and any of the Parent's ordinary shares (the "Parent Shares") issuable
thereunder for the purpose of investment and not with a view to distribution or
resale thereof. The acquisition by PMI of the Note and any Parent Shares shall
constitute a confirmation of this representation. PMI further represents that it
has been furnished access to the financial statements of the Parent and such
additional information and documents as it has requested and has been afforded
an opportunity to ask questions of and receive answers from representatives of
the Parent concerning the business and prospects of the Parent and the
acquisition of the Note and the Parent Shares pursuant to this Agreement. Each
of the Sellers further represents that it understands and agrees that until
registered under the United States Securities Act of 1933, as amended, or
transferred pursuant to the provisions of Rules 144 or 904 thereunder, or any
similar provision as promulgated by the Securities and Exchange Commission, all
certificates evidencing the Note or any of the Parent Shares, whether upon
initial issuance or upon any transfer thereof, shall bear a legend, prominently
stamped or printed thereon, reading substantially as follows:
"The securities represented hereby have not been registered under the
United States Securities Act of 1933 or applicable United States state
securities laws. These securities have been acquired for investment and
not with a view to distribution or resale, and may not be mortgaged,
pledged, hypothecated or otherwise transferred except (i) with an
effective registration statement for such securities under the United
States Securities Act of 1933 and applicable state securities laws,
(ii) in, on or through the facilities of a designated offshore
securities market in accordance with Rule 904 promulgated by the
Securities and Exchange Commission or (iii) with an opinion of counsel
reasonably satisfactory to the Issuer that registration is not required
under such Act and applicable state securities laws."
6.27. Broker. The Sellers have not retained, utilized or been
represented by any broker, agent, finder or intermediary in connection with the
negotiation or consummation of the transactions contemplated by this Agreement.
Article 7
Representations And Warranties of the Buyers and the Parent
The Buyers and the Parent jointly and severally represent and warrant
to the Sellers as follows:
7.1. Organization of Buyer; Authority. Each of ITL and the Parent is a
limited liability company duly incorporated and registered under the laws of
England. ITUI is a corporation duly organized and validly existing under the
laws of the State of Delaware. Each of the Buyers and the Parent has full power
and authority to execute and deliver the Transaction Documents to which it is a
party and to carry out all of the actions required of it pursuant to the terms
of such Transaction Documents.
7.2. Corporate Approval; Binding Effect. Subject to the passing of the
resolutions set out in the Notice of Extraordinary Meeting of the Parent (the
"Resolutions") contained in the Circular (as defined in Article 15 hereof), each
of the Buyers and the Parent has obtained all necessary corporate authorizations
and approvals from its respective Board of Directors required for the execution
and delivery of the Transaction Documents to which it is a party and the
consummation of the transactions contemplated hereby and thereby. This Agreement
has been duly executed and delivered by each of the Buyers and the Parent and
constitutes, and each of the other Transaction Documents when executed and
delivered by each of the Buyers and the Parent party thereto will constitute,
the legal, valid and binding obligation of such Buyer or the Parent, as the case
may be, enforceable against such Person in accordance with its terms, except to
the extent the enforceability thereof may be limited by any applicable
bankruptcy, reorganization, insolvency or other laws affecting creditors' rights
generally or by general principles of equity.
7.3. Non-Contravention. Subject to the passing of the Resolutions, the
execution and delivery by each of the Buyers and the Parent of the Transaction
Documents to which it is a party and the consummation by such Person of the
transactions contemplated hereby and thereby will not (a) violate or conflict
with any provisions of the charter and by-laws or other constitutional documents
of such Person, each as amended to date; or (b) constitute a violation of, or be
in conflict with, constitute or create a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property of
such Person pursuant to (i) any agreement or instrument to which such Person is
a party or by which such Person or any of its properties is bound or to which
such Person or any of its properties is subject, or (ii) any statute, judgment,
decree, order, regulation or rule of any court or governmental authority to
which such Person is subject.
7.4. Governmental Consents. Except as set forth in Schedule 7.4 hereto,
no consent, approval or authorization of, or registration, qualification or
filing with, any governmental agency or authority is required for the execution
and delivery by each of the Buyers and the Parent of the Transaction Documents
to which it is a party or for the consummation by such Person of the
transactions contemplated hereby or thereby.
7.5. Broker. Except for Winchester Capital (the fees for which shall be
the responsibility of the Parent), none of the Buyers or the Parent has
retained, utilized or been represented by any broker, agent, finder or other
intermediary in connection with the negotiation or consummation of the
transactions contemplated by this Agreement.
7.6. Financing. The Parent has entered into the Placing Agreement with
Greig Middleton & Co. Limited, the agreed form of which is attached hereto as
Exhibit K, and the Parent has no reason to believe that the conditions precedent
set forth therein will not be satisfied at or prior to the Closing Date.
Article 8
Conduct Of Business By the Sellers Pending Closing
The Sellers jointly and severally covenant and agree that, from and
after the date of this Agreement and until the Closing, except as otherwise
specifically consented to or approved by the Buyers and the Parent in writing:
8.1. Full Access. Each of the Sellers shall afford to the Buyers and
the Parent and their authorized representatives full access upon reasonable
notice during normal business hours to all properties, books, records, contracts
and documents of such Seller and a full opportunity to make such reasonable
investigations as they shall desire to make of such Seller or with respect to
the Acquired Assets, and such Seller shall furnish or cause to be furnished to
the Buyers and the Parent and their authorized representatives all such
information with respect to the affairs and businesses of such Seller and with
respect to the Acquired Assets as the Buyers and the Parent may reasonably
request.
8.2. Carry on in Regular Course. Each of the Sellers shall maintain the
Acquired Assets in good operating condition and repair, and make all planned or
usual renewals, additions and replacements thereto, and shall carry on the Wound
Care Business diligently and substantially in the same manner as heretofore and
shall not make or institute any material changes to its methods of manufacture,
purchase, sale, lease, management, accounting or operation from those methods
followed in the ordinary course of business prior to the date of this Agreement.
The Sellers shall ensure that on the Closing Date the levels of each category of
Inventory referred to in Section 1.1(b) shall not be less than the levels
included on Schedule 1.1(b).
8.3. No General Increases. Except as described on Schedule 8.3 hereto,
none of the Sellers shall grant any general or uniform increase in the rates of
pay of employees of such Seller employed in connection with the Wound Care
Business, nor grant any general or uniform increase in the benefits under any
bonus or pension plan or other contract or commitment to, for or with any such
employees; and none of the Sellers shall increase the compensation payable or to
become payable to officers, key salaried employees or agents employed in
connection with the Wound Care Business, or increase any bonus, insurance,
pension or other benefit plan, payment or arrangement made to, for or with any
such officers, key salaried employees or agents.
8.4. Contracts and Commitments. Insofar as it relates to the Wound Care
Business, none of the Sellers shall enter into any contract or commitment or
engage in any transaction not in the usual and ordinary course of business and
consistent with the business practices of the Sellers. Without limitation of the
foregoing, none of the Sellers shall enter into any licensing, distribution,
supply or any other contract relating to the sale of the products of the Wound
Care Business or any commitment to enter into the same without the prior written
consent of the Parent, other than purchase orders accepted by the Sellers in the
ordinary course of the Wound Care Business provided that the Sellers shall
deliver copies of such purchase orders to the Buyers promptly following receipt
thereof. In the event that any such contracts or commitments are entered into
prior to the Closing, all fees received by the Sellers in connection therewith
shall be for the account of the Buyers and shall be paid to the Buyers at the
Closing by wire transfer to an account designated by the Buyers.
8.5. Purchase and Sale of Capital Assets. None of the Sellers shall
purchase or sell or otherwise dispose of any capital asset relating to the Wound
Care Business other than (i) pursuant to this Agreement or (ii) ordinary course
dispositions of capital assets not to exceed $2,000 individually or $20,000 in
the aggregate prior to the Closing Date.
8.6. Insurance. Insofar as it relates to the Wound Care Business, each
of the Sellers shall maintain with financially sound and reputable insurance
companies, funds or underwriters, adequate insurance (including without
limitation the insurance described on Schedule 6.13) of the kinds, covering such
risks and in such amounts and with such deductibles and exclusions as are
consistent with prudent business practice.
8.7. Preservation of Organization. Insofar as it relates to the Wound
Care Business, each of the Sellers shall use its best efforts to preserve its
business organization intact, to keep available to the Buyers the present key
officers and employees of the Sellers and to preserve for the Buyers the present
relationships of the Sellers' suppliers and customers and others having business
relations with the Sellers.
8.8. No Default. None of the Sellers shall do any act or omit to do any
act, or permit any act or omission to act, which will cause a material breach of
any contract, commitment or obligation of the Sellers or any of them relating to
the Wound Care Business, including without limitation any of the Real Property
Leases, Personal Property Leases, Customer Contracts, Employee Agreements or
Other Contracts.
8.9. Compliance with Laws. Insofar as they relate to the Wound Care
Business, the Seller shall comply in all material respects with all laws,
regulations and orders applicable to the Seller or the Acquired Assets or as may
be required for the valid and effective transfer of the Acquired Assets.
8.10. Advice of Change. Insofar as they relate to the Wound Care
Business, the Sellers will promptly advise the Buyers and the Parent in writing
of any material adverse change in the condition of any of the Acquired Assets or
the Wound Care Business.
8.11. No Shopping, Etc. None of the Sellers shall negotiate for,
solicit or enter into any agreement with respect to (i) the sale of the Wound
Care Business or any portion of the Acquired Assets (except for sales of
inventory in the ordinary course of the Wound Care Business provided that at no
time shall the level of Inventory be less than the amounts set forth on Schedule
1.1(b)), or (ii) any merger or other business combination of any of the Sellers,
to or with any entity other than the Buyers.
8.12. Consents of Third Parties. Each of the Sellers will employ its
best efforts to secure, before the Closing Date, the consent, in form and
substance reasonably satisfactory to the Buyers and the Parent and the their
counsel, to the consummation of the transactions contemplated by this Agreement
by each party to any of the Real Property Leases, Personal Property Leases,
Employee Agreements, Customer Contracts, Other Contracts and Permits under which
such transactions would constitute a default, would accelerate obligations of
the Sellers thereunder or would permit cancellation of any such contract.
8.13. Satisfaction of Conditions Precedent. Each of the Sellers will
use its best efforts to cause the satisfaction of the conditions precedent
contained herein.
8.14. Creation of Encumbrances. None of the Sellers shall create
any mortgage, lien, lease, security interest or other charge or encumbrance on
any of the Acquired Assets.
8.15. Recruitment of Employees. None of the Sellers will offer
employment to any person in the Wound Care Business or serve notice of
termination of employment on any employee engaged in the Wound Care Business
at the date of this Agreement.
8.16. Confidentiality. Each of the Sellers shall maintain the
confidentiality of its customer and supplier information and of its other
proprietary information.
8.17. CardioTech Underlease. PIUL will use all reasonable efforts to
obtain the consent of the superior landlord and to obtain an Order of the local
County Court excluding the security of tenure provisions of the Landlord and
Tenant Act 1954 Part II in respect of an underlease intended to be granted to
CardioTech International, Inc. ("CardioTech") prior to Closing with respect to
that part of the Real Property located at Tarvin, Cheshire currently occupied by
CardioTech. The underlease will be in a form approved by the Parent (such
approval not to be unreasonably withheld).
8.18. Perstorp Amendment. PIUL will arrange a meeting between PIUL ,
ITL and Perstorp AB ("Perstorp") not later than fourteen (14) calendar days
following the date hereof and will use its best efforts to cause Perstorp to
enter into an amendment, in form and substance satisfactory to ITL, to the
Distribution Agreement dated as of October 1, 1996 by and between PIUL and
Perstorp (the "Perstorp Agreement"). In the event that for any reason Perstorp
fails to pay to ITL any portion of the (pound)150,000 payment to be made on the
first anniversary of the Effective Date (as defined in the Perstorp Agreement)
pursuant to Section 3(b) of the Perstorp Agreement, the Sellers shall pay to ITL
the amount of such unpaid portion, not to exceed (pound)50,000.
Article 9
Certain Transitional Matters
9.1. Nonassignable Contracts.
(a) To the extent that any Assumed Contract is not capable of
being transferred by the Sellers to the Buyers pursuant to this Agreement
without the consent, approval or waiver of a third person or entity (including a
governmental authority), and such consent is not obtained prior to the Closing,
or if such transfer or attempted transfer would constitute a breach thereof or a
violation of any law, rule or regulation, or would give a party thereto a right
of termination, nothing in this Agreement will constitute a transfer or an
attempted transfer thereof.
(b) Notwithstanding anything contained in this Agreement to
the contrary, the Sellers will not be obligated to transfer to the Buyers any of
their rights and obligations in and to any of the Assumed Contracts referred to
in paragraph (a) without first having obtained all consents, approvals and
waivers necessary for such transfers. Each of the Sellers shall use its best
efforts, and the Buyers will cooperate with the Sellers and use their best
efforts, to obtain such consents, approvals and waivers, to resolve the
impracticalities of transfer referred to in paragraph (a) and to obtain any
other consents, approvals and waivers necessary to transfer to the Buyers any of
such Assumed Contracts. The Buyers and the Sellers shall bear their own
respective expenses incurred in connection with such efforts.
(c) In the event that such consents, approvals and waivers
referred to in paragraph (a) are not obtained by the Sellers with respect to any
Assumed Contract and the Closing occurs, then until such consents, approvals or
waivers are received the Sellers and the Buyers will each use its best efforts,
each at its own expense, to take any reasonably necessary or appropriate steps
to provide to the applicable Buyer the benefits and burdens of such Assumed
Contract. Without limiting the foregoing, such steps shall include the
following:
(i) the Seller party to such Assumed Contract shall
hold such Assumed Contract and any rights, monies, goods or
other benefits received thereunder as agent and trustee for
the Buyer to whom such Assumed Contract was to have been
transferred and shall forthwith upon receipt of the same
account for and pay to such Buyer such monies, goods or
other benefits;
(ii) such Buyer shall perform such Assumed Contract
in accordance with its terms and conditions as
sub-contractor of such Seller so long as sub-contracting is
permitted under the terms of such Assumed Contract, and
where sub-contracting is not permissible, such Buyer shall
perform such Assumed Contract in accordance with its terms
and conditions as agent for such Seller; and
(iii) such Seller shall enforce, at the request of
such Buyer and for the account of such Buyer, any rights of
the Sellers arising from any such Assumed Contract
(including without limitation the right to elect to
terminate such Assumed Contract in accordance with the terms
thereof upon the advice of such Buyer).
(d) No consent, approval or waiver of a third person or entity
(including a governmental authority) with respect to the transfer of, or any
novation with respect to, any Assumed Contract, shall cause an Excluded
Liability to be deemed for purposes of this Agreement to have become an Assumed
Liability or vice-versa or otherwise affect the respective rights of the Buyers
and the Sellers under Article 13.
9.2. General Assistance.
(a) The Buyers agree to provide at the Sellers' cost such
support (including the availability of personnel and records) as the Sellers may
reasonably request to assist the Sellers in (i) defending any litigation,
arbitration or other dispute-resolution proceeding relating to any casualty,
personal injury, property damage, United States Equal Employment Opportunity
Commission ("EEOC") or other claims against any of the Sellers constituting part
of the Excluded Liabilities or (ii) pursuing claims of the Sellers against
insurers or other miscellaneous claims in connection with the Wound Care
Business. The Sellers, as applicable, shall continue to direct all such
litigation and shall be responsible for all costs (including legal fees and
expenses incurred in connection therewith).
(b) Each of the Sellers agrees to provide at the Buyers' cost
such support (including the availability of personnel and records) as the Buyers
may reasonably request to assist the Buyers in (i) defending any litigation,
arbitration or other dispute-resolution proceeding relating to any casualty,
personal injury, property damage, EEOC or other claims (other than Excluded
Liabilities) or (ii) pursuing claims against insurers or other miscellaneous
claims in connection with the Wound Care Business. The Buyers shall direct all
such litigation and shall be responsible for all costs (including legal fees and
expenses incurred in connection therewith).
9.3. Hiring Employees.
(a) At the Closing ITUI will offer employment to the US
Employees of the Seller listed on Schedule 9.3 hereto.
- -------- ---
(b) The parties hereby acknowledge that in relation to the UK
Employees the transaction effected by this Agreement is a transfer of an
undertaking to which the United Kingdom Transfer of Undertakings (Protection of
Employment) Regulations 1981 as amended from time to time (the "Regulations")
apply. The contract of employment of each of the UK Employees shall be
transferred to ITL in accordance with the Regulations with effect from the
Closing Date. The Sellers shall be liable for and shall jointly and severally
indemnify ITL in respect of all or any redundancy payments, unfair dismissal or
other compensation (whether statutory or contractual), salaries, wages,
commissions, remuneration, national insurance contributions, damages, costs,
claims, PAYE tax deductions or expenses which may be incurred by ITL as a result
of:
(i) anything done or omitted to be done (including
without limitation any failure to consult with any UK
Employees) before Closing by or in relation to any of the
Sellers in respect of the UK Employees or any of their
contracts of employment or being deemed to have been done by
or in relation to ITL by virtue of the Regulations;
(ii) any persons other than the UK Employees being
employees of the Sellers engaged in the UK Business in such
a way that their employment transfers to ITL pursuant to or
by virtue of the Regulations;
(iii) the particulars of employment of the UK
Employees set out in Schedule 6.15 being in any respect
inaccurate or incorrect.
In the event that wages salaries or commissions are due to any of the UK
Employees after Closing in respect of the period to and including Closing the
same shall be paid by ITL which shall forthwith on demand be indemnified in
respect thereof by the Sellers. The Sellers shall pay to ITL the full amount
necessary to enable ITL to meet the cost of providing accrued holiday
entitlement and accrued holiday remuneration of the UK Employees as at and
including Closing which sum is shown in the schedule to be delivered by the
Seller to the Buyers at Closing which is referred to in Section 10.12(c).
(c) The US Employees accepting the offer referred to in
paragraph (a) above and the UK Employees whose contracts of employment are
transferred to ITL in accordance with paragraph (b) above shall be referred to
collectively as the "Assumed Employees".
(d) Each of the Sellers shall retain all responsibility for
all employees of the Seller other than the Assumed Employees. Nothing in the
Agreement shall obligate any of the Buyers or the Parent to make any offer of
employment to anyone other than an Assumed Employee or, except as provided in
paragraph (e) below, to provide continued employment to any employee of any of
the Sellers, whether or not the subject of an employment offer from any of the
Buyers, for any specified period of time following the Closing Date, or to
maintain the same terms of employment (including compensation and benefits) for
any specified period of time following the Closing Date. ITUI will offer
employment as of the Closing Date only to US Employees listed on Schedule 9.3.
(e) ITUI agrees that, for a period of at least sixty (60) days
after the Closing Date, it will not cause any US Employees hired by it to suffer
"employment loss", excluding any employment loss in connection with the
completion of a project as contemplated by 29 U.S.C. ss.2103, for purposes of
the United States Worker Adjustment and Retraining Notification Act, 29 U.S.C.
ss.ss.2101-2109, and related regulations (the "WARN Act") if such employment
loss could create any liability for the Sellers unless ITUI delivers notices
under the WARN Act in such a manner and at such a time that the Sellers bear no
liability with respect thereto. The Sellers agree that, for a period of at least
sixty (60) days after the Closing Date, they will not cause any of their
employees to suffer an "employment loss", excluding any employment loss in
connection with the termination of a project as contemplated by 29 U.S.C.
ss.2103, for purposes of the WARN Act if such employment loss could result in
any liability for any of the Buyers or the Parent, unless the Sellers deliver
notices under the WARN Act in such a manner and at such a time that none of the
Buyers or the Parent bears any liability with respect thereto.
9.4. Undisclosed Contracts. If any of the Buyers learns that the
Sellers failed (whether or not inadvertently) to list any customer contract on
Schedule 1.1(g) (list of Customer Contracts), other than any contract the
performance of which has been completed, then the Buyers shall have the option
to treat such contract as a Customer Contract for all purposes under this
Agreement.
9.5. Access to Books and Records.
(a) Each of the Sellers agrees that, on and after the Closing
Date, upon reasonable prior notice and during normal business hours, it will
permit the Buyers and the Parent and their auditors, through their authorized
representatives, to have access to and examine and take copies of all books and
records of the Sellers relating to the Wound Care Business which are not
delivered to the Buyers pursuant to this Agreement (including, but not limited
to, correspondence, memoranda, books of account and the like) and relating to
(i) transactions or events occurring prior to the Closing and (ii) transactions
or events occurring subsequent to the Closing which are related to or arise out
of transactions or events occurring prior to the Closing.
(b) Each of the Buyers and the Parent agrees to cooperate with
the Sellers and to make available to the Sellers such documents, books, records
or information relating to the Acquired Assets or the Wound Care Business prior
to the Closing as the Sellers may reasonably require after the Closing in
connection with any tax determination, matter or claim or contractual
obligations to third parties, or to defend or prepare for the defense of any
claim against the Sellers or to prosecute or prepare for the prosecution of
claims against third parties by the Sellers relating to the conduct by the
Sellers of the Wound Care Business or in connection with any governmental
investigation of any of the Sellers.
