<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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
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PolyMedica Corporation
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3033368
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
11 State Street, Woburn, Massachusetts 01801
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 933-2020
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
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(Title of class)
Preferred Stock Purchase Rights
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares issued of the registrant's class of Common Stock as of
January 27, 1998 was 8,905,532 which includes 129,560 shares held in treasury.
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POLYMEDICA CORPORATION
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Financial Statements
Consolidated Balance Sheets at
December 31 and March 31, 1997 3
Consolidated Statements of Operations
for the three months and nine months
ended December 31, 1997 and 1996 5
Consolidated Statements of Cash Flows
for the nine months ended
December 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
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PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
POLYMEDICA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
DEC. 31, MARCH 31,
1997 1997
-------- ---------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $13,287 $11,028
Accounts receivable -- trade (net of
allowance for doubtful accounts of
$1,616 and $538 as of December 31
and March 31, 1997, respectively) 16,233 6,202
Inventories 5,389 5,481
Prepaid expenses and other
current assets 799 958
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Total current assets 35,708 23,669
Property, plant, and equipment, net 6,296 6,271
Intangible assets, net 40,124 42,024
Direct-response advertising, net 9,742 1,620
Deferred tax asset -- 1,133
Other assets, net 400 516
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Total assets $92,270 $75,233
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
3
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POLYMEDICA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
DEC. 31, MARCH 31,
1997 1997
-------- ---------
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Current liabilities:
Accounts payable -- trade $ 6,494 $ 2,982
Accrued expenses 8,140 3,403
Senior debt and notes payable 2,658 2,658
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Total current liabilities 17,292 9,043
Senior debt and notes payable, net 21,555 22,818
Deferred income taxes 2,011 --
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Total liabilities 40,858 31,861
Shareholders' equity:
Preferred stock $.01 par value; 2,000,000 shares
authorized, none issued or outstanding -- --
Common stock, $.01 par value; 20,000,000
shares authorized, 8,902,946 and 8,583,001
issued as of December 31 and March 31, 1997,
respectively 89 86
Treasury stock, at cost, (129,560 and 172,559
shares as of December 31 and March 31, 1997,
respectively) (831) (1,115)
Additional paid-in capital 54,596 53,338
Accumulated deficit (1,654) (7,783)
Notes receivable from officers (788) (929)
Currency translation adjustment -- (225)
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Total shareholders' equity 51,412 43,372
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Total liabilities and
shareholders' equity $92,270 $75,233
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</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
4
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POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
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DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1997 1996 1997 1996
------------------- -------------------
<S> <C> <C> <C> <C>
Revenues:
Net product sales $20,668 $ 8,662 $52,269 $20,550
Royalties, exclusivity, development
and license fees -- 349 -- 557
------- ------- ------- -------
20,668 9,011 52,269 21,107
Cost of product sales 10,220 4,328 24,927 8,846
------- ------- ------- -------
Total revenues, less cost of product sales 10,448 4,683 27,342 12,261
Operating expenses:
Selling, general, and administrative 7,838 3,529 20,411 8,798
Research and development 25 207 236 524
------- ------- ------- -------
7,863 3,736 20,647 9,322
Income from operations 2,585 947 6,695 2,939
Other income and expense:
Gain on sale of wound care business -- -- 4,126 --
Investment income 175 179 507 690
Interest expense (665) (703) (2,042) (2,073)
------- ------- ------- -------
(490) (524) 2,591 (1,383)
Income before tax provision 2,095 423 9,286 1,556
Provision for income taxes 712 12 3,157 46
------- ------- ------- -------
Net income $ 1,383 $ 411 $ 6,129 $ 1,510
======= ======= ======= =======
Net income per weighted average share,
basic $ .16 $ .05 $ .71 $ .18
======= ======= ======= =======
Net income per weighted average share,
diluted $ .14 $ .05 $ .63 $ .18
