<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-86575
2,900,000 SHARES
POLYMEDICA LOGO
COMMON STOCK
$21.25 PER SHARE
- --------------------------------------------------------------------------------
PolyMedica is offering 2,250,000 shares and the selling shareholders identified
in this prospectus are offering 650,000 shares with this prospectus. We will not
receive any proceeds from the sale of the shares by the selling shareholders.
This is a firm commitment underwriting.
Our common stock is traded on the Nasdaq National Market under the symbol
"PLMD." On October 6, 1999, the closing sale price of the common stock on Nasdaq
was $21.25 per share.
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Price to public............................................. $21.25 $61,625,000
Underwriting discount....................................... 1.17 3,393,000
Proceeds to PolyMedica...................................... 20.08 45,180,000
Proceeds to selling shareholders............................ 20.08 13,052,000
</TABLE>
PolyMedica and some of the selling shareholders have granted an over-allotment
option to the underwriters. Under this option, the underwriters may elect to
purchase a maximum of 435,000 additional shares from PolyMedica and the
participating selling shareholders within 30 days following the date of this
prospectus to cover over-allotments.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CIBC WORLD MARKETS FIRST UNION SECURITIES, INC.
The date of this prospectus is October 7, 1999.
<PAGE> 2
[Inside Front Cover]
In the upper right corner is a photograph of a selection of our products for
glucose monitoring. Directly underneath the photograph is the following text:
"Liberty Medical offers a full range of diabetes products from name-brand
manufacturers."
In the left side of the same page is a photograph of the actress who appears in
a number of our television commercials. In her right hand the actress is holding
a box containing several of our diabetes-care products, and in her left hand she
is holding one of those products. To the left of the photograph is the following
text: "Liberty Medical provides home delivery and bills Medicare directly for
eligible patients."
In the lower right corner is a photograph of several of our AZO brand products.
Directly underneath the photograph is the following text: "The AZO family of
products addresses urinary discomfort, where it is the market leader, as well as
symptoms of menopause and incontinence."
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 7
Forward-Looking Information................................. 10
Common Stock Market Price Data.............................. 10
Use of Proceeds............................................. 11
Dividend Policy............................................. 11
Capitalization.............................................. 12
Selected Consolidated Financial Data........................ 13
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
Business.................................................... 21
Management.................................................. 26
Principal and Selling Shareholders.......................... 28
Underwriting................................................ 30
Legal Matters............................................... 32
Experts..................................................... 32
Where You Can Find More Information......................... 32
Index to Consolidated Financial Statements.................. F-1
</TABLE>
------------------------
PolyMedica Corporation was incorporated as Emerging Sciences, Inc. in
Massachusetts in November 1988, and commenced commercial operations in October
1989. In July 1990, we changed our name to PolyMedica Industries, Inc., and in
September 1997, we changed our name to PolyMedica Corporation. Our executive
offices are located at 11 State Street, Woburn, Massachusetts, and our telephone
number is (781) 933-2020. Our World Wide Web site addresses are
www.polymedica.com and www.libertymedical.com. The information in our Web sites
is not a part of this prospectus and is not incorporated by reference into this
prospectus. Unless the context otherwise requires, references in this prospectus
to "PolyMedica," "we," "us," and "our" refer to PolyMedica Corporation and its
subsidiaries.
We have registered the trademarks "AZO STANDARD," "AZO CRANBERRY," "CYSTOSPAZ,"
"CYSTOSPAZ-M," "SUPPRETTES" and "AQUACHLORAL" on the Principal Register of the
United States Patent and Trademark Office. This prospectus also contains other
product names, trade names and trademarks that belong to us or to other
organizations.
Unless otherwise stated, all information contained in this prospectus assumes no
exercise of the over-allotment option granted to the underwriters.
The underwriters are offering the shares subject to various conditions and may
reject all or part of any order.
3
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained in other parts of this prospectus
or incorporated by reference in this prospectus. This summary is not complete
and does not contain all of the information that you should consider before
investing in our common stock. You should read the entire prospectus carefully,
especially the risks of investing in our common stock discussed under "Risk
Factors." Information contained on our Web sites is not part of this prospectus
and is not incorporated by reference into this prospectus.
OUR BUSINESS
Liberty Medical Supply, a PolyMedica company, is a national direct-mail provider
of diabetes supplies to seniors covered by Medicare. Liberty Medical has a
database of over 220,000 active Medicare-eligible customers to whom it sells
name-brand diabetes products. PolyMedica also holds a leading position in the
urinary health market through our consumer healthcare division and sells fever
thermometers through that division. We sell our line of over-the-counter women's
urinary health products under the AZO brand. We manufacture, distribute and sell
prescription urological and suppository products under our own brands through
our professional products division.
As a participating Medicare provider and third-party insurance biller, Liberty
Medical provides a simple, reliable way for seniors to obtain their diabetes
testing supplies. Liberty Medical delivers diabetes testing supplies to
customers' homes and bills Medicare and private insurance directly for those
supplies that are reimbursable. Liberty Medical meets the needs of seniors with
diabetes by:
- providing mail order delivery of supplies direct to our customers'
homes;
- billing Medicare or private insurance directly;
- providing 24-hour telephone support to customers; and
- using sophisticated software and advanced order fulfillment systems to
provide products and support quickly and efficiently.
In the United States, there are approximately 6.3 million seniors who have
diabetes. With our database of over 220,000 active Medicare-eligible customers,
Liberty Medical serves approximately 3.5% of the marketplace. While many of the
6.3 million seniors with diabetes are covered by managed care or are resident in
extended care facilities, we believe that the balance are potential customers of
Liberty Medical.
Liberty Medical recently initiated a program offering inhalation products to its
Medicare-eligible customers with diabetes who also suffer from chronic
respiratory conditions. We believe that our expertise in selling diabetes
testing supplies will be a significant advantage to us in entering this new
market. In addition, we also plan to initiate marketing efforts through
advertising and promotions to add customers who have respiratory problems but
who do not have diabetes.
Our consumer healthcare division primarily sells over-the-counter female urinary
discomfort products and fever thermometers. We sell our urinary discomfort
products for women under the AZO brand name and hold the number one position in
this market for these types of products. Our thermometers include digital
flexible tip, digital and glass thermometers. We sell our consumer healthcare
products through an extensive network to large drug store chains, major
supermarkets, mass merchandisers and drug wholesalers in the United States.
We also offer a broad line of prescription urology products, excluding
non-anti-infectives but including urinary analgesics, antispasmodics, local
anesthetics and analgesic suppositories. Our primary customers for these
products are large drug wholesalers in the United States.
4
<PAGE> 5
OUR STRATEGY
Our principal strategy is to expand the business of Liberty Medical. This
strategy includes the following elements:
- continue growth in our diabetes supply business by expanding our customer
base;
- sell products addressing other chronic disease categories;
- create alliances with national retailers;
- begin e-commerce marketing; and
- add complementary products and businesses.
THE OFFERING
Common stock offered by PolyMedica...... 2,250,000 shares
Common stock offered by selling
shareholders............................ 650,000 shares
Common stock to be outstanding after
this offering........................... 12,496,949 shares
Use of proceeds......................... Repayment of promissory notes to
John Hancock Mutual Life Insurance
Company and Barnett & Co. and early
payment premium, working capital
and other general corporate
purposes, including potential
acquisitions and strategic
investments. See "Use of Proceeds."
Nasdaq National Market symbol........... PLMD
5
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------ ------------------
1997 1998 1999 1998 1999
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF CONTINUING OPERATIONS DATA:
Net revenues:
Diabetes supplies..................... $ 8,652 $48,708 $ 80,597 $15,681 $26,365
Consumer healthcare................... 10,296 11,149 14,275 2,598 2,929
Professional products................. 11,505 13,968 9,953 2,382 2,286
------- ------- -------- ------- -------
Total......................... 30,453 73,825 104,825 20,661 31,580
Cost of sales........................... 13,603 35,575 49,605 9,921 13,715
------- ------- -------- ------- -------
Gross margin............................ 16,850 38,250 55,220 10,740 17,865
Selling, general and administrative
expenses.............................. 12,985 28,826 42,185 8,062 13,361
------- ------- -------- ------- -------
Income from operations.................. 3,865 9,424 13,035 2,678 4,504
Other income and expense:
Gain on sale of wound care business... -- 4,126 1,597 -- --
Investment income..................... 864 629 434 114 89
Interest expense...................... (2,774) (2,688) (2,555) (637) (603)
------- ------- -------- ------- -------
Income before income taxes.............. 1,955 11,491 12,511 2,155 3,990
Income tax provision (benefit).......... (367) 3,872 4,867 862 1,536
------- ------- -------- ------- -------
Net income.............................. $ 2,322 $ 7,619 $ 7,644 $ 1,293 $ 2,454
======= ======= ======== ======= =======
Earnings per share:
Basic................................. $ 0.28 $ 0.88 $ 0.86 $ 0.15 $ 0.27
Diluted............................... $ 0.27 $ 0.79 $ 0.78 $ 0.13 $ 0.25
Weighted average shares outstanding:
Basic................................. 8,259 8,652 8,898 8,789 9,152
Diluted............................... 8,618 9,691 9,786 9,771 9,890
Earnings per share excluding gain on
sale of wound care business,
diluted(1)............................ $ 0.27 $ 0.50 $ 0.68 $ 0.13 $ 0.25
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 32,767 $ 59,121
Cash and cash equivalents................................... 10,423 32,766
Total assets................................................ 116,607 138,950
Total long-term debt and notes payable, net................. 22,018 4,413
Total liabilities........................................... 50,686 29,070
Shareholders' equity........................................ 65,921 109,880
</TABLE>
- ---------------------------
(1) Adjusted to give effect to the after tax gain of $2,736,000 in 1998 and
$976,000 in 1999.
(2) Adjusted to give effect to the receipt of the estimated net proceeds of
this offering, the application of the net proceeds, the payment to
PolyMedica by executive officers and a director of an aggregate of
$759,781 to exercise options for shares to be sold by those officers in
this offering, and the use by executive officers of 19,400 shares of their
PolyMedica common stock to repay to PolyMedica loans aggregating $558,958.
6
<PAGE> 7
RISK FACTORS
You should carefully consider the following factors and other information in
this prospectus before deciding to invest in our common stock. If any of the
following risks or uncertainties actually occurs, our business, financial
condition and operating results would likely suffer, the market price of our
common stock could decline, and you could lose all or part of the money you paid
to buy our common stock.
WE COULD EXPERIENCE SIGNIFICANTLY REDUCED PROFITS IF MEDICARE CHANGES, DELAYS OR
DENIES REIMBURSEMENT
Sales of a significant portion of our diabetes-related products will depend on
the continued availability of reimbursement of our customers by government and
private insurance plans. Any reduction in Medicare reimbursement currently
available for our products would reduce our revenues. Without a corresponding
reduction in the cost of such products, the result would be a reduction in our
overall profit margin. Similarly, any increase in the cost of such products
would reduce our overall profit margin unless there were a corresponding
increase in Medicare reimbursement. Our profits could also be affected by the
imposition of more stringent regulatory requirements for Medicare reimbursement.
Any failure to comply with required Medicare reimbursement procedures could
result in delays or loss of reimbursement and other sanctions, including fines
and loss of Medicare provider status.
WE PLAN TO CONTINUE OUR RAPID EXPANSION; IF WE DO NOT MANAGE OUR GROWTH
SUCCESSFULLY, OUR GROWTH AND PROFITABILITY MAY SLOW OR STOP
We have expanded our operations rapidly and plan to continue to expand. This
expansion has created significant demands on our administrative, operational and
financial personnel and other resources. Additional expansion in existing or new
markets could strain these resources and increase our need for capital. Our
personnel, systems, procedures, controls and existing space may not be adequate
to support further expansion.
THE PROFITABILITY OF OUR DIABETES SUPPLY BUSINESS WILL DECREASE IF WE DO NOT
RECEIVE RECURRING ORDERS FROM CUSTOMERS
We generally incur losses and negative cash flow with respect to the first order
for diabetes supplies from a customer, due primarily to the marketing and
regulatory compliance costs associated with initial customer qualification.
Accordingly, the profitability of our diabetes supply business depends on
recurring and sustained reorders. Reorder rates are inherently uncertain due to
several factors, many of which are outside our control, including changing
customer preferences, competitive price pressures, customer transition to
extended care facilities, customer mortality and general economic conditions.
WE COULD EXPERIENCE SIGNIFICANTLY REDUCED PROFITS FROM OUR DIABETES SUPPLY
BUSINESS IF IMPROVED TECHNOLOGIES THAT ELIMINATE THE NEED FOR CONSUMABLE TESTING
SUPPLIES ARE DEVELOPED FOR GLUCOSE MONITORING
The majority of our diabetes supply products sales are of consumable testing
supplies used to draw and test small quantities of blood for the purpose of
measuring and monitoring glucose levels. Numerous research efforts are underway
to develop more convenient and less intrusive glucose measurement techniques.
The commercialization and widespread acceptance of new technologies that
eliminate or reduce the need for consumable testing supplies could negatively
affect Liberty Medical's business.
WE COULD BE LIABLE FOR HARM CAUSED BY PRODUCTS THAT WE SELL
The sale of medical products entails the risk that users will make product
liability claims. A product liability claim could be expensive. Our insurance
may not provide adequate coverage against these claims.
7
<PAGE> 8
WE COULD LOSE CUSTOMERS AND REVENUES TO NEW OR EXISTING COMPETITORS WHO HAVE
GREATER FINANCIAL OR OPERATING RESOURCES
Competition from other sellers of diabetes supplies, manufacturers of healthcare
products, pharmaceutical companies and other competitors is intense and expected
to increase. Many of our competitors and potential competitors are large
companies with well known names and substantial resources. These companies may
develop products and services that are more effective than any that we are
developing or selling. They may also promote and market these products more
successfully than we promote and market our products.
LOSS OF USE OF MANUFACTURING FACILITIES WOULD SIGNIFICANTLY REDUCE REVENUES AND
PROFITS FROM OUR CONSUMER HEALTHCARE AND PROFESSIONAL PRODUCTS
We manufacture substantially all of our professional products and many of our
AZO products at our facility in Woburn, Massachusetts. We also have most of our
thermometers manufactured at one facility in China. If we cannot use either
facility as a result of Food and Drug Administration, Occupational Safety and
Health Administration or other regulatory action, fire, natural disaster or
other event, our revenues and profits from the sale of those products will
decrease significantly. We might also incur significant expense in remedying the
problem or securing an alternative manufacturing source.
IF WE OR OUR SUPPLIERS DO NOT COMPLY WITH APPLICABLE GOVERNMENT REGULATIONS, WE
MAY BE PROHIBITED FROM SELLING OUR PRODUCTS
Many of the products that we sell are regulated by the Food and Drug
Administration and other regulatory agencies. If any of these agencies mandate a
suspension of production or sales of our products or mandate a recall, we may
lose sales and incur expense until we are in compliance with the regulations or
change to another acceptable supplier.
WE COULD HAVE DIFFICULTY SELLING OUR CONSUMER HEALTHCARE AND PROFESSIONAL
PRODUCTS IF WE CANNOT MAINTAIN AND EXPAND OUR SALES TO DISTRIBUTORS
We rely on third party distributors to market and sell our consumer healthcare
and professional products. Our sales of consumer healthcare and professional
products will therefore depend in part on our maintaining and expanding
marketing and distribution relationships with pharmaceutical, medical device,
personal care and other distributors and on the success of those distributors in
marketing and selling our products.
