<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, 1999
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. 0-19842
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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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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 August 10, 1999 was 9,458,008 which includes 112,117 shares held in
treasury.
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POLYMEDICA CORPORATION
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Financial Statements
Consolidated Balance Sheets at
June 30, 1999 and March 31, 1999 3
Consolidated Statements of Operations
for the three months ended June 30, 1999
and June 30, 1998 5
Consolidated Statements of Cash Flows
for the three months ended June 30, 1999
and June 30, 1998 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 21
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit Index 24
</TABLE>
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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,
1999 1999
(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents $ 10,423 $ 10,191
Accounts receivable (net of
allowances of $7,852 and $7,330 as of June 30 and
March 31, 1999, respectively) 31,609 32,251
Inventories 7,375 6,909
Deferred tax asset 2,708 2,708
Prepaid expenses and other
current assets 1,400 721
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Total current assets 53,515 52,780
Property, plant, and equipment, net 9,125 6,856
Intangible assets, net 36,708 37,278
Direct response advertising, net 17,023 15,678
Other assets, net 236 347
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Total assets $116,607 $112,939
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</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
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POLYMEDICA CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1999 1999
(UNAUDITED)
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade $ 9,895 $ 12,527
Accrued expenses 7,766 4,781
Current portion of long-term debt
and notes payable, net 3,087 3,083
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Total current liabilities 20,748 20,391
Long-term debt and notes payable, net 22,018 21,583
Deferred income taxes 7,920 7,920
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Total liabilities 50,686 49,894
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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; 9,319,913 and 9,197,075
issued as of June 30 and March 31, 1999,
respectively 93 92
Treasury stock, at cost, (90,971 and 78,003
shares as of June 30 and March 31, 1999,
respectively) (646) (458)
Additional paid-in capital 57,099 56,557
Retained earnings 9,934 7,480
Notes receivable from officers (559) (626)
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Total shareholders' equity 65,921 63,045
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Total liabilities and
shareholders' equity $ 116,607 $ 112,939
========= =========
</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 per share amounts)
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THREE MONTHS ENDED JUNE 30,
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1999 1998
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Net revenues $ 31,580 $ 20,661
Cost of sales 13,715 9,921
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Gross margin 17,865 10,740
Selling, general and administrative expenses 13,361 8,062
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Income from operations 4,504 2,678
Other income and expense:
Investment income 89 114
Interest expense (603) (637)
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(514) (523)
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Income before income taxes 3,990 2,155
Income tax provision 1,536 862
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Net income $ 2,454 $ 1,293
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Net income per weighted average share, basic $ .27 $ .15
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Net income per weighted average share, diluted $ .25 $ .13
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Weighted average shares, basic 9,152 8,789
Weighted average shares, diluted 9,890 9,771
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands)
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THREE MONTHS ENDED JUNE 30,
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1999 1998
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Cash flows from operating activities:
Net income $ 2,454 $ 1,293
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 851 800
Amortization of direct-response advertising 1,687 1,156
Direct-response advertising (3,032) (3,058)
Deferred income taxes -- 862
Provision for inventory obsolescence 125 --
Provision for bad debts 2,127 1,445
Provision for sales allowances 1,793 959
Changes in assets and liabilities:
Accounts receivable (3,278) 1,611
Inventories (590) (858)
Prepaid expenses and other assets (396) (815)
Accounts payable--trade (2,809) (527)
Accrued expenses 2,985 842
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Total adjustments (537) 2,417
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Net cash flows from operating activities 1,917 3,710
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Cash flows from investing activities:
Purchase of property, plant, and equipment (2,524) (482)
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Net cash flows from investing activities (2,524) (482)
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Cash flows from financing activities:
Proceeds from issuance of common stock 355 91
Repayment of long-term debt (1,000) --
Proceeds from issuance of long-term debt 1,417 --
Repayment of notes receivable from officers 67 --
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Net cash flows from financing activities 839 91
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Net increase in cash and cash equivalents 232 3,319
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Effect of exchange rate changes on cash -- --
Cash and cash equivalents at beginning of period 10,191 6,440
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Cash and cash equivalents at end of period $ 10,423 $ 9,759
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</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 included in the Company's Annual Report on Form 10-K for the year
ended March 31, 1999.