======= ======= ======= =======
Weighted average number of
common shares, basic 8,756 8,382 8,609 8,216
Weighted average number of
common shares, diluted 9,975 8,567 9,654 8,469
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
5
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POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------
DEC. 31, DEC. 31,
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,129 $ 1,510
Adjustments to reconcile net income to net cash flows
from operating activities:
Gain on sale of wound care business (4,126) --
Depreciation and amortization 2,439 2,238
Amortization of direct-response advertising 1,450 --
Deferred income taxes 3,715 --
Provision for bad debts 2,025 222
Provision for sales allowances 2,208 620
Provision for inventory obsolescence 25 64
Changes in assets and liabilities:
Accounts receivable--trade (14,026) (848)
Inventories (1,934) (246)
Prepaid expenses and other current assets (105) (287)
Direct-response advertising (9,573) (304)
Other assets (22) (49)
Accounts payable -- trade 3,514 (1,065)
Accrued expenses 3,820 (334)
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Total adjustments (10,590) 11
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Net cash flows from operating activities (4,461) 1,521
Cash flows from investing activities:
Sale of wound care business, net of related expenses 8,428 --
Purchase of property, plant, and equipment (2,069) (465)
Acquisition, net of cash acquired -- (6,713)
Spinoff of CardioTech International, Inc. -- (3,830)
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Net cash flows from investing activities 6,359 (11,008)
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Cash flows from financing activities:
Repayment of senior debt and notes payable (1,329) --
Proceeds from issuance of common stock 1,576 889
Repayment of officers notes receivable 110 --
Purchase of common stock -- (38)
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Net cash flows from financing activities 357 851
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Net increase (decrease) in cash and cash equivalents 2,255 (8,636)
-------- --------
Effect of exchange rate changes on cash 4 54
Cash and cash equivalents at beginning of period 11,028 23,302
-------- --------
Cash and cash equivalents at end of period $ 13,287 $ 14,720
======== ========
</TABLE>
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
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POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited consolidated financial statements included herein have been
prepared by PolyMedica Corporation ("PolyMedica" or the "Company"), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission and include, in the opinion of management, all adjustments,
consisting of normal, recurring adjustments, necessary for a fair presentation
of interim period results. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes, however, that its disclosures are adequate to
make the information presented not misleading. The results for the interim
periods presented are not necessarily indicative of results to be expected for
the full fiscal year. It is suggested that these interim consolidated financial
statements be read in conjunction with the audited consolidated financial
statements for the year ended March 31, 1997, which are incorporated by
reference herein from the Company's most recent Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that effect 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.
2. Inventories consist of the following:
(In thousands)
<TABLE>
<CAPTION>
DEC. 31, MARCH 31,
1997 1997
-------- ---------
<S> <C> <C>
Raw materials 915 $2,168
Work in process 558 845
Finished goods 3,916 2,468
------ ------
$5,389 $5,481
====== ======
</TABLE>
3. 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. In accordance with Statement of Position 93-7, direct-response
advertising and related costs are capitalized and amortized to expense on an
accelerated basis over a seven-year period, which matches the expected future
stream of revenues generated from new customers as a result of direct-response
advertising. The amortization rate is such that 55% of such costs are expensed
after two years from the date they are incurred. Management assesses the
realizability of the amounts of direct-response advertising costs reported as
assets at each balance sheet date by comparing the carrying amounts of such
assets to the probable remaining future benefits expected to result directly
from such advertising.
The Company has capitalized direct-response advertising of which $4.48
million and $9.57 million was incurred in the three and nine months ended
December 31, 1997, respectively. As of December 31, 1997, accumulated
amortization was $1.57 million, which resulted in a net capitalized
direct-response advertising asset of $9.74 million. A total of $731,000 and
$1.45 million in direct-response advertising was amortized in the three and nine
months ended December 31, 1997, respectively.