SHORTENING OR ELIMINATING AMORTIZATION OF OUR DIRECT-RESPONSE ADVERTISING COSTS
COULD ADVERSELY AFFECT OUR OPERATING RESULTS
Any accounting or business change that shortens or eliminates the four year
amortization of our direct-response advertising costs could result in
accelerated charges against our earnings.
OUR QUARTERLY REVENUES OR OPERATING RESULTS COULD VARY, WHICH MAY CAUSE THE
MARKET PRICE OF OUR COMMON STOCK TO DECLINE
We have experienced fluctuations in our quarterly operating results and
anticipate that such fluctuations could continue. Results may vary significantly
depending on a number of factors, including:
- changes in reimbursement guidelines and amounts;
- changes in regulations affecting the healthcare industry;
- changes in the mix or cost of our products;
- the timing of customer orders;
- the timing and cost of our advertising campaigns; and
- the timing of the introduction or acceptance of new products and
services offered by us or our competitors.
8
<PAGE> 9
WE MAY MAKE ACQUISITIONS THAT WILL STRAIN OUR FINANCIAL AND OPERATIONAL
RESOURCES
We regularly review potential acquisitions of businesses and products.
Acquisitions involve a number of risks that might adversely affect our financial
and operational resources, including:
- diversion of the attention of senior management from important business
matters;
- amortization of substantial goodwill;
- difficulty in retaining key personnel of an acquired business;
- failure to assimilate operations of an acquired business;
- failure to retain the customers of an acquired business;
- possible operating losses and expenses of an acquired business;
- exposure to legal claims for activities of an acquired business prior to
acquisition; and
- incurrence of debt and related interest expense.
WE MAY FAIL TO LOCATE ALTERNATIVE SUPPLIERS FOR OUR THERMOMETERS IF OUR SOLE
SUPPLIER IN CHINA CANNOT MEET OUR DEMANDS
We purchase most of our thermometers from a sole supplier based in China. The
delivery of products from this supplier is subject to changing risks associated
with political developments and restrictions on trade. In the event that this
supplier does not meet our demands, we cannot be certain that we could acquire
products from other sources on a timely or cost effective basis.
YEAR 2000 PROBLEMS MAY ADVERSELY AFFECT OUR BUSINESS
The Year 2000 problem could adversely affect all aspects of our business,
including the:
- manufacture and distribution of products;
- maintenance of communications with our customers and suppliers; and
- conduct of financial and administrative operations.
Although we have completed asking vendors, major customers, service suppliers
and banks to verify their Year 2000 readiness, not all have responded. We have
not yet completed our Year 2000 contingency plan.
OUR STOCK PRICE COULD BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
INVESTORS PURCHASING SHARES IN THIS OFFERING
The trading price of our common stock has been volatile and is likely to
continue to be volatile. The stock market in general, and the market for
healthcare-related companies in particular, has experienced extreme volatility.
This volatility has often been unrelated to the operating performance of
particular companies. Investors may not be able to sell their common stock at or
above our public offering price. Prices for the common stock will be determined
in the marketplace and may be influenced by many factors, including variations
in our financial results, changes in earnings estimates by industry research
analysts, investors' perceptions of us and general economic, industry and market
conditions.
9
<PAGE> 10
FORWARD-LOOKING INFORMATION
This prospectus contains or incorporates forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. You can identify these forward-looking statements by our use of the words
"believes," "anticipates," "plans," "expects," "may," "will," "would,"
"intends," "estimates" and similar expressions, whether in the negative or
affirmative. We cannot guarantee that we actually will achieve these plans,
intentions or expectations. Actual results or events could differ materially
from the plans, intentions and expectations disclosed in the forward-looking
statements we make. We have included important factors in the cautionary
statements in this prospectus, particularly under the heading "Risk Factors,"
that we believe could cause our actual results to differ materially from the
forward-looking statements that we make. The forward-looking statements do not
reflect the potential impact of any future acquisitions, mergers or
dispositions. We do not assume any obligation to update any forward-looking
statement we make.
COMMON STOCK MARKET PRICE DATA
Our common stock is quoted on the Nasdaq National Market under the symbol
"PLMD." Prior to January 11, 1999 our common stock was quoted on the American
Stock Exchange under the symbol "PM." The following table sets forth, for the
periods indicated, the high and low sale prices per share of our common stock as
reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
----- ---
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1998
First Quarter............................................... 8 7/8 4 1/4
Second Quarter.............................................. 14 1/4 7 3/4
Third Quarter............................................... 14 15/16 9 1/16
Fourth Quarter.............................................. 13 1/2 9 3/4
FISCAL YEAR ENDED MARCH 31, 1999
First Quarter............................................... 12 3/8 8 1/2
Second Quarter.............................................. 11 1/4 7 1/4
Third Quarter............................................... 11 1/2 7 5/8
Fourth Quarter.............................................. 11 3/16 5
FISCAL YEAR ENDING MARCH 31, 2000
First Quarter............................................... 11 1/8 7 1/2
Second Quarter.............................................. 30 15/16 9 11/16
Third Quarter (through October 6, 1999)..................... 23 20
</TABLE>
On October 6, 1999, the last reported sale price of our common stock on the
Nasdaq National Market was $21.25 per share. As of September 13, 1999,
PolyMedica had 413 shareholders of record.
10
<PAGE> 11
USE OF PROCEEDS
The net proceeds from the sale of the 2,250,000 shares of common stock offered
by us will be approximately $44,680,000, after deducting the underwriting
discount and estimated offering expenses payable by us. We will not receive any
proceeds from the sale of shares by the selling shareholders.
We intend to use $20.0 million of the net proceeds of this offering to retire
all of the Guaranteed Senior Secured Notes due January 31, 2003 held by John
Hancock Mutual Life Insurance Company and Barnett & Co. These notes bear
interest at the rate of 10.90% per annum. In addition, we will pay approximately
$1.9 million as an early payment premium. We will use the balance of the net
proceeds of this offering for working capital and general corporate purposes. We
have discussions on an ongoing basis regarding possible acquisitions or
investments in businesses or products that are complementary to our business.
Although we may use a portion of the net proceeds for these kinds of
investments, there are no current agreements or commitments in this regard. We
may, however, change the allocation of these proceeds in response to
developments or changes that affect our business or our industry. Pending use of
the net proceeds for the above purposes, we plan to invest such funds in
short-term, investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We presently intend to
retain earnings to support operations and to finance the growth and development
of our business. Therefore, we do not expect to pay cash dividends in the
foreseeable future. In addition, our revolving credit agreement restricts the
payment of cash dividends.
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<PAGE> 12
CAPITALIZATION
The following table sets forth the capitalization of PolyMedica as of June 30,
1999:
- On an actual basis; and
- On an as adjusted basis to reflect our issuance and sale of 2,250,000
shares of common stock in this offering, after deducting the estimated
underwriting discounts and our estimated offering expenses, the issuance of
an aggregate of 410,987 shares upon the cashless exercise by John Hancock
Mutual Life Insurance Company of its warrants at an exercise price of $5.18
per share based on the $21.25 per share closing sale price of our common
stock on October 6, 1999, the exercise by the other selling shareholders of
options for 239,013 shares to be sold by those shareholders in this
offering, the application of the net proceeds of the offering to repay debt
having a principal amount of $20 million and pay an early payment premium,
and the use by executive officers of 19,400 shares of their PolyMedica
common stock to repay to PolyMedica loans aggregating $558,958, resulting
in an increase in treasury stock of 19,400 shares.
The actual column of the following table is based on the number of shares
outstanding as of June 30, 1999 and excludes:
- 1,607,957 shares subject to options outstanding at a weighted average
exercise price of $5.83 per share; and
- the issuance of an aggregate of 410,987 shares upon the cashless exercise
by John Hancock Mutual Life Insurance Company of its warrants at an
exercise price of $5.18 per share based on the $21.25 per share closing
sale price of our common stock on October 6, 1999.
<TABLE>
<CAPTION>
JUNE 30, 1999
--------------------------
ACTUAL AS ADJUSTED
--------- -------------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C>
Long-term debt and notes payable, net....................... $22,018 $ 4,413
======= ========
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 issued; 12,219,913 shares issued as
adjusted............................................... 93 122
Treasury stock, at cost, (90,971 shares; 110,371 shares as
adjusted).............................................. (646) (1,205)
Additional paid-in capital................................ 57,099 102,512
Retained earnings......................................... 9,934 8,451
Notes receivable from officers............................ (559) --
------- --------
Total shareholders' equity............................. 65,921 109,880
------- --------
Total capitalization................................. $87,939 $114,293
======= ========
</TABLE>
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SELECTED CONSOLIDATED FINANCIAL DATA
This section presents selected consolidated financial data of PolyMedica. You
should read carefully the consolidated financial statements included in this
prospectus, including the notes to the consolidated financial statements. The
selected consolidated financial data in this section is not intended to replace
the consolidated financial statements.
We derived the consolidated statement of operations data for the years ended
March 31, 1997, 1998 and 1999 and consolidated balance sheet data as of March
31, 1998 and 1999 from the audited financial statements in this prospectus.
Those consolidated financial statements were audited by PricewaterhouseCoopers
LLP, independent accountants. We derived the consolidated statement of
operations data for the years ended March 31, 1995 and 1996 and the consolidated
balance sheet data as of March 31, 1995, 1996 and 1997 from consolidated audited
financial statements that are not included in the prospectus. We derived the
consolidated statement of operations data for the three months ended June 30,
1998 and 1999 and consolidated balance sheet data as of June 30, 1998 and 1999
from the unaudited consolidated financial statements included in this
prospectus. We believe that the unaudited consolidated financial statements
contain all adjustments needed to present fairly the information included in
those statements, and that the adjustments made consist only of normal recurring
adjustments. The selected consolidated financial data for the three months ended
June 30, 1999 are not necessarily indicative of the results that may be expected
in any future period.
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SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------------------------ -----------------
1995 1996 1997 1998 1999 1998 1999
------- ------- ------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................... $26,609 $24,763 $30,453 $73,825 $104,825 $20,661 $31,580
Cost of sales.................. 9,992 10,210 13,603 35,575 49,605 9,921 13,715
------- ------- ------- ------- -------- ------- -------
Gross margin................... 16,617 14,553 16,850 38,250 55,220 10,740 17,865
Selling, general and
administrative expenses...... 12,066 9,637 12,985 28,826 42,185 8,062 13,361
------- ------- ------- ------- -------- ------- -------
Income from operations......... 4,551 4,916 3,865 9,424 13,035 2,678 4,504
Other income and expense:
Gain on sale of wound care
business.................. -- -- -- 4,126 1,597 -- --
Investment income............ 566 892 864 629 434 114 89
Interest expense............. (2,668) (2,678) (2,774) (2,688) (2,555) (637) (603)
------- ------- ------- ------- -------- ------- -------
(2,102) (1,786) (1,910) 2,067 (524) (523) (514)
Income from continuing
operations before income
taxes........................ 2,449 3,130 1,955 11,491 12,511 2,155 3,990
Income tax provision
(benefit).................... 55 55 (367) 3,872 4,867 862 1,536
------- ------- ------- ------- -------- ------- -------
Income from continuing
operations................... 2,394 3,075 2,322 7,619 7,644 1,293 2,454
Discontinued operations:
Loss from operations of
Cardio Tech International,
Inc....................... (605) (923) -- -- -- -- --
Loss on disposal of Cardio
Tech International,
Inc....................... -- (1,878) -- -- -- -- --
------- ------- ------- ------- -------- ------- -------
(605) (2,801)
------- ------- ------- ------- -------- ------- -------
Net income..................... $ 1,789 $ 274 $ 2,322 $ 7,619 $ 7,644 $ 1,293 $ 2,454
======= ======= ======= ======= ======== ======= =======
Earnings per share from
continuing operations:
Basic........................ $ 0.27 $ 0.04 $ 0.28 $ 0.88 $ 0.86 $ 0.15 $ 0.27
Diluted...................... $ 0.26 $ 0.04 $ 0.27 $ 0.79 $ 0.78 $ 0.13 $ 0.25
Earnings per share from
discontinued operations:
Basic........................ $ (0.09) $ (0.39) -- -- -- -- --
Diluted...................... $ (0.09) $ (0.37) -- -- -- -- --
Weighted average shares
outstanding:
Basic........................ 6,642 7,096 8,259 8,652 8,898 8,789 9,152
Diluted...................... 6,790 7,492 8,618 9,691 9,786 9,771 9,890
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1998 1999
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............ $ 17,664 $ 25,546 $ 14,626 $ 21,069 $ 32,389 $21,734 $32,767
Cash and cash
equivalents.............. 14,006 23,302 11,028 6,440 10,191 9,759 10,423
Total assets............... 65,753 72,573 75,233 92,401 112,939 95,200 116,607
Total long-term debt and
notes payable, net....... 24,433 24,400 22,818 20,577 21,583 20,599 22,018
Total liabilities.......... 29,027 29,293 31,861 39,473 49,894 40,885 50,686
Shareholders' equity....... 36,726 43,280 43,372 52,928 63,045 54,315 65,921
</TABLE>
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We sell specialty medical products primarily in three areas. Liberty Medical is
a national direct-mail provider of diabetes supplies to seniors covered by
Medicare. PolyMedica also holds a leading position in the urinary health market
through our consumer healthcare division and sells fever thermometers through
that division. Our professional products division manufactures, distributes and
sells prescription urological and suppository products under our own brands.
Since acquiring Liberty Medical in 1996, we have devoted a large part of our
resources to the growth of our diabetes supplies business, resulting in
substantial increases in the revenues of that business in each of our 1997, 1998
and 1999 fiscal years. We intend to continue this emphasis on Liberty Medical in
the future.
We recognize revenues upon shipment of our products. Our expense items include
cost of sales and selling, general and administrative expenses:
- cost of sales consists primarily of purchasing finished goods for sale in
our diabetes supplies business and, to a lesser extent, materials and
overhead costs for products that we manufacture in our facility; and
- selling, general and administrative expenses consist primarily of
expenditures for personnel and benefits, as well as allowances for bad
debts, rent, amortization of capitalized direct-response advertising
costs and other amortization and depreciation.
We capitalize direct-response advertising and related costs and amortize those
costs on an accelerated basis during the first two years of a four-year period.
Under this method, we amortize 55% of the costs in the two years after the date
they are incurred, and we amortize 45% on a straight line basis over the next
two years. We assess the realizability of the amounts of direct-response
advertising costs reported as assets at each balance sheet date by comparing the
carrying amounts of those assets to the probable remaining future net benefits
expected to result directly from such advertising.
RESULTS OF OPERATIONS
The following table sets forth selected consolidated statement of operations
data as a percentage of total net revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
--------------------- --------------
1997 1998 1999 1998 1999
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................... 44.7 48.2 47.3 48.0 43.4
----- ----- ----- ----- -----
Gross margin................................................ 55.3 51.8 52.7 52.0 56.6
Selling, general and administrative expenses................ 42.6 39.0 40.2 39.0 42.3
----- ----- ----- ----- -----
Income from operations...................................... 12.7% 12.8% 12.5% 13.0% 14.3%
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Total net revenues increased by 52.9% to $31.6 million in the three months ended
June 30, 1999, as compared with $20.7 million in the three months ended June 30,
1998. This increase was primarily the result of the increase in Liberty Medical
sales.
