<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 June 30, 1998
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 Corporation
------------------------------------------------------
(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 (781) 933-2020
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
--------------------------------------
(Title of class)
Preferred Stock Purchase Rights
-------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's class of Common
Stock as of July 17, 1998 was 8,913,476 which includes 120,620 shares held in
treasury.
<PAGE> 2
POLYMEDICA CORPORATION
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Financial Statements
Consolidated Balance Sheets at
June 30, 1998 and March 31, 1998 3
Consolidated Statements of Operations
for the three months ended June 30, 1998
and June 30, 1997 5
Consolidated Statements of Cash Flows
for the three months ended June 30, 1998
and June 30, 1997 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
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
POLYMEDICA CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1998
------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,759 $ 6,440
Accounts receivable -- trade (net of
allowances of $5,428 and $3,914 as of
June 30 and March 31, 1998, respectively) 17,190 21,207
Inventories 5,716 4,857
Deferred tax asset 2,075 2,075
Prepaid expenses and other
current assets 1,877 845
------- -------
Total current assets 36,617 35,424
Property, plant, and equipment, net 6,563 6,285
Intangible assets, net 38,986 39,555
Direct response advertising, net 12,801 10,899
Other assets, net 233 238
------- -------
Total assets $95,200 $92,401
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
<PAGE> 4
POLYMEDICA CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1998
------- --------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade $ 7,911 $ 8,221
Accrued expenses 4,643 3,805
Senior debt and notes payable 2,329 2,329
------- -------
Total current liabilities 14,883 14,355
Senior debt and notes payable, net 20,599 20,577
Deferred income taxes 5,403 4,541
------- -------
Total liabilities 40,885 39,473
------- -------
Commitments
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; 8,913,476 and 8,909,718
issued as of June 30 and March 31, 1998,
respectively 89 89
Treasury stock, at cost, (120,620 and 129,560
shares as of June 30 and March 31, 1998,
respectively) (646) (706)
Additional paid-in capital 54,532 54,498
Retained earnings (deficit) 1,129 (164)
Notes receivable from officers (789) (789)
------- -------
Total shareholders' equity 54,315 52,928
------- -------
Total liabilities and
shareholders' equity $95,200 $92,401
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements
4
<PAGE> 5
POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
--------------------------
1998 1997
------- -------
<S> <C> <C>
Net product sales $20,661 $13,958
Cost of product sales 9,921 6,728
------- -------
Gross margin 10,740 7,230
Operating expenses:
Selling, general, and administrative 8,020 5,288
Research and development 42 123
------- -------
8,062 5,411
------- -------
Income from operations 2,678 1,819
Other income and expense:
Investment income 114 139
Interest expense (637) (698)
------- -------
(523) (559)
------- -------
Income before income taxes 2,155 1,260
Income tax provision 862 429
------- -------
Net income $ 1,293 $ 831
======= =======
Net income per weighted average share, basic $ .15 $ .10
======= =======
Net income per weighted average share, diluted $ .13 $ .09
======= =======
Weighted average shares, basic 8,789 8,426
Weighted average shares, diluted 9,771 9,021
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements
5
<PAGE> 6
POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1998 1997
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,293 $ 831
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 800 868
Amortization of direct-response advertising 1,156 243
Direct-response advertising (3,058) (2,305)
Deferred income taxes 862 504
Provision for bad debts 1,445 216
Provision for sales allowances 959 334
Changes in assets and liabilities:
Accounts receivable--trade 1,611 (5,695)
Inventories (858) 220
Prepaid expenses and other assets (815) (142)
Accounts payable--trade (527) 266
Accrued expenses 842 2,184
------- -------
Total adjustments 2,417 (3,307)
------- -------
Net cash flows from operating activities 3,710 (2,476)
------- -------
Cash flows from investing activities:
Purchase of property, plant, and equipment (482) (588)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 91 159
Repayment of officer notes receivable -- 30
------- -------
Net cash flows from financing activities 91 189
------- -------
Net increase (decrease) in cash and cash equivalents 3,319 (2,875)
------- -------
Effect of exchange rate changes on cash -- 2
Cash and cash equivalents at
beginning of period 6,440 11,028
------- -------
Cash and cash equivalents at end of period $ 9,759 $ 8,155
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
6
<PAGE> 7
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 included in the Company's Annual Report on Form 10-K for the year
ended March 31, 1998.