4. In July 1997, the Company sold certain assets of its U.S. and U.K. wound
care operations. Under the terms of the sale, the purchaser, Innovative
Technologies Group Plc ("IT"), paid the Company $9 million in cash and
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issued to the Company an unsecured promissory note in the face amount of $4
million. The Company could realize an additional $4.5 million if IT achieves
certain milestones, based on the performance of IT's stock and the performance
of the acquired business. The Company will recognize as income additional
proceeds in excess of the $9 million cash received only when and to the extent
realized. The net book value of assets sold and pretax gain as a result of this
transaction were $4.9 million and $4.1 million, respectively. Gain on the sale
for the nine months ended December 31, 1997, is as follows:
<TABLE>
<S> <C>
Gain on sale of wound care business $4,126
Provision for income taxes related to gain 1,403
------
Gain on sale, net of income taxes $2,723
======
Income per common share, basic, related to
gain on sale of wound care business $ .32
======
Income per common share, diluted, related to
gain on sale of wound care business $ .28
======
</TABLE>
5. In its fiscal quarter ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Share," which
modifies the calculation of earnings per share ("EPS"). The Standard replaces
the previous presentation of primary and fully diluted EPS to basic and diluted
EPS. Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS includes the dilution of common stock equivalents,
and is computed similarly to fully diluted EPS pursuant to APB Opinion 15. All
prior periods presented have been restated to reflect this adoption.
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, 1997 December 31, 1997
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $1,383 $ 411 $6,129 $1,510
BASIC:
Common stock outstanding, net of treasury stock,
beginning of period 8,737 8,382 8,410 7,953
Weighted average common stock issued during period 5 -- 184 273
Weighted average treasury stock issued during the period 14 4 17 8
Weighted average treasury stock repurchased -- (4) (2) (18)
------ ------ ------ ------
19 -- 199 263
Weighted average common stock outstanding, net of
treasury stock, end of period 8,756 8,382 8,609 8,216
====== ====== ====== ======
Net income per common share $ 0.16 $ 0.05 $ 0.71 $ 0.18
====== ====== ====== ======
</TABLE>
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, 1997 December 31, 1997
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
DILUTIVE:
Common stock outstanding, net of treasury stock,
beginning of period 8,737 8,382 8,410 7,953
Weighted average common stock issued during period 5 -- 184 273
Weighted average treasury stock issued during the period 14 4 17 8
Weighted average common stock equivalents (a) 1,219 185 1,045 252
Weighted average treasury stock repurchased -- (4) (2) (18)
----- ------ ------ ------
1,238 185 1,244 516
Weighted average common stock outstanding, net of
treasury stock, end of period 9,975 8,567 9,654 8,469
===== ====== ====== ======
Net income per common share $0.14 $ 0.05 $ 0.63 $ 0.18
===== ====== ====== ======
</TABLE>
- ----------
(a) not included if antidilutive
6. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. Management has not yet evaluated the
effects of this change on its reporting of income. The Company will adopt SFAS
No. 130 for its fiscal year ending March 31, 1999.
7. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information," which changes the way public
companies report information about operating segments. SFAS No. 131, which is
based on the management approach to segment reporting, establishes requirements
to report selected segment information quarterly and to report entity-wide
disclosures about products and services, major customers and the material
countries in which the entity holds assets and reports revenue. Management is
currently evaluating the effects of this change on its reporting of segment
information. The Company will adopt SFAS No. 131 for its fiscal year ending
March 31, 1999.
8. Certain amounts in the prior period financial statements have been
reclassified to conform with the current year presentation.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Business
PolyMedica is a leading provider of targeted medical products and services
primarily focused in the diabetes supplies and consumer healthcare markets.
PolyMedica sells diabetes supplies through its wholly-owned subsidiary Liberty
Medical Supply, Inc. ("Liberty Medical"). Liberty Medical is a leading
patient-focused, direct-mail distributor of more than 200 name-brand diabetes
products to insulin-using, Medicare-eligible seniors with diabetes. PolyMedica
holds a leading position in the over-the-counter urinary health market and
distributes a broad range of other medical products, including digital
thermometers and compliance products, primarily to food and drug retailers and
mass merchandisers nationwide. The Company also markets, manufactures and
distributes a line of prescription urological and suppository products.
In September 1997, the Company changed its name from PolyMedica Industries, Inc.
to PolyMedica Corporation.
Diabetes Supplies
Liberty Medical 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 Medical 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 Medical offers a wide array of
products from a full range of name-brand manufacturers, contacts the patient's
doctor to obtain the required prescription information and written
documentation, files the appropriate insurance forms and bills Medicare and
private insurers directly. This service frees the patient from paying for his or
her diabetes-related expenses out-of-pocket, and offers the convenience of free
home delivery of supplies.