(c) Each of the Buyers and the Parent, on the one hand, and
each of the Sellers, on the other hand, will direct its respective employees to
render any assistance which the other party may reasonably request in examining
or utilizing records referred to in this Section 9.5, provided that each party
shall be reimbursed by the other for any out-of-pocket expenses which it may
incur in rendering the services provided for in this Section 9.5. In addition,
to the extent that any records referred to in this Section 9.5 retained by the
Sellers and any records referred to in this Section 9.5 transferred to the
Buyers are located in the same third-party storage facilities, the Buyers and
the Sellers shall enter into mutually acceptable arrangements regarding the
sharing of costs, security procedures and similar matters. In addition, to the
extent that any of the Buyers or the Sellers concludes at any time more than
sixty (60) days after the Closing Date in its reasonable judgment that its
personnel have been devoting significantly more time providing the services
referred to in paragraph (a) or paragraph (b) above than the personnel of the
other party, the Buyers and the Sellers will agree on mutually acceptable
reimbursement provisions to reflect such disparity.
(d) Each of the Buyers and each of the Sellers agrees to
preserve and protect all books, records, files and data referred to in Section
1.1(k) and paragraphs (a) and (b) of this Section 9.5, (i) maintained for the
preparation of tax returns for a period of ten (10) years after the Closing
Date, and (ii) other than those described in (i) above, for a period of six (6)
years after the Closing Date.
(e) Each of the Buyers and each of the Sellers agrees not to
destroy any files or records which are subject to this Section 9.5, (i) for the
periods described in clause (d) of this Section 9.5 and (ii) thereafter, without
giving at least thirty (30) days' notice to the other party. Upon receipt of
such notice, such other party may (x) cause to be delivered to it the records
intended to be destroyed, at such other party's expense or (y) notify the first
party that such other party will pay the cost of storing and maintaining such
books and records (including any necessary costs of moving such books and
records to a location under control of such other party).
(f) Each of the Sellers will keep all information
referred to in this Section 9.5 confidential in accordance with Section 12.1.
9.6. Audit Rights. The Sellers and the Buyers agree that, in order to
verify compliance by the other parties with the various obligations under this
Agreement, each shall have the right at its cost, upon reasonable prior notice
and in a manner not disruptive of the other party's business, to audit the
relevant records of the other in order to determine whether the other party has
complied with its obligations under this Agreement and the other Transaction
Documents.
9.7. Prepayments and Returned Products.
(a) In the event that any of the Sellers shall receive any
prepayment from customers of the Wound Care Business on orders under Customer
Contracts which were not satisfied on or before the Closing Date (other than any
such prepayments paid over to the buyers at the Closing in accordance with
Section 4.2(i)), then the Sellers shall promptly pay the amount of such
prepayment or prepayments to the Buyers by check or wire transfer to an account
designated by the Buyers.
(b) The Buyers shall be obligated to replace any defective
product originally sold by the Sellers prior to closing and received back from
customers after the Closing ("Returned Product"), up to an amount of replacement
product with an aggregate value at the invoice price of $250,000. The Sellers
will be obligated to promptly reimburse the Buyers for the aggregate value at
the invoice price of Returned Product shipped by the Buyers in excess of such
$250,000 amount; provided that the Buyers have sent an invoice to the Sellers
for such reimbursement on or prior to September 20, 1997. The Sellers shall pay
such invoiced amounts to the Buyers by check or wire transfer within thirty (30)
days of the date after the invoice. The Sellers will be obligated to notify Dow
B. Hickam Inc. that it must notify the Sellers (and after completion the Buyers)
of any claim for replacement of defective product prior to September 1, 1997, in
order to enable the Buyers to make a claim for any excess amount against the
Sellers.
9.8. Receivables and Payables. The Buyers and the Sellers will follow
the procedures set forth on Schedule 9.8 hereto with respect to (a) collection
of the accounts receivable or book debts owed to the Sellers by customers of the
Wound Care Business arising prior to the Closing Date and (b) payments to trade
creditors of the Wound Care Business arising prior to the Closing Date.
9.9. Chronosphere Agreement. PMI and ITUI will negotiate in good faith
with a view to entering into an agreement on terms mutually satisfactory to the
parties with respect to (a) the use by ITUI of the Chronosphere machinery and
related equipment included within the Excluded Assets and (b) the supply of
products produced by such machine by ITUI to PMI at prices to be agreed by the
parties.
Article 10
Conditions Precedent To Buyers' and the Parent's Obligations
The obligation of the Buyers and the Parent to consummate the Closing
shall be subject to the satisfaction at or prior to the Closing of each of the
following conditions (to the extent noncompliance is not waived in writing by
the Buyer):
10.1. Representations and Warranties True at Closing. The
representations and warranties made by the Sellers in or pursuant to this
Agreement shall be true and correct in all material respects (without giving
duplicative effect to any materiality standard contained in such representation
or warranty) at and as of the Closing Date with the same effect as though such
representations and warranties had been made or given at and as of the Closing
Date, except for representations and warranties which speak as of a particular
date, which shall be true and correct as of such date.
10.2. Compliance with Agreement. Each of the Sellers shall have
performed and complied in all material respects (without giving duplicative
effect to any materiality standard contained in the terms of such obligations)
with all of its obligations under this Agreement to be performed or complied
with by it on or prior to the Closing Date.
10.3. Sellers' Certificate. The Sellers shall have delivered to the
Buyers and the Parent at and as of the Closing, a written certificate duly
executed by the Chief Executive Officer and Chief Financial Officer of each of
the Sellers in form and substance satisfactory to the Buyers and the Parent and
their counsel, certifying that the conditions in each of Section 10.1 and 10.2
have been satisfied.
10.4. Approvals. All corporate, stockholder and other approvals to be
obtained by the Sellers in connection with the transactions contemplated by this
Agreement and all certificates and other documents delivered hereunder shall be
reasonably satisfactory in form and substance to the Buyers and the Parent and
their counsel.
10.5. No Litigation. No restraining order or injunction shall prevent
the transactions contemplated by this Agreement and no action, suit or
proceeding shall be pending or threatened before any court or administrative
body in which it will be or is sought to restrain or prohibit or obtain damages
or other relief in connection with this Agreement or the consummation of the
transactions contemplated hereby.
10.6. Opinions. Hale and Dorr LLP, Massachusetts counsel to the
Sellers, shall have delivered to the Buyers and the Parent a legal opinion
substantially in the form of Exhibit L hereto.
10.7. Releases From Creditors. The Buyers shall have received all lien
discharges, UCC termination statements, deeds of release and similar instruments
required to comply with the Sellers' obligations under Section 4.2(a).
10.8. Environmental Report. The Buyers and the Parent shall have
obtained, at their own expense, a report, in form and substance reasonably
satisfactory to them, of an environmental engineering firm satisfactory to the
Buyers and the Parent, as to compliance of all Real Property included in the
Acquired Assets with all applicable environmental statutes, rules and
regulations, including without limitation the absence of any oil or hazardous
waste on all Owned Real Property and Leased Real Property.
10.9. Consents of Third Parties. The Sellers shall have obtained the
consent, in form and substance reasonably satisfactory to the Buyers and the
Parent and their counsel, to the consummation of the transactions contemplated
by this Agreement by each party to any of the Real Property Leases, Customer
Contracts, Personal Property Leases, Employee Agreements, Other Contracts and
Permits under which the transactions contemplated by this Agreement would
constitute a default, would accelerate obligations of any of the Sellers, the
Buyers or the Parent or would permit cancellation of any such contract.
10.10. Parent's Shareholder Approvals. The passing of the Resolutions
by the Parent's shareholders shall have occurred.
10.11. Amendments to Customer Contracts. The Sellers and the applicable
customers of the Wound Care Business shall have entered into amendments to the
Customer Contracts set forth on Schedule 10.11 in form and substance reasonably
satisfactory to the Buyers and their counsel.
10.12. Delivery of Certain Information. The Sellers shall have
provided to ITL:
(a) all records of National Insurance contributions
and PAYE relating to each of the UK Employees duly completed and up to date;
(b) all the records of the UK Business for value added
tax purposes referred to in Article 5; and
(c) a table showing the amounts of accrued holiday
entitlements and computations of accrued holiday remuneration in respect of the
UK Employees as at the Closing Date.
10.13. Placing Agreement. The Placing Agreement shall have become
unconditional in all respects (other than for any condition therein that this
Agreement shall have become unconditional in all respects) and shall not have
been terminated in accordance with its terms prior to becoming unconditional in
all respects.
10.14. Proceedings and Documents Satisfactory. All proceedings in
connection with the transactions contemplated by this Agreement and all
certificates and documents delivered to the Buyers and the Parent in connection
with the transactions contemplated by this Agreement shall be satisfactory in
all reasonable respects to the Buyers and the Parent and their counsel, and the
Buyers and the Parent shall have received the originals or certified or other
copies of all such records and documents as they may reasonably request.
Article 11
Conditions Precedent To Sellers' Obligations
The obligation of the Sellers to consummate the Closing shall be
subject to the satisfaction, at or prior to the Closing, of each of the
following conditions (to the extent noncompliance is not waived in writing by
the Sellers):
11.1. Representations and Warranties True at Closing. The
representations and warranties made by the Buyers and the Parent in this
Agreement shall be true and correct in all material respects (without giving
duplicative effect to any materiality standard contained in such representation
or warranty) at and as of the Closing Date with the same effect as though such
representations and warranties had been made or given at and as of the Closing
Date, except for representations and warranties which speak as of a particular
date, which shall be true and correct as of such date.
11.2. Compliance with Agreement. The Buyers and the Parent shall have
performed and complied in all material respects (without giving duplicative
effect to any materiality standard contained in the terms of such obligations)
with all of its obligations under this Agreement that are to be performed or
complied with by it at or prior to the Closing.
11.3. Buyer's Certificate. Each of the Buyers and the Parent shall have
delivered to the Sellers, at and as of the Closing, a written certificate duly
executed by the Chief Executive Officer and Chief Financial Officer of each such
Person, in form and substance satisfactory to the Sellers and their counsel, to
the effect that the conditions in each of Sections 11.1 and 11.2 have been
satisfied.
11.4. No Litigation. No restraining order or injunction shall prevent
the transactions contemplated by this Agreement and no action, suit or
proceeding shall be pending or threatened before any court or administrative
body in which it will be or is sought to restrain or prohibit or obtain damages
or other relief in connection with this Agreement or the consummation of the
transactions contemplated hereby.
11.5. Opinions. Bingham, Dana & Gould LLP, special Massachusetts
counsel to the Buyers and the Parent, shall have delivered to the Sellers a
legal opinion substantially in the form of Exhibit M hereto.
11.6. Proceedings and Documents Satisfactory. All proceedings in
connection with the transactions contemplated by this Agreement and all
certificates and documents delivered to the Sellers in connection with the
transactions contemplated by this Agreement shall be satisfactory in all
reasonable respects to the Sellers and its counsel, and the Sellers shall have
received the originals or certified or other copies of all such records and
documents as the Sellers may reasonably request.
Article 12
Certain Covenants
12.1. Confidential Information. At all times from and after the Closing
Date, except to the extent permitted in the License Agreement, each of the
Sellers shall keep secret and maintain in strictest confidence and shall not use
for its benefit or for the benefit of others any confidential or proprietary
information relating to the Wound Care Business, including, without limitation,
all Intellectual Property and files and records, other than any of such
information that is in the public domain prior to the date of this Agreement or
thereafter comes into the public domain (unless any of such information is in or
becomes in the public domain in whole or in part due to action or inaction of
the Sellers in violation of this Agreement). The foregoing shall not prohibit
use of such information as is required by applicable law, or as is necessary to
prepare tax returns or other filings with governmental authorities for the
period (including all prior taxable years) ending on and including the Closing
Date, or to assert or protect any rights of the Sellers under this Agreement,
provided that the Buyers and the Parent are given notice and an adequate
opportunity to contest such disclosure or to use any means available to minimize
such disclosure (e.g., the "confidential treatment" provisions of Rule 24b-2
promulgated under the United States Securities Exchange Act of 1934, as
amended).
12.2. Noncompetition.
(a) In order to transfer to the Buyers the full benefit of the
goodwill of the Wound Care Business and to ensure its continuing value the
Sellers jointly and severally covenant with the Buyers and the Parent that they
will not for a period of three (3) years after the Closing Date:
(i) (subject to clause (b) below) either solely or
jointly with or as manager, agent or servant of
any other person firm or company directly or
indirectly carry on or be engaged concerned or
interested in the manufacture, marketing and
sale of products directly competitive with
those manufactured, marketed, sold or designed
with such designs having been reduced to
practice by the Wound Care Business during the
one-year period ending on the Closing Date (the
"Restricted Business") in:
(A) the United States of America;
(B) the United Kingdom;
(C) Japan;
(D) the Peoples Republic of China; or
(E) each of the countries (or portions
thereof) located on the continent of Europe;
(ii) (subject to clause (b) below) either on their
account or otherwise and whether directly or
indirectly, solicit, canvass or accept orders
from or otherwise deal with any person, firm or
company or other organization who was a
customer of the Wound Care Business at any time
during the two (2) years prior to the Closing
Date or who on the Closing Date was in the
process of negotiating or doing business with
any of the Sellers;
(iii) represent themselves or permit themselves
to be held out as being in any way concerned
with or interested in the Restricted Business;
(iv) without the prior written consent of the Buyers
and the Parent (which shall not be unreasonably
withheld) either on their own account or
otherwise and whether directly or indirectly
solicit or endeavour to entice away, offer
employment or employ any person who was an
employee of either of the Sellers engaged in
skilled, technical or managerial work in
relation to the Wound Care Business at any time
during a period of three (3) years immediately
prior to the Closing Date;
(b) The restrictions in clauses (a)(i) and (ii) above shall
not operate to prohibit (i) any Seller from holding in aggregate up to 5% of the
shares of any company engaged in a Restricted Business the shares of which are
listed or dealt in on a recognised stock exchange or (ii) PMI from engaging in
the business of marketing and selling those products which are the subject of
the License and Supply Agreement in the United States of America.
(c) Each of the undertakings in this Section 12.2 is separate
and independent and may be severed from the remainder to the intent that the
invalidity of any one or more of such undertakings shall not in any way affect
the validity of any other.
(d) While the restrictions contained in this Section 12.2 are
considered by the Buyers and the Sellers to be reasonable in all circumstances
it is recognised that restrictions of the nature in question may be
unenforceable and accordingly if any of such restrictions shall be adjudged to
be void and unenforceable as going beyond what is reasonable in the
circumstances for the protection of the interests of the Buyers but would be
valid if part of the wording thereof was deleted or the period thereof was
reduced or the area dealt with thereby reduced in scope then such restrictions
shall apply with such modifications as may be necessary to make them valid and
effective.
(e) With respect to the UK Business only, none of the
provisions of this Agreement or of any document referred to in this Agreement
which are relevant restrictions as defined by the United Kingdom Restrictive
Trade Practices Act 1976 shall come into effect until the date following the day
on which full particulars of this Agreement have been furnished to the Office of
Fair Trading in accordance with the said Act and the Buyers and the Sellers
agree so to furnish such particulars within a period of 3 months from the date
of this Agreement.
(f) It is recognized by the parties hereto that damages for
breaches of covenants of the nature contained in this Section 12.2 are difficult
if not impossible precisely to prove; therefore, it is agreed that this
Agreement not to compete shall be enforceable by mandatory injunction, in
addition to any other remedy available to the Buyers under this Agreement or at
law or in equity.
Article 13
Indemnification
13.1. Indemnity by the Seller. Subject to the provisions of Sections
13.3 to 13.8, the Sellers agree jointly and severally to indemnify and hold the
Buyers and the Parent harmless from and with respect to any and all claims,
liabilities, losses, damages, costs and expenses, including without limitation
the reasonable fees and disbursements of counsel (collectively, the "Losses"),
related to or arising directly or indirectly out of any of the following:
(i) any failure or any breach by any of the Sellers
of any representation or warranty, covenant, obligation or undertaking
made by it in or pursuant to this Agreement (including the Schedules
and Exhibits hereto) or any other statement, certificate or other
instrument delivered pursuant hereto;
(ii) any claim, liability, obligation or damage with
respect to the Excluded Liabilities, including without limitation the
following:
(A) any actual or alleged liability for the cleanup
or removal of, or for death or injury to person or property as
a result of the release, emission or discharge of, any
hazardous substance, hazardous waste, toxic pollutants or
other chemical by-products relating to or affecting the
Acquired Assets or the Wound Care Business, to the extent such
liability arises out of any matter that occurred or existed on
or before the Closing Date; or
(B) any actual or alleged liability for death or
injury to person or property or product recall as a result of
any actual or alleged defect in any product sold or services
rendered by any of the Sellers on or prior to the Closing
Date; or
(C) any contractual product or service warranty
claims arising out of defects in any product sold or services
rendered by any of the Sellers prior to the Closing Date; or
(D) any actual or alleged liability for Taxes
attributable to periods prior to the Closing Date; or
(E) any claim, obligation or liability arising in
connection with the employment or termination of employment of
any persons in the Wound Care Business on or before the
Closing Date, including any worker's compensation claims, any
employee grievances, any liabilities with respect to pension,
medical or other employment benefits and any liabilities for
accrued vacation, bonus or severance payments arising as a
result of the consummation of the transactions contemplated by
this Agreement; or
(F) any violation by any of the Sellers or their
Affiliates of any law, statute, governmental regulation or
judicial or administrative order, judgment, writ, injunction,
decree or similar command;
(iii) other than the Assumed Liabilities, any claim
or liability arising under the bulk sales laws of any jurisdiction in
connection with transactions contemplated by this Agreement (in view of
such indemnification obligation the Buyers hereby waive the Sellers'
compliance with any such bulk sales laws as a condition to the Closing
hereunder);
(iv) any liability with respect to any of the items
disclosed on Schedules 6.6 or --------- --- 6.7 hereto;
(v) any liability arising out of any claim that the
Sellers or the Buyers do not own or have the sole and exclusive right
to use any of the Intellectual Property listed on Schedule 1.1(j) or
Schedule 6.18(a), or any liability arising out of any claim that any
aspect of the operation of the Wound Care Business by the Sellers or
the Buyers infringes on the rights of any other Person;
(vi) any liability arising out of the PolyMedica
Industries UK Limited Retirement and Death Benefits Scheme (established
by declaration of trust dated October 19, 1988) or the Beam Tech
Executive Pension Scheme;
(vii) any liability of the Sellers under Section 9.7;
or
(viii) any liability arising out of CardioTech being
required by the prime landlord, on the grounds that such occupation is
unauthorised, to vacate that portion of the Real Property located at
Tarvin, Cheshire currently occupied by CardioTech under an agreement
dated 1 October 1996 made between (x) PolyMedica Pharmaceuticals
(U.S.A.), Inc. and (y) CardioTech or otherwise howsoever occupied
and/or any liability with respect to the prime landlord on the grounds
that such occupation is unauthorised; provided that the Buyers and the
Parent shall immediately notify the Sellers of any claim made by the
superior landlord and shall at the request and cost of the Sellers take
all such steps as the Sellers may reasonably require and provided
further that neither the Buyers nor the Parent shall induce any claim
by the superior landlord or CardioTech in relation to this indemnity.
13.2. Indemnity by the Buyers and the Parent. Subject to the provisions
of Sections 13.3 to 13.8, the Buyers and the Parent agree jointly and severally
to indemnify and hold the Sellers harmless from and with respect to any and all
Losses, related to or arising directly or indirectly out of any failure or
breach by any of the Buyers or the Parent of any representation or warranty,
covenant, obligation or undertaking made by the Buyers or the Parent in this
Agreement (including the Schedules and Exhibits hereto) or any other statement,
certificate or other instrument delivered pursuant hereto.
13.3. Time Limitations. Neither the Sellers, on the one hand, nor the
Buyers and the Parent, on the other hand, shall be liable to the other under
this Article 13 for any claim under 13.1(i) or 13.2 unless the claim is asserted
in writing by the party seeking indemnification hereunder no later than eighteen
(18) months after the Closing Date. Any claim arising under Section 13.1(ii)(D)
(a "Tax Claim") may be made at any time in the future but not later than three
(3) months after the expiration of the applicable statute of limitations with
respect to the tax matter to which the Tax Claim relates, as such limitation
period may be extended from time to time. Any claim for indemnification under
Sections 13.1(ii) (other than a Tax Claim), 13.1(iii), 13.1(iv), 13.1(v),
13.1(vi), 13.1(vii) or 13.1(viii) may be made at any time in the future, subject
to any applicable statute of limitations.
13.4. Materiality Standards; Dollar Thresholds.
(a) For purposes of determining those Losses arising from
breaches of representations, warranties or covenants that will be considered
immaterial in nature and accordingly not subject to indemnification hereunder,
the parties have agreed to use predictable dollar thresholds as provided in this
paragraph (a). Accordingly, the parties agree that with respect to any
representation, warranty or covenant referred to in Section 13.1(i) or 13.2, if
such representation, warranty or covenant contains a materiality qualification
(e.g., "material," "materially," "material to the Wound Care Business," "in all
material respects," or similar qualifiers), such materiality qualification shall
be deemed to have been met, and such representation, warranty or covenant shall
be deemed to have been breached, if the Buyers and the Parent, on the one hand,
or the Sellers, on the other hand, incur or are alleged to have incurred Losses
in excess of US $10,000 in connection with the matter or event to which such
representation, warranty or covenant relates.