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,
1999 1999
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Raw materials $ 731 $ 739
Work in process 574 594
Finished goods 6,070 5,576
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$7,375 $6,909
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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, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in this
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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.
The Company capitalized direct-response advertising of $3.03 million
and $3.06 million in the three months ended June 30, 1999 and 1998,
respectively. A total of $1.69 million and $1.16 million in direct-response
advertising was amortized and charged to selling, general and administrative
expense for the three months ending June 30, 1999 and 1998, respectively. As of
June 30 and March 31, 1999, accumulated amortization was $9.61 million and $7.92
million, which resulted in a net capitalized direct-response advertising asset
of $17.02 million and $15.68 million, respectively.
4. As of June 30, 1999, gross unbilled receivables related to the
diabetes supplies segment included in accounts receivable were $16.60 million
as compared with $15.35 million as of March 31, 1999.
5. Calculations of earnings per share are as follows:
(In thousands, except per share data)
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THREE MONTHS ENDED
JUNE 30,
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1999 1998
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Net income $2,454 $1,293
BASIC:
Weighted average common stock outstanding, net of treasury stock, 9,152 8,789
end of period
Net income per common share, basic $ 0.27 $ 0.15
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DILUTED:
Weighted average common stock outstanding, net of treasury stock, 9,152 8,789
end of period
Weighted average common stock equivalents 738 982
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Weighted average common stock outstanding, net of treasury stock, 9,890 9,771
end of period
Net income per common share, diluted $ 0.25 $ 0.13
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</TABLE>
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6. Company's total net income and comprehensive income was $2.45 million
and $1.29 million for the three months ended June 30, 1999 and 1998,
respectively. There were no adjustments during the either period presented.
7. The Company adopted Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information ("SFAS
No. 131") during the year ended March 31, 1999. SFAS No. 131 established
standards for reporting information about operating segments in annual financial
statements and requires selected information about operating segments. It also
establishes standards for related disclosures about products, services and
geographic areas. The Company's reportable segments are strategic business units
or divisions that offer different products or services. These units have
separate financial information that is evaluated by senior management. The
Company has three reportable segments:
Diabetes Supplies - Liberty Medical Supply, Inc. is a direct
- -to-consumer provider of diabetes testing supplies to seniors who have Medicare
coverage.
Consumer Healthcare - PolyMedica Healthcare, Inc. offers the AZO line
of products which includes OTC ("over-the-counter") female urinary tract
discomfort products and home medical diagnostic kits; and is a manufacturer and
distributor of private-label and branded digital thermometers.
Professional Products - PolyMedica Pharmaceuticals (U.S.A.), Inc.
develops, manufactures and distributes prescription urology products.
All Other consists of operations associated with the Company's
corporate headquarters. Assets and depreciation and amortization expense are not
allocated to the operating segments for management evaluation purposes. However,
when evaluating Income before Income Taxes, management allocates all profit and
loss activities related to the Company's corporate headquarters to the operating
segments. As a result, the segment information may not be indicative of the
financial position or results of operations that would have been achieved had
these segments operated as unaffiliated entities. The Company does not organize
its units geographically, as its products and services are sold throughout the
United States only. The following segment information has been prepared in
accordance with the internal accounting policies of the Company, as described
above. There are no intersegment sales for the periods presented. Information
concerning the operations in these reportable segments is as follows:
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FOR THE THREE MONTHS ENDED
-------------------------------
JUNE 30, JUNE 30,
(In thousands) 1999 1998
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REVENUES:
Diabetes Supplies $ 26,365 $ 15,681
Consumer Healthcare 2,929 2,598
Professional Products 2,286 2,382
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Total $ 31,580 $ 20,661
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DEPRECIATION AND AMORTIZATION:
Diabetes Supplies 1,994 1,420
Consumer Healthcare 14 16
Professional Products 515 508
All Other 15 12
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Total $ 2,538 $ 1,956
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INCOME BEFORE INCOME TAXES:
Diabetes Supplies 2,857 1,246
Consumer Healthcare 567 509
Professional Products 566 400
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Total $ 3,990 $ 2,155
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JUNE 30, MARCH 31,
1999 1999
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SEGMENT ASSETS:
Diabetes Supplies 66,177 62,922
Consumer Healthcare 5,892 6,263
Professional Products 39,018 39,337
All Other 5,520 4,417
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Total $116,607 $112,939
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</TABLE>
8. The Company will adopt Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities" in
the fiscal year beginning April 1, 2000. On July 7, 1999, the Financial
Accounting Standards Board issued Statement of Accounting Standards No.