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>
JUNE 30, MARCH 31,
1998 1998
-------- ---------
<S> <C> <C>
Raw materials $ 785 $1,058
Work in process 450 296
Finished goods 4,481 3,503
------ ------
$5,716 $4,857
====== ======
</TABLE>
3. In accordance with Statement of Position 93-7, direct-response
advertising and related costs for all periods presented are capitalized and
amortized to selling, general and administrative expense on an accelerated basis
during the first two years of a four-year period. The amortization rate is such
that 55% of such costs are expensed after two years from the date they are
incurred, and the remaining 45% is expensed on a straight line basis over the
next two years. Revenues generated from new customers as a result of
direct-response advertising have historically resulted in a revenue stream
lasting seven years. Management has selected a more conservative four-year
amortization period, in consideration of the "Factors Affecting Future Operating
Results" in item 2 of "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in this Form 10-Q. 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 net benefits expected to result directly
from such advertising.
7
<PAGE> 8
The Company capitalized direct-response advertising of $3.06 million
and $2.31 million in the three months ended June 30, 1998 and 1997,
respectively. A total of $1.16 million and $243,000 in direct-response
advertising was amortized and charged to selling, general and administrative
expense for the three months ending June 30, 1998 and 1997, respectively. As of
June 30 and March 31, 1998, accumulated amortization was $3.70 million and $2.54
million, which resulted in a net capitalized direct-response advertising asset
of $12.80 million and $10.90 million, respectively
4. Promotional and sample costs, whose benefit is expected to assist sales
in future interim periods, are allocated among those interim periods based upon
the benefit received. Included in Prepaid Expenses and Other Current Assets as
of June 30, 1998 are $448,000 of costs related to contacting and qualifying
non-insulin using seniors with diabetes who first became Medicare eligible on
July 1, 1998. These costs will be expensed during the remaining three quarters
of the year ending March 31, 1999.
5. Calculations of earnings per share are as follows:
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------------
1998 1997
------- ------
<S> <C> <C>
Net income $1,293 $ 831
BASIC:
Weighted average common stock outstanding, net
of treasury stock, end of period 8,789 8,426
$ 0.15 $ 0.10
Net income per common share, basic ====== ======
DILUTED:
Weighted average common stock outstanding, net
of treasury stock, end of period 8,789 8,426
Weighted average common stock equivalents 982 595
Weighted average common stock outstanding, net ------ ------
of treasury stock, end of period 9,771 9,021
$ 0.13 $ 0.09
Net income per common share, diluted ====== ======
</TABLE>
6. Effective April 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 10, "Reporting Comprehensive Income." This Statement
establishes standards for reporting and displaying comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This Statement requires the classification
of items of comprehensive income by their nature in a financial statement and
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. Financial statements for prior periods have been restated.
8
<PAGE> 9
The Company's total comprehensive income was as follows:
(In thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
--------------------------
1998 1997
------ ----
<S> <C> <C>
Net income $1,293 $831
Other comprehensive expense, net of tax:
Currency translation adjustment -- (15)
------ ----
Total other comprehensive expense -- (15)
------ ----
Total comprehensive income $1,293 $816
====== ====
</TABLE>
7. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information," which supercedes FASB Statement No.
14, "Financial Reporting for Segments of a Business Enterprise" and 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. The Company will adopt Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" in the fiscal
year beginning April 1, 1999. This Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Under the new Statement, the accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative, the resulting designation. The Company believes that adoption of the
Statement will not have a material effect on the financial statements.