Consumer Healthcare
The Company's consumer healthcare products are focused on three areas: female
urinary tract discomfort, digital thermometers and medication compliance
products. In the urinary tract discomfort area, the Company's two products are
AZO-STANDARD(R), which provides relief from urinary tract discomfort, and
AZO-CRANBERRY(R), a dietary supplement which helps maintain a healthy urinary
tract.
The Company's consumer healthcare products also include digital, digital
flexible tip, basal and glass thermometers, as well as approximately 40 other
home-use diagnostic and compliance products. PolyMedica has patented and
introduced a new flexible tip thermometer that is available for this cough and
cold season. The Company custom manufacturers and/or distributes its other
consumer healthcare products under private label and under the brand names of
BASIS(R), MEDI-AID(R), and PeeDee Dose(TM).
Professional Products
PolyMedica's professional products represent one of the broadest lines of
prescription urology products available, including urinary analgesics,
anti-spasmodics, local anesthetics and suppositories. URISED(R), CYSTOSPAZ(R)
and CYSTOSPAZ-M(R) analgesics and anti-spasmodics provide effective symptomatic
relief for urinary pain,
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burning and spasms. Many urology offices, as well as hospitals, purchase the
local anesthetic ANESTACON(R) for use in diagnostic procedures and the
catheterization process. B&O(R) and AQUACHLORAL(R) suppositories are used by
patients unable to tolerate oral dosages of systemic analgesics and sedatives.
Recent Transactions
In May 1996, the Company's Board of Directors declared a stock dividend for the
purpose of making a distribution to the Company's shareholders of all its shares
of CardioTech International, Inc. ("CardioTech"). In June 1996, certificates
representing CardioTech common stock were mailed to the Company's shareholders.
The Company believes that this distribution qualified as a "tax-free" spinoff
under Section 355 of the Code. CardioTech, which is listed on the American Stock
Exchange, 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. CardioTech's operations are accounted
for as discontinued operations in the Company's fiscal 1996 and prior financial
statements and consequently, net revenues, operating costs and expenses and
other income and expense have been reclassified for amounts associated with
CardioTech's discontinued operations.
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 in March 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 principal amount of $1.30 million and (iii) 224,400
shares of the Company's Common Stock.
In July 1997, the Company sold certain assets of its U.S. and U.K. wound care
operations. Under the terms of the sale, the purchaser, Innovative Technologies
Group Plc ("IT"), paid the Company $9.00 million in cash and issued to the
Company an unsecured promissory note in the face amount of $4.00 million. The
Company could realize an additional $4.50 million if IT achieves certain
milestones, based on the performance of IT's stock and the performance of the
acquired business. The Company will recognize additional proceeds in excess of
the $9.00 million cash received only when and to the extent realized.
Other
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. In accordance with Statement of Position 93-7, direct-response
advertising and related costs are capitalized and amortized to expense on an
accelerated basis over a seven-year period, which matches the expected future
stream of revenues generated from new customers as a result of direct-response
advertising. The amortization rate is such that 55% of such costs are expensed
after two years from the date they are incurred. Management assesses the
realizability of the amounts of direct-response advertising costs reported as
assets at each balance sheet date by comparing the carrying amounts of such
assets to the probable remaining future benefits expected to result directly
from such advertising.
Although the use of certain of the Company's products is somewhat seasonal in
nature, the Company does not believe its net product sales, in the aggregate,
are generally subject to material seasonal fluctuations.
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The Company operates from manufacturing, distribution and research and
development facilities located in Massachusetts, Florida and Colorado. 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 primarily of pilot production of pharmaceutical products.
Period to period comparisons of changes in net product sales are not necessarily
indicative of results to be expected for any future period.
RESULTS OF OPERATIONS
Three Months Ended December 31, 1997 Compared to Three Months Ended December 31,
1996.
The Company generated $20.67 million of total net revenues in the three months
ended December 31, 1997, as compared with $9.01 million in the three months
ended December 31, 1996. This increase is primarily the result of the increase
in Liberty Medical sales during the three months ended December 31, 1997.