(b) Neither the Buyers and the Parent, on the one hand, and
the Sellers, on the other hand, shall be liable to the other for indemnification
claims if the total Losses with respect to all such claims do not exceed US
$100,000 (the "Claims Threshold"), but once the aggregate of such claims exceeds
the Claims Threshold, the indemnifying party shall be liable for the full amount
of such claims.
(c) The total amount payable by the Sellers under Section
13.1(i) with respect to all claims thereunder shall be US $13,000,000. The total
amount payable by the Buyers and the Parent under Section 13.2 with respect to
all claims thereunder shall be US $5,000,000.
(e) No claim for indemnification under Section 13.1, other
than a claim under Section 13.1(i), shall be subject to any threshold amount or
deductible amount or cap on liability.
13.5. Claims.
(a) Any party seeking indemnification hereunder (the
"Indemnified Party") shall promptly notify the other party hereto obligated to
provide indemnification hereunder (the "Indemnifying Party") for any action,
suit, proceeding, demand or breach (a "Claim") with respect to which the
Indemnified Party claims indemnification hereunder, provided that failure of the
Indemnified Party to give such notice shall not relieve any Indemnifying Party
of its obligations under this Article 13 except to the extent, if at all, that
such Indemnifying Party shall have been prejudiced thereby. If such Claim
relates to any action, suit, proceeding or demand instituted against the
Indemnified Party by a third party (a "Third Party Claim"), upon receipt of such
notice from the Indemnified Party, the Indemnifying Party shall be entitled to
participate in the defense of such Third Party Claim, and if and only if each of
the following conditions is satisfied, the Indemnifying Party may assume the
defense of such Third Party Claim, and in the case of such an assumption the
Indemnifying Party shall have the authority to negotiate, compromise and settle
such Third Party Claim:
(i) the Indemnifying Party confirms in writing
that it is obligated hereunder to indemnify the Indemnified
Party with respect to such Third Party Claim;
(ii) the Indemnified Party does not give the
Indemnifying Party written notice that it has determined, in
the exercise of its reasonable discretion, that matters of
corporate or management policy or a conflict of interest make
separate representation by the Indemnified Party's own counsel
advisable; and
(iii) the Indemnifying Party establishes to the
reasonable satisfaction of the Indemnified Party that the
Indemnifying Party has (and will continue to have) adequate
financial resources to satisfy and discharge such action or
claim.
The Indemnified Party shall retain the right to employ its own
counsel and to participate in the defense of any Third Party Claim, the defense
of which has been assumed by the Indemnifying Party pursuant hereto, but the
Indemnified Party shall bear and shall be solely responsible for its own costs
and expenses in connection with such participation.
(b) Notwithstanding the foregoing provisions of this Section
13.5, (i) no Indemnifying Party shall be entitled to settle any Third Party
Claim without the Indemnified Party's prior written consent unless as part of
such settlement the Indemnified Party is released in writing from all liability
with respect to such Third Party Claim and (ii) no Indemnified Party shall be
entitled to settle any Third Party Claim without the Indemnifying Party's prior
written consent unless as part of such settlement the Indemnifying Party is
released in writing from all liability with respect to such Third Party Claim.
(c) In the event one party hereunder should have a claim for
indemnification that does not involve a Third-Party Claim, the party seeking
indemnification shall promptly send notice of such Claim to the other party.
13.6. Method and Manner of Paying Claims; Set-Off. Subject to the
Indemnifying Party's right pursuant to Section 13.5 to defend, negotiate,
compromise and settle a Third Party Claim, the amount of any Claim shall be paid
by the Indemnifying Party forthwith on demand. The unpaid balance of a Claim
shall bear interest at the prime rate published in The Wall Street Journal plus
2% from the date notice thereof is given by the Indemnified Party to the
Indemnifying Party; provided that the Indemnifying Party shall only be obligated
to pay interest on that portion of such Claim ultimately determined to be owed
to the Indemnified Party. Any amounts owed by the Sellers to the Buyers, the
Parent or their Affiliates under this Agreement, the Note, the Loan Notes or any
of the other Transaction Documents may be set off by any of the Buyers or the
Parent in satisfaction of amounts owed by such Buyer or the Parent or their
Affiliates to the Sellers (whether under this Agreement, the Note, the Loan
Notes or otherwise).
13.7. Straddle Claims. With respect to the indemnification obligations
of the parties under this Article 13, to the extent that any matter, event or
occurrence exists both before and after the Closing Date, such that the Buyers
and the Parent, on the one hand, and the Sellers, on the other hand, could both
be entitled to indemnification with respect thereto (such as an ongoing OSHA
violation with respect to which any of the Sellers or the Buyers is assessed a
fine attributable to both pre-Closing and post-Closing periods), the respective
indemnification obligations of the parties shall be equitably apportioned
between the Buyers and the Parent, on the one hand, and the Sellers, on the
other hand, based on respective lengths of time, comparative opportunity to
correct or prevent such matter or occurrence, whether or not the underlying
matter or occurrence also gives rise to a breach of any of the representations
and warranties made by any party to this Agreement or other equitable factors.
<PAGE>
13.8. Insurance Proceeds.
(a) No Indemnified Party shall be obligated to pursue or
collect from any insurer prior to making a claim for indemnification pursuant to
this Article 13 and no Indemnifying Party shall be entitled to postpone
performance of any indemnification obligation under this Article 13 while an
insurance claim is pending. However, without limiting any of the provisions of
Sections 13.1 through 13.7, in connection with any matter subject to
indemnification under this Article 13, all parties shall cooperate with each
other in giving notice of any claim to any insurer (including an insurer of an
Indemnified Party) and shall provide reasonable assistance in the collection of
any such claim; provided, however, that there is no duty to provide notice,
cooperate or assist with respect to an Indemnified Party's insurance policies
where the Indemnified Party determines in its sole discretion that such notice,
cooperation or assistance could invalidate any portion of the coverage available
under such policy or result in the imposition of retroactive premiums or
prospective premium increases. In addition, if an Indemnified Party makes such a
determination after it has notified its insurer, it shall be entitled to retract
such notice.
(b) If an Indemnified Party actually receives insurance
proceeds, the amount for which such Indemnified Party is entitled to
indemnification under this Article 13 shall be reduced appropriately. In the
event an Indemnified Party receives insurance proceeds after being paid by the
Indemnifying Party with respect to an indemnifiable matter under this Article
13, the Indemnified Party will remit such proceeds to the Indemnifying Party, up
to the amount previously paid by the Indemnifying Party with respect to such
matter. Nothing in this Section 13.8 shall be deemed to waive or limit the
subrogation rights of any insurer.
Article 14
Termination
(a) This Agreement may be terminated by either the Buyers and
the Parent or the Sellers in writing, without liability to the terminating party
on account of such termination (provided the terminating party is not otherwise
in default or in breach of this Agreement), if the Closing shall not have
occurred on or before July 31, 1997, other than as a consequence of the
intentional breach or the intentional default by the terminating party.
(b) This Agreement may be terminated at any time
prior to the Closing by mutual written consent of all of the parties hereto.
(c) In the event of the termination and abandonment of this
Agreement by the Sellers or the Buyers and the Parent, as herein provided,
written notice thereof shall be given to the other party or parties and this
Agreement shall terminate without any further action of the parties hereto. If
this Agreement is terminated as provided herein: (i) each party will redeliver
all documents, work papers and other material of the other party or parties
relating to the transactions contemplated hereby including such memoranda,
notes, lists, records or other documents compiled or derived from such material,
whether so obtained before or after the execution hereof, to the party
furnishing the same; (ii) all information received by any party hereto with
respect to the business of the other parties or their affiliated companies shall
remain subject to the terms of Section 9 of the Letter of Intent; and (iii) no
party shall have any liability or further obligation to any other party to this
Agreement except as provided by this Article 14, and except that any termination
of this Agreement pursuant to the first sentence of this Article 14 shall not
relieve a defaulting or breaching party from any liability to the other party
hereto.
(d) The Sellers shall refund to the Parent the $400,000
deposit paid to the Sellers within five (5) days after termination of this
Agreement if such termination is a result of a breach by the Sellers of their
obligations under this Agreement, including their obligations to use their best
efforts to cause the satisfaction of the conditions precedent contained in this
Agreement.
Article 15
Definitions
As used herein the following terms not otherwise defined have the
following respective meanings:
"Affiliate" means, with respect to any Person, any Person controlling,
controlled by or under common control with such Person.
"Circular" means a circular proposed to be sent to the shareholders of
the Parent with regard to approval inter alia of the transactions contemplated
by this Agreement.
"Dollars" or "$" means dollars in the currency of the United States of
America.
"Employees" means all employees of the Sellers employed in connection
with the Wound Care Business.
"Improvements" means all improvements, modifications, innovations,
ideas, inventions, developments and discoveries, whether patentable or
unpatentable and whether or not reducible to practice, made, discovered,
invented, created, developed, originated or conceived by any of the Sellers or
their Affiliates or in which any of the Sellers or Affiliates has any rights.
"Intellectual Property" means United States and foreign patents,
inventions (whether patentable or unpatentable), trade secrets, know-how,
trademarks and associated goodwill, service marks, trade dress, logos, trade
names, copyrights, mask works and registrations and applications for each of the
foregoing, and computer software programs, computer data bases and related
documentation and materials.
"Material Adverse Effect" means any material adverse effect on the
operations, assets, business, condition (financial or otherwise) or prospects of
a Seller existing or impending, in each case insofar as it relates to the Wound
Care Business, or any material adverse effect on the ability of any of the
Sellers to perform its obligations under this Agreement or the other Transaction
Documents.
"Person" means any corporation, association, partnership, limited
liability company, organization, business, individual, government or political
subdivision thereof or governmental agency.
"Placing" means the conditional placing by Greig Middleton & Co.
Limited as agent of the Parent of approximately 4,101,555 ordinary shares in the
capital of the Parent pursuant to the Placing Agreement.
"Placing Agreement" means the conditional agreement by and between (i)
the Parent, (ii) Greig Middleton & Co. Limited, and (iii) the executive
directors of the Parent in relation to the Placing dated on or about the date of
this Agreement.
"Subsidiary" with respect to any Person, means any corporation a
majority (by number of votes) of the outstanding shares of any class or classes
of which shall at the time be owned (directly or indirectly) of record or
beneficially by such Person or by a Subsidiary of such Person, if the holders of
the shares of such class or classes (a) are ordinarily, in the absence of
contingencies, entitled to vote for the election of a majority of the directors
(or persons performing similar functions) of the issuer thereof, even though the
right so to vote has been suspended by the happening of such a contingency, or
(b) are at the time entitled, as such holders, to vote for the election of a
majority of the directors (or persons performing similar functions) of the
issuer thereof, whether or not the right so to vote exists by reason of the
happening of a contingency.
"Sterling" or "(pound)" shall mean the lawful currency in effect from
time to time of the United Kingdom. In the event that Sterling is replaced by
any other currency as the lawful currency of the United Kingdom, all amounts
denominated in this Agreement in Sterling shall be converted to the appropriate
amount in such other currency at the rate of exchange that would be required if
this Agreement were governed by English law.
"Tax" means any federal, state, local, or foreign income, gross
receipts, franchise, estimated, alternative minimum, add-on minimum, sales, use,
transfer, registration, value added, excise, natural resources, severance,
stamp, occupation, premium, windfall profit, environmental, customs, duties,
real property, personal property, capital stock, intangibles, social security,
unemployment, disability, payroll, license, employee, or other tax or levy, of
any kind whatsoever, including any interest, penalties, or additions to tax in
respect of the foregoing.
"UK Employees" means those Employees employed in the UK Business as set
forth in part 2 of Schedule 6.15.
"US Employees" means those Employees employed in that part of the Wound
Care Business which is carried on in the United States of America, as set forth
in part 1 of Schedule 6.15.
Article 16
General
16.1. Survival of Representations and Warranties. The representations
and warranties of the parties hereto contained in this Agreement or otherwise
made in writing in connection with the transactions contemplated hereby (in each
case except as affected by the transactions contemplated by this Agreement)
shall be deemed material and, notwithstanding any investigation by the Buyers
and the Parent or the Sellers, shall be deemed to have been relied on by the
Buyers and the Parent or the Sellers, as applicable, and shall survive the
Closing and the consummation of the transactions contemplated hereby.
16.2. Survival of Covenants. All covenants made by the parties in this
Agreement and in the other Transaction Documents that do not, by their terms,
relate only to a period ending on or before the Closing Date shall survive the
Closing and the consummation of the transaction contemplated hereby.
16.3. Expenses. Except as otherwise provided in Article 5, all transfer
and sales taxes payable with respect to the sale and conveyance of the Acquired
Assets to the Buyers shall be paid by the Sellers. All expenses of the
preparation, execution and consummation of this Agreement and of the
transactions contemplated hereby, including without limitation attorneys',
accountants' and outside advisers' fees and disbursements, shall be borne by the
party incurring such expenses.
16.4. Notices. All notices, demands and other communications hereunder
shall be in writing or by written telecommunication, and shall be deemed to have
been duly given if delivered personally or if mailed by certified mail, return
receipt requested, postage prepaid, or if sent by overnight courier, or sent by
written telecommunication, as follows:
If to the Sellers, to:
PolyMedica Industries, Inc.
11 State Street
Woburn, MA 01801
Attn: Steven J. Lee
Tel: 00 1 617 933 2020
Fax: 00 1 617 938 6950
with a copy sent contemporaneously to:
Hale and Dorr
60 State Street
Boston, MA 02109
Attn: John K. P. Stone III
Tel: 00 1 617 526 6000
Fax: 00 1 617 526 5000
If to the Buyers or the Parent to:
Innovative Technologies Group plc
Road Three
Winsford Industrial Estate
Winsford
Cheshire CW7 3PD
Attn: Diane Mitchell
Tel: 01606 863500
Fax: 01606 863600
with a copy sent contemporaneously to:
Wragge & Co.
55 Colmore Row
Birmingham B3 2AS
Attn: Ian Metcalfe
Tel: 0121 233 1000
Fax: 0121 214 1099
Any such notice shall be effective (a) if delivered personally, when
received, (b) if sent by overnight courier, when receipted for, (c) if mailed,
three (3) days after being mailed as described above, and (d) if sent by written
telecommunication, when dispatched.
16.5. Entire Agreement. This Agreement contains the entire
understanding of the parties, supersedes all prior agreements and understandings
relating to the subject matter hereof (including without limitation the Letter
of Intent) and shall not be amended except by a written instrument hereafter
signed by all of the parties hereto.
16.6. Governing Law. The validity and construction of this Agreement
shall be governed by the internal laws (and not the choice-of-law rules) of the
Commonwealth of Massachusetts.
16.7. Jurisdiction.
(a) The parties hereto irrevocably agree that the courts of
England are to have non-exclusive jurisdiction to settle any disputes which may
arise out of or in connection with this Agreement and that accordingly any suit,
action, or proceeding (together referred to as "Proceedings") arising out of or
in connection with this Agreement may be brought in such courts. The parties
further agree that nothing in this Section 16.7 shall limit the rights of the
parties to take proceedings in any other competent jurisdiction.
(b) Without prejudice to paragraph (a) above, the parties
further agree that any Proceedings arising out of or in connection with this
Agreement may be brought in any competent court in the Commonwealth of
Massachusetts or any federal court sitting therein, and the parties submit to
the non-exclusive jurisdiction of each such court.
16.8. Exchange Rate. For purposes of determining the application of the
terms of this Agreement to items denominated in a currency other than Dollars,
the relevant currency shall be converted to Dollars at the applicable exchange
rate published in the currency crossrate table of The Wall Street Journal (New
York edition) on the date of this Agreement (or, if applicable, on the date as
of which such calculation is made).
16.9. Sections and Section Headings. The headings of sections and
subsections are for reference only and shall not limit or control the meaning
thereof.
16.10. Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, successors and
permitted assigns. Neither this Agreement nor the obligations of any party
hereunder shall be assignable or transferable by such party without the prior
written consent of the other party hereto; provided, however, that nothing
contained in this Section 16.10 shall prevent any of the Buyers, without the
consent of the Sellers, (a) from transferring or assigning this Agreement or its
rights or obligations hereunder to one or more of its Affiliates or (b) from
assigning all or part of its rights or obligations hereunder by way of
collateral assignment to any bank or financing institution providing financing
for the acquisition contemplated hereby, but no such transfer or assignment made
pursuant to clauses (a) or (b) shall relieve such Buyer of its obligations under
this Agreement.
16.11. Severability. In the event that any covenant, condition, or
other provision herein contained is held to be invalid, void, or illegal by any
court of competent jurisdiction, the same shall be deemed to be severable from
the remainder of this Agreement and shall in no way affect, impair, or
invalidate any other covenant, condition, or other provision contained herein.
16.12. Further Assurances. The parties agree to take such reasonable
steps and execute such other and further documents as may be necessary or
appropriate to cause the terms and conditions contained herein to be carried
into effect.
16.13. Tax Treatment. The Buyers and the Parent, on the one hand, and
the Sellers, on the other hand, shall treat and report the transactions
contemplated by this Agreement in all respects consistently for purposes of any
federal, state or local tax, including without limitation with respect to
calculation of gain, loss and basis with reference to the allocations of the
purchase price made pursuant to Article 2 hereof. The parties hereto shall not
take any actions or positions inconsistent with the obligations set forth
herein. Each of ITUI and PMI agrees to file with the Internal Revenue Service an
IRS Form 8594 (Asset Acquisition Statement under Section 1060) with respect to
the acquisition by ITUI of the Acquired Assets acquired by it, with their
respective federal income tax returns for the year in which the Closing Date
occurs, consistent with the allocations made pursuant to Section 4.2(h).
16.14. No Implied Rights or Remedies. Except as otherwise expressly
provided herein, nothing herein expressed or implied is intended or shall be
construed to confer upon or to give any person, firm or corporation, other than
the Sellers, the Buyers and the Parent and their respective shareholders, any
rights or remedies under or by reason of this Agreement.
16.15. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
16.16. Public Statements or Releases. Each of the parties hereto agrees
that, save as required by the rules of the London Stock Exchange, prior to the
consummation of the Closing no party to this Agreement will make, issue or
release any public announcement, statement or acknowledgement of the existence
of, or reveal the status of, this Agreement or the transactions provided for
herein, without first obtaining the consent of the other parties hereto. Nothing
contained in this Section 16.16 shall prevent either party from making such
disclosures as such party may consider necessary to satisfy such party's legal,
regulatory or contractual obligations.
16.17. Waiver of Jury Trial. Each party hereto waives its right to a
jury trial with respect to any action or claim arising out of any dispute in
connection with this Agreement, any agreement, contract or other document or
instrument executed in connection herewith, or any of the transactions
contemplated hereby.
16.18. Construction. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rule of strict construction will be applied against any party.
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound hereby, the
parties hereto have caused this Agreement to be duly executed and delivered as a
sealed instrument as of the date and year first above written.
The Sellers: POLYMEDICA INDUSTRIES, INC.
By:/s/____________________
Title:
POLYMEDICA INDUSTRIES UK, LIMITED
By:/s/____________________
Title:
The Buyers: INNOVATIVE TECHNOLOGIES LIMITED
By:/s/____________________
Title:
INNOVATIVE TECHNOLOGIES (US) INC.
By:/s/____________________
Title:
The Parent: INNOVATIVE TECHNOLOGIES GROUP PLC
By:/s/____________________
Title:
EXHIBIT 10.71
EMPLOYMENT AGREEMENT
PARTIES
This Employment Agreement (this "Agreement") dated as of the 1st day of
October, 1996, is entered into by and between PolyMedica Industries, Inc., a
Massachusetts corporation having its principal place of business at 11 State
Street, Woburn, Massachusetts 01801 (the "Company") and Randy M. Sloan, an
individual with an address at 297 Lupine Way, Short Hills, New Jersey 07078 (the
"Executive").
TERMS OF AGREEMENT
In consideration of this Agreement and the continued employment of the
Executive by the Company, the parties agree as follows:
l. Employment. The Company hereby employs Executive, on a full-time
basis, to act as an executive of the Company and to perform such acts and duties
and furnish such services to the Company as the Company's Chief Executive
Officer or Board of Directors shall from time to time reasonably direct.
Executive shall be an officer of the Company. Executive hereby accepts said
employment. Executive shall use his best and most diligent efforts to promote
the interests of the Company; shall discharge his duties in a highly competent
manner; and shall devote his full business time and his best business judgment,
skill and knowledge to the performance of his duties and responsibilities
hereunder. Executive shall report directly to the Chief Executive Officer of the
Company. Nothing contained herein shall preclude Executive from devoting
incidental and insubstantial amounts of time to activities other than the
business of the Company.