9. Certain amounts in the prior period financial statements have been
reclassified to conform with the current year presentation.
10. On April 30, 1998, the Company entered into a $7.5 million
collateralized revolving credit facility with BankBoston, N.A., with a maturity
date of March 31, 2001. The facility is collateralized by certain assets of
the Company. Under the new facility, the Company is obligated to maintain
certain financial covenants. As of June 30, 1998 there were no amounts
outstanding under this credit facility.
11. In July 1998, the Company realized $1.6 million in cash from Innovative
Technologies Group plc ("IT") in a prepayment agreement as full and final
settlement of a $4 million unsecured promissory note issued to the Company in
connection with the July 1997 sale to IT of certain assets related to the
Company's wound care business. The $1.6 million cash received, net of related
expenses, will be recorded as Other Income in the quarter ending September 30,
1998.
At the time of the July 1997 sale, the Company recognized $9 million of
cash received. Through July 1998, the Company has realized total proceeds of
$10.6 million. The Company could realize up to an additional $4.5 million if IT
achieves certain milestones, which would bring the total potential value of the
sale to $15.1 million.
9
<PAGE> 10
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 is a leading patient-focused,
direct-mail distributor of more than 200 name-brand diabetes products to insulin
and non-insulin using, Medicare-eligible seniors with diabetes. PolyMedica also
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.
Diabetes Supplies
Liberty Medical is the leading direct-mail distributor of diabetes
testing supplies to patients who have Medicare. Liberty Medical provides a
simple, reliable way for seniors to obtain their diabetes testing supplies and
the related 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 upfront expenses, and offers the
convenience of free home delivery of supplies.
In July 1998, the Company began shipping diabetes supplies to
non-insulin using seniors covered for the first time by Medicare. Many of the
customers shipped were from the Company's database of seniors who had previously
contacted the Company in response to its television advertising.
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 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. During the three months ended March 31, 1998 the Company introduced AZO
TEST STRIPS(TM), an in-home urinary tract infection testing kit.
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 with Fever Alarm(TM) that became
available for the 1997-1998 cough and cold season. The Company custom
10
<PAGE> 11
manufacturers and/or distributes its other consumer healthcare products under
private label and under the brand names of BASIS(R), MEDI-AID(R), PolyMedica and
PeeDee Dose(TM).
Professional Products
PolyMedica's professional products represent one of the broadest lines
of prescription urology products excluding anti-infectives, 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, 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.
Other
In accordance with Statement of Position 93-7, direct-response
advertising and related costs for all periods presented are capitalized and
amortized to selling, general and administrative expense on an accelerated basis
during the first two years of a four-year period. The amortization rate is such
that 55% of such costs are expensed after two years from the date they are
incurred, and the remaining 45% is expensed on a straight line basis over the
next two years. Revenues generated from new customers as a result of
direct-response advertising have historically resulted in a revenue stream
lasting seven years. Management has selected a more conservative four-year
amortization period. 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 net 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.
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 relate to the manufacture 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 June 30, 1998 Compared to Three Months Ended June 30, 1997
Total net product sales increased by 48.0% to $20.66 million in the
three months ended June 30, 1998, as compared with $13.96 million in the three
months ended June 30, 1997. This increase is primarily the result of the
increase in Liberty Medical sales.
11
<PAGE> 12
Net product sales of diabetes supplies increased by 88.7% to $15.68
million in the three months ended June 30, 1998, as compared with $8.31 million
in the three months ended June 30, 1997. 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 34.1% to
$2.60 million in the three months ended June 30, 1998 as compared with $1.94
million in the three months ended June 30, 1997. Sales of both the AZO product
line and advanced thermometry products increased during the three months ended
June 30, 1998. The Company has added to its product line by introducing both its
Flexible-Tip Digital Thermometer and AZO Test Strips, sales of which were not
included in the three months ended June 30, 1997.
