<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 0-19842
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PolyMedica Corporation
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3033368
- ------------------------------ -------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
11 State Street, Woburn, Massachusetts 01801
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 933-2020
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's class of Common Stock
as of November 11, 1999 was 12,939,538.
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POLYMEDICA CORPORATION
TABLE OF CONTENTS
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Page
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PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Financial Statements
Consolidated Balance Sheets at
September 30, 1999 and March 31, 1999 3
Consolidated Statements of Operations
for the three and six months ended
September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows
for the six months ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 22
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 23
Item 6 - Exhibits and Reports on Form 8-K 24
Signatures 25
Exhibit Index 26
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
POLYMEDICA CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
SEPT. 30, MARCH 31,
1999 1999
(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents $ 11,063 $ 10,191
Accounts receivable (net of
allowances of $8,543 and $7,330 as of September 30
and March 31, 1999, respectively) 35,271 32,251
Inventories 7,451 6,909
Deferred tax asset 2,708 2,708
Prepaid expenses and other
current assets 1,457 721
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Total current assets 57,950 52,780
Property, plant, and equipment, net 9,472 6,856
Intangible assets, net 36,139 37,278
Direct response advertising, net 19,717 15,678
Other assets, net 255 347
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Total assets $123,533 $112,939
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</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
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POLYMEDICA CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
SEPT. 30, MARCH 31,
1999 1999
(UNAUDITED)
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade $ 11,816 $ 12,527
Accrued expenses 10,441 4,781
Current portion of long-term debt and
notes payable, net 4,218 3,083
--------- ---------
Total current liabilities 26,475 20,391
Long-term debt and notes payable, net 19,401 21,583
Deferred income taxes 7,920 7,920
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Total liabilities 53,796 49,894
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Commitments
Shareholders' equity:
Preferred stock $.01 par value; 2,000,000 shares
authorized, none issued or outstanding -- --
Common stock $.01 par value; 20,000,000
shares authorized; 9,766,240 and 9,197,075
issued as of September 30 and March 31, 1999,
respectively 96 92
Treasury stock, at cost, (169,291 and 78,003
shares as of September 30 and March 31, 1999,
respectively) (2,702) (458)
Additional paid-in capital 59,282 56,557
Retained earnings 13,061 7,480
Notes receivable from officers -- (626)
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Total shareholders' equity 69,737 63,045
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Total liabilities and
shareholders' equity $ 123,533 $ 112,939
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
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POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Net revenues $ 35,919 $ 24,823 $ 67,499 $ 45,484
Cost of sales 15,137 11,878 28,852 21,799
-------- -------- -------- --------
Gross margin 20,782 12,945 38,647 23,685
Selling, general and administrative expenses 15,227 9,927 28,588 17,989
-------- -------- -------- --------
Income from operations 5,555 3,018 10,059 5,696
Other income and expense:
Gain on sale of wound care business -- 1,597 -- 1,597
Investment income 110 139 199 253
Interest expense (579) (613) (1,182) (1,250)
-------- -------- -------- --------
(469) 1,123 (983) 600
Income before income taxes 5,086 4,141 9,076 6,296
Income tax provision 1,959 1,657 3,495 2,519
-------- -------- -------- --------
Net income $ 3,127 $ 2,484 $ 5,581 $ 3,777
======== ======== ======== ========
Net income per weighted average share, basic $ .33 $ .28 $ .60 $ .43
======== ======== ======== ========
Net income per weighted average share, diluted $ .30 $ .26 $ .55 $ .39
======== ======== ======== ========
Weighted average shares, basic 9,397 8,810 9,275 8,799
Weighted average shares, diluted 10,487 9,721 10,188 9,746
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
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POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPT. 30,
--------------------------
1999 1998