137("SFAS 137"), "Accounting for Derivative Instruments and Hedging Activities
Deferral of the Effective Date of FASB Statement No. 133." SFAS 137 delayed the
implementation of SFAS 133 by one year. SFAS 133 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 or 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.
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9. Long-Term Debt
Senior Debt
In connection with the purchase of the WEBCON product line, in January
1993, the Company and its wholly-owned subsidiary, PolyMedica Pharmaceuticals
(U.S.A.), Inc. ("PMP USA") sold to the John Hancock Mutual Life Insurance
Company ("Hancock"), $25 million of Guaranteed Senior Secured Notes due January
31,2003 (the "Hancock Notes"). As of June 30, 1999 the balance due to Hancock
was $21.0 million. The Company is required and was in compliance with certain
financial covenants. The effective interest rate of the Hancock Notes is 10.90%.
Revolving Credit Facility
In March 1999, the Company increased its existing revolving credit
facility from $7.5 million to $10 million. Under the terms of this facility, the
Company is required to repay all principal balances on March 31,2001. As of June
30, 1999, the Company had an outstanding balance of $3 million. Under the terms
of the credit facility, the Company is required to and was in compliance with
certain financial covenants. The interest rate is tied to the Company's funded
debt to EBITDA ratio and was 7.75% as of June 30, 1999.
Building Mortgage
To support Liberty Medical's growth, in May 1999 the Company purchased
a 66,000 square foot building in Port St. Lucie, Florida for $2.0 million,
financed by a $1.4 million mortgage. Under the terms of this mortgage, the
Company is required to repay all principal balances by May 2006 using a 15-year
amortization period. The mortgage is collateralized by the land, building,
future improvements and permanent fixtures. Under this mortgage, the Company is
required to and was in compliance with certain financial covenants. The interest
rate is 8.07%.
10. Certain amounts in the prior period financial statements have been
reclassified to conform with the current year presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Business
PolyMedica is a leading provider of direct-to-consumer specialty
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 mail-order distributor of diabetes
testing supplies to patients who 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
upfront expenses, and offers the convenience of free home delivery of supplies.
In May 1999, the Health Care Financial Administration revised the
document requirements for claims to allow for faxed doctor's order
authorizations for diabetes supplies which relieves Liberty Medical of the
expense of obtaining a mailed, original written doctor's order. (See "Factors
Affecting Future Operating Results.")
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 three products
include AZO-STANDARD, which provides relief from urinary tract discomfort,
AZO-CRANBERRY, a dietary supplement which helps maintain a healthy urinary tract
and AZO TEST STRIPS, an in-home urinary tract infection testing kit which allows
patients to call their doctors with testing results. In April 1999, the Company
began shipping two new homeopathic botanical products, AZO MENOPAUSE and AZO
CONFIDENCE. AZO MENOPAUSE offers relief from hot flashes and related symptoms.
AZO CONFIDENCE is used for the relief of symptoms of incontinence.
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 flexible tip thermometer. The Company custom manufacturers and/or
distributes its other consumer healthcare products under private label and under
the brand names of BASIS, MEDI-AID, PolyMedica and PeeDee Dose.