Net product sales of diabetes supplies increased by 68.1% to $26.4 million in
the three months ended June 30, 1999, as compared with $15.7 million in the
three months ended June 30, 1998. This growth was primarily due to shipments to
Type II diabetics who were not eligible for Medicare reimbursement during
15
<PAGE> 16
the three months ended June 30, 1998. These customers became eligible on July 1,
1998. Shipments to existing Type I diabetic customers also increased.
Net product sales of consumer healthcare products increased by 12.7% to $2.9
million in the three months ended June 30, 1999, from $2.6 million in the three
months ended June 30, 1998. Sales of both the AZO product line and thermometers
increased during the three months ended June 30, 1999. We added to our consumer
healthcare product line by introducing AZO MENOPAUSE and AZO CONFIDENCE in April
1999, sales of which were not included in the three months ended June 30, 1998.
In the professional products division, net product sales decreased by 3.8% to
$2.3 million in the three months ended June 30, 1999, as compared with $2.4
million in the three months ended June 30, 1998. This decrease was primarily a
result of focusing our marketing 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 products.
As a percentage of net product sales, selling, general and administration
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. Those expenses increased by
65.7% in the three months ended June 30, 1999 to $13.4 million as compared with
$8.1 million in the three months ended June 30, 1998. This dollar increase was
primarily attributable to the increase in personnel and expansion and
improvement of operating systems 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 we
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 a lower outstanding principal balance on the Guaranteed Senior
Secured Notes held by John Hancock Mutual Life Insurance Company and Barnett &
Co.
Pretax income was $4.0 million in the three months ended June 30, 1999, as
compared with $2.2 million in the three months ended June 30, 1998. Our net
income was $2.5 million, or $0.25 per diluted common share, in the three months
ended June 30, 1999. This performance compares with net income of $1.3 million,
or $0.13 per diluted common share, in the three months ended June 30, 1998.
The effective tax rate was 38.5% in the three months ended June 30, 1999 and 40%
in the same period in 1998.
YEAR ENDED MARCH 31, 1999 COMPARED TO YEAR ENDED MARCH 31, 1998
PolyMedica's total net revenues increased by 42.0% to $104.8 million in the
fiscal year ended March 31, 1999 as compared with $73.8 million in the fiscal
year ended March 31, 1998. This increase primarily resulted from the growth in
Liberty Medical revenues during the fiscal year ended March 31, 1999.
Liberty Medical's net product sales of diabetes supplies increased by 65.5% to
$80.6 million in the fiscal year ended March 31, 1999 as compared with $48.7
million in the fiscal year ended March 31, 1998. This growth was largely a
result of our direct-response advertising spending, as well as recurring
shipments to existing customers. In addition, we shipped product to Type II
diabetics for the first time beginning in July 1998.
PolyMedica's net product sales of consumer healthcare products increased by
28.1% to $14.3 million in the fiscal year ended March 31, 1999 as compared with
$11.1 million in the fiscal year ended March 31, 1998. Sales of both the AZO
line of products and thermometers increased during the fiscal year ended March
31, 1999. We began shipping AZO TEST STRIPS, an in-home urinary tract infection
testing kit, during the three months ended March 31, 1998. In addition, we added
to our product line by introducing our Flexible-Tip Digital Thermometer with
Fever Alarm which began shipping in August 1997.
16
<PAGE> 17
In the professional products group, there were $1.0 million of nonrecurring net
product sales of PolyMedica's institutional wound care products in the fiscal
year ended March 31, 1998. Excluding these wound care product sales, recurring
net product sales decreased by 23.1% to $10.0 million in the fiscal year ended
March 31, 1999 as compared with $12.9 million in the fiscal year ended March 31,
1998. Our sales of professional products in the fiscal year ended March 31, 1998
were higher than expected because a competitor left the market for those
products. That competitor later returned, resulting in lower revenues in 1999.
As a percentage of net product sales, overall gross margins were 52.7% in the
fiscal year ended March 31, 1999 and 51.8% in the fiscal year ended March 31,
1998. Gross margins in the fiscal year ended March 31, 1999 increased due to
improved gross margins at Liberty Medical, resulting from a change in product
mix and higher volume purchasing from suppliers, as well as improving margins of
professional products.
As a percentage of total revenues, selling, general and administrative expenses
were 40.2% for the fiscal year ended March 31, 1999 as compared with 39.0% for
the fiscal year ended March 31, 1998. Selling, general and administrative
expenses increased by 46.3% in the fiscal year ended March 31, 1999 to $42.2
million as compared with $28.8 million in the fiscal year ended March 31, 1998.
We attribute this increase primarily to expenditures for personnel in customer
service, marketing and other areas as well as for enhancements of information
technology systems related to our expansion of Liberty Medical.
Our investment income decreased by 31.0% to $434,000 in the fiscal year ended
March 31, 1999 as compared with $629,000 in the fiscal year ended March 31, 1998
as we earned interest on lower average cash balances in the fiscal year ended
March 31, 1999. We faced interest expense of $2.6 million in the fiscal year
ended March 31, 1999 as compared with $2.7 million in the fiscal year ended
March 31, 1998, as we accrued interest expense in both periods on the Guaranteed
Senior Secured Notes due January 31, 2003 held by John Hancock Mutual Life
Insurance Company and Barnett & Co.
Our pretax income was $12.5 million in the fiscal year ended March 31, 1999.
Excluding the $1.6 million pretax gain related to the sale of the wound care
business, pretax income from ongoing businesses was $10.9 million, a 48.2%
increase as compared with $7.4 million in the fiscal year ended March 31, 1998.
Our net income was $7.6 million, or $0.78 per diluted common share, in the
fiscal year ended March 31, 1999. Net income, excluding the $976,000 after tax
gain from the sale of the wound care business, or $0.10 per diluted common
share, was $6.7 million, or $0.68 per diluted common share. This performance
compares to net income, excluding the gain on the sale of the Company's wound
care business, of $4.9 million, or $0.50 per diluted common share, in the fiscal
year ended March 31, 1998.
The effective tax rate was 38.9% in the fiscal year ended March 31, 1999 and
33.7% in the fiscal year ended March 31, 1998.
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997
PolyMedica's total net revenues increased by 142.5% to $73.8 million in the
fiscal year ended March 31, 1998 as compared with $30.5 million in the fiscal
year ended March 31, 1997. We attribute this increase primarily to the growth in
Liberty Medical revenues, which were generated for twelve months during the
fiscal year ended March 31, 1998 as compared to seven months during the fiscal
year ended March 31, 1997.
Liberty Medical's net product sales of diabetes supplies were $48.7 million in
the fiscal year ended March 31, 1998. This performance compares with $8.7
million in the fiscal year ended March 31, 1997 for the seven month period
beginning with the August 1996 acquisition of Liberty Medical by the Company.
This growth was largely a result of our increased direct-response advertising
spending, including our initiation of television advertising at the end of the
fiscal year ended March 31, 1997.
17
<PAGE> 18
PolyMedica's net product sales of consumer healthcare products increased by 8.3%
to $11.1 million in the fiscal year ended March 31, 1998 as compared with $10.3
million in the fiscal year ended March 31, 1997. Sales of thermometers products
increased during the fiscal year ended March 31, 1998, offset by a decline in
sales of AZO STANDARD. Shipments of AZO TEST STRIPS, an in-home urinary tract
infection testing kit, began during the three months ended March 31, 1998.
PolyMedica's net product sales of professional products increased by 21.4% to
$14.0 million in the fiscal year ended March 31, 1998 as compared with $11.5
million in the fiscal year ended March 31, 1997. Professional products include a
full year of wound care product sales in the fiscal year ended March 31, 1997.
The increase in professional products sales was primarily due to additional
shipments of URISED in the fiscal year ended March 31, 1998. We believe that
this increase was the result of the temporary departure of a competitor from the
generic products market partially offset by a lower level of wound care related
sales in the fiscal year ended March 31, 1998 due to the sale of certain assets
of the wound care division in July 1997.
As a percentage of net revenues, PolyMedica's overall gross margins were 51.8%
in the fiscal year ended March 31, 1998 and 55.3% in the fiscal year ended March
31, 1997. Gross margins in the fiscal year ended March 31, 1998 decreased due to
the inclusion of significant sales of diabetes-related products, which have
gross margins that are lower than our average for products sold in the fiscal
year ended March 31, 1997, partially offset by improving margins and higher
revenues of professional products.
As a percentage of total revenues, our selling, general and administrative
expenses were 39.0% for the fiscal year ended March 31, 1998 as compared with
42.6% for the fiscal year ended March 31, 1997. Selling, general and
administrative expenses increased by 122.0% in the fiscal year ended March 31,
1998 to $28.8 million as compared with $13.0 million in the fiscal year ended
March 31, 1997. We attribute this increase primarily to general and
administrative expenses related to the expansion of Liberty Medical, and
marketing and advertising costs related to our consumer healthcare products.
Investment income decreased by 27.2% to $629,000 in the fiscal year ended March
31, 1998 as compared with $864,000 in the fiscal year ended March 31, 1997 as we
earned interest on lower average cash balances in the fiscal year ended March
31, 1998. Interest expense was $2.7 million in the fiscal year ended March 31,
1998 as compared with $2.8 million in the fiscal year ended March 31, 1997. We
accrued this expense in both periods on the Guaranteed Senior Secured Notes due
January 31, 2003 held by John Hancock Mutual Life Insurance Company and Barnett
& Co.
PolyMedica's pretax income was $11.5 million in the fiscal year ended March 31,
1998. Excluding the $4.1 million pretax gain from the sale of the wound care
business, pretax income from ongoing businesses was $7.4 million, an increase of
275.5% as compared with $2.0 million in the fiscal year ended March 31, 1997.
Our net income was $7.6 million, or $0.79 per diluted common share, in the
fiscal year ended March 31, 1998. Net income, excluding the $2.7 million after
tax gain from the sale of the wound care business, or $0.29 per diluted common
share, was $4.9 million, or $0.50 per diluted common share. This performance
compares to net income, excluding the gain on the sale of our wound care
business, of $2.3 million, or $0.27 per diluted common share, in the fiscal year
ended March 31, 1997.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth a summary of our unaudited quarterly results of
operations for each of the five quarters in the period ended June 30, 1999.
These data have been derived from our unaudited interim financial statements
which, in our opinion, have been prepared on substantially the same basis as the
audited financial statements contained elsewhere in this prospectus and include
all normal recurring adjustments necessary for a fair presentation of the
financial information for the periods presented. These unaudited quarterly
results should be read in conjunction with our consolidated financial statements
and
18
<PAGE> 19
notes thereto included elsewhere in this prospectus. The operating results in
any quarter are not necessarily indicative of the results that may be expected
for any future period.
SELECTED QUARTERLY OPERATING RESULTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1998 1998 1998 1999 1999
-------- --------- -------- --------- --------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues....................................... $20,661 $24,823 $28,791 $30,550 $31,580
Cost of sales...................................... 9,921 11,878 13,965 13,841 13,715
------- ------- ------- ------- -------
Gross margin....................................... 10,740 12,945 14,826 16,709 17,865
Selling, general and administrative expenses....... 8,062 9,927 11,394 12,802 13,361
------- ------- ------- ------- -------
Income from operations............................. $ 2,678 $ 3,018 $ 3,432 $ 3,907 $ 4,504
======= ======= ======= ======= =======
Depreciation and amortization, including
amortization of direct-response advertising...... $ 1,956 $ 2,122 $ 2,237 $ 2,358 $ 2,538
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since PolyMedica's inception, we have raised $53.5 million in gross equity
capital, of which $7.2 million was from venture capital financing before our
initial public offering, $39.0 million was from our March 1992 initial public
offering, $4.5 million was from our November 1995 public offering and $2.75
million was from our March 1996 private placement of common stock. In January
1993, we sold $25.0 million of Guaranteed Senior Secured Notes due January 31,
2003 to John Hancock Mutual Life Insurance Company.
As of June 30, 1999, we had working capital of $32.7 million, including cash and
cash equivalents of $10.4 million, which compares with working capital of $32.4
million, including cash and cash equivalents of $10.2 million, as of March 31,
1999.
During the three months ended June 30, 1999, we repaid $1.0 million under our
$10.0 million collateralized revolving credit facility. Under the terms of this
facility, we are required to repay all principal balances on March 31, 2001.
This facility is collateralized by specified assets. Under this facility, we are
obligated to be in compliance with certain financial covenants including
maintenance of net income, limitations on indebtedness and maintenance of
certain accounts and inventory above a specified level. The interest rate is
tied to our funded debt to EBITDA ratio and averaged 7.75% per annum during the
three months ended June 30, 1999.
To support Liberty Medical's growth we purchased a 66,000 square foot building
in Port St. Lucie, Florida in May 1999 for $2.2 million, financed by a $1.4
million mortgage. Under the terms of this mortgage, we must repay all principal
balances by May 2006. The mortgage is collateralized by the land, building,
future improvements and permanent fixtures. The interest rate is 8.07% per
annum. During this fiscal year we intend to make the investment necessary to
improve and configure this building to meet Liberty Medical's operating
requirements.
Our net accounts receivable were $32.3 million as of March 31, 1999 and $31.6
million as of June 30, 1999. As of June 30, 1999, Liberty Medical's gross
unbilled receivables included in accounts receivable were $16.6 million as
compared with $15.3 million as of March 31, 1999. The increase was primarily a
result of the overall growth of Liberty Medical's sales in the fiscal year ended
March 31, 1999.
We expect that the net proceeds of this offering, together with our current
working capital, revolving credit facility and funds generated from future
operations will be adequate to meet our liquidity and capital requirements for
at least the next 18 months. In the event that we undertake to make acquisitions
of
19
<PAGE> 20
complementary businesses, products or technologies, or if we enter into
alliances, we may require substantial additional funding beyond currently
available funds. We currently have no commitments or agreements with respect to
any such acquisition.
YEAR 2000 READINESS DISCLOSURE
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.
Year 2000 problems could affect the manufacture and distribution of products,
maintenance of communications with our customers and suppliers and conduct of
financial and administrative operations. We are making programming modifications
and upgrades to correct or replace the systems critical to our business which we
have identified as non-Year 2000 compliant. In addition to our in-house efforts,
we have asked, and are awaiting responses from, 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. We are testing such systems where appropriate and possible. We have
not completed our 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. We do not expect the
future costs relating to Year 2000 compliance to have a material effect on our
results of operations or financial condition.
The above expectations are subject to uncertainties. For example, if we are
unsuccessful in identifying or fixing all Year 2000 problems in our critical
operations, or if we are affected by the failure of suppliers or major customers
(such as a large drug wholesaler or distributor) to continue operations due to
such a problem, our results of operations or financial condition could be
materially and adversely impacted.
The total costs that we incur in connection with the Year 2000 problems will be
influenced by our successful identification of Year 2000 problems, the nature
and amount of programming required to fix affected programs, the related labor
and/or consulting costs for such remediation and the success of third parties
with whom we have business relationships in addressing their own Year 2000
concerns. These and other unforeseen factors could have a material adverse
effect on our business, results of operations or financial condition.
The information presented above is based upon our estimates, which we made using
assumptions of future events. Uncontrollable factors such as the compliance of
the systems of third parties and the availability of resources could materially
increase the cost of, or delay, remedying Year 2000 problems. All Year 2000
statements contained herein are designated as "Year 2000 Readiness Disclosures"
pursuant to the Year 2000 Information and Readiness Disclosures Act (P.L.
105-271).
20
<PAGE> 21
BUSINESS
INTRODUCTION
Liberty Medical Supply, a PolyMedica company, is a national direct-mail provider
of diabetes supplies to seniors covered by Medicare. Liberty Medical has a
database of over 220,000 active Medicare-eligible customers to whom it sells
name-brand diabetes products. PolyMedica also holds a leading position in the
urinary health market through our consumer healthcare division and sells fever
thermometers through that division. We sell our line of over-the-counter women's
urinary health products under our AZO brand. We manufacture, distribute and sell
prescription urological and suppository products under our own brands through
our professional products division.