2. Term of Employment. The Company agrees to employ the Executive for a
period commencing on October 1, 1996 and ending on September 30, 1997 (the
"Employment Period"). Notwithstanding the foregoing, both Executive and the
Company shall have the right to terminate the Executive's employment under this
Agreement upon thirty (30) days' written notice to the other party, subject to
the Company's obligation to pay severance benefits under certain circumstances
as provided in Section 3.6. If Executive shall remain in the employ of the
Company beyond the Employment Period, in the absence of any other express
agreement between the parties, this Agreement shall be deemed to continue on a
month-to-month basis (the "Extended Employment Period").
3. Compensation and Benefits; Disability.
3.1 Salary. During Executive's employment, the Company shall
pay Executive an annualized base salary of $150,000 ("Base Salary") payable in
equal installments pursuant to the Company's customary payroll policies in force
at the time of payment (but in no event less frequently than monthly), less
required payroll deductions and
1
<PAGE>
state and federal withholdings. Executive's Base Salary may be adjusted from
time to time in the sole discretion of the Board of Directors of the Company,
except that Executive, if a Director, shall not be entitled to vote thereon.
Executive's Base Salary shall be reviewed annually by the Board of Directors of
the Company.
3.2 Bonus Payment. During the Employment Period, Executive may
receive, in the sole discretion of the Compensation Committee of the Board of
Directors of the Company, an annual bonus payment in an amount, if any, to be
determined by the Compensation Committee, except that Executive, if a member of
the Compensation Committee, shall not be entitled to vote thereon.
3.3 Executive Benefits. During the Employment Period,
Executive shall receive such benefits as are customarily provided to other
officers and employees of the Company, including but not limited to the
following benefits:
(a) Health Insurance. Non-contributory health
insurance pursuant to a Guardian policy or substantially similar policy; and
(b) Life Insurance. Life insurance on the life
of Executive with an Executive-directed beneficiary in the amount of 150% of
Executive's Base Salary.
3.4 Vacation. Executive may take three weeks of paid vacation
during each year at such times as shall be consistent with the Company's
vacation policies and (in the Company's judgment) with the Company's vacation
schedule for officers and other employees.
3.5 Disability. If during the Employment Period Executive
shall become ill, disabled or otherwise incapacitated so as to be unable to
perform his usual duties (a) for a period in excess of one hundred twenty (120)
consecutive days or (b) for more than one hundred eighty (180) days in any
consecutive twelve (12) month period, then the Company shall have the right to
terminate this Agreement, in accordance with applicable laws, on thirty (30)
days' notice to Executive.
3.6 Severance Pay. In the event (i) the Company terminates
this Agreement without cause (i.e., other than pursuant to Section 3.5 or
Section 4 hereof) at any time (including during the Extended Employment Period)
or (ii) Executive terminates his employment for Good Reason following a Change
in Control of the Company, the Company shall continue to pay Executive at his
then current Base Salary for twelve months (the "Severance Period"). "Good
Reason" shall mean, during the nine (9) month period following a Change in
Control, (1) a good faith determination by the Executive that as a result of
such Change in Control he is not able to discharge his duties effectively or (2)
without the Executive's express written consent, the occurrence of any of the
following circumstances:
2
<PAGE>
(a) the assignment to Executive of any duties inconsistent (except in the nature
of a promotion) with the position in the Company that he held immediately prior
to the Change in Control or a substantial adverse alteration in the nature or
status of his position or responsibilities or the conditions of his employment
from those in effect immediately prior to the Change in Control; (b) a reduction
by the Company in Executive's annual base salary as in effect on the date hereof
or as the same may be increased from time to time; (c) the Company's requiring
the Executive to be based more than twenty-five (25) miles from the Company's
offices at which he was principally employed immediately prior to the date of
the Change in Control except for required travel on the Company's business to an
extent substantially consistent with his present business travel obligations; or
(d) the failure by the Company to continue in effect any material compensation
or benefit plan in which the Executive participates immediately prior to the
Change in Control unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan, or the
failure by the Company to continue the Executive's participation therein (or in
such substitute or alternative plan) on a basis not materially less favorable,
both in terms of the amount of benefits provided and the level of his
participation relative to other participants, than existed at the time of the
Change in Control. For purposes of this Agreement, "Change in Control" shall
mean the acquisition of beneficial ownership (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended) of securities representing more
than 50% of the combined voting power of the Company's then outstanding
securities except to the extent that the directors of the Company who were
directors immediately before such Change in Control (and any directors elected
by a majority of such directors) designate that any securities when issued by
the Company shall not be counted for purposes of determining percentages of
beneficial ownership as contemplated in the Agreement. Executive's continued
employment shall not constitute consent to, or a waiver of rights with respect
to, any circumstance constituting Good Reason hereunder.
3.7 Benefits During Severance Period. Except as otherwise
required by law, the Executive shall not be entitled to any employee benefits
provided under Section 3.3 after termination of Executive whether or not
severance pay is being provided, except that (i) the Company shall continue in
full force and effect, at its expense, the life insurance provided for in
Section 3.3(b) for a period of six months after termination of Executive's
employment hereunder or until Executive becomes employed, whichever first
occurs, and (ii) (Consolidated Omnibus Budget Reconciliation Act of 1986). If
Executive elects not to maintain health insurance pursuant to COBRA, the Company
is under no obligation to reimburse Executive for his otherwise elected
coverage. Executive shall be obligated to give the Company prompt notice of his
employment.
4. Discharge for Cause. The Company may discharge Executive and
terminate his employment under this Agreement for cause without further
liability to the Company, except that Executive, if a Director, shall not be
entitled to vote thereon. As used in this Section 4, "cause" shall mean any or
all of the following:
3
<PAGE>
(a) misconduct of Executive during the course of his
employment which is materially injurious to the Company and which is brought to
the attention of Executive promptly after discovery by the Company, including
but not limited to theft or embezzlement from the Company, the intentional
provision of services to competitors of the Company, or improper disclosure of
proprietary information, but not including any act or failure to act by
Executive which he believed in good faith to be proper conduct not adverse to
his duties hereunder;
(b) willful disregard or neglect by Executive of his
duties or of the Company's interests which continues after being brought to the
attention of the Executive;
(c) unavailability (except as provided in Section 3.5)
of Executive to substantially perform the duties provided for herein;
(d) conviction of a fraud or felony or any criminal
offense involving dishonesty, breach of trust or moral turpitude during
Executive's employment;
(e) Executive's breach of any of the material terms of this
Agreement (including the failure of Executive to discharge his duties in a
highly competent manner) or any of the agreements executed in connection
herewith as enumerated in Section 10.1.
In the event the Company exercises its right to terminate Executive's
employment under this Section 4, Executive shall not be entitled to receive any
severance pay or other termination benefits, except as required by law.
5. Termination Without Cause. The Company may terminate this
Agreement without cause without further liability to the Company except as set
forth in Sections 3.6 and 3.7, except that Executive, if a Director, shall not
be entitled to vote thereon.
6. Expenses. Pursuant to the Company's customary policies in
force at the time of payment, Executive shall be promptly reimbursed, against
presentation of vouchers or receipts therefor, for all authorized expenses
properly incurred by him on the Company's behalf in the performance of his
duties hereunder.
7. Agreement Not to Compete. Upon execution of this Agreement,
Executive shall execute and deliver to the Company an Agreement Not to Compete
in the form attached hereto as Exhibit A (the "Additional Agreement").
8. Arbitration. All disputes and claims relating to this
Agreement and the rights, obligations and performance of the parties hereto
shall be settled by a single arbitrator sitting in Boston, Massachusetts, under
the applicable rules of the American Arbitration Association.
4
<PAGE>
9. Notices. Any notice or communication given by any party hereto to
the other party or parties shall be in writing and personally delivered or
mailed by certified mail, return receipt requested, postage prepaid, to the
addresses provided above. All notices shall be deemed given when actually
received. Any person entitled to receive notice (or a copy thereof) may
designate in writing, by notice to the others, another address to which notices
to such person shall thereafter be sent.
10. Miscellaneous.
10.1 Entire Agreement. This Agreement contains the entire
understanding of the parties in respect of its subject matter and supersedes all
prior agreements and understandings between the parties with respect to such
subject matter; provided, that nothing in this Agreement shall affect
Executive's or the Company's obligations under the Additional Agreement.
10.2 Amendment; Waiver. This Agreement may not be amended,
supplemented, cancelled or discharged, except by written instrument executed by
the party affected thereby. No failure to exercise, and no delay in exercising,
any right, power or privilege hereunder shall operate as a waiver thereof. No
waiver of any breach of any provision of this Agreement shall be deemed to be a
waiver of any preceding or succeeding breach of the same or any other provision.
10.3 Binding Effect; Assignment. The rights and obligations of
this Agreement shall bind and inure to the benefit of any successor of the
Company by reorganization, merger or consolidation, or any assignee of all or
substantially all of the Company's business and properties. Executive's rights
or obligations under this Agreement may not be assigned by Executive; except
that Executive's right to compensation to the earlier of date of death or
termination of actual employment shall pass to Executive's executor or
administrator.
10.4 Headings. The headings contained in this Agreement are
for reference purposes only and shall not affect the meaning or interpretation
of this Agreement.
10.5 Governing Law; Interpretation. This Agreement shall be
construed in accordance with and governed for all purposes by the laws and
public policy of the Commonwealth of Massachusetts applicable to contracts
executed and to be wholly performed within such Commonwealth. Service of process
in any dispute shall be effective (a) upon the Company, if service is made on
any officer of the Company other than the Executive; (b) upon the Executive, if
served at Executive's residence last known to the Company with an information
copy to the Executive at any other residence, or in care of a subsequent
employer of which the Company may be aware.
5
<PAGE>
10.6 Further Assurances. Each of the parties agrees to
execute, acknowledge, deliver and perform, or cause to be executed,
acknowledged, delivered or performed, at any time, or from time to time, as the
case may be, all such further acts, deeds, assignments, transfers, conveyances,
powers of attorney and assurances as may be necessary or proper to carry out the
provisions or intent of this Agreement.
10.7 Severability. If any one or more of the terms,
provisions, covenants or restrictions of this Agreement shall be determined by a
court of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions of this Agreement
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated. If, moreover, any one or more of the provisions contained in
this Agreement shall for any reason be determined by a court of competent
jurisdiction to be excessively broad as to duration, geographical scope,
activity or subject, it shall be construed by limiting or reducing it so as to
be enforceable to the extent compatible with then applicable law.
EXECUTION
The parties executed this Agreement as a sealed instrument as of the
date first above written, whereupon it became binding in accordance with its
terms.
POLYMEDICA INDUSTRIES, INC.
By:/s/ Steven J. Lee
Title: Chairman and Chief
Executive Officier
/s/ Randy M. Sloan
Randy M. Sloan
6
<TABLE>
EXHIBIT 10.72
Confidential Materials omitted and filed separately with the Securities and Exchange Commission.
Asterisks denote such omissions.
<CAPTION>
1998 EXECUTIVE INCENTIVE COMPENSATION PLAN
Fiscal Year 1998
Effective 7/1/97
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SJL(1) AAS(1) EGW(1) RMS(1) ML ML RJZ(1) PME(1)
CASH(1) OPTIONS(1)
Consolidated Net Revenues
FY 1998 over FY 1997
****** ****** $40,000 base $30,000 base $20,000 base $10,000 base
****** ****** 125% of base 125% of base 125% of base 125% of base
****** ****** 150% of base 150% of base 150% of base 150% of base
****** ****** 175% of base 175% of base 175% of base 175% of base
****** ****** 200% of base 200% of base 200% of base 200% of base
Consolidated Pretax Income
(before bonus)
FY 1998 over FY 1997
****** ****** $75,000 base $55,000 base $40,000 base $10,000 base
****** ****** 125% of base 125% of base 125% of base 125% of base
****** ****** 150% of base 150% of base 150% of base 150% of base
****** ****** 175% of base 175% of base 175% of base 175% of base
****** ****** 200% of base 200% of base 200% of base 200% of base
Successful Acquisition/Sale
(Each) $25,000 $22,500 $15,000 -
Stock Price - 4th fiscal
quarter average closing
****** ****** $10,000 $10,000 $ 5,000 $2,500
****** ****** 15,000 15,000 7,500 3,750
****** ****** 20,000 20,000 10,000 5,000 $ 7,500
****** ****** 30,000 30,000 12,500 6,250 10,000
(1)Not cumulative in column.
<PAGE>
Confidential Materials omitted and filed separately with the Securities and Exchange Commission.
Asterisks denote such omissions.
SJL(1) AAS(1) EGW(1) RMS(1) ML ML RJZ(1) PME(1)
CASH(1) OPTIONS(1)
LIBERTY
Revenues
********** ... $ 2,500 $ 2,500 $ 1,000 $ 1,000 $10,000 5,000
********** ... 5,000 5,000 2,000 2,000 20,000 7,500
********** ... 7,500 7,500 3,000 3,000 30,000 10,000
********** ... 10,000 10,000 4,000 4,000 40,000 12,500
Pre-Tax Income
(before bonus)
********** .... -- -- -- -- $30,000 10,000
***************** ... $ 10,000 $10,000 $ 5,000 $ 5,000 30,000 10,000
PMH (includes AZO)
Net Revenues
****** . ********** $ 5,000 $ 5,000
****** . ********** 10,000 10,000
****** . ********** 20,000 20,000
****** . ********** 25,000 25,000
Pretax Income
(before bonus)
****** . ********** $ 5,000 $ 5,000
****** . ********** 20,000 20,000
****** . ********** 30,000 30,000
****** . ********** 40,000 40,000
Product Introduction
(each new concept) .. $10,000 $ 5,000
Acquisition
(product line, each) $15,000 $ 5,000
(1)Not cumulative in column.
<PAGE>
Confidential Materials omitted and filed separately with the Securities and Exchange Commission.
Asterisks denote such omissions.
SJL(1) AAS(1) EGW(1) RMS(1) ML ML RJZ(1) PME(1)
CASH(1) OPTIONS(1)
PMP
Rx Net Revenues
****** . ********** $5,000
****** . ********** 7,500
****** . ********** 10,000
Rx Pretax Income
(includes full intangible
charges) $7,500
*********** 10,000
*********** 25,000
***********
URISED Production
(No quarter-end backlog) $5,000
Acquisition Rx $5,000
Fiscal 1998
************* $10,000
************* 10,000
(1)Not cumulative in column.
</TABLE>
EXHIBIT 13
ANNUAL REPORT COPY
COVER:
PolyMedica
1997 Annual Report
INSIDE FRONT COVER:
POLYMEDICA--AMEX: PM
PolyMedica is a leading provider of targeted medical products and services with
primary focus in the diabetes supply and consumer healthcare markets. PolyMedica
participates in the following markets:
Diabetes Supplies--Liberty Medical Supply, added in August 1996 to the
PolyMedica family, is one of the largest patient-focused, direct-mail
distributors of diabetes supplies covered by Medicare. Liberty
distributes more than 200 name-brand diabetes products to over 30,000
customers. Consumer Healthcare--PolyMedica Healthcare holds leading
positions in the urinary health and OTC medical device markets. The
Company distributes a broad range of products to food, drug and mass
retailers nationwide. Professional Products--PolyMedica manufactures,
distributes and markets prescription urological and suppository
products.
In fiscal 1997, fueled by the acquisition of Liberty Medical Supply and growth
in Consumer Healthcare, the Company achieved record levels of sales and
earnings.
Contents:
Financial Highlights
Letter to Shareholders
PolyMedica At A Glance
Review of Operations
Management's Discussion
Financial Statements
Directors and Executive Officers
Corporate and Shareholder
Information
1
<PAGE>
FINANCIAL HIGHLIGHTS
Financial Highlights
(In thousands, except per share data)
Year ended March 31 1997 1996
Revenue $30,453 $24,763
Net Income $ 2,322 $ 274*
Income per common share $ 0.27 $ 0.04
Weighted average number of shares outstanding 8,618 7,492
*Includes one-time charge for discontinued operations
As of March 31 1997 1996
Total assets $75,233 $75,573
Shareholders' equity $43,372 $43,280
3 graphs - 5 year history
Year Ended March 31 1997 1996 1995 1994 1993
Revenue $30,453 $24,763 $26,609 $22,194 $10,599
Net income $ 2,322 $ 274 $ 1,789 $ (415) $(3,939)
Income per common share $ 0.27 $ 0.04 $ 0.26 $ (0.06) $ (0.56)
2
<PAGE>
SHAREHOLDERS LETTER
Photo: Steven and Arthur together
Caption: PolyMedica Chairman and Chief Executive Officer Steven J. Lee, left,
and President Arthur A. Siciliano, Ph.D.
Dear Shareholder,
Fiscal 1997 was a year of remarkable growth and transition for PolyMedica. The
Company successfully evolved from a technology-driven organization to a
market-driven healthcare company. We emerged as a leading provider of targeted
medical products and services with a primary focus in the diabetes supply and
consumer healthcare markets. As a result of new strategic initiatives,
PolyMedica is now a stronger, more focused company, and poised for future
growth.
Many significant accomplishments were achieved in fiscal 1997 which we believe
have set the stage for rapid sales and earnings growth.
o We acquired Liberty Medical Supply which provides the Company
with a strong market position in the distribution of diabetes
testing supplies.
o We achieved record revenues in our Consumer Healthcare
business driven by our AZO-Standard and digital thermometer
product lines.
o We successfully built or maintained our leading market
positions in the Company's core strategic growth markets.
PolyMedica has a leading position in the mail-order diabetes
supply market, the number one urinary analgesic brand
(AZO-Standard), and is the leading distributor of private
label digital thermometry products in the U.S.
o We completed the qualification of our Woburn manufacturing
site for pharmaceutical production which will give us greater
control over our product supply and product costs for this key
area of our business.
o We strengthened our marketing capabilities through the
addition of an experienced vice president of marketing, who
brings in-house expertise in brand management, market research
and consumer affairs.
PolyMedica has a clear, strategic focus as it targets the following markets:
Diabetes Supplies - Liberty Medical Supply is one of the largest direct
mail distributors of diabetes supplies covered by Medicare. Liberty distributes
more than 200 name brand diabetes products to over 30,000 customers.
3
<PAGE>
Consumer Healthcare - PolyMedica holds leading positions in OTC urinary
health, thermometry and medication compliance. The Company distributes a broad
range of products to over 36,000 retail outlets.
Professional Products - PolyMedica manufactures, distributes and
markets prescription urological and suppository products. The Company has one of
the broadest urology product lines available.
In the upcoming year, we will concentrate on achieving two core objectives.
o Expand our leadership position in providing diabetes supplies
to senior citizens through Liberty Medical Supply.
o Significantly grow our consumer healthcare business.
We have put in place a number of new initiatives to support these growth goals.
Because advertising is the key driver for new customers, advertising support
levels have been increased both at Liberty and behind our AZO product line. We
are upgrading our systems and expanding our operations to ensure
state-of-the-art customer service in our telemarketing operation. Finally, we
have increased our efforts to develop new and profitable products and services
which will build on our existing businesses. The Company has several new
products in development to expand the Consumer Healthcare business and is
actively pursuing managed care opportunities in the diabetes supply market
through Liberty Medical.
As important as our growth initiatives, the Company decided to exit from certain
areas of operations as part of our evolution in fiscal 1997.
In late 1995, management and the board of directors determined that the Company
could not fund both a long-range vascular graft research project and sustain
desired levels of growth in revenues and earnings. Consequently in June, 1996,
PolyMedica distributed all of its stock in CardioTech International, Inc. to
PolyMedica shareholders in a tax free spin-off.
In addition, the Company has determined that a combination of changes in
regulatory reimbursement procedures and market factors in the U.S. have reduced
the opportunity and potential for our institutional wound dressing products.
Therefore, in June 1997, PolyMedica entered into a definitive Asset Purchase
Agreement, conditioned on certain events, for the sale of its wound care
operation. This sale, together with the CardioTech distribution, allows us to
focus our efforts and apply increased resources in those areas which can provide
a greater return to our shareholders.
In fiscal 1997, we demonstrated that the development of PolyMedica into a
leading provider of targeted medical products and services can generate
significant growth. PolyMedica finished fiscal 1997 with revenues of $30.5
million, an increase of 23% over the prior year, and record net income of $2.3
million. In fiscal year 1998 we expect to do even better.
We thank the members of our board of directors for their wise counsel and our
management team and staff for their hard work and positive influence. Together
they have contributed to the present success and
4
<PAGE>
future potential of PolyMedica. Above all, we thank our shareholders for their
ongoing confidence; they have supported our initiatives to create a premier
company with a strong business in the present and a very exciting future.
Sincerely,
/s/ Steven J. Lee /s/ Arthur A. Siciliano
Steven J. Lee Arthur A. Siciliano, Ph.D.
Chairman and Chief Executive Officer President
Side Bar: As a result of new strategic initiatives, PolyMedica is now a
stronger, more focused company, and poised for future growth.
5
<PAGE>
POLYMEDICA AT A GLANCE
Recent Highlights
- -Acquisition of Liberty Medical Supply -- The Company's entry into the diabetes
supply business and its commitment to an aggressive advertising program provide
significant growth opportunities through increased market penetration.
- -New Marketing Expertise -- The addition of an experienced vice president of
marketing introduces in-house expertise for brand management, market research
and consumer affairs.