In the professional products group, there were $914,000 of nonrecurring
net product sales of the Company's institutional wound care products in the
three months ended June 30, 1997. Excluding the wound care product sales,
recurring net product sales decreased by 14.8% to $2.38 million in the three
months ended June 30, 1998, as compared with $2.80 million in the three months
ended June 30, 1997. As noted above, certain assets of the wound care division
were sold in July 1997. The decrease in professional products sales is primarily
due to additional shipments of URISED in the three months ended June 30, 1997,
which was the result of a reduction in the supply of generic products by the
unexpected exit of a major supplier in the marketplace during that period.
As a percentage of net product sales, overall gross margins were 52.0%
in the three months ended June 30, 1998 and 51.7% in the three months ended June
30, 1997. Gross margins in the three months ended June 30, 1998 increased due to
higher gross margins of diabetes-related product sales, resulting from changes
in product mix and volume purchasing during the three months ended June 30,
1998.
As a percentage of net product sales, selling, general and
administration expenses ("SG&A expenses") were 38.8% for the three months ended
June 30, 1998 as compared with 37.9% for the three months ended June 30, 1997.
SG&A expenses increased by 51.7% in the three months ended June 30, 1998 to
$8.02 million as compared with $5.29 million in the three months ended June 30,
1997. This dollar 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 $42,000 in the three months
ended June 30, 1998 as compared with $123,000 in the three months ended June 30,
1997. 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
which was more research and development intensive than the Company's other
businesses.
Investment income decreased by 18.0% to $114,000 in the three months
ended June 30, 1998 as compared with $139,000 in the three months ended June 30,
1997 as the Company earned interest on lower average cash balances due to
investments in direct-response advertising during the year ended March 31, 1998.
Interest expense decreased by 8.7% to $637,000 in the three months ended
12
<PAGE> 13
June 30, 1998 as compared with $698,000 in the three months ended June 30, 1997,
reflecting $2.0 million of principal payments during the year ended March 31,
1998 on Guaranteed Senior Secured Notes due January 31, 2003 (the "Hancock
Notes") to the John Hancock Mutual Life Insurance Company ("Hancock").
Pretax income increased by 71.0% to $2.15 million in the three months
ended June 30, 1998, as compared with $1.26 million in the three months ended
June 30, 1997. The Company's net income increased by 55.6% to $1.29 million, or
$0.13 per diluted common share, in the three months ended June 30, 1998. This
performance compares to net income of 831,000 or $0.09 per diluted common share,
in the three months ended June 30, 1997. The Company's tax provision increased
to 40% in the three months ended June 30, 1998 which compares with 34% in the
three months ended June 30, 1997.
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 1996 public offering of
700,000 shares of common stock, and $2.75 million from the March 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 $25 million
of 10.65% Guaranteed Senior Secured Notes due January 31, 2003 (the "Hancock
Notes"). In January 1996, the Company executed an amendment which increased the
interest rate on the Hancock Notes to 10.9%.
As of June 30, 1998, working capital was $21.73 million as compared
with working capital of $21.07 and $15.79 million as of March 31, 1998 and June
30, 1997, respectively. Cash and cash equivalents were $9.76 million and $6.4
million as of June 30 and March 31, 1998, respectively.
Accounts receivable -- trade were $17.2 million and $21.2 million as of
June 30 and March 31, 1998, respectively. This decrease was a major contributor
to the increase in cash at the end of the quarter.
The Company expects that its current working capital and funds
generated from future operations will be adequate to meet its liquidity and
capital requirements for current operations. In the event that the Company
undertakes to make acquisitions of complementary businesses or products, the
Company may require substantial additional funding beyond currently available
working capital and funds generated from operations. Currently, the Company is
conducting an active search for the strategic acquisition of complementary
businesses or products. The Company has no present commitments or agreements
with respect to any such acquisition.