LIBERTY MEDICAL
Diabetes Supplies
We believe that Liberty Medical is the leading direct-mail provider of testing
supplies to seniors with diabetes in the United States. As a participating
Medicare provider and third-party insurance biller, Liberty Medical provides a
simple, reliable way for seniors to obtain their diabetes testing supplies.
Liberty Medical delivers diabetes testing supplies to customers' homes and bills
Medicare and private insurance directly for those supplies that are
reimbursable. Liberty Medical has over 220,000 active customers and, we believe,
the country's largest proprietary database of seniors with diabetes. We define
an active customer as one who has ordered products within the last six months.
Liberty Medical meets the needs of seniors with diabetes by:
- providing mail order delivery of supplies direct to our customers' homes;
- billing Medicare or private insurance directly;
- providing 24-hour telephone support to customers; and
- using sophisticated software and advanced order fulfillment systems to
provide products and support quickly and efficiently.
Liberty Medical's rapid growth has been due to innovations in identifying,
qualifying and retaining its customers. In 1997, Liberty Medical launched its
direct-response advertising program using national television advertisements
targeting seniors with diabetes. This advertising program introduced the
convenience and simplicity of Liberty Medical's direct-to-customer delivery of
diabetic supplies and the benefit of relieving customers of cumbersome
reimbursement paperwork. From its acquisition by PolyMedica through June 30,
1999, Liberty Medical has invested $26.6 million in direct-response advertising.
These advertisements have increased the number of Liberty Medical's active
customers from approximately 18,700 to over 220,000.
Liberty Medical's 122-person customer service staff communicates with active
customers at least four times per year. Through this relationship, we remind our
customers to reorder necessary testing supplies, we introduce new products and
we maintain an informed and personal dialogue. Our database tracks each contact
made by our customer service staff as well as each customer's order patterns and
related medical documentation. This interactive, real-time data equips our
representative with current knowledge of each customer's testing requirements.
We have made significant investments in computer systems, telecommunications
equipment and information technology staff. These investments allow us to
provide efficient customer fulfillment and complete electronic billing to
Medicare in accordance with Medicare regulations. We also maintain a 24-hour
help line to respond to customer inquiries.
Liberty Medical offers a full range of products from name-brand manufacturers
including Johnson & Johnson, Roche, Bayer and Home Diagnostics. These products
range from consumables, such as glucose test strips, lancets and syringes, to
equipment, such as blood glucose monitors and lancing devices.
21
<PAGE> 22
Diabetes Market
In the United States, there are approximately 6.3 million seniors who have
diabetes. With our database of over 220,000 active Medicare-eligible customers,
Liberty Medical serves approximately 3.5% of the marketplace. While many of the
6.3 million seniors with diabetes are covered by managed care or are resident in
extended care facilities, we believe that the balance are potential customers of
Liberty Medical.
Diabetes is a chronic disease in which the body's metabolism of glucose is
ineffective due to inadequate production of insulin. People with diabetes are
classified as Type I or Type II. In general, individuals with Type I diabetes
must obtain insulin from injection, while individuals with Type II diabetes may
control their disease with medication, exercise and diet. For all people with
diabetes, frequent monitoring of blood glucose helps avoid serious medical
complications. The cost of glucose monitoring is high. The average person with
Type I diabetes spends $1,700 per year to control his or her disease.
Diabetes testing supplies fall under Medicare Part B reimbursement. Medicare
currently reimburses 80% of the cost of testing supplies such as test strips,
lancets and glucometers, for eligible diabetics, but does not reimburse for
insulin, syringes, oral medications and accessories. Medicare has historically
reimbursed only people with Type I diabetes. On July 1, 1998, Medicare extended
this coverage to people with Type II diabetes, expanding the number of people
currently eligible to be reimbursed for purchases of diabetes testing supplies.
The aging United States population is a key factor in the expected increase in
the number of people diagnosed with diabetes. Type II diabetes usually appears
after the age of 45. Industry analysts therefore expect the rapid growth of the
over-40 population to drive the growth in the number of diagnosed diabetics.
Approximately 18.4% of all people in the United States over the age of 65 have
either Type I or Type II diabetes. As more people are diagnosed with diabetes,
their doctors may recommend active disease management programs. This should
significantly increase the demand for testing products.
Many older diabetes patients today fail to buy the necessary supplies or test as
frequently as they should because they believe that they cannot afford the
supplies, have difficulty traveling to the local pharmacy or do not understand
the Medicare reimbursement process. As a result, these patients may not monitor
their blood sugar levels as closely as medical experts believe they should.
Studies show that when people with diabetes maintain their blood glucose levels
as close to normal as possible, the risk of complications such as eye disease,
kidney disease, nerve disease and cardiovascular disease may be reduced by a
range of 35% to more than 70%.
Respiratory Products
Liberty Medical has recently initiated a program offering inhalation products to
its Medicare-eligible customers with diabetes who also suffer from chronic
respiratory conditions. We believe that our database of over 220,000 active
diabetes supply customers and our expertise in selling diabetes testing supplies
will be a significant advantage to us in entering this new market. In addition,
we intend to initiate marketing efforts through advertising and promotions to
add customers who have respiratory problems but who do not have diabetes.
CONSUMER HEALTHCARE
Our consumer healthcare division primarily sells over-the-counter female urinary
discomfort products and fever thermometers. We sell our urinary discomfort
products for women under the AZO brand name. We acquired the AZO brand in 1992,
and we continue our efforts to increase awareness of our over-the-counter
urinary discomfort products through promotion and advertising. We sell our broad
range of fever thermometers primarily on a private label basis.
In the urinary discomfort area, our three principal products are AZO STANDARD,
for the relief of urinary discomfort, AZO CRANBERRY, to help maintain a healthy
urinary tract, and AZO TEST STRIPS, a home diagnostic kit for urinary tract
infections. For the quarter ended June 30, 1999, the AZO line of products
excluding our new products AZO CONFIDENCE and AZO MENOPAUSE, maintained
22
<PAGE> 23
its leading market share with over 46% of the market. In April 1999, we began
shipment of two new AZO brand products for women. AZO MENOPAUSE offers relief
from hot flashes and related menopausal symptoms. It is estimated that, in the
United States and Canada, approximately 4,000 women reach menopause daily. AZO
CONFIDENCE provides temporary relief of incontinence, which is estimated to
affect approximately 25% of women between the ages of 30 to 59. We manufacture
AZO CRANBERRY, AZO MENOPAUSE and AZO CONFIDENCE in our Woburn facility.
Our thermometers include digital flexible tip, digital and glass thermometers. A
supplier in China in which we have a minority ownership interest custom
manufactures our digital thermometers. We sell our consumer healthcare products
through an extensive network to large drug store chains, major supermarkets,
mass merchandisers and drug wholesalers.
PROFESSIONAL PRODUCTS
PolyMedica offers a broad line of prescription urology products, excluding
non-anti-infectives but including urinary analgesics, antispasmodics, local
anesthetics and analgesic suppositories. URISED, CYSTOSPAZ, and CYSTOSPAZ-M
analgesics and antispasmodics provide symptomatic relief for urinary pain,
burning and feelings of urgency, along with spasms. Many urology offices and
hospitals purchase our local anaesthetic ANESTACON for use in diagnostic
procedures or in the catheterization process. B&O SUPPRETTES and AQUACHLORAL
suppositories are used by patients unable to tolerate oral analgesics and
sedatives. Our primary customers for these products are large drug wholesalers
in the United States.
We currently manufacture URISED, AQUACHLORAL, B&O SUPPRETTES and CYSTOSPAZ in
our Woburn facility and outsource the manufacturing of the other products. Our
state-of-the-art, automated equipment provides manufacturing efficiency.
BUSINESS STRATEGY
Our strategy includes the following elements:
- Continue growth in our diabetes supply business by expanding our customer
base. We believe that we can significantly expand our customer base of
Medicare-eligible seniors with diabetes through increased marketing and
advertising.
- Sell products addressing other chronic disease categories. Seniors with
diabetes have higher incidences of other chronic conditions. We believe
that we can capitalize on our expertise in selling products eligible for
Medicare and private insurance reimbursement by expanding our product
offerings to this group. Our planned entry into the market for respiratory
products is our initial implementation of this strategy.
- Create alliances with national retailers. We are seeking to create
alliances with large drug store chains to service their customers who have
diabetes. These alliances could add sales volume while leveraging our
processing, customer service and fulfillment infrastructure.
- Begin e-commerce marketing. We are developing a new web site to extend
Liberty Medical's product offerings into the e-commerce market. Seniors are
one of the fastest growing segments of computer and Internet users.
- Add complementary businesses and products. We will consider adding
businesses, manufacturing capabilities and new products that capitalize
upon our established Liberty Medical and AZO brand franchises and that can
take advantage of our strengths in sales, marketing and distribution.
23
<PAGE> 24
GOVERNMENT REGULATION
Medicare
Medicare is a federally funded program that provides health insurance coverage
for persons age 65 or older and for some disabled persons. Medicare provides
reimbursement for some of the products that we sell. This portion of our
business is therefore subject to extensive regulation. Medicare reimbursement
payments are often lower than reimbursement payments of other third-party
payers, such as traditional indemnity insurance companies. Effective July 1,
1998, testing supplies for Type II diabetics became reimbursable. In addition,
on October 1, 1998, new Medicare reimbursement guidelines provided that
quarterly orders of diabetes supplies to existing customers be administratively
verified before shipment and that all doctor's orders for supplies are valid for
a period of six months. In addition, the new regulations require that
individuals with Type I diabetes who test more frequently than three times per
day and individuals with Type II diabetes who test more frequently than one time
per day visit their physician every six months and maintain a 30-day log book to
verify frequency of testing.
We accept assignment of Medicare claims, as well as claims with respect to other
third-party payers, on behalf of our customers. We process claims, accept
payments and assume the risks of delay or nonpayment. We also employ the
administrative personnel necessary to transmit claims for product reimbursement
directly to Medicare and private health insurance carriers. We seek payment for
any unreimbursed amounts directly from our customers within the limits permitted
by law and regulation.
As a Medicare provider, we can provide medically necessary equipment and
supplies to Medicare beneficiaries and obtain reimbursement directly from the
Medicare intermediaries. Medicare reimburses 80% of the Medicare approved costs
of Medicare covered equipment and supplies that meet its guidelines for
reimbursement. Because we do not obtain full reimbursement through Medicare, our
customers are personally responsible for the 20% balance of the cost either
through secondary private insurance coverage or otherwise.
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 the reimbursements that Medicare pays to us
are subject to review. Routine Medicare document requests to date have not
resulted in any audits or significant adjustments.
Pharmacy Licensing
In general, our pharmacy operations are regulated by the State of Florida Board
of Pharmacy and the statutes of the State of Florida where we are licensed to do
business as a pharmacy. Many of the states into which we deliver pharmaceuticals
have laws and regulations governing our activities, although they generally
permit our pharmaceutical activities so long as they are permitted under the
laws and regulations of Florida. Nevertheless, we have applied for pharmacy
licenses in 33 states and have been granted pharmacy licenses in 27 of them. An
additional 10 states do not require non-resident pharmacy licenses. We believe
that we are in compliance with the laws and regulations governing pharmaceutical
activities in every state in which we deliver pharmaceuticals.
General
Numerous federal, state and local laws relating to controlled drug substances,
safe working conditions, manufacturing practices, environmental protection, fire
hazard control and disposal of hazardous or potentially hazardous substances
apply to portions of our operations. For example, the Drug Enforcement
Administration, known as the DEA, regulates controlled drug substances, such as
the narcotics used in some of our professional products, under the Controlled
Substances Act and the Controlled Substances Import and Export Act.
Manufacturers, distributors and dispensers of controlled substances must be
registered and inspected by the DEA, and are subject to inspection, labeling and
packaging, export, import, security, production quota, record keeping and
reporting requirements. In addition, labeling and promotional activities
relating to medical devices and drugs are, in certain instances, subject to
regulation by the Federal Trade Commission. To the extent we engage in new
activities or expand current activities into new states, the cost of compliance
with applicable regulations and licensing requirements could be
24
<PAGE> 25
significant. In addition, our manufacturing facility is subject to the Good
Manufacturing Practices regulations of the United States Food and Drug
Administration. The FDA enforces these regulations through its plant inspection
program. In addition, our drug products are subject to the requirements of the
Food, Drug and Cosmetics Act and related regulations.
COMPETITION
We compete in highly competitive markets. Many of our competitors and potential
competitors have substantially greater capital resources, purchasing power and
advertising budgets, as well as more experience in marketing and distributing
products. These competitors include:
- retail pharmacies;
- healthcare product distributors;
- disease management companies; and
- pharmacy benefit management companies.
In the urinary discomfort category, our AZO STANDARD urinary analgesic is the
category leader. Competitors include a number of major pharmaceutical companies.
In the thermometer market, one very large medical device company has the
dominant market share. In the professional products market, numerous
pharmaceutical companies develop and market prescription products that compete
with our products on a branded and generic basis.
We believe that the principal competitive factors in the diabetes supply market
include attracting new customers, identifying and responding to customer needs,
the quality and breadth of service and product offerings, and expertise with
respect to the reimbursement process. We believe that we compete effectively in
all of these areas because of:
- Liberty Medical's brand recognition supported by a national television
advertising campaign;
- our expertise in the Medicare reimbursement and compliance process; and
- our significant investment in employee training, computer systems and order
processing systems to assure high quality customer service and
cost-effective order processing.
EMPLOYEES
As of September 30, 1999, we had 718 employees. We expect to employ additional
personnel as we expand our operations. None of our employees is a member of a
labor union. We believe that employee relations are good.
PROPERTIES
Our facilities are located in Woburn, Massachusetts; Palm City, Port St. Lucie
and Stuart, Florida; and Golden, Colorado. Our corporate headquarters and our
manufacturing facility are in Woburn in an approximately 60,000 square foot
facility that we own. We also lease approximately 40,000 square feet at our
Liberty Medical facilities in Palm City and Stuart, Florida and approximately
12,000 square feet at our distribution and sales facility in Golden, Colorado.
We recently acquired and are currently configuring an approximately 66,000
square foot facility in Port St. Lucie, Florida to support the growth of our
diabetes supply business. We believe that these facilities are adequate for our
current needs.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
25
<PAGE> 26
MANAGEMENT
The following table lists our executive officers and directors as of October 6,
1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven J. Lee.......................... 52 Chairman and Chief Executive Officer, Director
Arthur A. Siciliano.................... 56 President
Eric G. Walters........................ 47 Chief Financial Officer and Clerk
W. Keith Trowbridge.................... 48 Vice President; President, Liberty Medical
Daniel S. Bernstein.................... 72 Director
Peter K. Hoffman....................... 50 Director
Marcia J. Hooper....................... 45 Director
Frank W. LoGerfo....................... 59 Director
Thomas S. Soltys....................... 51 Director
</TABLE>
Mr. Lee has been Chairman since June 1996 and Chief Executive Officer and a
director since May 1990. Mr. Lee served as President from May 1990 through June
1996. From March 1990 to May 1990, Mr. Lee was a manager in the Mergers and
Acquisitions practice at Coopers & Lybrand. From November 1987 to March 1990,
Mr. Lee was President and a director of Shawmut National Ventures, the venture
capital division of Shawmut Bank, N.A. From 1984 to 1986, he was President,
Chief Executive Officer and a director of RepliGen Corporation, a biotechnology
company. Mr. Lee also spent eleven years in venture capital as President of
Venture Management Advisors and at Bankers Trust Company. Mr. Lee currently
serves as a director of Commonwealth BioVentures, Inc. and Fibersense Technology
Corporation.