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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, CYSTOSPAZ and CYSTOSPAZ-M 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
for use in diagnostic procedures and the catheterization process. B&O and
AQUACHLORAL 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 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 and distribution 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, 1999 Compared to Three Months Ended June 30, 1998
Total net product sales increased by 52.9% to $31.58 million in the
three months ended June 30, 1999, as compared with $20.66 million in the three
months ended June 30, 1998. This increase is primarily the result of the
increase in Liberty Medical sales.
Pretax income was $3.99 million in the three months ended June 30,
1999, which compares to $2.15 million in the three months ended June 30, 1998.
The Company's net income was $2.45 million, or $0.25 per diluted common share,
in the three months ended June 30, 1999. This
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performance compares with net income of $1.29 million, or $0.13 per diluted
common share, in the three months ended June 30, 1998.
Net product sales of diabetes supplies increased by 68.1% to $26.36
million in the three months ended June 30, 1999, as compared with $15.68 million
in the three months ended June 30, 1998. This growth is primarily due to
shipments to non-insulin using (Type II) diabetics who were not eligible for
Medicare reimbursement during the three months ended June 30, 1998. These
customers became eligible on July 1, 1998. Shipments to existing insulin using
(Type I) diabetic customers also increased. Liberty Medical sales gains during
the first quarter further strengthened its position as the leading direct to
consumer distributor of diabetes testing supplies to Medicare-eligible seniors.
Net product sales of consumer healthcare products increased by 12.7% to
$2.93 million in the three months ended June 30, 1999, as compared with $2.60
million in the three months ended June 30, 1998. Sales of both the AZO product
line and advanced thermometry products increased during the three months ended
June 30, 1999. The Company added to its consumer healthcare product line by
introducing AZO MENOPAUSE and AZO CONFIDENCE in April 1997, sales of which were
not included in the three months ended June 30, 1998.
In the professional products group, net product sales decreased by 3.8%
to $2.29 million in the three months ended June 30, 1999, as compared with $2.38
million in the three months ended June 30, 1998. This decrease is primarily a
result of the Company focusing its resources on the diabetes and consumer
healthcare segments.
As a percentage of net product sales, overall gross margins were 56.6%
in the three months ended June 30, 1999 and 52.0% in the three months ended June
30, 1998. Gross margins in the three months ended June 30, 1999 increased due to
an improved gross margin on sales of diabetes related products.
As a percentage of net product sales, selling, general and
administration expenses ("SG&A expenses") were 42.3% for the three months ended
June 30, 1999 as compared with 39.0% for the three months ended June 30, 1998.
SG&A expenses increased by 65.7% in the three months ended June 30, 1999 to
$13.36 million as compared with $8.06 million in the three months ended June 30,
1998. This dollar increase is primarily attributable to SG&A expenses related to
the expansion of Liberty Medical.
Investment income decreased by 21.9% to $ 89,000 in the three months
ended June 30, 1999 as compared with $114,000 in the three months ended June 30,
1998 as the Company earned interest on lower average cash balances due to
investments in direct-response advertising and Liberty Medical infrastructure.
Interest expense decreased by 5.3% to $603,000 in the three months ended June
30, 1999, as compared with $637,000 in the three months ended June 30, 1998,
primarily reflecting lower outstanding principal on the Guaranteed Senior
Secured Notes due January 31, 2003 (the "Hancock Notes") to the John Hancock
Mutual Life Insurance Company ("Hancock").
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,
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$39.00 million from its March 1992 initial public offering, $4.55 million from
a November 1995 public offering of 700,000 shares of common stock, and $2.75
million from the March 1996 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 Hancock Notes.
As of June 30, 1999, working capital was $32.77 million, as compared
with working capital of $32.39 million and $21.73 million as of March 31, 1999
and June 30, 1998, respectively. Cash and cash equivalents were $10.42 million
and $10.19 million as of June 30, and March 31, 1999, respectively.