Net product sales of diabetes supplies were $14.52 million in the three months
ended December 31, 1997. This performance compares with $3.17 million in the
three months ended December 31, 1996. This growth is largely a result of the
Company's increased advertising spending, including its initiation of television
advertising at the end of fiscal 1997. The Company currently expects its
promotional and advertising spending to continue in order to further the
expansion of Liberty Medical's customer base.
Net product sales of consumer healthcare products increased by 4.4% to $3.41
million in the three months ended December 31, 1997 as compared with $3.27
million in the three months ended December 31, 1996. Sales of advanced
thermometry products increased during the three months ended December 31, 1997,
offset by a decline in sales of AZO STANDARD. The Company has added to its
product line by introducing its Flexible-Tip Digital Thermometer whose sales
were included in the three months ended December 31, 1997. The Company believes
that the decline in sales of AZO STANDARD is due to an inventory oversupply at
the distribution level. In addition, the Company introduced AZO Test Strips, an
in-home urinary tract infection testing kit which allows patients to call their
doctors with testing results. Shipments of AZO Test Strips are expected to begin
during the three months ended March 31, 1998.
Net product sales of the Company's professional products increased by 6.3% to
$2.74 million in the three months ended December 31, 1997 as compared with $2.58
million in the three months ended December 31, 1996. Professional products
included wound care products in the three months ended December 31, 1996. As
noted above, certain assets of the wound care division were sold in July 1997.
The 6.3% increase in professional products sales is primarily due to additional
shipments of URISED in the three months ended December 31, 1997, which the
Company believes is the result of a reduction in the supply of generic products
in the marketplace, partially offset by the elimination of wound care related
sales in the three months ended December 31, 1997.
As a percentage of net product sales, overall gross margins were 50.6% in the
three months ended December 31, 1997 and 50.0% in the three months ended
December 31, 1996. Gross margins in the three months ended December 31, 1997
increased due to improving margins of professional products, partially offset by
the inclusion of significant sales of diabetes-related products, whose gross
margins are lower than the Company average for products sold in the three months
ended December 31, 1997.
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As a percentage of net product sales, selling, general and administration
expenses ("SG&A expenses") were 37.9% for the three months ended December 31,
1997 as compared with 39.2% for the three months ended December 31, 1996. SG&A
expenses were 41.3% of net product sales in the three months ended September 30,
1997. SG&A expenses increased by 122.1% in the three months ended December 31,
1997 to $7.84 million as compared with $3.53 million in the three months ended
December 31, 1996. This increase is primarily attributable to SG&A expenses
related to the expansion of Liberty Medical, and marketing and advertising costs
related to its consumer healthcare products.
Research and development expenses were $25,000 in the three months ended
December 31, 1997 as compared with $207,000 in the three months ended December
31, 1996. This decrease in research and development costs is a result of the
Company's July 1997 sale of certain assets related to its wound care business.
Investment income was $175,000 in the three months ended December 31, 1997 as
compared with $179,000 in the three months ended December 31, 1996. Interest
expense was $665,000 in the three months ended December 31, 1997 as compared
with $703,000 in the three months ended December 31, 1996, as the Company
accrued interest expense in both periods on $25 million of Guaranteed Senior
Secured Notes due January 31, 2003 (the "Hancock Notes") to the John Hancock
Mutual Life Insurance Company ("Hancock"). In July 1997, the Company made its
first principal repayment of $1 million on the Hancock Notes.
Pretax income was $2.10 million in the three months ended December 31, 1997,
which compares with $423,000 in the three months ended December 31, 1996. The
Company's net income was $1.38 million, or $0.14 per diluted common share, in
the three months ended December 31, 1997. This performance compares to net
income of $411,000, or $.05 per diluted common share, in the three months ended
December 31, 1996.
Nine Months Ended December 31, 1997 Compared to Nine Months Ended December 31,
1996.
The Company generated $52.27 million of total net revenues in the nine months
ended December 31, 1997, as compared with $21.11 million in the nine months
ended December 31, 1996, when the Company had owned Liberty Medical for only
four months.
Net product sales of diabetes supplies were $33.69 million in the nine months
ended December 31, 1997. This performance compares with $4.07 million in net
product sales in the nine months ended December 31, 1996. As the Company
purchased Liberty Medical on August 30, 1996, there were only four months of
sales of diabetes supplies in the nine months ended December 31, 1996. This
growth in sales of diabetes supplies is also a result of the Company's increased
advertising spending, including its initiation of television advertising at the
end of fiscal 1997. The Company currently expects its promotional and
advertising spending to continue in order to further the expansion of Liberty
Medical's customer base.