Dr. Siciliano has been President since June 1996 and served as Executive Vice
President from July 1994 to June 1996, Senior Vice President from January 1993
to July 1994, Vice President, Pharmaceutics from July 1991 to January 1993 and
Vice President, Manufacturing from June 1990 to July 1991. From our inception
until June 1990, he served as Chief Operating Officer. From 1986 to 1989, he
served as President of MediControl Corporation, a subsidiary of Biotechnology
Development Corporation that he helped found. From 1984 to 1986, Dr. Siciliano
served as President of Microfluidics Corporation, a high technology equipment
manufacturer and a subsidiary of the Biotechnology Development Corporation. He
served as President of the Heico Chemicals Division of the Whittaker Corporation
from 1982 to 1984, as General Manager of Reheis Chemicals (Ireland), Ltd. during
1981 and as Technical Director for Reheis Chemical Co., a division of Revlon
Inc., from 1975 to 1982. Dr. Siciliano also served as Director of Corporate
Research for Kolmar Laboratories, Inc. from 1973 to 1975 and as Senior Scientist
for The Gillette Company from 1969 to 1973.
Mr. Walters joined us in August 1990 as Chief Financial Officer and Treasurer.
From 1987 to 1990, Mr. Walters served in various positions at John Hancock
Capital Growth Management, Inc., most recently as Assistant Treasurer. From 1983
to 1987, Mr. Walters served as Controller of Venture Founders Corporation and
from 1979 to 1983, he was employed at Coopers & Lybrand, most recently as an
Audit Supervisor. Mr. Walters is a Certified Public Accountant.
Mr. Trowbridge was appointed President of Liberty Medical and was elected Vice
President of PolyMedica in May 1999. He joined us in February 1999 as Chief
Operating Officer of Liberty Medical. From December 1997 to February 1999, he
served as President, and from November 1994 to December 1997, he served as
Executive Vice President, of U.S. Operations for Transworld Healthcare, Inc.,
where he was responsible for three domestic operating units including MK
Diabetes Support Services. From August 1991 to October 1994, Mr. Trowbridge
served as Chairman and CEO of Medical Associates of America, a national
integrated network of physician owned pharmacies. Mr. Trowbridge also served as
Executive Vice President of T2 Medical from January 1988 to August 1991.
Dr. Bernstein has been a director since 1992. Dr. Bernstein has been a physician
at Brigham Medical Associates, Boston, Massachusetts since 1993, a lecturer at
Harvard Medical School, Cambridge, Massachusetts since 1993 and Clinical
Professor of Medicine Emeritus, Boston University School of Medicine since 1973.
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<PAGE> 27
Mr. Hoffman has been a director since 1997. Mr. Hoffman has served as President
of Commercial Operations for the Duracell North Atlantic Group of The Gillette
Company since January 1988. He served as Senior Vice President, Business
Management, for the North Atlantic Group of The Gillette Company from 1988 to
1998. Mr. Hoffman joined The Gillette Company in 1972 and has held a variety of
product management positions.
Ms. Hooper has been a director since 1991. Currently, she is Vice President and
Partner of Advent International Corporation. Ms. Hooper served as President of
Viking Capital Corporation from 1993 to 1996. Ms. Hooper served as General
Partner of three venture capital funds of Ampersand Ventures from 1985 to 1993
and is currently a limited partner of the general partner of three venture
capital funds of Ampersand Ventures.
Dr. LoGerfo has been a director since 1994. Dr. LoGerfo has been Attending
Surgeon, Associate Chairman for Research, Department of Surgery, and Chief,
Division of Vascular Surgery, Beth Israel Deaconess Medical Center since 1987.
Dr. LoGerfo has served as William V. McDermott Professor of Surgery at Harvard
Medical School since 1991.
Mr. Soltys has been a director since 1996. Mr. Soltys has served as President of
Boston Special Risks Insurance Agency, Inc. since 1988 and has been its sole
owner since 1994.
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<PAGE> 28
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information regarding beneficial ownership of our
common stock as of October 6, 1999 by:
- each person we know who beneficially owns more than 5% of the outstanding
shares of our common stock;
- each of our directors;
- each of our most highly compensated executive officers in fiscal 1999;
- all our current directors and executive officers as a group; and
- each of the selling shareholders.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting or investment power with
respect to shares. Shares of common stock issuable upon the exercise of stock
options exercisable within 60 days after October 6, 1999, which we refer to as
Presently Exercisable Options, are deemed outstanding for computing the
percentage ownership of the person holding the options but are not deemed
outstanding for computing the percentage ownership of any other person. Unless
otherwise indicated below, to our knowledge, all persons named in the table have
sole voting and investment power with respect to their shares of common stock,
except to the extent authority is shared by spouses under applicable law. The
inclusion of any shares in this table does not constitute an admission of
beneficial ownership for the person named below.
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON
STOCK STOCK
BENEFICIALLY OWNED PRIOR TO BE BENEFICIALLY OWNED
TO OFFERING NUMBER OF SHARES AFTER OFFERING(1)
------------------------ OF COMMON STOCK ------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE BEING OFFERED(1) NUMBER PERCENTAGE
------------------------ ---------- ----------- ---------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Safeco Corporation(2)
Safeco Plaza
Seattle, WA 98185................. 1,429,900 14.9% -- 1,429,900 11.4%
John Hancock Mutual Life Insurance
Company(3)
200 Clarendon Street
Boston, MA 02116.................. 410,987 4.1 410,987 -- --
Steven J. Lee(4).................... 676,195 6.8 108,642 567,553 4.4
Arthur A. Siciliano(5).............. 405,187 4.1 81,482 323,705 2.6
Eric G. Walters(6).................. 236,332 2.4 43,457 192,875 1.5
W. Keith Trowbridge(7).............. 6,249 * -- 6,249 *
Thomas S. Soltys(8)................. 125,125 1.3 -- 125,125 *
Daniel S. Bernstein(9).............. 48,237 * 5,432 42,805 *
Marcia J. Hooper(10)................ 41,288 * -- 41,288 *
Frank W. LoGerfo(11)................ 35,250 * -- 35,250 *
Peter K. Hoffman(12)................ 17,260 * -- 17,260 *
All directors and executive officers
as a group (9 persons)(13)........ 1,591,123 15.1 239,013 1,352,110 10.3
</TABLE>
- ---------------------------
* Less than 1%
(1) If the underwriters' over-allotment option is exercised in full, the
following selling shareholders will sell the number of additional shares
of common stock set forth in the following table and, after the sale, will
beneficially own the number of shares of common stock that is set forth
below opposite their respective names; in addition, all directors and
executive officers as a group will beneficially own the number of shares
of common stock that is set forth below:
28
<PAGE> 29
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK TO BE
BENEFICIALLY OWNED
AFTER
NUMBER OF SHARES EXERCISE OF
OF COMMON STOCK BEING UNDERWRITERS'
OFFERED UPON EXERCISE OVER-ALLOTMENT OPTION
OF THE UNDERWRITERS' -----------------------
NAME OVER-ALLOTMENT OPTION NUMBER PERCENTAGE
---- ---------------------------- --------- ----------
<S> <C> <C> <C>
Steven J. Lee 23,176 544,377 4.1%
Arthur A. Siciliano 17,382 306,323 2.4
Eric G. Walters 9,270 183,605 1.4
Daniel S. Bernstein 1,159 41,646 *
All directors and executive officers as a group
(9 persons) 50,987 1,301,123 9.6
</TABLE>
(2) Based on a Schedule 13G filed by Safeco Corporation and affiliated entities
on February 12, 1999 pursuant to the Securities Exchange Act of 1934, as
amended. The reported shares are owned beneficially by registered
investment companies for which a subsidiary of Safeco Corporation serves as
advisor. Safeco Corporation and the subsidiary that serves as an advisor
disclaim beneficial ownership of the shares reported.
(3) Represents aggregate shares of common stock issuable to John Hancock Mutual
Life Insurance Company upon the cashless exercise of currently exercisable
stock purchase warrants at an exercise price of $5.18 per share based on
the $21.25 per share closing sale price of our common stock on October 6,
1999.
(4) Includes 418,978 Presently Exercisable Options held by Mr. Lee.
(5) Includes 197,781 Presently Exercisable Options held by Dr. Siciliano.
(6) Includes 148,234 Presently Exercisable Options held by Mr. Walters.
(7) Includes 6,249 Presently Exercisable Options held by Mr. Trowbridge.
(8) Includes 25,125 Presently Exercisable Options held by Mr. Soltys.
(9) Includes 40,500 Presently Exercisable Options held by Dr. Bernstein and
4,620 shares held by Dr. Bernstein in an IRA account.
(10) Includes 40,500 Presently Exercisable Options held by Ms. Hooper.
(11) Includes 35,250 Presently Exercisable Options held by Dr. LoGerfo.
(12) Includes 17,260 Presently Exercisable Options held by Mr. Hoffman.
(13) Includes 929,877 Presently Exercisable Options beneficially owned prior to
this offering, gives effect to the exercise of options for 239,013 shares
and the sale of those shares in the offering and, therefore, includes
690,864 Presently Exercisable Options beneficially owned after the
offering.
29
<PAGE> 30
UNDERWRITING
PolyMedica and the selling shareholders have entered into an underwriting
agreement with the underwriters named below. CIBC World Markets Corp. and First
Union Capital Markets Corp. are acting as representatives of the underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
CIBC World Markets Corp. ................................... 1,505,000
First Union Securities, Inc. ............................... 1,005,000
Banc of America Securities LLC.............................. 60,000
Hambrecht & Quist LLC....................................... 60,000
Warburg Dillon Read LLC..................................... 60,000
Ryan, Beck & Co., Inc. ..................................... 60,000
Branch, Cabell & Company.................................... 30,000
Credit Research And Trading LLC............................. 30,000
Cruttenden Roth Incorporated................................ 30,000
Fechtor, Detwiler & Co., Inc. .............................. 30,000
Jesup & Lamont Securities Corporation....................... 30,000
----------
Total............................................. 2,900,000
==========
</TABLE>
This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus (other than
those covered by the over-allotment option described below) if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The representatives have advised PolyMedica and the selling shareholders that
the underwriters propose to offer the shares directly to the public at the
public offering price that appears on the cover page of this prospectus. In
addition, the representatives may offer some of the shares to certain securities
dealers at such price less a concession of $0.68 per share. The underwriters may
also allow, and such dealers may reallow, a concession not in excess of $0.10
per share to certain other dealers. After the shares are released for sale to
the public, the representatives may change the offering price and other selling
terms at various times.
PolyMedica and some of the selling shareholders have granted the underwriters an
over-allotment option. This option, which is exercisable for up to 30 days after
the date of this prospectus, permits the underwriters to purchase a maximum of
435,000 additional shares from PolyMedica and the participating selling
shareholders to cover over-allotments. If the underwriters exercise all or part
of this option, they will purchase shares covered by the option at the public
offering price that appears on the cover page of this prospectus, less the
underwriting discount. If this option is exercised in full, the total price to
public will be approximately $70.9 million, and the total proceeds to PolyMedica
and the selling shareholders will be approximately $52.9 million and $14.1
million, respectively. The underwriters have severally agreed that, to the
extent the over-allotment option is exercised, they will each purchase a number
of additional shares proportionate to the underwriter's initial amount reflected
in the foregoing table.
30
<PAGE> 31
The following table provides information regarding the amount of the discount to
be given to the underwriters by PolyMedica and the selling shareholders.
<TABLE>
<CAPTION>
TOTAL WITHOUT TOTAL WITH
EXERCISE OF FULL EXERCISE OF
PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------- --------------------- ---------------------
<S> <C> <C> <C>
PolyMedica................................... $1.17 $2,632,500 $3,081,795
Selling shareholders......................... 1.17 760,500 820,155
---------- ----------
Total.............................. $3,393,000 $3,901,950
========== ==========
</TABLE>
PolyMedica will pay all of the expenses of the offering, excluding the
underwriting discount, which expenses we estimate to be approximately $500,000.
PolyMedica and the selling shareholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
PolyMedica, its officers and directors and certain other shareholders have
agreed to a 90-day "lock up" with respect to approximately 1,338,812 shares of
common stock and certain other PolyMedica securities that they beneficially own,
including securities that are exchangeable or exercisable for shares of common
stock. This means that, subject to certain exceptions, for a period of 90 days
following the date of this prospectus, PolyMedica and such persons may not
offer, sell, pledge or otherwise dispose of the PolyMedica securities without
the prior written consent of CIBC World Markets Corp.
Rules of the Securities and Exchange Commission may limit the underwriters from
bidding for or purchasing shares before the distribution of the shares is
completed. However, the underwriters may engage in the following activities in
accordance with the rules:
- Stabilizing transactions -- The representatives may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares,
so long as stabilizing bids do not exceed a specified maximum.
- Over-allotments and syndicate covering transactions -- The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created
in connection with the offering, the representatives may engage in
syndicate covering transactions by purchasing shares in the open market.
The representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option.
- Penalty bids -- If the representatives purchase shares in the open market
in a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
- Passive market making -- Market makers in the shares who are underwriters
or prospective underwriters may make bids for or purchases of shares,
subject to certain limitations, until the time, if ever, at which a
stabilizing bid is made.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares.
Neither PolyMedica nor the underwriters make any representation or prediction as
to the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If these transactions are commenced, they may be discontinued without notice at
any time.
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<PAGE> 32
LEGAL MATTERS
The validity of the shares of common stock we are offering will be passed upon
for us by Hale and Dorr LLP, Boston, Massachusetts. Certain legal matters in
connection with this offering will be passed upon for the selling shareholders
by Hale and Dorr LLP. Certain legal matters in connection with this offering
will be passed upon for the underwriters by Testa, Hurwitz & Thibeault, LLP,
Boston, Massachusetts.
EXPERTS
The consolidated financial statements as of March 31, 1998 and 1999 and for each
of the three years in the period ended March 31, 1999 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other documents with the Securities and
Exchange Commission. You may read and copy any document we file at the SEC's
public reference room at Judiciary Plaza Building, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549. You should call 1-800-SEC-0330 for more
information on the public reference room. Our SEC filings are also available to
you on the SEC's Internet site at http://www.sec.gov. In addition, these
materials may be read at the offices of The Nasdaq Stock Market, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
This prospectus is part of the registration statement and does not contain all
of the information included in the registration statement. Whenever a reference
is made in this prospectus to any contract or other document of PolyMedica, the
reference may not be complete and you should refer to the exhibits that are a
part of the registration statement for a copy of the contract or document.
The SEC allows us to "incorporate by reference" into this prospectus information
that we file with the SEC in other documents. This means that we can disclose
important information to you by referring to other documents that contain that
information. The information incorporated by reference is considered to be part
of this prospectus, and information that we file with the SEC in the future and
incorporate by reference will automatically update and may supersede the
information contained in this prospectus. We incorporate by reference the
documents listed below and any future filings we make with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, prior to the sale of all the shares covered by this prospectus.
- - Our Annual Report on Form 10-K for the fiscal year ended March 31, 1999;
- - Our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1999;
- - All of our filings pursuant to the Exchange Act after the date of filing the
initial registration statement and prior to effectiveness of the registration
statement; and
- - The description of our common stock contained in our Registration Statement
on Form 8-A dated March 27, 1995.