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Cash flows from operating activities:
Net income $ 5,581 $ 3,777
Adjustments to reconcile net income to net cash flows
from operating activities:
Gain on sale of wound care business -- (1,597)
Depreciation and amortization 1,736 1,615
Amortization of direct-response advertising 3,640 2,463
Direct-response advertising (7,679) (5,542)
Deferred income taxes -- 2,354
Provision for inventory obsolescence 125 --
Provision for bad debts 4,368 2,503
Provision for sales allowances 3,887 1,631
Changes in assets and liabilities:
Accounts receivable (11,275) (1,489)
Inventories (666) (2,261)
Prepaid expenses and other assets (477) (883)
Accounts payable--trade (887) 1,218
Accrued expenses 5,660 78
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Total adjustments (1,568) 90
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Net cash flows from operating activities 4,013 3,867
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Cash flows from investing activities:
Proceeds from sale of wound care business, net of related expenses -- 1,597
Purchase of property, plant, and equipment (3,160) (744)
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Net cash flows from investing activities (3,160) 853
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Cash flows from financing activities:
Proceeds from issuance of common stock 1,044 269
Repayment of long-term debt and notes payable (3,000) (1,329)
Proceeds from issuance of long-term debt and notes payable 1,908 --
Repayment of notes receivable from officers 67 68
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Net cash flows from financing activities 19 (992)
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Net increase in cash and cash equivalents 872 3,728
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Effect of exchange rate changes on cash -- (6)
Cash and cash equivalents at beginning of period 10,191 6,440
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Cash and cash equivalents at end of period $ 11,063 $ 10,162
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
6
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POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited consolidated financial statements included herein have been
prepared by PolyMedica Corporation ("PolyMedica" or the "Company"), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission and include, in the opinion of management, all adjustments,
consisting of normal, recurring adjustments, necessary for a fair presentation
of interim period results. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes, however, that its disclosures are adequate to
make the information presented not misleading. The results for the interim
periods presented are not necessarily indicative of results to be expected for
the full fiscal year. It is suggested that these interim consolidated financial
statements be read in conjunction with the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended March 31, 1999 and its unaudited Quarterly Report on Form 10-Q for the
period ended June 30, 1999.
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. In addition, certain
amounts in the prior period financial statements have been reclassified to
conform with the current year presentation.
2. Inventories consist of the following:
(In thousands)
<TABLE>
<CAPTION>
SEPT. 30, MARCH 31,
1999 1999
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<S> <C> <C>
Raw materials $ 657 $ 739
Work in process 351 594
Finished goods 6,443 5,576
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$7,451 $6,909
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</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.
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<PAGE> 8
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 $4.65 million and
$2.48 million in the three months ended September 30, 1999 and 1998,
respectively. A total of $1.95 million and $1.30 million in direct-response
advertising was amortized and charged to selling, general and administrative
expense for the three months ended September 30, 1999 and 1998, respectively. A
total of $7.68 million and $5.54 million of direct-response advertising was
capitalized in the six months ended September 30, 1999 and 1998, respectively. A
total of $3.64 million and $2.46 million in direct-response advertising was
amortized and charged to selling, general and administrative expense in the six
months ended September 30, 1999 and 1998, respectively. As of September 30 and
March 31, 1999, accumulated amortization was $11.57 million and $7.92 million,
which resulted in a net capitalized direct-response advertising asset of $19.72
million and $15.68 million, respectively.
4. As of September 30, 1999, gross unbilled receivables related to the
diabetes supplies segment included in accounts receivable, net were $16.80
million as compared with $15.35 million as of March 31, 1999.