- -In-house Production Startup -- The recent validation and commencement of
in-house pharmaceutical production will ensure consistency of supply and
control of manufacturing costs.
- -Strong Working Capital Position -- The Company's working capital position
enables management to generate growth and expansion through investments in
promotion and advertising, and to seek additional acquisitions which are
accretive to earnings.
Products and Services
PRODUCTS/SERVICES PRODUCTS STRENGTHS
I. Diabetes Supplies More than 200 products Liberty Medical provides
supplied by Lifescan, diabetes supplies to more
Boehringer Mannheim, than 30,000 customers and
Bayer and others. addresses a potential market
of more than 1.3 million
Medicare - eligible seniors
with diabetes.
II. Consumer Healthcare
OTC Medical Devices Digital, basal and glass Number one private - label
thermometers and market position and number
other home-use diagnostic two overall market position
and compliance products. in digital thermometers.
Extensive distribution
network to major retailers.
Urinary Discomfort AZO-STANDARD(R) Leading OTC product line in
Products AZO-CRANBERRY(R) an expanding market segment.
III.Professional Products
Prescription URISED(R), Substantial cash flow
Urologicals CYSTOSPAZ(R)/ generator.
CYSTOSPAZ-M(R),
ANESTACON(R) and a line
of suppositories.
Photos: Sampling of Liberty Products
Line of thermometers
AZO line
Line of prescription products
6
<PAGE>
Revenue Mix
Fiscal 1997 4th Qtr. 1997
Diabetes Supplies 28% 49%
Consumer Healthcare 34% 27%
Professional Products 38%* 24%*
Diabetes supplies and consumer healthcare will become increasingly significant
business areas.
*includes wound care sales
7
<PAGE>
DIABETES SUPPLIES
(FIRST SPREAD)
Photo: Couple on bicycles
caption: Liberty provides a full range of name-brand diabetes products with over
200 product offerings delivered right to the door.
LIBERTY MEDICAL SUPPLY OFFERS SIGNIFICANT GROWTH POTENTIAL
With the acquisition of Liberty Medical Supply in August of 1996, PolyMedica
immediately gained a strong market position in the distribution of diabetes
testing supplies. Liberty is one of the leading mail-order distributors of
diabetes testing supplies to patients who use insulin and have Medicare or
private insurance coverage.
Liberty is expected to accelerate the Company's revenues and earnings growth
rate and substantially enhance long-term growth. Liberty provides an additional
distribution channel for PolyMedica. Market penetration for mail-order diabetes
supplies among Medicare eligible patients is low (approximately 10%) offering
the potential for significant expansion. PolyMedica's strong working capital
position allows Liberty to implement new marketing initiatives that should
generate further rapid expansion into the large diabetes patient market.
Approximately 16 million people, or roughly 6% of the total population, are
afflicted with diabetes, with about half of them actively diagnosed. This
patient population is growing rapidly, with more than 650,000 new cases
diagnosed each year. Diabetes is a chronic disease in which the body's
metabolism of glucose is ineffective due to inadequate production of insulin.
Frequent monitoring of blood glucose is an important part of managing diabetes
to help avoid serious medical complications. The cost to manage diabetes is
high; the average person with diabetes spends $1,200 per year on supplies to
test and control the disease.
Side Bar:
Diabetes--a prevalent and costly healthcare problem - 16 million people (about
6% of the population) have diabetes - direct costs to the nation of over $90
billion
- -14 cents of every healthcare dollar SOURCE: American Diabetes Association
- -30% of Medicare budget
LIBERTY PROVIDES SPECIALIZED SERVICE
Liberty Medical Supply specializes in providing diabetes supplies to patients
who qualify for Medicare reimbursement. Medicare currently reimburses 80% of the
cost of testing supplies for people with diabetes requiring insulin. As a
participating Medicare provider and third-party insurance biller, Liberty
provides a simple, reliable way for seniors to obtain their diabetes testing
supplies and the Medicare and insurance benefits to which they are entitled.
Liberty provides free direct delivery of name-brand supplies and performs the
added-value service of billing Medicare or private insurance on behalf of the
customer instead of requiring patients to pay out-of-pocket for supplies at
local pharmacies.
8
<PAGE>
Photo of older woman receiving delivery
caption: Liberty provides free delivery and bills Medicare directly for eligible
patients
Many older diabetes patients today may fail to buy the necessary supplies or
test as frequently as they should because they believe that they can't afford
the supplies, have difficulty traveling to the store or do not understand the
reimbursement process. As a result, many of these patients may not be
controlling their blood sugar levels as closely as they should. Studies show
that when people with diabetes keep their blood glucose level as close to normal
as possible, the risk of complications is reduced by as much as 65%.
Through its extensive mail order catalog, Liberty provides seniors with access
to more than 200 diabetes-related over-the-counter products from a full range of
name brand manufacturers including Lifescan, Boehringer Mannheim and Bayer.
These products range from consumables, such as glucose test strips, lancets,
insulin and syringes to medical equipment, such as blood glucose monitors.
Liberty has a current customer base of more than 30,000 patients.
Photo of key products and catalog
caption: Liberty provides a full range of name-brand diabetes products with over
200 product offerings
(SECOND SPREAD)
DIABETES SUPPLIES
GROWTH THROUGH MARKET PENETRATION
Although Liberty has experienced dramatic growth in the past year, all diabetes
mail-order suppliers together are estimated to service barely over 10% of the
market. There are 1.2 million adults over age 65 using insulin, and the Company
estimates only about 150,000 are taking advantage of the convenience and cost
savings of a mail-order service such as Liberty. With over a million
insulin-using seniors as yet unserviced, the Company believes a significant
portion of the diabetes patient market can benefit from Liberty's mail order
fulfillment services.
Bar chart:
Growth of Liberty Customer Base Market Potential
1996 1997 1.2 million insulin-using seniors with diabetes
20,000 30,000 150,000 serviced by industry
30,000 serviced by Liberty
Caption: Untapped diabetes patient market provides growth opportunity
INCREASED ADVERTISING TO LEVERAGE SIGNIFICANT OPPORTUNITY
Liberty has significantly increased its investment in advertising for this
coming year to reach the untapped diabetes patient market segment. The Company
has also dramatically improved advertising efficiency and effectiveness since
the acquisition, significantly reducing the cost of acquiring new customers.
9
<PAGE>
New advertising inset of 3 frames
Caption: New advertising introduces Liberty's services to seniors nationwide
Liberty has developed considerable expertise in direct marketing methods through
the use of various media, including print, television, direct mail and radio,
which it leverages to acquire new customers. The Company also obtains business
through referrals generated from healthcare providers, insurance companies, home
healthcare staffing companies, senior centers and local diabetes associations.
MOMENTUM WITH LIBERTY
Since the acquisition of Liberty Medical by PolyMedica, Liberty has demonstrated
dramatic growth. Annualized sales have grown from approximately $12 million at
the time of the acquisition to more than $20 million seven months later at the
end of fiscal 1997 (a growth rate of more than 65%).
The Company believes that planned increases in advertising and other marketing
programs will fuel the momentum. With almost 90% of the market as yet untapped,
there is abundant opportunity for growth. In addition, legislation is pending in
the U.S. House of Representatives (H.R. 58) which would extend Medicare coverage
for diabetes testing supplies to patients who are presently non-insulin using.
Passage of H.R. 58 would approximately double the size of Liberty's market.
Side Bar: Source: American Diabetes Association
Medicare Reimbursement Expansion Proposed
President Clinton Supports Passage of H.R. 58
On January 7, the Medicare Diabetes Education and Supplies Amendments of 1997,
H.R. 58, was introduced in Congress by Representative Elizabeth Furse (D-OR) and
Representative George Nethercutt (R-WA). This bill includes a provision which
would expand Medicare coverage to include blood-testing strips for individuals
without regard to injection of insulin. House Speaker Newt Gingrich (R-GA)
co-sponsored identical legislation in the 104th Congress and has said that
addressing diabetes is one of his top four legislative priorities. The growing
awareness of the seriousness of diabetes, along with strong support from
President Clinton (President Clinton included Medicare coverage of diabetes
outpatient self-management training services and blood testing strips in his
fiscal year 1998 budget proposal) and House Speaker Gingrich and Congress, is a
clear mandate for immediate action to improve Medicare coverage for diabetes.
H.R.58 incorporates two bills introduced in the 104th Congress--H.R.1073 and
H.R.1074. Of the more than 4,000 bills introduced last year, only 12 had more
co-sponsors than H.R. 1073.
If this bill passes as expected, the 57% of people with diabetes who do not use
insulin would be added to the rolls of those whose diabetes testing supplies are
covered by Medicare. Effective as of January 1, 1998, the passage of H.R. 58
would more than double Liberty Medical's potential market of Medicare-eligible
people with diabetes.
.
SYSTEMS READY--PREPARED FOR GROWTH
To manage its growth effectively, Liberty continues to expand, upgrade and
develop its operations and information systems. Infrastructure has been expanded
in many key areas including staffing, facilities and computer systems.
10
<PAGE>
In the past six months, Liberty has grown from 70 to over 200 employees trained
to address the needs of customers with diabetes. Quality is Liberty's number one
goal, and management is acting to ensure that the company continues to offer the
highest level of customer service through its rapid growth.
Liberty's operations are supported by integrated computer systems and
sophisticated telecommunications equipment, all recently upgraded and designed
for expansion over the next several years. The new phone system can handle up to
2,500 calls at a time. The "smart" phone system identifies the caller through
the phone lines, which allows the integrated computer system to locate a patient
profile before the operator answers the call. A new customer fulfillment and
Medicare billing software program provides complete electronic billing to
Medicare. New state-of-the-art document imaging will create a "paperless office"
and electronically store doctors' orders and insurance forms required to conform
with Medicare regulations.
LIBERTY MEDICAL SUPPLY LEADS POLYMEDICA GROWTH
The acquisition of Liberty Medical Supply brings tremendous growth opportunity
to PolyMedica. With PolyMedica's resources, Liberty's infrastructure and
marketing programs have been advanced to generate and manage rapid growth.
Liberty is well on its way to becoming the largest division within the
PolyMedica family.
11
<PAGE>
CONSUMER HEALTHCARE
Photo: Mother with sick child
Caption: PolyMedica's new Flexible-Tip Digital Thermometer with Fever Alarm(TM)
will be available for this year's cough & cold season.
Fueled by the growth in demand for the Company's urinary discomfort products, as
well as by the strength of the Company's digital thermometers, the consumer
healthcare division achieved record levels of sales in fiscal 1997. Accelerated
growth in the consumer healthcare market is a key strategic objective as the
Company holds leading positions in its core markets of urinary discomfort,
digital thermometry and medication compliance products. Increased investments in
advertising and new product programs have been put in place to drive growth in
this area.
AZO POSITIONED FOR GROWTH
Fiscal 1997 was a banner year for the AZO line of products. Revenue was up 42%
compared with fiscal 1996 as a result of rapid category expansion. The product
line maintained its number one market share position despite new competitive
entries. In fact, the AZO line finished calendar 1996 with over a 44% share of
the market.
The Company believes that the urinary discomfort market offers continued
significant growth potential. Awareness of the availability of these products is
less than 10%. Generating awareness through advertising in the media will have
an immediate impact on sales as women discover the availability of effective OTC
relief.
The Company has begun to implement several new initiatives to continue to grow
the AZO line. Advertising support has been tripled to generate broad awareness
and keep the AZO sales climbing. The entire AZO line has undergone a face lift
with new packaging to begin shipping this coming year. Finally, product
development efforts have been increased to provide additional new products with
meaningful consumer benefits.
Photo: New AZO packaging
Caption: New AZO packaging will increase shelf impact and encourage consumer
selection
INCREASED FOCUS ON THERMOMETRY
PolyMedica holds the number one U.S. private-label market position and number
two overall position in digital thermometers. The Company has an extensive
distribution network reaching most major retailers. Thermometry is a target area
for growth and plans to strengthen its branded position through new product
introductions and marketing programs are underway.
After a year of extensive investigation and patent engineering, PolyMedica is
introducing a "Flexible-Tip Digital Thermometer with Fever Alarm(TM)" to be
available for this year's cough and cold season. This unique thermometer offers
a comfortable flat tip and soft flexible probe designed to provide gentle care
12
<PAGE>
for children and ease of reading. It also has an exclusive Fever Alarm feature
to alert parents to an elevated temperature.
Photo: Flexible tip thermometer and graphic of flexing tip
Caption: The new Flexible-Tip Digital Thermometer offers a unique flexible, flat
tip design
In addition to the AZO and thermometry products, PolyMedica distributes nearly
60 items under the registered brand names Basis(R) and Medi-Aid(R), and provides
over 300 private label products to many national retailers such as Eckerd Drug,
Rite Aid, CVS, and Target.
Photo: Sampling of compliance products
CONSUMER HEALTHCARE EXPANSION
With a strategic focus on consumer healthcare, product expansion is being
explored through internal development as well as potential acquisitions within
the targeted medical products and services arena.
13
<PAGE>
PROFESSIONAL PRODUCTS
Photo: Young Woman taking pill
Caption: PolyMedica offers one of the broadest lines of prescription urology
products
UROLOGICAL PRODUCTS CONTINUE TO GENERATE CASH
PolyMedica's current professional products, the prescription urological
products, continue to deliver substantial cash flow to help fund growth in the
diabetes supplies and consumer healthcare areas. The strategic focus for the
urological product line is to maximize this cash flow generation through
immediate-return promotional programs as well as ongoing cost reduction.
PolyMedica offers one of the broadest lines of prescription urology products
including urinary analgesics, antispasmodics, local anesthetics and analgesic
suppositories. URISED(R), CYSTOSPAZ(R) and CYSTOSPAZ-M(R) analgesics and
antispasmodics provide effective symptomatic relief for urinary pain, burning
and feelings of urgency, along with distressing spasms. Many urology offices as
well as hospitals purchase the local anesthetic ANESTACON(R) for use in
diagnostic procedures or in the catheterization process. B&O(R) and
AQUACHLORAL(R) suppositories are used by patients unable to tolerate oral
dosages of systemic analgesics and sedatives.
Photo: Urised bottle with pills
IN-HOUSE PRODUCTION FACILITY OPENS
This year marked the culmination of several years of planning with the launch of
in-house pharmaceutical production at the Woburn facility. By April 1997, all of
the steps to validate, manufacture and sell products made at the Woburn site
were completed. With receipt of an FDA Establishment Registration Number,
in-house manufacturing is now underway for several established products
including AQUACHLORAL(R), B&O(R) and Urised(R). The state-of-the-art automated
suppository machine forms, fills and seals automatically and the
computer-controlled, hands-off equipment provides improved manufacturing
efficiency.
Photo: Suppositories (in silver)
Process improvements were also developed internally and implemented with the
move to production in-house. In addition, the Company's advanced laboratory
equipment provides capabilities for in-house testing for all products sold. New
in-house production capabilities have helped to ensure consistency of supply and
control of manufacturing costs.
Photo: coating machine
Caption: New in-house production facility uses state-of-the-art
computer-controlled equipment
14
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
PolyMedica is a leading provider of targeted medical products and services
focused on diabetes supplies, consumer healthcare and professional products.
Targeted Markets
Entrance into the Diabetes Supplies Business through Purchase of Liberty Medical
Supply, Inc. The Company entered the Diabetes Supplies market with its August
1996 acquisition of Liberty Medical Supply, Inc. ("Liberty Medical"). Liberty
Medical is among the largest, patient-focused, direct-mail providers of diabetes
supplies to the senior citizens covered by Medicare.
On August 30, 1996, the Company acquired all of the outstanding stock of Liberty
Medical 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
acquisition agreement, as amended on March 26, 1997, provided for an aggregate
purchase price of $10.26 million (including $490,000 of related expenses),
comprised of (i) $7.35 million in cash, (ii) two-year 7% subordinated promissory
notes in the aggregate amount of $1.30 million and (iii) 224,400 shares of the
Company's common stock.
Liberty Medical is headquartered in Palm City, Florida and was founded in 1989.
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 30,000 customers in the U.S.,
making it one of the largest diabetes suppliers in the country. Its products
address a market estimated to include 1.2 million insulin-using patients
over 65 years old, of which it is estimated that 150,000 patients currently
receive supplies through mail-order companies similar to Liberty Medical.
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 people with diabetes who are non-insulin-using. There are current
proposals in Congress to include this group under Medicare following a
Congressional Budget Office study indicating that improving diabetes coverage
would reduce Medicare expenditures.
Consumer Healthcare
Consumer Healthcare includes OTC Medical Devices and Urinary Discomfort
Products. OTC Medical Devices include the number one private-label market
position and number two overall market position in digital thermometers. These
products are sold through an extensive network to major retailers. Digital
thermometry continues to be a growth category. Urinary Discomfort Products for
women include AZO-STANDARD(R), which is currently the number one selling product
in a growing market segment.
Professional Products
Professional Products include Prescription Urologicals and Dressings.
Prescription Urologicals include a stable line of branded products such as
URISED(R), CYSTOSPAZ(R), ANESTACON(R) and a line of suppositories. Dressings
include MITRAFLEX(R) and SPYROFLEX(R) advanced wound care products sold in the
professional and OTC markets.
15
<PAGE>
The recent 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.
In June 1997, the Company entered into a definitive Asset Purchase Agreement
(the "Agreement") to sell certain assets of its US and UK wound care operations.
Under the terms of the Agreement, the prospective purchaser, Innovative
Technologies Group Plc, ("IT") would pay the Company $9 million in cash, an
unsecured promissory note in the face amount of $4 million, and additional
consideration of up to $4.5 million, depending on IT achieving future fixed
milestones. The sale is subject to the approval of IT's shareholders and other
customary closing conditions.
Overview
In determining net product sales, the Company records an allowance for future
returns of certain products as an adjustment to gross sales. 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 telemarketing, national
distributors, wholesalers, mail-order catalogs, and retail chains. The Company
continues to seek opportunities to deliver new products to a broader customer
base by leveraging Liberty Medical's efficient, mail-order distribution system
and sophisticated software for billing and customer monitoring.
Consumer healthcare products are sold through a network of more than 100
independent sales representatives and national wholesalers such as McKesson Drug
Company and Bergen Brunswig Corporation, and to retailers including CVS HC Inc.,
Jack Eckerd Co., OSCO (American Drug Stores Inc.) and Rite-Aid Corp. The Company
promotes sales of its products through national advertising in consumer and
professional publications, at professional and trade group meetings, as well as
through retail advertising.
The Company's recent hiring of an experienced vice president of marketing
introduces in-house expertise for brand management, market research and consumer
affairs.
Although the use of certain of the Company's products are somewhat seasonal in
nature, the Company does not believe its net product sales, in the aggregate,
are generally subject to material seasonal fluctuations.
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's research and development activities are funded from
ongoing operations and consist of pilot production of pharmaceutical products
and the design, development and manufacture of polyurethane-based medical
products derived from proprietary technology and manufacturing processes.
Fiscal 1997 has seen the completion of all the steps to validate, manufacture
and sell pharmaceutical products made in the Company's Woburn facility. With
receipt of an FDA Establishment Registration Number, in-house manufacturing is
now underway for several established products including AQUACHLORAL(R), B&O(R),
and URISED(R). The state-of-the-art automated suppository machine forms, fills
and seals automatically and the computer-controlled, hands-off equipment
provides improved manufacturing efficiency.
16
<PAGE>
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.
Distribution of CardioTech International, Inc. Common Stock to PolyMedica
Shareholders
In May 1996, the Company's board of directors declared a stock dividend for the
purpose of making a distribution (the "Distribution") to the Company's
shareholders of all its shares of CardioTech International, Inc. (formerly
PolyMedica Biomaterials, Inc.) ("CardioTech"). In June 1996, certificates
representing CardioTech common stock were mailed to the Company's shareholders.
The Company believes that the distribution of CardioTech Common Stock qualified
as a "tax-free" spinoff under Section 355 of the Internal Revenue Code of 1986,
as amended. CardioTech (AMEX: CTE) develops, manufactures and markets its
polymer technologies with particular emphasis on the development of implantable
synthetic grafts for a broad variety of applications, including vascular access
grafts, peripheral grafts and coronary artery bypass grafts. Certain other
technology of the biomaterials business was retained by the Company.
CardioTech's operations are accounted for as discontinued operations in the
Company's fiscal 1996 and fiscal 1995 statements of operations, and accordingly,
its operations are segregated in the accompanying consolidated statements
of operations for the fiscal 1996 and fiscal 1995 periods presented. Net sales,
operating costs and expenses, and other income and expense have been
reclassified for amounts associated with CardioTech's discontinued operations.
Results of Operations
Year Ended March 31, 1997 ("fiscal 1997") Compared to Year Ended March 31, 1996
("fiscal 1996")
The Company's net income increased to $2.32 million, or $.27 per common share,
in fiscal 1997. This performance compares to net income of $274,000, or $.04 per
common share, reported in fiscal 1996. Before taking into account the effect of
discontinued operations, income from continuing operations was $3.07 million, or
$.41 per common share in fiscal 1996. There were no discontinued operations
reported in fiscal 1997. Total revenues increased by 23% to $30.45 million in
fiscal 1997 as compared with $24.76 million in fiscal 1996.