You may request a copy of these documents, which will be provided at no cost, by
contacting: PolyMedica Corporation, 11 State Street, Woburn, Massachusetts
01801, Attention: Investor Relations; Telephone (781) 933-2020.
32
<PAGE> 33
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of March 31, 1998 and 1999... F-3
Consolidated Statements of Operations for the years ended
March 31, 1997, 1998, and 1999............................ F-4
Consolidated Statements of Shareholders' Equity for the
years ended March 31, 1997, 1998, and 1999................ F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 1997, 1998, and 1999............................ F-6
Notes to Consolidated Financial Statements.................. F-7
Consolidated Balance Sheets at March 31, 1999 and June 30,
1999...................................................... F-23
Consolidated Statements of Operations for the three months
ended June 30, 1998 and June 30, 1999..................... F-24
Consolidated Statements of Cash Flows for the three months
ended June 30, 1998 and June 30, 1999..................... F-25
Notes to Consolidated Financial Statements.................. F-26
</TABLE>
F-1
<PAGE> 34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of PolyMedica Corporation:
In our opinion, the accompanying consolidated balance sheets, and the related
statements of operations, shareholders' equity and cash flows present fairly, in
all material respects, the financial position of PolyMedica Corporation and its
subsidiaries (the "Company") at March 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
--------------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
May 6, 1999
F-2
<PAGE> 35
POLYMEDICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1998 1999
-------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,440 $ 10,191
Accounts receivable (net of allowances of $3,914 and
$7,330 in 1998 and 1999 , respectively)................ 21,207 32,251
Inventories............................................... 4,857 6,909
Deferred tax asset........................................ 2,075 2,708
Prepaid expenses and other current assets................. 845 721
-------- --------
Total current assets................................... 35,424 52,780
Property, plant, and equipment, net......................... 6,285 6,856
Intangible assets, net...................................... 39,555 37,278
Direct response advertising, net............................ 10,899 15,678
Other assets, net........................................... 238 347
-------- --------
Total assets........................................... $ 92,401 $112,939
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade................................. $ 8,221 $ 12,527
Accrued expenses.......................................... 3,805 4,781
Long-term debt and notes payable.......................... 2,329 3,083
-------- --------
Total current liabilities.............................. 14,355 20,391
Long-term debt and notes payable, net....................... 20,577 21,583
Deferred income taxes....................................... 4,541 7,920
-------- --------
Total liabilities...................................... 39,473 49,894
-------- --------
Commitments (Note K)
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; 8,909,718 and 9,197,075 shares issued in
1998 and 1999, respectively............................ 89 92
Treasury stock, at cost (129,560 and 78,003 shares in 1998
and 1999, respectively)................................ (706) (458)
Additional paid-in capital................................ 54,498 56,557
Retained earnings (deficit)............................... (164) 7,480
Notes receivable from officers............................ (789) (626)
-------- --------
Total shareholders' equity............................. 52,928 63,045
-------- --------
Total liabilities and shareholders' equity............. $ 92,401 $112,939
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 36
POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------
1997 1998 1999
---------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net revenues............................................ $ 30,453 $73,825 $104,825
Cost of sales........................................... 13,603 35,575 49,605
-------- ------- --------
Gross margin............................................ 16,850 38,250 55,220
Selling, general and administrative expenses............ 12,985 28,826 42,185
-------- ------- --------
Income from operations.................................. 3,865 9,424 13,035
Other income and expense:
Gain on sale of wound care business................... -- 4,126 1,597
Investment income..................................... 864 629 434
Interest expense...................................... (2,774) (2,688) (2,555)
-------- ------- --------
(1,910) 2,067 (524)
Income before income taxes.............................. 1,955 11,491 12,511
Income tax provision (benefit).......................... (367) 3,872 4,867
-------- ------- --------
Net income.............................................. $ 2,322 $ 7,619 $ 7,644
======== ======= ========
Net income per weighted average share, basic............ $ .28 $ .88 $ .86
======== ======= ========
Net income per weighted average share, diluted.......... $ .27 $ .79 $ .78
======== ======= ========
Weighted average shares, basic.......................... 8,259 8,652 8,898
Weighted average shares, diluted........................ 8,618 9,691 9,786
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 37
POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------ ------------------- ADDITIONAL
NUMBER OF NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ------ --------- ------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1996....................... 8,112,635 $81 (159,905) $(1,036) $54,917 $(10,105)
Exercise of stock options....................... 245,966 3 (11,880) (110) 924
Issuance of common stock........................ 224,400 2 1,115
Purchase of common stock........................ (8,900) (38)
Officer notes receivable........................
Payment of officer note receivable.............. (9,832) (93)
Issuance of treasury stock under the 1992
Employee Stock Purchase Plan.................. 17,958 162 (70)
Distribution of CardioTech stock to PolyMedica
shareholders.................................. (3,548)
Currency translation adjustment.................
Net income...................................... 2,322
--------- --- -------- ------- ------- --------
BALANCE AT MARCH 31, 1997....................... 8,583,001 86 (172,559) (1,115) 53,338 (7,783)
Exercise of stock options and warrants.......... 326,717 3 11,471 125 1,325
Payment of officer notes receivable............. (3,282) (30)
Issuance of treasury stock under the 1992
Employee Stock Purchase Plan.................. 34,810 314 (165)
Currency translation adjustment.................
Net income...................................... 7,619
--------- --- -------- ------- ------- --------
BALANCE AT MARCH 31, 1998....................... 8,909,718 89 (129,560) (706) 54,498 (164)
Exercise of stock options and warrants.......... 287,357 3 34,608 134 987
Payments of officer notes receivable............
Tax benefit from stock options exercised........ 1,046
Issuance of treasury stock under the 1992
Employee Stock Purchase Plan.................. 16,949 114 26
Net income...................................... 7,644
--------- --- -------- ------- ------- --------
BALANCE AT MARCH 31, 1999....................... 9,197,075 $92 (78,003) $ (458) $56,557 $ 7,480
========= === ======== ======= ======= ========
<CAPTION>
NOTES CURRENCY TOTAL
RECEIVABLE TRANSLATION STOCKHOLDERS'
FROM OFFICERS ADJUSTMENT EQUITY
------------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE AT MARCH 31, 1996....................... $(415) $(162) $43,280
Exercise of stock options....................... 817
Issuance of common stock........................ 1,117
Purchase of common stock........................ (38)
Officer notes receivable........................ (607) (607)
Payment of officer note receivable.............. 93
Issuance of treasury stock under the 1992
Employee Stock Purchase Plan.................. 92
Distribution of CardioTech stock to PolyMedica
shareholders.................................. (3,548)
Currency translation adjustment................. (63) (63)
Net income...................................... -- 2,322
----- ----- -------
BALANCE AT MARCH 31, 1997....................... (929) (225) 43,372
Exercise of stock options and warrants.......... 1,453
Payment of officer notes receivable............. 140 110
Issuance of treasury stock under the 1992
Employee Stock Purchase Plan.................. 149
Currency translation adjustment................. 225 225
Net income...................................... 7,619
----- ----- -------
BALANCE AT MARCH 31, 1998....................... (789) 0 52,928
Exercise of stock options and warrants.......... 1,124
Payments of officer notes receivable............ 163 163
Tax benefit from stock options exercised........ 1,046
Issuance of treasury stock under the 1992
Employee Stock Purchase Plan.................. 140
Net income...................................... -- 7,644
----- ----- -------
BALANCE AT MARCH 31, 1999....................... $(626) $ 0 $63,045
===== ===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 38
POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from continuing operating activities:
Net income................................................ $ 2,322 $ 7,619 $ 7,644
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization........................... 3,045 3,243 3,290
Amortization of direct-response advertising............. 120 2,423 5,383
Direct-response advertising............................. (1,740) (11,702) (10,162)
Deferred income taxes................................... (1,138) 3,604 2,746
Tax benefit from stock options exercised................ -- -- 1,046
(Gain) loss on disposal of fixed assets................. 4 (60) --
Provision for bad debts................................. 237 3,138 7,119
Provision for sales allowances.......................... 1,369 4,846 3,702
Provision for inventory obsolescence.................... 71 12 10
Gain on sale of wound care business..................... -- (4,126) (1,597)
Changes in assets and liabilities:
Accounts receivable................................... (3,650) (22,988) (21,866)
Inventories........................................... (1,051) (1,390) (2,062)
Prepaid expenses and other assets..................... (389) 141 3
Accounts payable -- trade............................. 589 5,240 4,306
Accrued expenses...................................... 459 125 977
-------- -------- --------
Total adjustments..................................... (2,074) (17,494) (7,105)
-------- -------- --------
Net cash flows from continuing operations.......... 248 (9,875) 539
Net cash flows used for discontinued operations.... (389) -- --
-------- -------- --------
Net cash flows from operating activities........... (141) (9,875) 539
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of wound care business................. -- 8,428 1,597
Spinoff of CardioTech International, Inc.................. (3,830) -- --
Acquisition, net of cash acquired......................... (7,375) -- --
Purchase of property, plant, and equipment................ (913) (2,303) (1,474)
Proceeds from sale of equipment........................... -- 100 --
-------- -------- --------
Net cash flows from investing activities........... (12,118) 6,225 123
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 905 1,606 1,262
Purchase of common stock.................................. (38) -- --
Proceeds from long-term debt.............................. -- -- 4,000
Repayment (issuance) of officer notes receivable.......... (607) 110 163
Repayment of senior debt and notes payable................ (312) (2,658) (2,329)
-------- -------- --------
Net cash flows from financing activities........... (52) (942) 3,096
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... (12,311) (4,592) 3,758
-------- -------- --------
Effect of exchange rate changes on cash..................... 37 4 (7)
Cash and cash equivalents at beginning of period............ 23,302 11,028 6,440
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 11,028 $ 6,440 $ 10,191
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 2,769 $ 2,728 $ 2,554
Income taxes paid......................................... 10 25 1,086
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 39
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS:
PolyMedica Corporation (the "Company") was incorporated as Emerging Sciences,
Inc. in Massachusetts on November 16, 1988, and commenced commercial operations
in October 1989. In July 1990, the Company changed its name to PolyMedica
Industries, Inc. In June 1996, the Company distributed to its shareholders all
of its shares of CardioTech International, Inc. ("CardioTech") in a transaction
that qualified as a tax free spinoff. In August 1996, the Company purchased
Liberty Medical Supply, Inc., a diabetes supply company. In July 1997, the
Company sold certain assets of its U.S. and U.K. professional wound care
operations. In September 1997, the Company changed its name to PolyMedica
Corporation. The Company and its subsidiaries operate from manufacturing,
distribution, and laboratory facilities located in Massachusetts, Florida, and
Colorado.
The Company generates sales from Diabetic Supplies; Consumer Healthcare, which
includes OTC medical devices and urinary discomfort products; and Professional
Products, which include prescription urologicals.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly- and majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from those estimates.
EARNINGS PER COMMON SHARE
In its fiscal quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which modifies the
calculation of earnings per share ("EPS"). The Standard replaced the previous
presentation of primary and fully diluted EPS to basic and diluted EPS. Basic
EPS excludes dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS includes the dilution of common stock equivalents, and is
computed similarly to fully diluted EPS pursuant to APB Opinion 15. All prior
periods presented have been restated to reflect this adoption. See Note L.
UNCERTAINTIES
The Company is subject to risks common to companies in the healthcare industry,
including but not limited to, development by the Company or its competitors of
new technological innovations, dependence on key personnel, protection of
proprietary technology, receipt of third party healthcare reimbursement, and
compliance with FDA government regulations.
F-7
<PAGE> 40
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid short-term investments purchased with an
initial maturity of three months or less to be cash equivalents. The Company
places its cash and cash equivalents with high credit quality financial
institutions.
INVESTMENTS
In 1999 and 1998, the Company invested primarily in commercial paper with
initial maturities of 90 days or less and classifies all investments as
held-to-maturity. All investments held as of March 31, 1999 and 1998 have been
classified as cash equivalents and are carried at amortized cost which
approximates market value.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
INTANGIBLE ASSETS
The Company capitalizes and includes in intangible assets the costs of acquiring
patents on its products, a customer list, a covenant-not-to-compete, and
goodwill, which is the cost in excess of the fair value of the net assets of
acquired companies and product lines. All amortization is computed on the
straight-line basis over the shorter of the economic life of the asset or the
term of the underlying agreement. A customer list, a covenant-not-to-compete,
and goodwill are amortized over seven, ten, and seven to thirty years,
respectively.
LONG-LIVED ASSETS
Management's policy is to evaluate the recoverability of its long-lived assets
when the facts and circumstances suggest that these assets may be impaired. The
test of such recoverability is a comparison of the book value of the asset to
expected cumulative (undiscounted) operating cash flows resulting from the
underlying asset over its remaining life. If the book value of the long-lived
asset exceeds undiscounted cumulative operating cash flows, the write-down is
computed as the excess of the asset over the present value of the operating cash
flow discounted at the Company's weighted average cost of capital over the
remaining amortization period.
MARKETING AND PROMOTIONAL COSTS
Advertising, promotional, and other marketing costs are charged to earnings in
the period in which they are incurred. Promotional and sample costs whose
benefit is expected to assist future sales are expensed as the related materials
are used.
F-8
<PAGE> 41
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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, 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 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this Annual Report. 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 incurred and capitalized direct-response advertising of $1.74
million, $11.70 million and $10.16 million in 1997, 1998 and 1999, respectively.
As of March 31, 1998 and 1999, accumulated amortization was $2.54 million and
$7.92 million, which resulted in a net capitalized direct-response advertising
asset of $10.90 million and $15.68 million, respectively. A total of $120,000,
$2.42 million and $5.38 million in direct-response advertising was amortized and
charged to selling, general and administrative expenses in 1997, 1998 and 1999,
respectively.
OTHER ASSETS
Other assets consist principally of senior debt issuance costs and deposits for
equipment yet to be placed in service. Senior debt issuance costs are being
amortized over ten years.
FOREIGN CURRENCY TRANSLATION
In accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation", assets and liabilities of the Company's foreign
subsidiaries are translated into U.S. dollars using current exchange rates at
the balance sheet date, and revenues and expenses are translated at average
exchange rates prevailing during the period. The resulting translation
adjustments are recorded in a separate component of Shareholders' Equity. As
result of the inactivity of foreign subsidiaries caused by the sale of the U.S.
and U.K. wound care business in July 1997, all foreign currency translation
adjustments were expensed.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Depreciation is computed
using the straight-line method based on the estimated useful lives of the
various assets which range from five to twelve years. Amortization of leasehold
improvements is computed using the straight-line method based on estimated
useful lives or terms of the lease, whichever is shorter. Upon retirement or
disposal of fixed assets, the costs and accumulated depreciation are removed
from the accounts, and any gain or loss is reflected in income. Expenditures for
repairs and maintenance are charged to expense as incurred. Construction in
progress is not depreciated until placed in service.
F-9
<PAGE> 42
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based on temporary
differences between the financial statements and tax basis of assets and
liabilities using enacted tax rates expected to be in effect when they are
realized.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment. Included as reductions to gross
accounts receivable are a sales allowance for returned goods and an allowance
for bad debts.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. 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, additional paid-in capital and the equity section of the balance
sheet. The Company adopted SFAS No. 130 for its fiscal year ended March 31,
1999.
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. The
Company adopted SFAS No. 131 for its fiscal year ended March 31, 1999.
RECLASSIFICATIONS
Certain amounts in the prior financial statements have been reclassified to
conform with the current year presentation.