During the three months ended June 30, 1999, the Company repaid $1
million under the Company's $10.0 million collateralized revolving credit
facility. Under the terms of this facility, the Company is required to repay all
principal balances on March 31, 2001. This facility is collateralized by certain
assets of the Company. Under this facility, the Company is obligated to and was
in compliance with certain financial covenants. The interest rate is tied to the
Company's funded debt to EBITDA ratio and averaged 7.75% during the three months
ended June 30, 1999.
To support Liberty Medical's growth, in May 1999 the Company purchased
a 66,000 square foot building in Port St. Lucie, Florida for $2.0 million,
financed by a $1.4 million mortgage. Under the terms of this mortgage, the
Company is required repay all principal balances by May 2006 using a 15-year
amortization period. The mortgage is collateralized by the land, building,
future improvements and permanent fixtures. Under this mortgage, the Company is
required to and was in compliance with certain financial covenants. The
interest rate is 8.07%.
Net accounts receivable was $31.61 million and $32.25 million as of
June 30 and March 31, 1999, respectively. As of June 30, 1999, Liberty Medical's
gross unbilled receivables included in accounts receivable were $16.60 million.
This increase in the unbilled receivables balance as of June 30, 1999 is
primarily a result of record shipments by Liberty Medical during the three
months ended June 30, 1999.
The Company expects that its current working capital, revolving credit
facility 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
Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 to mean the
year 1900 instead. If not corrected, those programs could cause date-related
transaction failures.
The Company is currently addressing this concern. It has performed a
detailed assessment of all internal computer systems and, as discussed below, is
developing and implementing plans to correct any problems. The Company expects
these projects to be successfully completed during the remainder of calendar
1999.
15
<PAGE> 16
Year 2000 problems could affect production, distribution, financial,
administrative and communication operations. Systems critical to the Company's
business which have been identified as non-Year 2000 compliant are either being
replaced or corrected through programming modifications or upgrades. In
addition, the Company is addressing Year 2000 readiness from other aspects of
the business, including customer order-taking, manufacturing, supply of raw
materials and plant process equipment. The Company intends to have remediated or
replaced internal systems by September 1999 to allow time for testing and
verification. In addition to the Company's in-house efforts, the Company is in
the process of asking vendors, major customers, service suppliers,
communications providers and banks whose systems failures potentially could have
a significant impact on operations to verify Year 2000 readiness. No major
system failures are expected by those companies which have responded to the
Company's survey. The Company is testing such systems where appropriate and
possible. The Company does not have a Year 2000 contingency plan.
External and internal costs specifically associated with modifying
internal use software for Year 2000 compliance are expensed as incurred. To
date, expenditures related to the Year 2000 problem have not been material. Such
costs do not include normal system upgrades and replacements. The Company does
not expect the future costs relating to Year 2000 compliance to have a material
effect on its results of operations or financial condition.
The above expectations are subject to uncertainties. For example, if
the Company is unsuccessful in identifying or fixing all Year 2000 problems in
its critical operations, or if it is affected by the inability of suppliers or
major customers (such as a large drug wholesaler or distributor) to continue
operations due to such a problem, its results of operations or financial
condition could be materially and adversely impacted.
The total costs that the Company incurs in connection with the Year
2000 problems will be influenced by its ability to successfully identify Year
2000 systems' problems, the nature and amount of programming required to fix
affected programs, the related labor and/or consulting costs for such
remediation, and the ability of third parties with whom the Company has business
relationships to successfully address their own Year 2000 concerns. These and
other unforeseen factors could have a material adverse effect on the results of
operations or financial condition.
The estimates and conclusions herein contain forward-looking statements
and are based on management's best estimates of future events. Risks to
completing the plan include the availability of resources, the Company's ability
to discover and correct the potential Year 2000 sensitive problems which could
have a serious impact on specific facilities, and the ability of suppliers to
bring their systems into Year 2000 compliance.