Net product sales of diabetes supplies were $8.65 million in fiscal 1997, for
the seven month period beginning with the August 1996 acquisition of Liberty
Medical by the Company. Annualized sales of Liberty Medical have increased from
approximately $12 million at the time of the acquisition to more than $20
million, an annualized growth rate of more than 65% six months after the
acquisition. This growth is largely a result of the Company's increased
advertising spending. The Company expects its promotional and advertising
spending to continue to increase in order to further the expansion of Liberty
Medical's customer base.
Net product sales of consumer healthcare products increased by 16.7% to $10.30
million in fiscal 1997 as compared with $8.82 million in fiscal 1996. Most of
the increase in net product sales in fiscal 1997 was due to increased shipments
of thermometry products and AZO-STANDARD. The Company intends to increase its
advertising and promotional campaign to support anticipated continued growth of
the AZO products in an expanding market segment, which includes the introduction
of Uristat(R) by Johnson & Johnson.
17
<PAGE>
Net product sales of professional products decreased by 29.5% to $10.93 million
in fiscal 1997 as compared with $15.50 million in fiscal 1996. Net product sales
of prescription urologicals, which comprised approximately two-thirds of
professional product sales, declined by 10.4% in fiscal 1997 as compared to
fiscal 1996. Net product sales of wound dressings declined by 53.9% in fiscal
1997 as compared with fiscal 1996. Net product sales of wound dressings
represented 10.5% of Company-wide net product sales as in fiscal 1997 as
compared with 28.0% in fiscal 1996. This decline was primarily due to the above
described changes in Medicare reimbursement and resulted in the early
termination of the Company's MITRAFLEX supply contract with Bristol-Myers
Squibb. The Company announced in June 1997 the signing of a definitive Asset
Purchase Agreement, conditioned on certain events, to sell its wound care
operations.
Royalty, exclusivity, development and license fees increased by 31.7% to
$573,000 in fiscal 1997 as compared with $435,000 in fiscal 1996. This increase
is primarily due to the inclusion in fiscal 1997 of a fee from Perstorp AB in
connection with the establishment of Perstorp as the exclusive pan-European
distributor of SPYROSORB(R), offset by a decline in royalties earned from
shipments of MITRAFLEX by Bristol-Myers Squibb.
As a percentage of net product sales, overall gross margins were 54.5% in fiscal
1997 and 58.0% in fiscal 1996. Gross margins in fiscal 1997 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 in fiscal
1996.
Selling, general, and administration expenses ("SG&A expenses") increased by
37.0% in fiscal 1997 to $12.32 million as compared with $8.99 million in fiscal
1996. Included in SG&A expenses were depreciation and amortization, wages,
benefit costs, and outside professional services totaling $6.50 million in
fiscal 1997, or 52.8% of SG&A expenses, as compared with $4.22 million or 47.0%
of SG&A expenses in fiscal 1996. SG&A expenses in fiscal 1997 includes costs
related both to Liberty Medical operations and to increased market research for
the Company's consumer products.
Research and development expenses increased by 3.2% to $670,000 in fiscal 1997
as compared with $649,000 in fiscal 1996.
Investment income decreased by 3.1% to $864,000 in fiscal 1997 as compared with
$892,000 in fiscal 1996, as the Company earned interest on lower average cash
balances, in part due to the spinoff of CardioTech and the purchase of Liberty
Medical. Interest expense was $2.77 million in fiscal 1997, as compared $2.68
million in fiscal 1996, as the Company accrued and paid interest expense in both
periods on $25 million of 10.90% Guaranteed Senior Secured Notes due January 31,
2003 (the "Hancock Notes") to the John Hancock Mutual Life Insurance Company
("Hancock").
Year Ended March 31, 1996 ("fiscal 1996") Compared to Year Ended March 31, 1995
("fiscal 1995")
The Company's income from continuing operations increased by 28.5% to $3.07
million, or $.41 per common share, in fiscal 1996. This performance represents
an increase in income from continuing operations when compared to $2.39 million,
or $.35 per common share, reported in fiscal 1995. After taking into account the
effect of discontinued operations, net income was $274,000, or $.04 per common
share in fiscal 1996, which compares to $1.79 million, or $.26 per common share,
reported in fiscal 1995.
Discontinued operations, as shown on the consolidated statement of operations
for fiscal 1996, reflected two components. Loss from discontinued operations of
$923,000 includes all CardioTech operating losses from April 1995 through
February 1996, the date the Company's board of directors voted to proceed with
the
18
<PAGE>
spinoff. Loss on disposal of CardioTech of $1.88 million principally includes
operating losses from February 1996 through the June 1996 spinoff date and
professional fees and other costs related to the spinoff. Loss from discontinued
operations of $605,000 for fiscal 1995 included CardioTech operating losses for
all of fiscal 1995.
Net product sales of consumer healthcare products decreased by 3.2% to a $8.82
million in fiscal 1996 as compared with $9.12 million in fiscal 1995. This
decrease is due to anticipated lower shipments of urinary discomfort products
which resulted from a strategic decision to focus on the profitability of these
products by reducing marketing and sales programs, offset by an increase of OTC
medical device net product sales by 8.9% to $5.85 million in fiscal 1996 as
compared with $5.37 million in fiscal 1995. This increase was primarily due to
larger sales volume of digital and glass fever thermometers and ear, nose and
throat kits.
Net product sales of professional products decreased by 2.6% to $15.50 million
in fiscal 1996 as compared with $15.92 million in fiscal 1995. Sales of
prescription urologicals were unchanged in fiscal 1996 as compared with fiscal
1995. Sales of professional MITRAFLEX and SPYROFLEX wound care products
decreased by 7.7% to $6.21 million in fiscal 1996 as compared with $6.73 million
in fiscal 1995. This overall 7.7% decrease was principally the result of a 7.2%
decrease in total unit volume of all dressing sizes, stated on a 4" x 4"
equivalent basis. Overall average unit selling prices for all products in fiscal
1996 as compared with fiscal 1995 were unchanged.
Royalty, exclusivity, development and license fees from continuing operations
decreased by 72.4% to $435,000 in fiscal 1996 as compared with $1.58 million in
fiscal 1995. This decrease is primarily due to the inclusion in fiscal 1995 of a
one-time $1 million transaction fee in connection with the sale of Calgon Vestal
Laboratories by Merck & Co., Inc. to Bristol-Myers Squibb.
As a percentage of net product sales, overall gross margins were 58.0% in fiscal
1996 and 60.1% in fiscal 1995. Gross margins in fiscal 1996 were adversely
affected by the inclusion of certain obsolescence provisions for pharmaceutical
products with dating expiration.
Selling, general, and administration expenses ("SG&A expenses") decreased by
22.7% in fiscal 1996 to $8.99 million as compared with $11.62 million in fiscal
1995. Included in SG&A expenses were depreciation and amortization, wages,
benefit costs, and outside professional services totaling $4.22 million in
fiscal 1996, or 47.0% of SG&A expenses, as compared with $5.49 million or 47.3%
of SG&A expenses in fiscal 1995. Amortization expense decreased by $884,000 in
fiscal 1996, as compared with fiscal 1995, as a result of the extension in March
1995 of a covenant not to compete made by Alcon Laboratories, Inc. ("Alcon"),
and the related amortization period, by five years to ten years. In addition,
marketing and sales expenses for the promotion of pharmaceutical products
decreased by 51.6% to $1.27 million in fiscal 1996, as compared with $2.63
million in fiscal 1995, due to a strategic decision in fiscal 1995 to focus on
the profitability of these products.
Research and development expenses increased by 45.6% to $649,000 in fiscal 1996,
as compared with $444,000 in the fiscal 1995. This increase is primarily due to
an acceleration of the Company's ongoing wound care development projects and
costs associated with the initiation of pilot production testing of the
Company's in-house pharmaceutical manufacturing equipment.
Investment income increased by 57.3% to $892,000 in fiscal 1996, as compared
with $566,000 in fiscal 1995, as the Company earned interest on larger average
cash balances, in part due to proceeds from the Company's
19
<PAGE>
common stock offering in November 1995, at higher overall interest rates.
Interest expense was $2.68 million in fiscal 1996 as compared to $2.67 million
in fiscal 1995, as the Company accrued interest expense in both periods on the
Hancock Notes. See "Liquidity and Capital Resources" for a discussion of the
January 1996 amendment to the Hancock Notes which increased the interest rate to
10.9 %.
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 700,000
shares of common stock, and $2.75 million from the sale of 431,937 shares of its
common stock, pursuant to Regulation S promulgated under the Securities Act of
1933. In January 1993, the Company sold to Hancock the Hancock Notes. In January
1996, the Company executed an amendment which increased the interest rate to
10.9%
As of March 31, 1997, the Company had working capital of $15.15 million,
including cash and cash equivalents of $11.03 million, which compares with
working capital of $25.55 million as of March 31, 1996. There were two major
factors which affected working capital in fiscal 1997. In June 1996, the Company
paid $3.83 million in cash to CardioTech as partial payment for additional
shares of CardioTech. In August 1996 and March 1997, the Company paid a total of
$7.84 million in cash in connection with the Liberty Medical acquisition.
In June 1992, the Company's board of directors authorized the purchase of up to
250,000 shares of its common stock on the open market for future issuance to
employees under the 1992 Employee Stock Purchase Plan (the "Purchase Plan"). At
the present time, the Company has ceased purchasing treasury shares for the
Purchase Plan. As of March 31, 1997, cumulative repurchases of treasury stock
totaled 82,426 shares for $744,000, of which 66,634 shares have been issued to
employees under the Purchase Plan.
In June 1993, the Company's board of directors authorized the purchase of up to
500,000 shares of the Company's common stock on the open market as part of its
program to purchase shares for future issuance in connection with the warrant
related to the Hancock Notes. As of March 31, 1997, cumulative repurchases of
treasury stock totaled 78,767 shares for $607,000 under this program.
In May 1994, the Company's board of directors authorized the purchase of up to 1
million shares of the Company's common stock in the open market, such purchased
shares to be held in treasury. As of March 31, 1997, cumulative repurchases of
treasury stock totaled 78,000 shares for $341,000 under this program.
Under the terms of the Hancock Notes, Hancock has a security interest in all of
the assets of two of the Company's directly and indirectly owned subsidiaries,
PolyMedica Pharmaceuticals (U.S.A.), Inc., ("PMP USA") and PolyMedica
Pharmaceuticals (Puerto Rico), Inc. which amounted to approximately $45.2
million as of March 31, 1997. The Company is also subject to certain financial
covenants and ratios.
In January 1996, the Company signed an amendment to the Hancock Notes with
Hancock. Under the terms of the amendment, scheduled semi-annual repayments of
principal commence at $1.00 million each in fiscal 1998, increase to $2.08
million each beginning in January 2000 and are completed with a $7.50 million
payment at January 31, 2003. Pursuant to the amendment, the exercise price for
the Hancock warrant, exercisable for 536,993 shares of common stock of the
Company, was reduced from $8.38 to $7.00 per share
20
<PAGE>
and the interest rate of the Hancock Notes was increased to 10.9%. In addition,
the Company obtained less restrictive dividend terms and revised financial
covenants.
In January 1997 certain executive officers of the Company purchased in the
aggregate 100,000 shares of the Company's common stock on the open market. The
purchases, valued at $607,000, were funded by a note issued by the Company to
each officer.
As a result of a private placement of the Company's Common Stock in March 1996
and the Liberty Medical acquisition in August 1996, the exercise price of the
Hancock warrant was adjusted to $5.18 per share of common stock and the total
shares for which the warrant is exercisable was adjusted to 543,464.
In October 1996, the board of directors approved the cancellation of 1,172,355
options whose exercise prices ranged from $.95 to $13.33 per common share. A
total of 1,172,355 new options were granted whose exercise prices ranged from
$.71 to $5.38 per common share.
At March 31, 1997, the Company had approximately $10.1 million of net operating
loss carryforwards for income tax purposes. Pursuant to the Tax Reform Act of
1986, the Company believes that the use of these net operating loss
carryforwards in any particular year will be limited as a result of changes in
ownership which occurred in prior periods.
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 in which the Company can profit from its strong operating
margins by maximizing operating efficiencies. The Company has no present
commitments or agreements with respect to any such acquisition.
21
<PAGE>
Inflation
To date, inflation has not had a material effect on the Company's financial
results.
Factors Affecting Future Operating Results
The statements contained in this Report that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding the Company's expectations, hopes, intentions or strategies
regarding the future. Forward-looking statements include, among others:
statements regarding possible future expansion of diabetes coverage under
Medicare; statements regarding future benefits from the Company's advertising
and promotional expenditures; statements regarding future product revenue
levels; statements regarding product development, introduction and marketing;
and statements regarding future acquisitions. All forward-looking statements
included in this Report are based on information available to the Company on the
date hereof, and the Company assumes no obligation to update any such
forward-looking statements. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.
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.
Healthcare Reimbursement. Political, economic and regulatory influences are
resulting in fundamental changes in the healthcare industry in the Unites
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.
Product Liability. The testing, marketing and sale of 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.
Competition and Technological Change. The Company is engaged in rapidly evolving
and highly competitive fields. 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
22
<PAGE>
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.
Reliance on Distributors; Limited Direct Marketing Experience. The Company has a
limited direct marketing and sales organization and relies on its current
distributors for certain product sales. 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 market and distribute
the Company's products successfully 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.
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 to the regulations of additional
countries. 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. Products that the
Company may develop in the future may 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.
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 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
23
<PAGE>
market the affected product, and, if so, there can be no assurance that such
licenses will be available on acceptable terms, if at all.
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.
24
<PAGE>
PolyMedica Industries, Inc.
(In Thousands, except per share data)
Selected Consolidated Financial Data
Year Ended March 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
Statement of Operations Data
Total revenues 30,453 24,763 26,609 22,194 10,599
Income (loss) from continuing
operations 2,322 3,075 2,394 275 (3,756)
Net income (loss) 2,322 274 1,789 (415) (3,939)
Income (loss) per common
share .27 .04 .26 (.06) (.56)
Weighted average number of
common shares outstanding 8,618 7,492 6,790 6,866 6,982
Balance Sheet Data
Cash and cash equivalents 11,028 23,302 14,006 10,305 8,058
Total assets 75,233 72,573 65,753 64,532 64,144
Total liabilities 31,861 29,293 29,027 29,188 28,173
Total debt 25,476 24,400 24,433 24,360 24,595
Shareholders' equity 43,372 43,280 36,726 35,344 35,971
In connection with the distribution of CardioTech International, Inc.
shares to PolyMedica shareholders, CardioTech's operations are accounted for as
discontinued operations of the Company's fiscal 1996 and prior statements of
operations.
During fiscal 1997, the Company determined that it is more likely than not
that certain deferred tax assets will be realized and accordingly eliminated the
related valuation allowance. Realization of the net deferred tax assets is
dependent on generating sufficient taxable income prior to the expiration of
loss carryforwards. Although realization is not assured, management believes
that is more likely than not that such net deferred tax assets will be realized.
As a result, the Company recorded a tax benefit in fiscal 1997.
25
<PAGE>
PolyMedica Industries, Inc.
(Dollars in Thousands)
Consolidated Balance Sheets
March 31, March 31,
ASSETS 1997 1996
----------------------------------
Current assets:
Cash and cash equivalents $11,028 $23,302
Accounts receivable -- trade
(net of allowance for doubtful
accounts of $538 and $82 in
1997 and 1996, respectively) 6,202 2,558
Inventories 5,481 4,163
Prepaid expenses and other current assets 1,478 416
------- -------
Total current assets 24,189 30,439
Property, plant, and equipment, net 6,271 6,273
Intangible assets, net 42,024 35,500
Deferred tax asset 1,133 --
Other assets, net 1,616 361
------- -------
Total assets $75,233 $72,573
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade $ 2,982 $ 1,288
Accrued expenses 3,403 3,605
Senior debt and notes payable 2,658 --
------- -------
Total current liabilities 9,043 4,893
Senior debt 22,818 24,400
------- -------
Total liabilities 31,861 29,293
------ -------
Commitments (Note J)
Shareholders' equity:
Preferred stock, $.01 par value;
2,000,000 shares authorized in 1997
and 1996, none issued or outstanding -- --
Common stock, $.01 par value; 20,000,000
shares authorized in 1997 and 1996;
8,583,001 and 8,112,635 shares issued
and outstanding in 1997 and 1996,
respectively 86 81
Treasury stock, at cost (172,559 and
159,905 shares in 1997 and 1996,
respectively) (1,115) (1,036)
Additional paid-in capital 53,338 54,917
Accumulated deficit (7,783) (10,105)
Notes receivable from officers (929) (415)
Currency translation adjustment (225) (162)
------- -------
Total shareholders' equity 43,372 43,280
------- -------
Total liabilities and shareholders'
equity $75,233 $72,573
====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
26
<PAGE>
PolyMedica Industries, Inc.
(In Thousands, except per share data)
Consolidated Statements of Operations
Year Ended March 31, 1997 1996 1995
--------------------------------------------------------------------
Revenues:
Net product sales $ 29,880 $ 24,328 $ 25,031
Royalties, exclusivity, development
and license fees 573 435 1,578
------- ------- ------
Total revenues 30,453 24,763 26,609
Cost of product sales 13,603 10,210 9,992
------ ------ ------
Total revenues, less cost of product sales 16,850 14,553 16,617
Operating expenses:
Selling, general and administrative 12,315 8,988 11,622
Research and development 670 649 444
------ ------ ------
12,985 9,637 12,066
------ ------ ------
Income from operations 3,865 4,916 4,551
Other income and expense:
Investment income 864 892 566
Interest expense (2,774) (2,678) (2,668)
------ ------ ------
(1,910) (1,786) (2,102)
Income from continuing operations
before income taxes 1,955 3,130 2,449
Income tax provision (benefit) (367) 55 55
------ ------ ------
Income from continuing operations 2,322 3,075 2,394
Discontinued operations:
Loss from operations -- (923) (605)
Loss on disposal -- (1,878) --
------ ------ ------
-- (2,801) (605)
------ ------ ------
Net income $ 2,322 $ 274 $ 1,789
====== ====== ======
Income (loss) per share of common stock:
Income from continuing operations $ .27 $ .41 $ .35
Discontinued operations -- (.37) (.09)
------ ------ ------
Net income $ .27 $ .04 $ .26
====== ====== ======
Weighted average number of
common shares outstanding 8,618 7,492 6,790
The accompanying notes are an integral part of the consolidated financial
statements.
27
<PAGE>
PolyMedica Industries, Inc.
Consolidated Statements of Shareholders' Equity
for the years ended March 31, 1995, 1996 and 1997
(Dollars in Thousands)
Common Stock Treasury Stock
Number of Number of
Shares Amount Shares Amount
Balance at March 31, 1994 6,628,662 66 (95,040) (861)
Exercise of stock options 7,000
Purchase of common stock (60,000) (244)
Issuance of treasury stock under the
1992 Employee Stock Purchase Plan 18,395 170
5% stock dividend 331,630 3 (7,320)
Officer notes receivable
Currency translation adjustment
Net Income ________ ______ ________ ______
Balance at March 31, 1995 6,967,292 69 (143,965) (935)
Exercise of stock options 13,406 1
Issuance of common stock 1,131,937 11
Purchase of common stock (34,700) (270)
Issuance of treasury stock under the
1992 Employee Stock Purchase Plan 18,760 169
Amendment to warrant issued in
connection with Hancock Notes
Currency translation adjustment
Net Income ________ ______ _______ ______
Balance at March 31, 1996 8,112,635 81 (159,905) (1,036)
Exercise of stock options 245,966 3 (11,880) (110)
Issuance of common stock 224,400 2
Purchase of common stock (8,900) (38)
Officer notes receivable
Payment of officer note receivable (9,832) (93)
Issuance of treasury stock under the
1992 Employee Stock Purchase Plan 17,958 162
Distribution of CardioTech stock to
PolyMedica shareholders
Currency translation adjustment
Net Income ________ ______ _______ ______
Balance at March 31, 1997 8,583,001 $86 (172,559) $(1,115)
========= === ======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
28 (continued)
<PAGE>
PolyMedica Industries, Inc.
Consolidated Statements of Shareholders' Equity (continued)
for the years ended March 31, 1995, 1996 and 1997
(Dollars in Thousands)
Additional Notes
Paid-In Accumulated Receivable
Capital Deficit from Officers
Balance at March 31, 1994 48,647 (12,168)
Exercise of stock options 20
Purchase of common stock
Issuance of treasury stock under the
1992 Employee Stock Purchase Plan (109)
5% stock dividend (3)
Officer notes receivable (415)
Currency translation adjustment
Net Income 1,789
------ ------ ------
Balance at March 31, 1995 48,555 (10,379) (415)
Exercise of stock options 63
Issuance of common stock 6,272
Purchase of common stock
Issuance of treasury stock under the
1992 Employee Stock Purchase Plan (83)
Amendment to warrant issued in
connection with Hancock Notes 110
Currency translation adjustment
Net Income 274
------ ------ ------
Balance at March 31, 1996 54,917 (10,105) (415)
Exercise of stock options 924
Issuance of common stock 1,115
Purchase of common stock
Officer notes receivable (607)
Payment of officer note receivable 93
Issuance of treasury stock under the
1992 Employee Stock Purchase Plan (70)
Distribution of CardioTech stock to
PolyMedica shareholders (3,548)
Currency translation adjustment
Net Income 2,322
------ ------ ------
Balance at March 31, 1997 $53,338 $(7,783) $ (929)
====== ====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
28 (continued)
<PAGE>
PolyMedica Industries, Inc.