YEAR 2000 COMPLIANCE
The Company has conducted a review of its computer systems to identify
the systems that are affected by the year 2000 problem. The year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year, which may result in some programs being unable to
recognize the year 2000 in date fields, or recognizing it as the year 1900,
13
<PAGE> 14
resulting in malfunctions and system failures. The Company intends to upgrade
its systems over the next 12-18 months in an effort to make more detailed data
available on a system wide basis in a timely manner. Such costs will be
capitalized and amortized over the useful life of the new software. This upgrade
will be year 2000 compliant. The Company believes that with planned
modifications to existing software and conversions, the year 2000 issue will not
pose significant operational problems for the Company's computer systems. The
Company will continue to address any further year 2000 issues and believes that
any costs relating to such issues will not be material to the Company's
financial condition or results of operations.
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.
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 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.
14
<PAGE> 15
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 Statement of Position 93-7, direct-response
advertising and related costs for all periods presented are capitalized and
amortized to selling, general and administrative expense on an accelerated basis
during the first two years of a four-year period. The amortization rate is such
that 55% of such costs are expensed after two years from the date they are
incurred. Revenues generated from new customers as a result of direct-response
advertising have historically resulted in a revenue stream lasting seven years.
Management has selected a more conservative four-year amortization period.
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 net benefits
expected to result directly from such advertising. The Company can expect
fluctuations in its advertising costs to attract and retain new customers. 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, 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 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
15
<PAGE> 16
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 are 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 of
healthcare products have been subjected to significant claims for damages
allegedly resulting from their products. The Company currently maintains product
16
<PAGE> 17
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
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 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.
Certain aspects of the Company's business are subject to federal and
state regulation. Federal regulation covers, among other things, reimbursement
for diabetes testing supplies and the manufacturing, distribution and sale of
the Company's drugs and medical devices.
17
<PAGE> 18
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
the market for the Company's products and services 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 immediately following this report and
incorporated herein by reference.
(b) There were no reports on Form 8-K filed during the three
months ended June 30, 1998.
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: July 20, 1998
20
<PAGE> 21
Exhibit Index
-------------
POLYMEDICA CORPORATION
Exhibit Description
- ------- -----------
10.61 - Letter Agreement amendment to Employment Agreement by and between the
Registrant and Steven J. Lee dated July 1, 1998.
10.62 - Letter Agreement amendment to Employment Agreement by and between the
Registrant and Dr. Arthur A. Siciliano dated July 1, 1998.
10.63 - Letter Agreement amendment to Employment Agreement by and between the
Registrant and Eric G. Walters dated July 1, 1998.
10.64 - Prepayment Agreement between Innovative Technologies Group plc and the
Registrant dated June 30, 1998.
27.1 - Financial Data Schedule - Three Months Ended June 30, 1998
27.2 - Financial Data Schedule - Restated Three Months Ended June 30, 1997
21
<PAGE> 1
EXHIBIT 10.61
July 1, 1998
Mr. Steven J. Lee
112 Farm Road
Sherborn, MA 01770
Re: Amendment of Employment Agreement
---------------------------------
Dear Steve,
This letter agreement serves to further amend the employment agreement dated as
of May 16, 1990, by and between you and PolyMedica Industries, Inc. (the
"Company"), as amended by certain letter agreements dated as of June 1, 1991;
December 5, 1991; March 18, 1993; March 31, 1994; April 11, 1995; April 3, 1996;
and July 1, 1997 (together, the "Employment Agreement").
TERM OF EMPLOYMENT. The Employment Period, as defined in Section 2 of
the Employment Agreement, is extended to November 30, 2000.
If the foregoing is acceptable to you, please indicate your agreement by signing
a copy of this letter agreement and returning it to the undersigned.