C. SALE OF WOUND CARE BUSINESS:
In July 1997, the Company sold certain assets of its U.S. and U.K. wound care
operations. Under the terms of the sale, the purchaser, Innovative Technologies
Group Plc ("IT"), paid the Company $9 million in cash and issued to the Company
an unsecured promissory note in the face amount of $4 million. In July 1998, the
Company received $1.6 million as final settlement of this note. The net book
value of assets sold and pretax gain as a result of this transaction were $4.9
million and $5.7 million, respectively. Gains on the sale for the years ended
March 31, 1998 and 1999 were as follows:
F-10
<PAGE> 43
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Gain on sale of wound care business........................ $4,126 $1,597
Provision for income taxes related to gain................. 1,390 621
------ ------
Gain on sale, net of income taxes.......................... $2,736 $ 976
====== ======
Net income per common share, diluted, related to gain...... $ .29 $ .10
====== ======
Net income per common share, diluted....................... $ .79 $ .78
====== ======
</TABLE>
D. PURCHASE OF LIBERTY MEDICAL SUPPLY, INC.:
On August 30, 1996, the Company acquired all of the outstanding stock of Liberty
Medical Supply, Inc. in a transaction accounted for under the purchase method of
accounting. Accordingly, the net assets and operations of Liberty Medical have
been included in the Company's financial statements since the date of
acquisition. The acquisition, as amended on March 26, 1997, was for an aggregate
purchase price of $10.26 million (including $490,000 of related expenses), which
was comprised of (i) $7.35 million in cash, (ii) two-year 7% subordinated
promissory notes in the aggregate amount of $1.30 million and (iii) 224,400
shares of the Company's common stock.
The purchase price was allocated to net assets acquired based on their fair
value at the date of acquisition, and the excess of the purchase price over the
fair value of the assets acquired was recorded as attributable to a customer
list ($1.82 million, to be amortized over seven years) and goodwill ($6.82
million, to be amortized over twenty years).
If the acquisition had taken place at the beginning of the year ending March 31,
1997, giving effect to adjustments for amortization of intangible assets,
interest income and interest expense for twelve months, the Company's pro forma
(unaudited) revenues, net income and net income per share for the twelve months
ended March 31, 1997 would have been $35.63 million, $2.50 million and $.29,
respectively.
E. DISCONTINUED OPERATIONS:
On March 1, 1996, the Company announced its strategic decision to distribute to
its shareholders all of its shares of CardioTech under a plan which was approved
by the Company's board of directors. In May 1996, the Company's board of
directors declared a stock dividend for the purpose of making a distribution to
the Company's shareholders of all of the outstanding shares it owned in
CardioTech. The Company believes that the distribution of CardioTech Common
Stock in the Distribution qualified as a "tax-free" spinoff under Section 355 of
the Internal Revenue Code of 1986, as amended. CardioTech develops, manufactures
and markets its polymer technologies with particular emphasis on the development
of implantable synthetic grafts for a broad variety of applications, including
vascular access grafts, peripheral grafts and coronary artery bypass grafts.
F. ACCOUNTS RECEIVABLE:
As of March 31, 1999, Liberty Medical's gross unbilled receivables included in
accounts receivable were $15.35 million as compared with $10.82 million as of
March 31, 1998. The increase is primarily a result of the overall growth of
Liberty Medical's sales in the fiscal year ended March 31, 1999. The Company
recorded sales returns and bad debt write-offs of $5.13 million and $7.41
million in the fiscal years ended March 31, 1998 and 1999, respectively.
F-11
<PAGE> 44
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
G. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1998 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.......................................... $1,058 $ 739
Work in process........................................ 296 594
Finished goods......................................... 3,503 5,576
------ ------
$4,857 $6,909
====== ======
</TABLE>
H. PROPERTY, PLANT, AND EQUIPMENT:
Property, plant, and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1998 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Manufacturing equipment................................ $1,841 $1,937
Laboratory equipment................................... 188 222
Land................................................... 663 663
Building............................................... 2,345 2,364
Leasehold improvements................................. 343 343
Furniture, fixtures, and office equipment.............. 2,638 3,485
Construction in progress............................... -- 403
------ ------
8,018 9,417
Less accumulated depreciation and amortization......... (1,733) (2,561)
------ ------
$6,285 $6,856
====== ======
</TABLE>
Depreciation and amortization expense from continuing operations for property,
plant, and equipment for the years ended March 31, 1997, 1998, and 1999, was
approximately $899,000, $838,000, and $903,000, respectively. In May 1999, the
Company purchased a 66,000 square foot building in Port St. Lucie, Florida to
support the Company's growth.
F-12
<PAGE> 45
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
I. INTANGIBLE ASSETS:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1998 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Goodwill............................................... $42,816 $42,816
Covenant-not-to-Compete................................ 6,800 6,800
Customer list.......................................... 1,816 1,816
------- -------
51,432 51,432
Less accumulated amortization.......................... (11,877) (14,154)
------- -------
$39,555 $37,278
======= =======
</TABLE>
Amortization expense from continuing operations associated with intangible
assets for the years ended March 31, 1997, 1998, and 1999, was $2,117,000,
$2,279,000, and $2,277,000, respectively.
J. LONG-TERM DEBT AND NOTES PAYABLE:
SENIOR DEBT
In connection with the purchase of the WEBCON product line, in January 1993, the
Company and its wholly-owned subsidiary, PolyMedica Pharmaceuticals (U.S.A.),
Inc. ("PMP USA") sold to the John Hancock Mutual Life Insurance Company
("Hancock"), $25 million 10.65% Guaranteed Senior Secured Notes due January 31,
2003, and a warrant for the purchase of up to 500,000 shares of common stock of
the Company at $13.50 each (the "Hancock Notes"). The effective interest rate of
the Hancock Notes was 10.97%. Interest is payable semi-annually. At that time,
the warrant was valued at $725,000 and was recorded as a discount to the Hancock
Notes, to be amortized to expense over the life of the Hancock Notes. The
warrant was exercisable beginning in January 1994. The Company recorded $89,000
of amortization expense each for the years ended March 31, 1998 and 1999. As of
March 31, 1998 and 1999 the balance due to Hancock was $23.0 million and $21.0
million, respectively. As of March 31, 1998 and 1999, there was $423,000 and
$334,000, respectively, of unamortized discount, netted against senior debt.
In January 1996, the Company and Hancock signed an amendment to the Hancock
Notes. Under the terms of the amendment, scheduled semi-annual repayments of
principal commence at $1.00 million each in fiscal 1998, increase to $2.08
million each beginning in January 2000 and are completed with a $7.50 million
payment at January 31, 2003. Pursuant to the amendment, the exercise price for
the Hancock warrant, exercisable for 536,993 shares of common stock of the
Company, was reduced from $8.38 to $7.00 per share and the interest rate of the
Hancock Notes was increased from 10.65% to 10.9%. In addition, the Company
obtained less restrictive dividend terms and revised financial covenants. This
amendment resulted in a revaluation of the warrant to $623,000, which compared
with a $513,000 unamortized value on January 1, 1996. The difference of $110,000
was recorded to additional paid-in capital.
As a result of a private placement of the Company's Common Stock in March 1996
and the acquisition of Liberty Medical in August 1996, the exercise price of the
Hancock warrant was adjusted to $5.18 per share of common stock for a total of
543,464 shares exercisable under the warrant.
F-13
<PAGE> 46
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the terms of the Hancock Notes, Hancock has a security interest in all of
the assets of PMP USA and its subsidiary PolyMedica Pharmaceuticals (Puerto
Rico), Inc. ("PMP PR").
The Hancock Notes are collateralized by all of the assets of PMP USA and PMP PR,
which amounted to approximately $40.9 million as of March 31, 1999.
Interest expense recorded for the Hancock Notes was $2,725,000, $2,634,000, and
$2,416,000 in the years ended March 31, 1997, 1998, and 1999, respectively.
REVOLVING CREDIT FACILITY
In March 1999, the Company increased its existing revolving credit facility from
$7.5 million to $10 million. As of March 31, 1999, the Company had an
outstanding balance of $4 million. Under the terms of this facility, the Company
is required to repay all principal balances on March 31, 2001. The facility is
collateralized by certain assets of the Company. Under this facility, the
Company is required to maintain certain financial covenants. The interest rate
is tied to the Company's funded debt to EBITDA ratio and was 7.75% as of March
31, 1999.
K. COMMITMENTS:
The Company leases its facilities and certain equipment under operating leases
expiring through 2004. The annual future minimum lease and rental commitments as
of March 31, 1999, under all the Company's leases are:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000......................................... $ 945
2001......................................... 705
2002......................................... 523
2003......................................... 364
2004......................................... 168
------
Total minimum lease payments............ $2,705
======
</TABLE>
Rental expense under these leases amounted to approximately $368,000, $418,000,
and $500,000, for the years ended March 31, 1997, 1998, and 1999, respectively.
F-14
<PAGE> 47
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
L. EARNINGS PER SHARE:
Calculation of per share earnings is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
------------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income........................................... $2,322 $7,619 $7,644
BASIC:
Weighted average common stock outstanding, net of
treasury stock, end of period...................... 8,259 8,652 8,898
Net income per common share, basic................... $ 0.28 $ 0.88 $ 0.86
====== ====== ======
DILUTED:
Weighted average common stock outstanding, net of
treasury stock, end of period...................... 8,259 8,652 8,898
Weighted average common stock equivalents............ 359 1,039 888
Weighted average common stock outstanding, net of
treasury stock, end of period...................... 8,618 9,691 9,786
Net income per common share, diluted................. $ 0.27 $ 0.79 $ 0.78
====== ====== ======
</TABLE>
M. COMPREHENSIVE INCOME:
The Company's total comprehensive income was as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income............................................... $2,322 $7,619 $7,644
Other comprehensive expense, net of tax:
Currency translation adjustment.......................... (63) 225 --
------ ------ ------
Total comprehensive income............................... $2,259 $7,844 $7,644
====== ====== ======
</TABLE>
N. SHAREHOLDERS' EQUITY:
Each holder of outstanding common stock has a preferred stock purchase right (a
"Right") for each share of common stock. Each Right entitles the holder to
purchase from the Company one one-hundredth of a share of Series A junior
participating preferred stock at a cash exercise price to be determined by the
board of directors. Initially, the Rights will be attached to all common stock
certificates and will not be exercisable. The Rights will become exercisable
upon the earlier of certain events, including an acquisition by a person or
group of 15% or more of the outstanding common stock (an "Acquiring Person"), or
the commencement of a tender offer or exchange offer that would result in an
Acquiring Person beneficially owning 15% or more of the outstanding common
stock.
The Company will generally be entitled to redeem the Rights at $.01 per share at
any time until the tenth day following public announcement that a 15% stock
position has been acquired. The Rights will expire on January 23, 2002, unless
earlier redeemed or exchanged.
Between June 1992 and May 1994, the Company's board of directors authorized the
future purchase of up to an aggregate of 1,750,000 shares of the Company's
common stock on the open market, with any shares
F-15
<PAGE> 48
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to be held in treasury. As of March 31, 1999, cumulative purchases of common
stock totalled 239,193 for an aggregate of $1.69 million. The purpose of this
purchase program is, in part, to provide shares of common stock for issuance
pursuant to the 1992 Employee Stock Purchase Plan and upon the exercise of the
warrant issued to Hancock.
O. INCOME TAXES:
Income (loss) before income taxes was generated as follows in the years ended
March 31:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
United States.......................................... $1,994 $10,291 $12,463
Foreign................................................ (39) 1,200 48
------ ------- -------
$1,955 $11,491 $12,511
====== ======= =======
</TABLE>
The provision (benefit) for income taxes consists of the following for the years
ended March 31:
<TABLE>
<CAPTION>
1997 1998 1999
----- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
FEDERAL
-- current.............................................. $(275) $ 216 $1,381
-- deferred............................................. -- 2,495 2,749
----- ------ ------
-- total................................................ (275) 2,711 4,130
STATE
-- current.............................................. 65 52 740
-- deferred............................................. (157) 1,109 (3)
----- ------ ------
-- total................................................ (92) 1,161 737
----- ------ ------
Total Federal and State................................... $(367) $3,872 $4,867
===== ====== ======
</TABLE>
A reconciliation between the Company's effective tax rate for operations and the
U.S. statutory rate is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----- ---- ----
<S> <C> <C> <C>
U.S. statutory rate......................................... 34.0% 34.0% 34.0%
Change in valuation allowance............................... (60.5%) (5.5%) --
State income taxes, net of U.S.
Federal Income Tax effect................................... 6.5% 6.6% 4.7%
Other....................................................... 1.2% (1.9%) .2%
----- ---- ----
Effective tax rate.......................................... (18.8%) 33.2% 38.9%
===== ==== ====
</TABLE>
The Company determined that it is more likely than not that deferred tax assets
remaining on March 31, 1999 will be realized. Realization of the net deferred
tax assets is dependent on generating sufficient taxable income prior to the
expiration of loss carryforwards. Although realization is not assured,
management believes that it is more likely than not that such net deferred tax
assets will be realized. The following is a summary of
F-16
<PAGE> 49
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the significant components of the Company's deferred tax assets and liabilities
as of March 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets (liabilities) -- current:
Reserves............................................... $ 2,075 $ 2,708
======= =======
Deferred tax assets (liabilities) -- long term:
Federal and state net operating loss carryforwards..... $ 1,558 $ 79
Foreign net operating loss carryforwards............... -- --
Other assets........................................... -- --
Intangible assets...................................... (1,291) (1,579)
Property, plant and equipment.......................... (419) (520)
Direct-response advertising............................ (4,389) (5,900)
------- -------
Net deferred tax liability -- long term................ $(4,541) $(7,920)
======= =======
</TABLE>
As of March 31, 1998, accrued expenses included $1.04 million of accrued taxes.
As of March 31, 1999, the Company has utilized all net operating loss
carryforward amounts for federal income tax purposes.
P. MAJOR CUSTOMERS:
For the fiscal years ended March 31, 1997, 1998 and 1999, no customer
represented more than 10% of the Company's consolidated net revenues. As of
March 31, 1998 and 1999, the amounts due from Health Care Financing
Administration of the United States government related to Liberty Medical
revenues was $4.64 million and $8.77 million, respectively.
Q. STOCK OPTIONS:
Effective September 1998, the Company's shareholders approved the 1998 Stock
Incentive Plan (the "1998 Plan"), which replaced the 1990 Stock Option Plan (the
"1990 Plan") and the 1992 Directors Stock Option Plan (the "1992 Plan")
(collectively, the "Plans").
The 1998 Plan provides for the grant to certain individuals of stock options to
purchase up to 315,000 shares of the Company's common stock.
Generally, when shares acquired pursuant to the exercise of incentive stock
options are sold within one year of exercise or within two years from the date
of grant, the Company derives a tax deduction measured by the amount that the
fair market value exceeds the option price at the date the options are
exercised. When non-qualified stock options are exercised, the Company derives a
tax deduction measured by the amount that the fair market value exceeds the
option price at the date the options are exercised. The tax benefit from these
deductions are recognized as additional paid-in capital.