Net product sales of consumer healthcare products increased by 5.1% to $8.20
million in the nine months ended December 31, 1997 as compared with $7.80
million in the nine months ended December 31, 1996. Sales of advanced
thermometry products increased during the nine months ended December 31, 1997,
partially offset by a decline in sales of AZO-STANDARD. The Company believes
that the decline in sales of AZO-STANDARD is due to an inventory oversupply at
the distribution level.
Net product sales of the Company's professional products increased by 12.5% to
$10.38 million in the nine months ended December 31, 1997 as compared with $9.23
million in the nine months ended December 31, 1996.
13
<PAGE> 14
This increase is primarily due to additional shipments of URISED in the nine
months ended December 31, 1997, which the Company believes is the result of a
reduction in the supply of generic products in the marketplace, partially offset
by the elimination of wound care related sales, as certain assets of the wound
care division were sold in July 1997.
As a percentage of net product sales, overall gross margins were 52.3% in the
nine months ended December 31, 1997 and 57.0% in the nine months ended December
31, 1996. Gross margins in the nine months ended December 31, 1997 decreased
primarily due to the inclusion of significant sales of diabetes-related
products, whose gross margins are lower than the Company average for products
sold during the nine months ended December 31, 1997, partially offset by a
higher level of sales of professional products whose gross margins are higher
than the Company average.
As a percentage of net product sales, SG&A expenses were 39.1% for the nine
months ended December 31, 1997 as compared with 41.7% for the nine months ended
December 31, 1996. SG&A expenses increased by 132.0% in the nine months ended
December 31, 1997 to $20.41 million as compared with $8.80 million in the nine
months ended December 31, 1996. This increase is primarily attributable to SG&A
expenses related to Liberty Medical, which the Company owned for only the last
four months in the nine months ended December 31, 1996. In addition, during the
nine months ended December 31, 1997, the Company increased marketing and
advertising costs related to its consumer healthcare products.
Research and development expenses were $236,000 in the nine months ended
December 31, 1997 as compared with $524,000 in the nine months ended December
31, 1996. This decrease in research and development costs is a result the
Company's July 1997 sale of certain assets related to its wound care business.
Investment income decreased by 26.5% to $507,000 in the nine months ended
December 31, 1997 as compared with $690,000 in the nine months ended December
31, 1996, as the Company earned interest on lower average cash balances due to
the June 1996 cash transfer to CardioTech, cash paid for the purchase of Liberty
Medical in August 1996, and investments in direct-response advertising. This use
of cash was partially offset by cash received in July 1997 in connection with
the sale of certain assets related to the Company's wound care business.
Interest expense was $2.04 million in the nine months ended December 31, 1997 as
compared with $2.07 million in the nine months ended December 31, 1996, as the
Company accrued interest expense in both periods on the Hancock Notes. In July
1997, the Company made its first principal repayment of $1 million on the
Hancock Notes.
In the nine months ended December 31, 1997, the Company recorded a $4.13 million
pretax gain on the sale of certain assets related to the Company's wound care
business.
Pretax income was $9.29 million in the nine months ended December 31, 1997.
Excluding the $4.13 million pretax gain described above, pretax income was $5.16
million as compared with $1.56 million in the nine months ended December 31,
1996. The Company's net income was $6.13 million, or $0.63 per diluted common
share, in the nine months ended December 31, 1997. Excluding the $2.72 million
after tax gain from the sale of the wound care business, or $0.28 per diluted
common share, income was $3.41 million, or $0.35 per diluted common share. This
performance compares to net income of $1.51 million, or $0.18 per diluted common
share, in the nine months ended December 31, 1996.
14
<PAGE> 15
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 financing before the
Company's initial public offering, $39.00 million from its March 1992 initial
public offering, $4.55 million from a November 1995 public offering of common
stock and $2.75 million from a March 1996 private placement of common stock. In
January 1993, the Company sold to John Hancock Mutual Life Insurance Company
("Hancock") $25.00 million of Hancock Notes.