Consolidated Statements of Shareholders' Equity (continued)
for the years ended March 31, 1995, 1996 and 1997
(Dollars in Thousands)
Currency Total
Translation Shareholders'
Adjustment Equity
Balance at March 31, 1994 (340) 35,344
Exercise of stock options 20
Purchase of common stock (244)
Issuance of treasury stock under the
1992 Employee Stock Purchase Plan 61
5% stock dividend
Officer notes receivable (415)
Currency translation adjustment 171 171
Net Income 1,789
------ -------
Balance at March 31, 1995 (169) 36,726
Exercise of stock options 64
Issuance of common stock 6,283
Purchase of common stock (270)
Issuance of treasury stock under the
1992 Employee Stock Purchase Plan 86
Amendment to warrant issued in
connection with Hancock Notes 110
Currency translation adjustment 7 7
Net Income 274
------ ------
Balance at March 31, 1996 (162) 43,280
Exercise of stock options 817
Issuance of common stock 1,117
Purchase of common stock (38)
Officer notes receivable (607)
Payment of officer note receivable
Issuance of treasury stock under the
1992 Employee Stock Purchase Plan 92
Distribution of CardioTech stock to
PolyMedica shareholders (3,548)
Currency translation adjustment (63) (63)
Net Income 2,322
------
Balance at March 31, 1997 $(225) $43,372
====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
28
<PAGE>
PolyMedica Industries, Inc.
(In Thousands)
Consolidated Statements of Cash Flows
Year Ended March 31, 1997 1996 1995
----------------------------------------------------------------------------
Cash flows from continuing operating activities:
Net income $ 2,322 $ 274 $ 1,789
Loss from discontinued operations -- 2,801 605
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 3,165 2,708 3,519
Deferred income tax, net (1,138) -- --
Write-off of intangible assets -- 142 (125)
Loss (gain) on disposal of fixed assets 4 (6) 48
Provision for bad debts 237 37 77
Provision for sales allowances 1,369 915 863
Provision for obsolescence 71 288 271
Changes in assets and liabilities:
Restricted cash and cash equivalents -- -- 109
Accounts receivable (3,650) (861) (1,118)
Inventories (1,051) 628 (1,695)
Prepaid expenses and other assets (389) 144 (297)
Accounts payable -- trade 589 (143) (310)
Accrued expenses 459 465 267
Total adjustments (334) 4,317 1,609
----- ----- -----
Net cash flows from continuing
operations 1,988 7,392 4,003
Net cash flows used for discontinued
operations (389) (2,581) (540)
Net cash flows from operating
activities 1,599 4,811 3,463
----- ----- -----
Cash flows from investing activities:
Acquisition, net of cash acquired (7,375) -- --
Spinoff of CardioTech (3,830) -- --
Direct-response advertising (1,740) -- --
Purchase of property, plant, and equipment (913) (1,782) (2,000)
Proceeds from sale of equipment -- 123 --
Proceeds from sale and maturity of marketable
securities -- -- 5,056
Purchases of marketable securities -- -- (2,100)
------ ------ ------
Net cash flows from investing
activities (13,858) (1,659) 956
------- ------ ------
Cash flows from financing activities:
Proceeds from issuance of common stock 905 6,432 61
Purchase of common stock (38) (270) (244)
Loans to officers (607) -- (415)
Payment of short-term notes (312) -- (150)
----- ----- -----
Net cash flows from financing activities (52) 6,162 (748)
Net (decrease) increase in cash and cash
equivalents (12,311) 9,314 3,671
Effect of exchange rate changes on cash 37 (18) 30
Cash and cash equivalents at beginning
of period 23,302 14,006 10,305
Cash and cash equivalents at end of
period $11,028 $23,302 $14,006
====== ====== ======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $2,769 $2,667 $2,669
Income taxes paid $ 10 $ 5 $ 11
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE>
PolyMedica Industries, Inc.
Notes to Consolidated Financial Statements
A. Nature of Business:
PolyMedica Industries, Inc. (the "Company") was incorporated as Emerging
Sciences, Inc. in Massachusetts on November 16, 1988, and commenced commercial
operations in October 1989. In July 1990, the Company changed its name to
PolyMedica Industries, Inc. In June 1996, the Company distributed to its
shareholders all of its shares of CardioTech International, Inc. ("CardioTech")
in a transaction that qualified as a tax free spinoff. The Company and its
subsidiaries operate from manufacturing, distribution, and laboratory facilities
located in Massachusetts, Florida, Colorado, and the United Kingdom.
The Company generates sales from Diabetes Supplies; Consumer Healthcare,
which includes OTC medical devices and urinary discomfort products; and
Professional Products, which includes prescription urologicals and dressings.
B. Summary of Significant Accounting Policies:
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-and majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
The operations of CardioTech are accounted for as discontinued operations
in 1996 and 1995, and accordingly, its operations are segregated in the
accompanying consolidated statements of operations for the 1996 and 1995 periods
presented. Net revenues, operating costs and expenses, and other income and
expense have been reclassified for amounts associated with CardioTech's
discontinued operations. See Note D.
Use of Estimates
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.
Earnings per Common Share
Earnings for common and common equivalent shares are computed using the
weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding warrants and options to purchase common stock.
All per share and weighted average share amounts have been restated to reflect
the October 1994 stock dividend of 5%. See Note K.
Uncertainties
The Company is subject to risks common to companies in the healthcare
industry, including but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, and compliance with FDA government
regulations.
30
<PAGE>
PolyMedica Industries, Inc.
Notes to Consolidated Financial Statements
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments purchased
with an initial maturity of three months or less to be cash equivalents. The
Company places its cash and cash equivalents with high credit quality financial
institutions.
Investments
In 1997 and 1996, the Company invested primarily in commercial paper with
initial maturities of 90 days or less and classifies all investments as
held-to-maturity. All investments held as of March 31, 1997 and 1996 have been
classified as cash equivalents and are carried at amortized cost which
approximates market value.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method)
or market.
Research and Development
Research and development costs are charged to expense as incurred.
Intangible Assets
The Company capitalizes and includes in intangible assets the costs of
acquiring patents on its products, a customer list, a covenant-not-to-compete,
and goodwill, which is the cost in excess of net assets of acquired companies
and product lines. All amortization is computed on the straight-line basis over
the shorter of the economic life of the asset or the term of the underlying
agreement. Patents, a customer list, and goodwill are amortized over seventeen,
seven, and seven to thirty years, respectively. Pursuant to a revised agreement
between Alcon Laboratories, Inc. ("Alcon") and the Company, the life of the
covenant-not-to-compete and its amortization period were extended to ten years
effective March 27, 1995. Previously, the covenant-not-to-compete was amortized
over a five year period as originally defined in the non-compete agreement
between Alcon and the Company.
Management's policy is to evaluate the recoverability of its intangible
assets when the facts and circumstances suggest that these assets may be
impaired. The test of such recoverability is a comparison of the book value of
the asset to expected cumulative (undiscounted) operating cash flows resulting
from the underlying asset over its remaining life. If the book value of the
intangible asset exceeds undiscounted cumulative operating cash flows, the
write-down is computed as the excess of the asset over the present value of the
operating cash flow discounted at the Company's weighted average cost of capital
over the remaining amortization period.
Marketing and Promotional Costs
Advertising, promotional, and other marketing costs are charged to
earnings in the period in which they are incurred. Promotional and sample costs
whose benefit is expected to assist future sales are expensed as the related
materials are used. Direct-response advertising and related 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. Management assesses the realizability of the amounts
of direct-response advertising reported as assets at each balance sheet date by
comparing the carrying amounts of such assets to the probable remaining future
net revenues expected to result directly from such advertising.
31
<PAGE>
PolyMedica Industries, Inc.
Notes to Consolidated Financial Statements
At March 31, 1997, $1.62 million of direct-response advertising was reported as
assets and $120,000 was expensed.
Other Assets
Other assets consist principally of capitalized direct-response
advertising costs, patent application fees, senior debt issuance costs, and
deposits for equipment yet to be placed in service. Senior debt issuance costs
are being amortized over ten years.
Foreign Currency Translation
In accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation", assets and liabilities of the Company's foreign
subsidiaries are translated into U.S. dollars using current exchange rates at
the balance sheet date, and revenues and expenses are translated at average
exchange rates prevailing during the period. The resulting translation
adjustments are recorded in a separate component of Shareholders' Equity.
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost. Depreciation is
computed using the straight-line method based on the estimated useful lives of
the various assets which range from five to seven years. Amortization of
leasehold improvements is computed using the straight-line method based on
estimated useful lives or terms of the lease, whichever is shorter. Upon
retirement or disposal of fixed assets, the costs and accumulated depreciation
are removed from the accounts, and any gain or loss is reflected in income.
Expenditures for repairs and maintenance are charged to expense as incurred.
Construction in progress is not depreciated until placed in service.
Income Taxes
The Company recognizes deferred tax assets and liabilities based on
temporary differences between the financial statements and tax basis of assets
and liabilities using enacted tax rates expected to be in effect when they are
realized.
Revenue Recognition
For product sales, the Company recognizes revenue upon shipment.
Contracted development fees from corporate partners are recognized upon
completion of service or the attainment of technical benchmarks, as appropriate.
Royalty revenue from product sales is recognized based upon the terms of the
royalty agreement, principally upon sale by the Company's distributors to end
users.
The Company records an allowance for future returns of certain products as
an adjustment to product sales and accounts receivable--trade. As of March 31,
1997 and 1996, the allowance for sales returns was $523,000 and $365,000,
respectively.
32
<PAGE>
PolyMedica Industries, Inc.
Notes to Consolidated Financial Statements
Other
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). The
Company implemented SFAS 121 in fiscal 1997. The Company was generally in
conformance with this standard prior to adoption of SFAS 121, and therefore the
implementation did not have a material effect on its financial statements.
Reclassifications
Certain amounts in the prior financial statements have been reclassified
to conform with the current year presentation.
C. Purchase of Liberty Medical Supply, Inc.:
On August 30, 1996, the Company acquired all of the outstanding stock of
Liberty Medical Supply, Inc. 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 acquisition agreement, as amended on March 26, 1997, for an
aggregate purchase price of $10.26 million (including $490,000 of related
expenses), which was comprised of (i) $7.35 million in cash, (ii) two-year 7%
subordinated promissory notes in the aggregate amount of $1.30 million and (iii)
224,400 shares of the Company's common stock.
The purchase price was allocated to 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 ($6.82
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 for twelve months, the Company's
pro forma (unaudited) revenues, net income and net income per share for the
twelve months ended March 31, 1997 would have been $35.63 million, $2.50 million
and $.29, respectively. If the acquisition had taken place at the beginning of
the year ended March 31, 1996, the Company's pro forma revenues, net loss and
net loss per share for the twelve months ended March 31, 1996 would have been
$35.1 million, $228,000, and $.03, respectively.
D. Discontinued Operations:
On March 1, 1996, the Company announced its strategic decision to
distribute to its shareholders all of its shares of CardioTech under a plan
which was approved by the Company's board of directors. In May 1996, the
Company's board of directors declared a stock dividend for the purpose of making
a distribution (the "Distribution") to the Company's shareholders of all of the
outstanding shares it owned in CardioTech. The Company believes that the
distribution of CardioTech common stock in the Distribution qualified as a
"tax-free" spinoff under Section 355 of the Internal Revenue Code of 1986, as
amended. CardioTech develops, manufactures and markets its polymer technologies
with particular emphasis on the development of implantable synthetic grafts for
a broad variety of applications, including vascular access grafts, peripheral
grafts and coronary artery bypass grafts.
33
<PAGE>
PolyMedica Industries, Inc.
Notes to Consolidated Financial Statements
Discontinued operations as shown on the consolidated statement of
operations for fiscal 1996 reflect two components. Loss from discontinued
operations, or $923,000, includes all CardioTech operating losses from April 1,
1996 through February 20, 1996, the date the Company's Board of directors voted
to proceed with the spinoff. Loss on disposal of CardioTech, or $1,878,000,
principally includes operating losses from February 1996 through the estimated
June 1996 spinoff date and outside professional fees and other costs related to
the spinoff.
Summary operating results of the discontinued operations, excluding loss
on disposal, follows for years ended March 31:
1996 1995
---- ----
(In thousands)
Revenues $166 $411
Net loss $983 $605
Net assets related to the discontinued business as of March 31, 1996
and 1995 were $3.49 million and $219,000, respectively. Included in these
balances were accounts receivable, laboratory equipment, and intangible assets.
As of March 31, 1996, net assets included $3.83 million in cash which was
transferred from the Company to CardioTech in June 1996.
Since CardioTech's inception, all facilities and support services,
including research and administrative support, have been provided by the
Company. In connection with the Distribution, CardioTech has entered into the
following agreements with the Company:
Distribution Agreement
This agreement allocates the costs related to the implementation of the
Distribution between the Company and CardioTech and provides that each company
will share equally any liabilities under the federal and any state securities
laws incurred as a result of the distribution of the Information Statement.
Lease Agreement
This agreement provides that the Company will continue to lease certain
space in its Woburn, MA and Tarvin, Cheshire, UK facilities to CardioTech for
approximately $200,000 a year. The agreement has a term of two years beginning
in October 1996, with a cancellation provision by CardioTech after the first
year.
License Agreement
The Company has granted to CardioTech an exclusive, perpetual,
world-wide, royalty-free license for CardioTech to use all of the necessary
patent and other intellectual property owned by the Company in the implantable
devices and materials field (collectively, the "Licensed Technology"). The
Company, at its own expense, will file patent or other applications for the
protection of all new inventions formulated, made or conceived by the Company
during the term of the license that related to the Licensed Technology and all
such inventions will be part of the technology licensed to CardioTech.
CardioTech, at its own expense, will file patent or other applications for
the protection of all new inventions formulated, made, or conceived by
CardioTech during the term of the license that related to the Licensed
Technology and all such inventions shall be exclusively licensed to the
34
<PAGE>
PolyMedica Industries, Inc.
Notes to Consolidated Financial Statements
Company for use by the Company in fields other than the implantable devices and
materials field.
Tax Matters Agreement
The Tax Matters Agreement provides, among other things, that the
Company will be responsible for all federal, state, local and foreign tax
liabilities of CardioTech for periods ending on or prior to the Distribution
Date and CardioTech will be responsible for all tax liabilities of CardioTech
subsequent to that time.
E. Inventories:
(In thousands)
Inventories consist of the following:
March 31, March 31,
1997 1996
-------- --------
Raw materials $2,168 $1,465
Work in process 845 902
Finished goods 2,468 1,796
----- -----
$5,481 $4,163
====== ======
F. Property, Plant, and Equipment:
(In thousands)
Property, plant, and equipment consist of the following:
March 31, March 31,
1997 1996
Manufacturing equipment $ 3,273 $ 3,294
Laboratory equipment 766 947
Land 663 663
Building 2,207 2,173
Leasehold improvements 585 513
Furniture, fixtures, and
office equipment 1,448 838
Construction in progress 1,818 1,408
----- -----
10,760 9,836
Less accumulated depreciation
and amortization (4,489) (3,563)
----- -----
$ 6,271 $ 6,273
====== ======
35
<PAGE>
PolyMedica Industries, Inc.
Notes to Consolidated Financial Statements
Depreciation and amortization expense from continuing operations for
property, plant, and equipment for the years ended March 31, 1997, 1996, and
1995, was approximately $899,000, $800,000, and $823,000, respectively.
Depreciation and amortization expense from discontinued operations for property,
plant, and equipment for the years ended March 31, 1997, 1996, and 1995 was
approximately $0, $66,000, and $50,000.
Construction in progress consists of equipment purchased in
Massachusetts and Colorado, which was placed in service in April 1997.
G. Intangible Assets:
(In thousands)
Intangible assets consist of the following:
March 31, March 31,
1997 1996
Goodwill $43,460 $36,787
Covenant-not-to-Compete 6,800 6,800
Customer list 1,816 --
Patents 258 258
------- -------
52,334 43,845
Less accumulated amortization (10,310) ( 8,345)
-------- --------
$42,024 $35,500
Amortization expense from continuing operations associated with
intangible assets for the years ended March 31, 1997, 1996, and 1995, was
$2,117,000, $1,811,000, and $2,670,000, respectively. Amortization expense from
discontinued operations associated with intangible assets for the years ended
March 31, 1997, 1996, and 1995, was $0, $6,000, and $6,000, respectively.
H. Accrued Expenses:
As of March 31, 1997 and 1996, accrued expenses included $460,000 and
$458,000, respectively, of accrued interest. As of March 31, 1997, accrued
expenses included $771,000 of accrued taxes. As of March 31, 1996, accrued
expenses included $426,000 in accrued bonus and $640,000 of accrued expenses
related to the spinoff of CardioTech.
I. Senior Debt:
In connection with the purchase of the WEBCON product line, in January
1993, the Company and its wholly-owned subsidiary, PolyMedica Pharmaceuticals
(U.S.A.), Inc. ("PMP USA") sold to the John Hancock Mutual Life Insurance
Company ("Hancock"), $25 million 10.65% Guaranteed Senior Secured Notes due
January 31, 2003, and a warrant for the purchase of up to 500,000 shares of
common stock of the Company at $13.50 each (the "Hancock Notes"). The effective
interest rate of the Hancock Notes was 10.97%. Interest is payable
semi-annually. At that time, the warrant was valued at $725,000 and was recorded
as a discount to the Hancock Notes, to be amortized to expense over the life of
the Hancock Notes. The warrant is exercisable beginning in January 1994. The
Company recorded $89,000 and $77,000 of amortization expense
36
<PAGE>
PolyMedica Industries, Inc.
Notes to Consolidated Financial Statements
each for the years ended March 31, 1997, and 1996, respectively. As of March 31,
1997 and March 31, 1996, there was $511,000 and $600,000, respectively, of
unamortized discount, netted against senior debt.
Commencing on April 1, 1993, the Company and PMP USA are required to
maintain certain covenants, including certain financial ratios as described in
the loan documents. In addition, there are certain restrictions on the payment
of dividends by PMP USA to the Company. Fees incurred in connection with
the Hancock Notes were $211,000, are classified as other assets, and are being
amortized over the ten year life of the Hancock Notes.
The Company and PMP USA received a waiver in June 1993 of certain
financial covenants for the period June 30, 1993 to April 1, 1994. In
consideration of the waiver, the exercise price of the related warrant was
reduced from $13.50 to $9.00 per share. The Company received waivers from
Hancock of certain fiscal 1994 and 1995 financial covenants with which it was
not in compliance as of March 31, 1994 and 1995, respectively. In addition, in
June 1994 and 1995, PMP USA established certain less restrictive financial
covenants with Hancock effective for fiscal 1995 and 1996, respectively.
In January 1996, the Company and Hancock signed an amendment to the
Hancock Notes. Under the terms of the amendment, scheduled semi-annual
repayments of principal commence at $1.00 million each in fiscal 1998, increase
to $2.08 million each beginning in January 2000 and are completed with a $7.50
million payment at January 31, 2003. Pursuant to the amendment, the exercise
price for the Hancock warrant, exercisable for 536,993 shares of common stock of
the Company, was reduced from $8.38 to $7.00 per share and the interest rate of
the Hancock Notes was increased from 10.65% to 10.9%. In addition, the Company
obtained less restrictive dividend terms and revised financial covenants. This
amendment resulted in a revaluation of the warrant to $623,000, which compared
with a $513,000 unamortized value on January 1, 1996. The difference of $110,000
was credited to additional paid-in capital.
The number of shares exercisable in connection with the warrant issued
with the Hancock Notes increased from 500,000 to 536,993 due to the 5% common
stock dividend declared by the Company in October 1994 and a public offering of
the Company's common stock in November 1995.
As a result of a private placement of the Company's Common Stock in
March 1996 and the acquisition of Liberty Medical in August 1996, the exercise
price of the Hancock warrant was adjusted to $5.18 per share of common stock for
a total of 543,464 shares exercisable under the warrant.
Under the terms of the Hancock Notes, Hancock has a security interest
in all of the assets of PMP USA and its subsidiary PolyMedica Pharmaceuticals
(Puerto Rico), Inc. ("PMP PR"), its subsidiary.
The Hancock Notes are collateralized by all of the assets of PMP USA
and PMP PR, which amounted to approximately $45.2 million as of March 31, 1997.
Interest expense recorded for the Hancock Notes was $2,725,000 and
$2,678,000 in the years ended March 31, 1997 and 1996, respectively.
J. Commitments:
The Company leases its facilities and certain equipment under operating
leases expiring through 2001. Under the terms of the facility lease in the
United Kingdom, the Company has an option to terminate its lease beginning in
1996.
37
<PAGE>
PolyMedica Industries, Inc.