F-17
<PAGE> 50
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option activity under the Plans is as follows:
<TABLE>
<CAPTION>
OPTION OPTION
SHARES PRICES
---------- --------------
<S> <C> <C>
Outstanding, March 31, 1996............................. 1,674,559 $ .95 - $13.33
Granted............................................... 1,983,212 .71 - 6.38
Exercised............................................. (245,966) 2.06 - 7.86
Cancelled............................................. (1,435,197) .95 - 13.33
----------
Outstanding, March 31, 1997............................. 1,976,608 $ .71 - $ 6.38
----------
Granted............................................... 271,360 4.87 - 13.75
Exercised............................................. (326,717) .71 - 5.38
Cancelled............................................. (46,736) 4.31 - 5.38
----------
Outstanding, March 31, 1998............................. 1,874,515 $ .71 - $13.75
----------
Granted............................................... 267,250 7.56 - 11.44
Exercised............................................. (287,357) 0.71 - 7.75
Cancelled............................................. (97,645) 4.31 - 13.75
----------
Outstanding, March 31, 1999............................. 1,756,763 $2.14 - $13.75
==========
</TABLE>
At March 31, 1999, 1,482,659 shares were exercisable and 274,104 will vest
principally over three years under the Plans. There were 73,000 shares remaining
that are authorized for future option grants under the 1998 Plan. The weighted
average exercise price of shares exercisable as of March 31, 1999 was $5.33.
In October 1996, the board of directors approved the cancellation of prior
grants of 1,172,355 options whose exercise prices ranged from $.95 to $13.33 per
common share. A total of 1,172,355 new options were granted whose exercise
prices ranged from $.71 to $5.38 per common share.
SUPPLEMENTAL DISCLOSURES FOR STOCK-BASED COMPENSATION
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for the Plans. Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," ("SFAS 123") issued in 1995, defined a fair value
method of accounting for stock options and other equity instruments. Under the
fair value method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service period, which is
usually the vesting period. The Company elected to continue to apply the
accounting provisions of APB Opinion No. 25 for stock options. The required
disclosures under SFAS 123 as if the Company had applied the new method of
accounting are made below.
Summarized information about stock options outstanding as of March 31, 1999, is
as follows:
<TABLE>
<CAPTION>
NUMBER OF
RANGE OF NUMBER OF WEIGHTED AVG. OPTIONS WEIGHTED-AVG.
EXERCISE OPTIONS REMAINING WEIGHTED AVG. OUTSTANDING- EXERCISE-PRICE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISABLE
- -------------- ----------- ---------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$ 2.14 - 2.14.. 39,663 7.51 $ 2.15 39,663 $ 2.14
$ 3.30 - 4.64.. 897,980 7.63 $ 4.01 860,202 $ 4.00
$ 5.38 - 7.75.. 551,252 8.28 $ 6.22 426,738 $ 5.81
$ 8.63 - 11.88.. 229,119 8.76 $11.14 117,307 $11.69
$13.50 - 13.75.. 38,749 8.50 $13.51 38,749 $13.51
</TABLE>
F-18
<PAGE> 51
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option granted during 1998 and 1999 is estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1998 1999
----- -----
<S> <C> <C>
Dividend yield.............................................. none none
Expected volatility......................................... 55.0% 55.0%
Risk-free interest rate..................................... 6.18% 4.89%
Expected life............................................... 4 4
Weighted average fair value of options granted at fair value
during:
1998............................................................. $5.80
1999............................................................. $3.79
Employee Stock Purchase Plan weighted-average fair value of
options:
1998............................................................. $2.06
1999............................................................. $2.82
</TABLE>
Had compensation cost for the Company's 1998 and 1999 stock option grants been
determined consistent with SFAS 123, the Company's net income and net income per
share would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
NET INCOME
PER FULLY
NET INCOME DILUTED SHARE
---------- -------------
<S> <C> <C>
As reported:
1998.............................................. $7,619,000 $.79
1999.............................................. $7,644,000 $.78
Pro forma:
1998.............................................. $7,003,000 $.72
1999.............................................. $7,035,000 $.72
</TABLE>
The effect of applying SFAS 123 in this pro forma disclosure is not indicative
of future amounts. SFAS 123 does not apply to awards made prior to 1995.
Additional awards in future years are anticipated.
R. 401(k) PLAN:
The PolyMedica Corporation 401(k) Plan and Trust (the "401(k) Plan") is a
voluntary savings plan for all eligible employees which is intended to qualify
under Section 401(k) of the Internal Revenue Code. Each eligible employee may
elect to contribute to the 401(k) Plan, through payroll deductions, up to 15% of
his or her salary, subject to statutory limitations. The Company may make
matching contributions on behalf of participating employees of half of the
dollar amount of each participating employee's contribution, up to a maximum of
3% of an employee's total cash compensation, subject to certain limitations.
For the years ended March 31, 1997, 1998, and 1999, the Company paid and accrued
matching contributions of $69,000, $108,000, and $190,000, respectively, for the
401(k) Plan participants.
F-19
<PAGE> 52
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
S. SEGMENT INFORMATION:
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, except for gains related to the sale of the Company's wound care
business. As a result, the segment information may not be indicative of the
financial position of 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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
------------------------------
1997 1998 1999
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Diabetes Supplies.................................... $ 8,652 $48,708 $ 80,597
Consumer Healthcare.................................. 10,296 11,149 14,275
Professional Products................................ 11,505 13,968 9,953
All Other............................................ -- -- --
------- ------- --------
Total........................................... $30,453 $73,825 $104,825
======= ======= ========
DEPRECIATION AND AMORTIZATION EXPENSE:
Diabetes Supplies.................................... 506 3,331 6,507
Consumer Healthcare.................................. 51 62 65
Professional Products................................ 2,561 2,218 2,048
All Other............................................ 47 55 53
------- ------- --------
Total........................................... $ 3,165 $ 5,666 $ 8,673
======= ======= ========
</TABLE>
F-20
<PAGE> 53
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
------------------------------
1997 1998 1999
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME BEFORE INCOME TAXES:
Diabetes Supplies.................................... 716 1,140 5,300
Consumer Healthcare.................................. 2,120 1,253 2,868
Professional Products................................ (881) 4,972 2,746
All Other(1)......................................... 0 4,126 1,597
------- ------- --------
Total........................................... $ 1,955 $11,491 $ 12,511
======= ======= ========
SEGMENT ASSETS:
Diabetes Supplies.................................... 15,417 40,795 62,922
Consumer Healthcare.................................. 4,229 5,217 6,263
Professional Products................................ 48,429 43,540 39,337
All Other............................................ 7,158 2,849 4,417
------- ------- --------
Total........................................... $75,233 $92,401 $112,939
======= ======= ========
</TABLE>
- ---------------------------
(1) Represents pretax gains related to the sale of the Company's wound care
business.
T. INTERIM INFORMATION (UNAUDITED):
The following consolidated interim financial information is unaudited. Such
information reflects all adjustments, consisting solely of normal recurring
adjustments, which are in the opinion of management necessary for a fair
presentation.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999
----------------------------------------
QTR. 1 QTR. 2* QTR. 3 QTR. 4
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues...................................... $20,661 $24,823 $28,791 $30,550
Gross margin........................................ 10,740 12,945 14,826 16,709
Net income.......................................... 1,293 2,484 1,746 2,121
Net income per weighted average share, basic........ $ 0.15 $ 0.28 $ 0.20 $ 0.23
Net income per weighted average share, diluted...... $ 0.13 $ 0.26 $ 0.18 $ 0.22
</TABLE>
- ---------------------------
* includes after tax gain of $976,000 or $0.10 per diluted share related to
the sale of the Company's wound care business.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1998
----------------------------------------
QTR. 1 QTR. 2* QTR. 3 QTR. 4
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues.............................. $13,958 $17,643 $20,668 $21,556
Gross margin................................ 7,230 9,664 10,448 10,908
Net income.................................. 831 3,915 1,383 1,490
Net income per weighted average share,
basic..................................... $ 0.10 $ 0.45 $ 0.16 $ 0.17
Net income per weighted average share,
diluted................................... $ 0.09 $ 0.39 $ 0.14 $ 0.15
</TABLE>
- ---------------------------
* includes after tax gain of $2.74 million or $0.29 per diluted share related to
the sale of the Company's wound care business
F-21
<PAGE> 54
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U. RELATED PARTY TRANSACTIONS:
In December 1994 and January 1997, certain executive officers of the Company
purchased in the aggregate 100,000 and 100,000 shares, respectively, of the
Company's common stock on the open market. The purchases, valued at $415,000 and
$607,000, respectively, were funded by a note issued by the Company to each
officer. The terms of the notes provide for each executive to repay the Company
with Company shares within five years from the date of the note at a market
value equal to the original principal of the note. The principal balance due is
shown as notes receivable from officers in Shareholders' Equity on the
Consolidated Balance Sheet. As of March 31, 1999 the balance of notes receivable
was $626,000.
V. SUBSEQUENT EVENT:
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 maintain
certain financial covenants. The interest rate is 8.07%.
F-22
<PAGE> 55
POLYMEDICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1999
--------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS,
EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 10,191 $ 10,423
Accounts receivable (net of allowances of $7,330 and
$7,852 as of March 31, and June 30 1999,
respectively).......................................... 32,251 31,609
Inventories............................................... 6,909 7,375
Deferred tax asset........................................ 2,708 2,708
Prepaid expenses and other current assets................. 721 1,400
-------- --------
Total current assets................................... 52,780 53,515
Property, plant, and equipment, net......................... 6,856 9,125
Intangible assets, net...................................... 37,278 36,708
Direct response advertising, net............................ 15,678 17,023
Other assets, net........................................... 347 236
-------- --------
Total assets........................................... $112,939 $116,607
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade................................. $ 12,527 $ 9,895
Accrued expenses.......................................... 4,781 7,766
Current portion of long-term debt and notes payable,
net.................................................... 3,083 3,087
-------- --------
Total current liabilities.............................. 20,391 20,748
Long-term debt and notes payable, net....................... 21,583 22,018
Deferred income taxes....................................... 7,920 7,920
-------- --------
Total liabilities...................................... 49,894 50,686
-------- --------
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;
9,197,075 and 9,319,913 issued as of March 31 and June
30, 1999, respectively................................. 92 93
Treasury stock, at cost, (78,003 and 90,971 shares as of
March 31 and June 30, 1999, respectively).............. (458) (646)
Additional paid-in capital................................ 56,557 57,099
Retained earnings......................................... 7,480 9,934
Notes receivable from officers............................ (626) (559)
-------- --------
Total shareholders' equity............................. 63,045 65,921
-------- --------
Total liabilities and shareholders' equity............. $112,939 $116,607
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-23
<PAGE> 56
POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------
1998 1999
--------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net revenues................................................ $20,661 $31,580
Cost of sales............................................... 9,921 13,715
------- -------
Gross margin................................................ 10,740 17,865
Selling, general and administrative expenses................ 8,062 13,361
------- -------
Income from operations...................................... 2,678 4,504
Other income and expense:
Investment income......................................... 114 89
Interest expense.......................................... (637) (603)
------- -------
(523) (514)
------- -------
Income before income taxes.................................. 2,155 3,990
Income tax provision........................................ 862 1,536
------- -------
Net income.................................................. $ 1,293 $ 2,454
======= =======
Net income per weighted average share, basic................ $ .15 $ .27
======= =======
Net income per weighted average share, diluted.............. $ .13 $ .25
======= =======
Weighted average shares, basic.............................. 8,789 9,152
Weighted average shares, diluted............................ 9,771 9,890
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-24
<PAGE> 57
POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------
1998 1999
------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,293 $ 2,454
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization.......................... 800 851
Amortization of direct-response advertising............ 1,156 1,687
Direct-response advertising............................ (3,058) (3,032)
Deferred income taxes.................................. 862 --
Provision for inventory obsolescence................... -- 125
Provision for bad debts................................ 1,445 2,127
Provision for sales allowances......................... 959 1,793
Changes in assets and liabilities:
Accounts receivable.................................. 1,611 (3,278)
Inventories.......................................... (858) (590)
Prepaid expenses and other assets.................... (815) (396)
Accounts payable -- trade............................ (527) (2,809)
Accrued expenses..................................... 842 2,985
------- -------
Total adjustments................................. 2,417 (537)
------- -------
Net cash flows from operating activities.......... 3,710 1,917
------- -------
Cash flows from investing activities:
Purchase of property, plant, and equipment................ (482) (2,524)
------- -------
Net cash flows from investing activities.......... (482) (2,524)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 91 355
Repayment of long-term debt............................... -- (1,000)
Proceeds from issuance of long-term debt.................. -- 1,417
Repayment of notes receivable from officers............... -- 67
------- -------
Net cash flows from financing activities.......... 91 839
------- -------
Net increase in cash and cash equivalents......... 3,319 232
------- -------
Effect of exchange rate changes on cash..................... -- --
Cash and cash equivalents at beginning of period............ 6,440 10,191
------- -------
Cash and cash equivalents at end of period.................. $ 9,759 $10,423
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-25
<PAGE> 58
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:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1999
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................ $ 739 $ 731
Work in process.......................................... 594 574
Finished goods........................................... 5,576 6,070
------ ------
$6,909 $7,375
====== ======
</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, "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.
The Company capitalized direct-response advertising of $3.06 million and $3.03
million in the three months ended June 30, 1998 and 1999, respectively. A total
of $1.16 million and $1.69 million in direct-response advertising was amortized
and charged to selling, general and administrative expense for the three months
ending June 30, 1998 and 1999, respectively. As of March 31 and June 30, 1999,
accumulated amortization was $7.92 million and $9.61 million, which resulted in
a net capitalized direct-response advertising asset of $15.68 million and $17.02
million, respectively.
F-26
<PAGE> 59
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------
1998 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net income.................................................. $1,293 $2,454
BASIC:
Weighted average common stock outstanding, net of treasury
stock, end of period...................................... 8,789 9,152
Net income per common share, basic.......................... $ 0.15 $ 0.27
====== ======
DILUTED:
Weighted average common stock outstanding, net of treasury
stock, end of period...................................... 8,789 9,152
Weighted average common stock equivalents................... 982 738
------ ------
Weighted average common stock outstanding, net of treasury
stock, end of period...................................... 9,771 9,890
Net income per common share, diluted........................ $ 0.13 $ 0.25
====== ======
</TABLE>
6. Company's total net income and comprehensive income was $1.29 million and
$2.45 million for the three months ended June 30, 1998 and 1999, 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
F-27
<PAGE> 60
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
--------------------
JUNE 30, JUNE 30,
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
REVENUES:
Diabetes Supplies........................................... $15,681 $26,365
Consumer Healthcare......................................... 2,598 2,929
Professional Products....................................... 2,382 2,286
------- -------
Total....................................................... $20,661 $31,580
======= =======
DEPRECIATION AND AMORTIZATION:
Diabetes Supplies........................................... 1,420 1,994
Consumer Healthcare......................................... 16 14
Professional Products....................................... 508 515
All Other................................................... 12 15
------- -------
Total....................................................... $ 1,956 $ 2,538
======= =======
INCOME BEFORE INCOME TAXES:
Diabetes Supplies........................................... 1,246 2,857
Consumer Healthcare......................................... 509 567
Professional Products....................................... 400 566
------- -------
Total....................................................... $ 2,155 $ 3,990
======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1999
--------- --------
<S> <C> <C>
SEGMENT ASSETS:
Diabetes Supplies........................................... 62,922 66,177
Consumer Healthcare......................................... 6,263 5,892
Professional Products....................................... 39,337 39,018
All Other................................................... 4,417 5,520
-------- --------
Total....................................................... $112,939 $116,607
======== ========
</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
F-28
<PAGE> 61
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
resulting designation. The Company believes that adoption of the statement will
not have a material effect on the financial statements.
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.
F-29
<PAGE> 62
- --------------------------------------------------------------------------------
[POLYMEDICA LOGO]
POLYMEDICA CORPORATION
2,900,000 SHARES
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
October 7, 1999
CIBC WORLD MARKETS
FIRST UNION SECURITIES, INC.
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER,
SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