As of December 31, 1997, the Company had working capital of $18.42 million,
including cash and cash equivalents of $13.29 million, which compares with
working capital of $14.63 million as of March 31, 1997. The primary reason for
the increase in working capital as of December 31, 1997, when compared to March
31, 1997, was the receipt by the Company in July 1997 of $9 million in cash in
connection with the sale of certain assets related to its wound care business.
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, products or technologies, the
Company may require substantial additional funding beyond currently available
working capital and funds generated from operations. The Company is conducting
an active search for the strategic acquisition of complementary businesses,
products or technologies which leverage its marketing, sales and distribution
infrastructure. The Company currently has no commitments or agreements with
respect to any such acquisition.
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,
but not limited to, 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 and those
set forth in the Company's Annual Report on Form 10-K for the year ended March
31, 1997.
HEALTHCARE REIMBURSEMENT
Political, economic and regulatory influences are resulting in fundamental
changes in the healthcare industry in the United States. The Company anticipates
that Congress and state legislatures will continue to review and assess
alternative healthcare delivery systems and payment methods. Sales of a large
portion of the Company's
15
<PAGE> 16
products depend to a significant extent on the availability of reimbursement to
the Company's customers by government and private insurance plans.
Any further reduction in the reimbursement provisions currently in effect for
the Company's diabetes supplies products which are reimbursable under Medicare
would reduce the Company's revenues and earnings.
The processing of third-party reimbursements is a labor-intensive effort, and
delays in processing claims for reimbursement may increase working capital
requirements. Final determination of reimbursements are subject to audit by
Medicare. Medicare audits of the Company to date have not resulted in any
significant adjustments. Future audits may, however, result in retroactive
adjustments for past charges for products and services, and such adjustments
could affect the future operations and earnings of the Company. The Balanced
Budget Act of 1997 expands Medicare coverage to seniors with diabetes who do not
use insulin. Any delay in the expected July 1998 implementation of this
legislation would correspondingly delay the anticipated expansion of Liberty
Medical's market.
ABILITY TO MANAGE GROWTH
The Company has expanded its operations rapidly, which has created significant
demands on the Company's systems, its administrative, operational, development
and financial personnel and its other resources. Additional expansion by the
Company may further strain the Company's management, financial and other
resources, including its working capital resources, as a result of delays in
processing claims for third-party reimbursement. Although the Company has
recently upgraded its systems and other steps have been taken to address these
issues, there can be no assurance that such steps will be effective.
DIRECT-RESPONSE ADVERTISING
In accordance with generally accepted accounting principles, for financial
statement purposes, the Company capitalizes direct-response advertising and
related costs and amortizes such costs over a seven-year period on an
accelerated basis, 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 costs
reported as assets at each balance sheet date by comparing the carrying amounts
of such assets to the probable remaining future benefits expected to result
directly from such advertising. The Company expects that it will continue to
incur substantial direct-response advertising and related costs in connection
with the further expansion of its diabetes supplies business.
COMPETITION
The Company is engaged in rapidly evolving and highly competitive fields.
Competition from other sellers of diabetes supplies, manufacturers of healthcare
products, 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 experience in
marketing and distribution of products than does the Company. There can be no
assurance that the Company's competitors will not succeed in developing products
and services that are more effective than any that are being developed or sold
by the Company.
The Company believes that the principal competitive factors in the healthcare
products industry include the ability to identify and respond to customer needs,
quality and breadth of service and product offerings, price and technical
expertise. The Company believes that its ability to compete also depends in part
on a number of
16
<PAGE> 17
competitive factors outside its control, including the ability to hire and
retain employees, the development by others of products and services that are
competitive with the Company's products and services, the price at which others
offer comparable products and services and the extent of its competitors'
responsiveness to customer needs.