Notes to Consolidated Financial Statements
The annual future minimum lease and rental commitments as of March 31,
1997, under all the Company's leases are:
(In thousands)
1998 $ 455
1999 334
2000 198
----
Total minimum lease payments $ 987
====
Rental expense from continuing operations under these leases amounted
to approximately $368,000, $330,000, and $388,000 for the years ended March 31,
1997, 1996, and 1995, respectively.
The Company had purchase commitments for equipment and building
improvements of $130,000 and $52,000 as of March 31, 1997 and 1996,
respectively.
K. Shareholders' Equity:
In March 1992, the Company completed an initial public offering,
selling 3 million newly issued shares of its common stock, resulting in net
proceeds of $35.3 million. In November 1995, the Company completed a public
offering of its common stock, selling 700,000 shares, resulting in net proceeds
of $3.75 million. In March 1996, the Company sold 431,937 shares of its common
stock for net proceeds of $2.55 million, pursuant to Regulation S of the
Securities Act of 1933.
Each holder of outstanding common stock has a preferred stock purchase
right (a "Right") for each share of common stock. Each Right entitles the holder
to purchase from the Company one one-hundredth of a share of Series A junior
participating preferred stock at a cash exercise price to be determined by the
Board of directors. Initially, the Rights will be attached to all common stock
certificates and will not be exercisable. The Rights will become exercisable
upon the earlier of certain events, including an acquisition by a person or
group of 15% or more of the outstanding common stock (an "Acquiring Person"), or
the commencement of a tender offer or exchange offer that would result in an
Acquiring Person beneficially owning 15% or more of the outstanding common
stock.
The Company will generally be entitled to redeem the Rights at $.01 per
share at any time until the tenth day following public announcement that a 15%
stock position has been acquired. The Rights will expire on January 23, 2002,
unless earlier redeemed or exchanged.
In June 1992, the Company's board of directors authorized the purchase
of up to 250,000 shares of its common stock on the open market for future
issuance to employees under the 1992 Employee Stock Purchase Plan (the "Purchase
Plan"). At the present time, the Company has ceased purchasing treasury shares
for the Purchase Plan. As of March 31, 1997, cumulative repurchases of treasury
stock totaled 82,426 shares for $744,000, of which 66,634 shares have been
issued to employees under the Purchase Plan.
In June 1993, the Company's board of directors authorized the purchase
of up to 500,000 shares of the Company's common stock on the open market as part
of its program to purchase shares for future issuance in connection with the
warrant related to the Hancock Notes. As of March 31, 1997, cumulative
repurchases of treasury stock totaled 78,767 for $607,000 under this program.
38
<PAGE>
PolyMedica Industries, Inc.
Notes to Consolidated Financial Statements
In May 1994, the Company's board of directors authorized the purchase
of up to 1 million shares of the Company's common stock in the open market, such
purchased shares to be held in treasury. As of March 31, 1997, cumulative
repurchases of treasury stock totaled 78,000 shares for $341,000 under this
program.
In October 1994, the board of directors declared a 5% stock dividend
paid on October 28, 1994, to holders of record as of October 14, 1994. Earnings
per share for all prior periods presented have been restated to reflect the
stock dividend.
L. Income Taxes:
(In thousands)
Income (loss) before income taxes was generated as follows in the years
ended March 31:
1997 1996
------ ------
United States $1,994 $ 820
Foreign (39) (491)
----- -----
$1,955 $329
===== =====
Tax provisions (benefits) related to discontinued operations are
immaterial. The provision for income taxes for continuing operations consists of
the following for the years ended March 31:
1997 1996
------ ------
Federal - current $(275) $55
State - current (92) --
---- ----
$(367) $55
===== =====
A reconciliation between the Company's effective tax rate for
continuing operations and the U.S. statutory rate is as follows:
1997 1996
------ ------
U.S. statutory rate 34.0% 34.0%
U.S. net operating loss carryforward utilization (60.5%) (25.2%)
Foreign net operating loss carryforward utilization --- (8.0%)
State income taxes, net of
U.S. Federal Income Tax effect 6.5% ---
Other 1.2% 1.0%
--- ---
Effective tax rate (18.8)% 1.8%
====== =====
During fiscal 1997, the Company determined that it is more likely than
not, that tax assets principally related to state and federal net operating
losses will be realized and accordingly eliminated the related valuation
allowance. Realization of the net deferred tax assets is dependent on generating
sufficient taxable income prior to the expiration of loss carryforwards.
Although realization is not assured, management believes that it is more likely
than not that such net deferred tax assets will be realized. The following is a
summary of the significant components of the Company's deferred tax assets and
liabilities as of March 31, 1997 and 1996:
39
<PAGE>
PolyMedica Industries, Inc.
Notes to Consolidated Financial Statements
1997 1996
Deferred tax assets:
Federal and state net operating loss carryforwards $ 2,304 $ 1,800
Foreign net operating loss carryforwards 643 --
Reserves 1,498 1,842
------ ------
Total deferred tax assets 4,445 3,642
Valuation allowance for deferred tax assets (643) (1,954)
------ ------
Deferred tax liability:
Depreciation and amortization 2,012 1,688
Deferred advertising 652 --
------ ------
Net deferred tax asset $ 1,138 $ --
====== ======
As of March 31, 1997, the Company had a net operating loss
carryforwards for federal income tax purposes of approximately $10.1 million
available to offset future taxable income, expiring at various dates beginning
in the year 2003 through 2012. Deferred tax assets related to CardioTech, which
were not retained by the Company after the Distribution, have been excluded from
the deferred tax assets as of March 31, 1997.
M. Major Customers:
Customers comprising more than 10% of the Company's: (1) net product
sales, or (2) royalties, exclusivity, development and license fees, for the
years ended March 31 are shown below as follows:
Net Product Sales Fees
----------------- ----
1997 1996 1995 1997 1996 1995
------------------------ -----------------------
Customer A -- 10% 12% 17% 58% 86%
Customer B -- 12% 12% -- -- --
Customer C -- 11% -- -- -- --
Customer D -- 13% 11% -- 23% 13%
Customer E -- -- -- -- 13% --
Customer F -- -- -- 55% -- --
Customer G -- -- -- 23% -- --
Amounts due from Customer A were $13,000 and $372,000 as of March 31,
1997 and 1996, respectively. The amount due from Customer B was $169,000 as of
March 31, 1996. The amount due from Customer C was $344,000 as of March 31,
1996. The amount due from Customer D was $250,000 as of March 31, 1996. As of
March 31, 1997, the amount due from Healthcare Finance Agency of the United
States government related to Liberty Medical revenues was $1,083,000.
40
<PAGE>
PolyMedica Industries, Inc.
Notes to Consolidated Financial Statements
N. Stock Options:
The Company issues stock options under two plans: the 1990 Stock Option
Plan (the "1990 Plan"), and the 1992 Directors Stock Option Plan (the "Directors
Plan"). In addition, in connection with the acquisition of American CDI, Inc.,
the Company assumed American CDI, Inc.'s 1991 Stock Option Plan (the "CDI Plan")
(collectively, the "Plans").
The 1990 Plan and the Directors Plan, provide for the grant to certain
individuals of stock options to purchase up to 2,400,000 and 200,000 shares,
respectively, of the Company's common stock. The CDI Plan, as assumed by the
Company, provided for the grant of 61,905 shares of the Company's common stock.
All amounts have been adjusted to reflect the 5% stock dividend declared and
paid in October 1994.
Supplemental Disclosures for Stock-Based Compensation
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for the Plans. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") issued in 1995, defined
a fair value method of accounting for stock options and other equity
instruments. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. The Company elected to
continue to apply the accounting provisions of APB Opinion No. 25 for stock
options. The required disclosures under SFAS 12 as if the Company had applied
the new method of accounting are made below.
Option activity under the Plans is as follows:
Option Option
Shares Prices
Outstanding, March 31, 1994 1,026,710 $ .95 - $13.33
Granted 478,275 $4.19 - $ 4.76
Exercised (7,000) $ 2.86
Cancelled (14,090) $5.48 - $12.38
--------- ------ ------
Outstanding, March 31, 1995 1,483,895 $ .95 - $13.33
Granted 238,425 $ 5.75 - $ 9.19
Exercised (13,406) $ 2.86 - $ 5.48
Cancelled (34,355) $ 5.48 - $12.38
--------- ------ ------
Outstanding, March 31, 1996 1,674,559 $ .95 - $13.33
Granted 1,983,212 $ 0.71 - $ 6.38
Exercised (245,966) $ 2.06 - $ 7.86
Cancelled (1,435,197) $ .95 - $13.33
--------- ------ ------
Outstanding, March 31, 1997 1,976,608 $ .71 - $ 6.38
========= ======================
41
<PAGE>
PolyMedica Industries, Inc.
Notes to Consolidated Financial Statements
At March 31, 1997, 1,635,615 shares were exercisable and 340,993
shares will vest principally over three years under the Plans. There were
199,157, 125,375 and -0- shares remaining that are authorized for future option
grants under the 1990 Plan, Directors Plan, and CDI Plan, respectively.
In October 1996, the board of directors approved the cancellation of
prior grants of 1,172,355 options whose exercise prices ranged from $.95 to
$13.33 per common share. A total of 1,172,355 new options were granted whose
exercise prices ranged from $.71 to $5.38 per common share. At March 31, 1996
and 1995 there were 1,419,646 and 1,144,743 shares exercisable,
respectively.
Weighted
Avg. Number of
Range of Number of Remaining Weighted Options Weighted-Avg.
Exercise Options Contractual Avg. Exercise Outstanding Exercise-Price
Prices Outstanding Life Price Exercisable Exercisable
- ------------------------------------------------------------------------------
$ .71 - 1.05 12,075 3.76 $ 0.71 12,075 $ 0.71
$ 2.10 - 3.15 123,317 4.33 $ 2.16 123,317 $ 2.16
$ 3.30 - 4.95 1,328,023 8.71 $ 4.04 1,022,068 $ 3.99
$ 5.00 - 6.38 513,193 6.09 $ 5.41 478,155 $ 5.38
The fair value of each option granted during fiscal 1997 and
fiscal 1996 is estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions:
1997 1996
Dividend yield................................. none none
Expected volatility............ ............... 55.0% 55.0%
Risk-free interest rate........................ 6.05% 5.71%
Expected life.................................. 4 4
Weighted average fair value of options granted at fair value during:
1997 $2.13
1996 $3.08
Employee Stock Purchase Plan
In January 1992, the board of directors adopted the 1992 Employee Stock
Purchase Plan (the "1992 Plan"). Under the 1992 Plan, eligible employees of the
Company may purchase shares of Common Stock, through payroll deductions, at the
lower of 85% of fair market value of the stock at the beginning or the end of
the offering period. A total of 261,972 shares have been reserved for issuance
under the 1992 Plan. Shares are issued to participants twice a year after each
six-month offering period, which ends April 30 and October 31. The Company
issued 17,958 and 18,760 in fiscal 1997 and fiscal 1996, respectively. The
weighted average fair values of shares issued under the 1992 Plan during fiscal
1997 and fiscal 1996 were $1.79 and $2.14, respectively.
42
<PAGE>
PolyMedica Industries, Inc.
Notes to Consolidated Financial Statements
Had compensation cost for the Company's 1997 and 1996 stock option
grants been determined consistent with SFAS 123, the Company's net income and
net income per share would approximate the pro forma amounts below:
Net income per
Net Income fully diluted share
As reported:
1997 $2,322,000 $ .27
1996 $274,000 $ .04
Pro forma:
1997 $1,134,000 $ .13
1996 $126,000 $ .02
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards made prior to
1995. Additional awards in future years are anticipated.
O. 401(k) Plan:
The PolyMedica Industries, Inc. 401(k) Plan and Trust (the "401(k)
Plan") is a voluntary savings plan for all eligible employees which is intended
to qualify under Section 401(k) of the Internal Revenue Code. Each eligible
employee may elect to contribute to the 401(k) Plan, through payroll deductions,
up to 15% of his or her salary, subject to statutory limitations. The Company
may make matching contributions on behalf of participating employees of half of
the dollar amount of each participating employee's contribution, up to a maximum
of 3% of an employee's total cash compensation, subject to certain limitations.
For the years ended March 31, 1997, 1996, and 1995, the Company paid
and accrued matching contributions of $69,000, $57,000, and $65,000,
respectively, for the 401(k) Plan participants.
P. Related Party Transactions:
In December 1994, certain executive officers of the Company purchased
in the aggregate 100,000 shares of the Company's common stock on the open
market. The purchases, valued at $415,000, were funded by a note issued by the
Company to each officer. The terms of the notes provide for each executive to
repay the Company with Company shares within five years from the date of the
note at a market value equal to the original principal of the note. The
principal balance due is shown as notes receivable from officers in
Shareholders' Equity on the Consolidated Balance Sheet.
In January 1997, certain executive officers of the Company purchased
in the aggregate 100,000 shares of the Company's common stock on the open
market. The purchases, valued at $607,000 were funded by a note issued by the
Company to each officer.
In June 1996, Michael Szycher resigned as Chairman and Chief
Technical Officer of the Company. At that time, Dr. Szycher tendered shares
to the Company whose fair market value was equal to his officer loan as payment
in full.
43
<PAGE>
PolyMedica Industries, Inc.
Notes to Consolidated Financial Statements
Q. Fourth Quarter Transactions in Fiscal 1995:
In November 1994, the Company executed an amendment to its
Supply-Requirements and License Agreement with Calgon Vestal Laboratories
("Calgon"), a division of Calgon Corporation, a subsidiary of Merck & Co., Inc.
("Merck"), whereby it agreed to transfer exclusivity for the U.S. distribution
of MITRAFLEX to a new owner of Calgon. As consideration for this transfer, the
Company received $1 million from Calgon in connection with the sale of Calgon by
Merck to Bristol-Myers Squibb.
As a result of the Company's future in-house production capacity and
its ability to find alternate, low-cost producers for certain of its
pharmaceutical products, in May 1995 it notified Alcon PR to cease production of
the majority of pharmaceutical products in calendar 1995, as required under the
terms of the Processing Agreement with Alcon PR. The Company charged $230,000
as general and administrative expenses in fiscal 1995 for expected costs to be
incurred as a result of this decision.
R. Subsequent Event:
In June 1997, the Company entered into a definitive Asset Purchase
Agreement (the "Agreement") to sell certain assets of its US and UK wound care
operations. Under the terms of the Agreement, the prospective purchaser,
Innovative Technologies Group Plc, ("IT") would pay the Company $9 million in
cash, an unsecured promissory note in the face amount of $4 million, and
additional consideration of up to $4.5 million, depending on IT achieving future
fixed milestones. The sale is subject to the approval of IT's shareholders and
other customary closing conditions.
44
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of PolyMedica Industries, Inc.:
We have audited the accompanying consolidated balance sheets of
PolyMedica Industries, Inc. as of March 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended March 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audit, the financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of PolyMedica Industries, Inc. as of March 31, 1997, and 1996, and
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
May 9, 1997 except as to the information presented in Note R, for which the date
is June 23, 1997.
45
<PAGE>
CORPORATE AND SHAREHOLDER INFORMATION
Annual Meeting
The annual meeting of shareholders will take place on Thursday, September 11,
1997, at 9:00 a.m. at the offices of Hale and Dorr, 60 State Street, Boston, MA
02109.
Corporate Headquarters
PolyMedica Industries, Inc.
11 State Street
Woburn, MA 01801
617-933-2020
Subsidiaries
PolyMedica Healthcare, Inc.
581 Conference Place
Golden, CO 80401
303-271-0300
Liberty Medical Supply, Inc.
3595 S.W. Corporate Parkway
Palm City, FL 34990
561-221-1683
PolyMedica Pharmaceuticals (U.S.A.), Inc.
11 State Street
Woburn, MA 01801
617-933-2020
Auditors
Coopers & Lybrand L.L.P.
Boston, MA
Legal Counsel
Hale and Dorr LLP
Boston, MA
Investor Inquiries
Members of the investment community who would like more information about
PolyMedica Industries, Inc. may contact Eric G. Walters, Chief Financial
Officer, at Corporate Headquarters, 617-933-2020, fax 617-938-6950.
Form 10-K
A copy of the Company's Annual Report to the Securities and Exchange Commission
on Form 10-K may be obtained without charge upon written request to:
Treasurer
PolyMedica Industries, Inc.
11 State Street
Woburn, MA 01801
46
<PAGE>
Transfer Agent and Registrar
BankBoston
c/o Boston EquiServe
Shareholder Services Division
P.O. Box 8040
Boston, MA 02266
Stock Profile
The Common Stock of PolyMedica Industries, Inc. is traded on the American Stock
Exchange under the symbol PM. At June 3, 1997, the Company's Common Stock was
held by 535 holders of record. The Company believes that the actual number of
beneficial owners of the Company's Common Stock is substantially greater than
the stated number of holders of record because a substantial portion of the
Common Stock outstanding is held in "street name".
The following table sets forth the high and low sales price per share of Common
Stock on the American Stock Exchange:
Fiscal Year 1996 High Low
1st Quarter 6 1/2 5 1/2
2nd Quarter 10 7/8 5 3/4
3rd Quarter 9 1/4 5 1/2
4th Quarter 9 5 1/2
Fiscal Year 1997
1st Quarter 9 3/4 5
2nd Quarter 5 7/8 4 5/8
3rd Quarter 5 5/8 3 3/8
4th Quarter 6 3/8 3 5/8
47
<PAGE>
DIRECTORS AND OFFICERS
Board of Directors
Steven J. Lee
Chairman and Chief Executive Officer, PolyMedica Industries, Inc.
Richard H. Bard
Chairman and Chief Executive Officer, Bard & Company, Inc.
Daniel S. Bernstein, M.D.
Brigham Medical Associates, Lecturer at Harvard Medical School, Clinical
Professor of Medicine Emeritus, Boston University School of Medicine
Marcia J. Hooper
Vice President/Partner, Advent International Corporation
Peter K. Hoffman
Senior Vice President, Business Management, The Gillette Company
Frank W. LoGerfo, M.D.
Chief, Division of Vascular Surgery, Beth Israel Deaconess Medical Center;
William V. McDermott Professor of Surgery, Harvard Medical School
Thomas S. Soltys
President, Boston Special Risks Insurance Agency, Inc.
Executive Officers
Steven J. Lee
Chairman and Chief Executive Officer
Arthur A. Siciliano, Ph.D.
President; President, PolyMedica Pharmaceuticals (U.S.A.), Inc.
Eric G. Walters
Chief Financial Officer
Randy M. Sloan
Vice President of Marketing; Group Executive, PolyMedica Healthcare, Inc.,
PolyMedica Wound Care Company
Mark A. Libratore
Vice President; President, Liberty Medical Supply, Inc.
Robert J. Zappa
Vice President; President, PolyMedica Healthcare, Inc.
Andrew M. Reed, Ph.D.
Vice President; President, PolyMedica Wound Care Company
Back Cover:
PolyMedica
11 State Street
Woburn, MA 01801-2050
617-933-2020
48
EXHIBIT 21
SUBSIDIARIES OF
POLYMEDICA INDUSTRIES, INC.
State or Other Jurisdiction of
Name Incorporation or Organization
PolyMedica Pharmaceuticals
(U.S.A.), Inc. Massachusetts
PolyMedica Healthcare, Inc. Delaware
Liberty Medical Supply, Inc. Florida
PolyMedica Securities, Inc. Massachusetts
PolyMedica Holdings, Inc. Delaware
PolyMedica Industries UK, Ltd. England and Wales
SUBSIDIARIES OF
POLYMEDICA PHARMACEUTICALS (U.S.A.), INC.
PolyMedica Pharmaceuticals
(Puerto Rico), Inc. Delaware
PolyMedica Pharmaceuticals
Securities, Inc. Massachusetts
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference into the previously filed
Registration Statements on Form S-8 (File no. 333-17415, 333-17387, 33-48130,
33-48132, 33-48134, 33-59202, 33-70626 and 33-86836) of PolyMedica Industries,
Inc. of our report dated May 9, 1997, except as to the information presented in
Note R for which the date is June 23, 1997 on our audits of the consolidated
financial statements of PolyMedica Industries, Inc. as of March 31, 1997 and
1996 and for each of the three years in the period ended March 31, 1997, which
report is included in the Company's 1997 Annual Report on Form 10K.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
June 26, 1997
<TABLE> <S> <C>
<ARTICLE>5
<CIK> 0000878748
<NAME> PolyMedica Industries, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 11028
<SECURITIES> 0
<RECEIVABLES> 6564
<ALLOWANCES> 538
<INVENTORY> 5481
<CURRENT-ASSETS> 24189
<PP&E> 10760
<DEPRECIATION> (4489)
<TOTAL-ASSETS> 75233
<CURRENT-LIABILITIES> 9043
<BONDS> 22818
0
0
<COMMON> 86
<OTHER-SE> 43286
<TOTAL-LIABILITY-AND-EQUITY> 75233
<SALES> 29880
<TOTAL-REVENUES> 30453
<CGS> 13603
<TOTAL-COSTS> 13603
<OTHER-EXPENSES> 12985
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2774
<INCOME-PRETAX> 1955
<INCOME-TAX> (367)
<INCOME-CONTINUING> 2322
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2322
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