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 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; and
16
<PAGE> 17
statements regarding Year 2000 compliance. 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 change in health care delivery systems or payment methods,
including any further reduction in the reimbursement provisions currently in
effect for the Company's diabetes supplies products which are reimbursable under
Medicare, could 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.
Effective October 1, 1998, new Medicare reimbursement guidelines
generally provide that quarterly orders of diabetes supplies to existing
customers must be administratively verified before shipment and that all doctors
orders for diabetic supplies are valid for a reduced period of six months. In
addition, the new regulations require that Type I Medicare diabetic customers
who test more frequently than three times per day or Type II Medicare diabetic
customers who test more frequently than one time per day visit their physician
every six months and maintain a 30-day log book for compliance.
The Company's customer service department, as part of its ongoing
administrative contact with existing customers to obtain approval documents and
answer product questions, will continue to determine testing supply levels and
verify compliance testing and the renewal of doctors orders. Management is
currently evaluating the effects of implementing these new guidelines.
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
17
<PAGE> 18
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 taken
other steps 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 operating expenses 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 at least 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.
Medical Advances
There are medical technology and device companies which are conducting
research and development on alternate methods for the monitoring of blood
glucose levels as well as finding more effective treatment or even a cure for
diabetes. The commercial success of new products could materially affect the
growth of Liberty Medical's diabetes supply 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
18
<PAGE> 19
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, customer
approvals of quarterly orders, general economic conditions and customer
satisfaction.
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
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
19
<PAGE> 20
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, reimbursement
for diabetes testing supplies and 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 the market for the
Company's products and services on permissible activities of the Company, and
the relative costs associated with doing business.
20
<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe that it has any material market risk
exposure with respect to derivative or other financial instruments that would
require disclosure under this item.
21
<PAGE> 22
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, 1999.
22
<PAGE> 23
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: August 13, 1999
23
<PAGE> 24
EXHIBIT INDEX
POLYMEDICA CORPORATION
EXHIBIT DESCRIPTION
- ------- -----------
10.61 - Third Amendment to Agented Loan and Security Agreement between
the Registrant and BankBoston, N.A. dated June 29, 1999.
27.1 - Financial Data Schedule - Three Months Ended June 30, 1999
<PAGE> 1
EXHIBIT 10.61
THIRD AMENDMENT TO AGENTED LOAN AND SECURITY AGREEMENT
DATED APRIL 30, 1998 BETWEEN
POLYMEDICA CORPORATION,
LIBERTY MEDICAL SUPPLY, INC.,
POLYMEDICA HEALTHCARE, INC.,
POLYMEDICA SECURITIES, INC.
AND
BANKBOSTON, N.A.
This Third Amendment to Agented Loan and Security Agreement
(hereinafter, the "Amendment") is made as of June 29, 1999 by and among
POLYMEDICA CORPORATION, LIBERTY MEDICAL SUPPLY, INC., POLYMEDICA HEALTHCARE,
INC., and POLYMEDICA SECURITIES, INC., (hereinafter, individually and
collectively, the "Principal Borrowers") and BANKBOSTON, N.A., a national
banking association with its principal place of business at 100 Federal Street,
Boston, Massachusetts (hereinafter, the "Lender"), in consideration of the
mutual covenants contained herein and the benefits to be derived herefrom.
Unless otherwise specified herein, all capitalized terms shall have the same
meaning as set forth in the Loan Agreement (as defined hereinbelow).