DEPENDENCE ON REORDERS - CHANGE IN DEMAND FOR DIABETES SUPPLIES
The Company generally incurs negative cash flow with respect to the first order
for its diabetes supplies from a customer due primarily to customer acquisition
costs, including advertising and Medicare and secondary insurance compliance
costs. Accordingly, the profitability of the Company's diabetes supplies
business depends on recurring orders. Reorder rates are inherently uncertain and
are subject to several factors, many of which are outside of the Company's
control, including customer shifts to nursing homes or other forms of managed
care, customer mortality, changing customer preferences, general economic
conditions and customer satisfaction. Furthermore, efforts are underway to
improve treatment of, and to seek a cure for, diabetes. Significant developments
in either area could substantially reduce or eliminate the demand for the
diabetes supplies sold by the Company.
DEPENDENCE ON SUPPLIERS
The Company purchases several of its consumer healthcare products, including its
thermometers, from suppliers based in the People's Republic of China, usually
using molds and tooling owned by or committed exclusively to the Company. To
date, the Company has not experienced difficulties in obtaining timely delivery
from these suppliers. Although the Company believes there are alternate sources
available for these products, there can be no assurance that the Company would
be able to acquire products from other sources on a timely or cost-effective
basis in the event current foreign suppliers were unable to supply these
products on a timely basis.
Although the Company has three long-term purchase contracts with respect to its
diabetes supplies business, it operates principally on a purchase-order basis.
Each of the Company's over-the-counter products for urinary tract discomfort and
urinary tract health is manufactured by a single supplier. Some of the Company's
professional products also are manufactured by single suppliers. PolyMedica is
currently taking steps to provide alternate sources of supply for both of these
lines of products, but such efforts are not yet complete.
DEPENDENCE ON SINGLE MANUFACTURING FACILITY FOR PROFESSIONAL PRODUCTS
A majority of the Company's professional products is manufactured at its
headquarters facility in Woburn, Massachusetts. While the Company maintains
business interruption insurance, any prolonged inability to utilize this
facility as a result of fire, natural disaster or other event would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company complies with Good Manufacturing Practices
("GMP") regulations, prescribed by the Food and Drug Administration ("FDA"), in
its internal manufacturing facilities. The FDA enforces the GMP regulations
through its plant inspection program. If the Company fails to comply with GMP
regulations, the Company could be required to make material expenditures and
could experience manufacturing delays to return to compliance.
PRODUCT LIABILITY
The testing, manufacturing, 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. Certain manufacturers
17
<PAGE> 18
of healthcare products 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.
RELIANCE ON DISTRIBUTORS FOR CONSUMER HEALTHCARE AND PROFESSIONAL PRODUCTS;
LIMITED DIRECT MARKETING EXPERIENCE
The Company has a limited direct marketing and sales organization, and relies on
its current distributors, for the sale of consumer healthcare and professional
products. The Company's ability to sell its consumer healthcare and professional
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 Company's products
effectively.
INTEGRATION OF OTHER BUSINESSES, PRODUCTS AND TECHNOLOGIES
As part of its growth strategy, the Company currently intends to expand through
the acquisition of other businesses, products and technologies. The Company
regularly reviews such potential acquisitions, some of which may be material.
There can be no assurance that the Company will successfully acquire any
businesses, products or technologies, or that any such acquired businesses,
products or technologies will be profitable. The Company does not currently have
any commitments or agreements with respect to any such acquisition.
GOVERNMENT REGULATION
Certain aspects of the Company's business are subject to federal and state
regulation. Federal regulation covers, among other things, the manufacturing,
distribution and sale of the Company's drugs and medical devices. The Company
believes that its operations comply with applicable federal and state laws and
regulations in all material respects. However, changes in the law or new
interpretations of existing laws could have a material adverse effect on
permissible activities of the Company, and the relative costs associated with
doing business.
18
<PAGE> 19
PART II - OTHER INFORMATION
POLYMEDICA CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index
(b) There were no reports on Form 8-K filed during the three months ended
December 31, 1997.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PolyMedica Corporation
----------------------------------------
(registrant)
/s/ Steven J. Lee
----------------------------------------
Steven J. Lee
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Eric G. Walters
----------------------------------------
Eric G. Walters
Chief Financial Officer, Treasurer,
and Clerk (Principal Financial and
Accounting Officer)
Dated: January 29, 1998
20
<PAGE> 21
Exhibit Index
POLYMEDICA CORPORATION
Exhibit Description
- ------- -----------
27 - Financial Data Schedule
21
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