Very truly yours,
/s/ Arthur A. Siciliano
--------------------------------
Arthur A. Siciliano
President
ACCEPTED AND AGREED TO:
/s/ Steven J. Lee
- ------------------------------
Steven J. Lee
<PAGE> 1
EXHIBIT 10.62
July 1, 1998
Arthur A. Siciliano, Ph.D.
3 Pavia Place
Framingham, MA 01701
Re: Amendment of Employment Agreement
---------------------------------
Dear Art,
This letter agreement serves to further amend the employment agreement dated as
of May 16, 1990, by and between you and PolyMedica Industries, Inc. (the
"Company"), as amended by certain letter agreements dated as of June 1, 1991;
December 5, 1991; March 18, 1993; March 31, 1994; April 11, 1995; April 3, 1996;
and July 1, 1997 (together, the "Employment Agreement").
TERM OF EMPLOYMENT. The Employment Period, as defined in Section 2 of
the Employment Agreement, is extended to May 31, 2000.
If the foregoing is acceptable to you, please indicate your agreement by signing
a copy of this letter agreement and returning it to the undersigned.
Very truly yours,
/s/ Steven J. Lee
------------------------------------
Steven J. Lee
Chairman and Chief Executive Officer
ACCEPTED AND AGREED TO:
/s/ Arthur A. Siciliano
- ------------------------------
Arthur A. Siciliano
<PAGE> 1
EXHIBIT 10.63
July 1, 1998
Mr. Eric G. Walters
165 Cambridge Turnpike
Concord, MA 01742
Re: Amendment of Employment Agreement
---------------------------------
Dear Eric,
This letter agreement serves to further amend the employment agreement dated as
of June 1, 1991, by and between you and PolyMedica Industries, Inc. (the
"Company"), as amended by certain letter agreements dated as of December 5,
1991; March 18, 1993; March 31, 1994; April 11, 1995; April 3, 1996; and July 1,
1997 (together, the "Employment Agreement").
TERM OF EMPLOYMENT. The Employment Period, as defined in Section 2 of
the Employment Agreement, is extended to May 31, 2000.
If the foregoing is acceptable to you, please indicate your agreement by signing
a copy of this letter agreement and returning it to the undersigned.
Very truly yours,
/s/ Steven J. Lee
------------------------------------
Steven J. Lee
Chairman and Chief Executive Officer
ACCEPTED AND AGREED TO:
/s/ Eric G. Walters
- ------------------------------
Eric G. Walters
<PAGE> 1
EXHIBIT 10.64
THIS PREPAYMENT AGREEMENT is made on June 30, 1998
BETWEEN
(1) INNOVATIVE TECHNOLOGIES GROUP PLC (No. 2867684), a company incorporated
in England and Wales, whose registered office is at Road Three,
Winsford Industrial Estate, Winsford, Cheshire CW7 3PD ("the Maker");
and
(2) POLYMEDICA CORPORATION, a Massachusetts corporation, whose principal
place of business is at 11 State Street, Woburn, Massachusetts 01801,
USA ("the Holder").
WHEREAS:
(A) On 18 July 1997 the Maker issued to the Holder a promissory note ("the
Promissory Note") for the principal amount of four million US Dollars
(US$4,000,000) bearing interest as provided by the terms of the
Promissory Note.
(B) In accordance with Section VI (G) of the Promissory Note, the parties
have agreed that the Maker shall prepay the Promissory Note, at an
agreed discounted rate, on the terms and subject to the conditions set
out below.
1 PREPAYMENT
1.1 Subject to and on or about July 7, 1998, or such other day as
the parties shall in writing agree, being referred to as "the
Completion Date," the Maker shall pay to the Holder the sum of
one million six hundred thousand US Dollars (US$1,600,000)
("the Prepayment Amount") in full and final settlement of all
amounts (whether of principal or interest) which are now or
may hereafter become payable by the Maker under the terms of
the Promissory Note.