W I T N E S S E T H:
WHEREAS, the Principal Borrowers executed and delivered to the Lender a
certain Agented Loan and Security Agreement dated April 30, 1998, as amended by
a certain Waiver of Default and Amendment dated as of November 30, 1998, and a
certain Second Amendment to Agented Loan and Security Agreement dated March 12,
1999, (hereinbefore and hereinafter, as amended, the "Loan Agreement") pursuant
to which, among other things, the Lender extended in favor of the Principal
Borrowers a Revolving Credit in the current maximum principal amount of
$10,000,000.00; and
WHEREAS, the Principal Borrowers have requested that the Lender amend
the Loan Agreement to revise Section 1 of Exhibit 9-8; and
WHEREAS, the Lender has indicated its willingness to do so, BUT ONLY on
the terms and conditions contained in this Amendment; and
WHEREAS, the Principal Borrowers have determined that this Amendment is
in each of the Principal Borrower's best interest.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. The Principal Borrowers hereby certify to the Lender that, to the
best of each of the Principal Borrower's knowledge and belief
after due inquiry, the representations and warranties contained in
the Loan Agreement, as modified by this Amendment, are true as of
the date hereof (except those of which relate to a specific date,
or to the
1
<PAGE> 2
extent such have become inaccurate due to transactions permitted
under the Loan Agreement) and that no Event of Default under the
Loan Agreement or any document executed in connection therewith
has occurred and is continuing.
2. The Principal Borrowers acknowledge and agree that the none of the
Principal Borrowers have any offsets, defenses, claims or
counterclaims against the Lender with respect to the Loan
Agreement, this Amendment or any other document, instrument or
agreement executed and delivered by the Principal Borrowers to the
Lender in connection therewith and, to the extent that any of the
Principal Borrowers have any such offsets, defenses, claims or
counterclaims, the Principal Borrowers hereby affirmatively WAIVE
any such offsets, defenses, claims or counterclaims and
specifically RELEASE the Lender for any such liability on account
thereof.
3. Exhibit 9-8 of the Loan Agreement is hereby amended by deleting
Section 1 thereof in its entirety and substituting the following
therefor:
"1. (a) The Principal Borrowers, in the aggregate, shall at all
times maintain net income (as defined in accordance with
GAAP) of $1.00 per fiscal quarter commencing as of the
fiscal quarter ending June 30, 1999.
(b) Liberty and Securities, singly, shall each at all times
maintain net income (as defined in accordance with GAAP)
of $1.00 per fiscal quarter commencing as of the fiscal
quarter ending June 30, 1999.
(c) Healthcare shall at no time suffer a net loss (as
defined in accordance with GAAP) in excess of
$250,000.00 per fiscal quarter commencing as of the
fiscal quarter ending June 30, 1999."
4. This Amendment and all other documents, instruments or agreements
executed in connection herewith incorporate all discussions and
negotiations between the Principal Borrowers and the Lender,
either expressed or implied, concerning the matters included
herein, any statute, custom, or usage to the contrary
notwithstanding. No such discussions or negotiations shall limit,
modify or otherwise affect the provisions hereof. No modification,
amendment, or waiver of any provision of this Amendment or the
Loan Agreement or any provision under any other agreement,
document or instrument between the Principal Borrowers and the
Lender shall be effective unless executed in writing by the party
to be charged with such modification, amendment or waiver, and if
such party be the Lender, then by a duly authorized officer
thereof.
5. Except as specifically modified herein, the Loan Agreement shall
remain in full force and effect as originally written and the
Principal Borrowers hereby ratify and confirm all terms and
conditions contained therein and further ratify and reaffirm all
representations and warranties made therein as of the date hereof.
6. This Amendment shall be construed in accordance with and governed
by the laws of the Commonwealth of Massachusetts and shall take
effect as a sealed instrument.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
as of the date first written above.
POLYMEDICA CORPORATION
By: /s/ Eric G. Walters
--------------------------------------
Title: CFO and Treasurer
LIBERTY MEDICAL SUPPLY, INC.
By: /s/ Steven J. Lee
--------------------------------------
Title: Treasurer
POLYMEDICA HEALTHCARE, INC.
By: /s/ Eric G. Walters
--------------------------------------
Title: Treasurer and Secretary
POLYMEDICA SECURITIES, INC.
By: /s/ Eric G. Walters
--------------------------------------
Title: Treasurer and Clerk
BANKBOSTON, N.A.
By: /s/ Jeffrey G. Millman
- ------------------------------------------
Name: Jeffrey G. Millman
Title: Vice President
3
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