The Holder warrants to the Maker that it is legal and
beneficial owner of the Promissory Note, that it has not
pledged, assigned, granted a security interest in or otherwise
encumbered the Promissory Note, that no other third party
rights exist in respect of the Promissory Note, it possesses
the original Promissory Note and that it is entitled to enter
into and perform the provisions of this Prepayment Agreement.
1
<PAGE> 2
2 COMPLETION
2.1 Completion of the parties' obligations hereunder shall take
place at the offices of the Maker or such other place as the
parties may in writing agree on the Completion Date whereupon:
(a) the Maker shall pay the Prepayment Amount by
electronic funds transfer to a bank account
identified by the Holder to the Maker; and
(b) the Holder shall deliver to the Maker the original
Promissory Note marked "Satisfied in Full."
2.2 Payment by the Maker to the Holder of the Prepayment Amount
shall constitute an absolute discharge in favour of the Maker
of all liabilities, obligations, amounts, interest, costs,
claims and expenses whatsoever and whensoever arising on its
part or against it under the terms of the Promissory Note.
3 GOVERNING LAW
This Prepayment Agreement may be signed in separate counterparts in the
same form. It shall be governed by and construed in accordance with the
internal laws (and not the choice of law rules) of the Commonwealth of
Massachusetts.
IN WITNESS WHEREOF this Prepayment Agreement has been duly executed and
delivered as an instrument under seal as of the date first above written.
SIGNED by )
David Robert Chellingsworth ) /s/ D. R. Chellingsworth
duly authorised for and on behalf of ) ----------------------------
INNOVATIVE TECHNOLOGIES )
GROUP plc in the presence of: )
Ian R. Metcalfe ) /s/ Ian R. Metcalfe
Solicitor, Wragg & Co. ) ----------------------------
POLYMEDICA CORPORATION
BY: /s/ Steven J. Lee
-------------------------------------------
NAME: Steven J. Lee
TITLE: Chairman and Chief Executive Officer
2
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 9,759
<SECURITIES> 0
<RECEIVABLES> 17,190
<ALLOWANCES> 4,037
<INVENTORY> 5,716
<CURRENT-ASSETS> 36,617
<PP&E> 8,499
<DEPRECIATION> 1,936
<TOTAL-ASSETS> 95,200
<CURRENT-LIABILITIES> 14,883
<BONDS> 20,599
0
0
<COMMON> 89
<OTHER-SE> 54,226
<TOTAL-LIABILITY-AND-EQUITY> 95,200
<SALES> 20,661
<TOTAL-REVENUES> 20,661
<CGS> 9,921
<TOTAL-COSTS> 9,921
<OTHER-EXPENSES> 8,062
<LOSS-PROVISION> 1,445
<INTEREST-EXPENSE> 637
<INCOME-PRETAX> 2,155
<INCOME-TAX> 862
<INCOME-CONTINUING> 1,293
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,293
<EPS-PRIMARY> .15
<EPS-DILUTED> .13
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 8,155
<SECURITIES> 0
<RECEIVABLES> 11,246
<ALLOWANCES> 756
<INVENTORY> 5,262
<CURRENT-ASSETS> 27,332
<PP&E> 11,347
<DEPRECIATION> 4,762
<TOTAL-ASSETS> 78,757
<CURRENT-LIABILITIES> 11,540
<BONDS> 22,840
0
0
<COMMON> 86
<OTHER-SE> 44,291
<TOTAL-LIABILITY-AND-EQUITY> 78,757
<SALES> 13,958
<TOTAL-REVENUES> 13,958
<CGS> 6,728
<TOTAL-COSTS> 6,728
<OTHER-EXPENSES> 5,411
<LOSS-PROVISION> 216
<INTEREST-EXPENSE> 698
<INCOME-PRETAX> 1,260
<INCOME-TAX> 429
<INCOME-CONTINUING> 831
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 831
<EPS-PRIMARY> .10
<EPS-DILUTED> .09
</TABLE>