5. Calculations of earnings per share are as follows:
<TABLE>
<CAPTION>
(In thousands, except per share data) Three Months Ended Six Months Ended
Sept. 30, Sept. 30,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Net income $ 3,127 $ 2,484 $ 5,581 $ 3,777
BASIC:
Weighted average common stock outstanding,
net of treasury stock, end of period 9,397 8,810 9,275 8,799
Net income per common share, basic $ .33 $ .28 $ .60 $ .43
======= ======= ======= =======
DILUTED:
Weighted average common stock outstanding,
net of treasury stock, end of period 9,397 8,810 9,275 8,799
Weighted average common stock equivalents 1,090 911 913 947
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Weighted average common stock outstanding,
net of treasury stock, end of period 10,487 9,721 10,188 9,746
Net income per common share, diluted $ .30 $ .26 $ .55 $ .39
======= ======= ======= =======
</TABLE>
8
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Options to purchase 77,500 and 246,198 shares of common stock were
outstanding during the three months ended September 30, 1999 and 1998,
respectively, but were not included in the computation of diluted earnings per
share because the options' exercise price was greater than the average market
price of the common shares.
6. The Company's total net income and comprehensive income was $3.13 million
and $2.48 million for the three months ended September 30, 1999 and 1998,
respectively.
7. 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 -The Company's consumer healthcare segment 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 - The Company's professional products segment
consists of: (i) prescription branded urology products, including urinary
analgesics, anti-spasmodics, local anesthetics and suppositories, and (ii)
respiratory products, for Medicare-eligible seniors suffering from chronic
obstructive pulmonary disease ("COPD").
All Other consists of operations associated with the Company's corporate
headquarters.
This 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. Information concerning the operations in these
reportable segments is as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
(In thousands) 1999 1998 1999 1998
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<S> <C> <C> <C> <C>
REVENUES:
Diabetes Supplies $29,245 $18,738 $55,610 $34,419
Consumer Healthcare 4,087 3,818 7,016 6,416
Professional Products 2,587 2,267 4,873 4,649
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Total $35,919 $24,823 $67,499 $45,484
======= ======= ======= =======
DEPRECIATION AND AMORTIZATION:
Diabetes Supplies $ 2,278 $ 1,580 $ 4,272 $ 3,000
Consumer Healthcare 15 15 29 32
Professional Products 531 513 1,046 1,021
All Other 15 13 29 25
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Total $ 2,839 $ 2,121 $ 5,376 $ 4,078
======= ======= ======= =======
</TABLE>
9
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<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
(In thousands) 1999 1998 1999 1998
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<S> <C> <C> <C> <C>
INCOME BEFORE INCOME TAXES:
Diabetes Supplies $4,131 $2,401 $6,988 $3,651
Consumer Healthcare 715 803 1,280 1,229
Professional Products 240 937 808 1,416
------ ------ ------ ------
Total $5,086 $4,141 $9,076 $6,296
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</TABLE>
<TABLE>
<CAPTION>
SEPT. 30, MARCH 31,
1999 1999
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<S> <C> <C>
SEGMENT ASSETS:
Diabetes Supplies $ 73,162 $ 62,922
Consumer Healthcare 7,686 6,263
Professional Products 38,037 39,337
All Other 4,648 4,417
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Total $123,533 $112,939
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</TABLE>
8. The Company will adopt Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities" in
the fiscal year beginning April 1, 2000. On July 7, 1999, the Financial
Accounting Standards Board issued Statement of Accounting Standards No. 137
("SFAS 137"), "Accounting for Derivative Instruments and Hedging Activities
Deferral of the Effective Date of FASB Statement No. 133." SFAS 137 delayed the
implementation of SFAS 133 by one year. SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Under the new statement, the accounting for changes in the fair value of a
derivative (that is, gains or losses) depends on the intended use of the
derivative. The Company believes that adoption of the statement will not have a
material effect on the financial statements.
9. During the three months ended September 30, 1999, certain executive
officers transferred 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.
10. 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 September 30, 1999 the balance due to
Hancock was $20.0 million. Subsequent to September 30, 1999, the Company repaid
all amounts due to Hancock. See Note 12.
10
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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 September
30, 1999, the Company had an outstanding balance of $2.5 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 8.25% as of September 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%.
11. In July 1998, the Company realized $1.6 million in cash from Innovative
Technologies Group plc ("IT") in a prepayment agreement as full and final
settlement of a $4 million unsecured promissory note issued to the Company in
connection with the July 1997 sale to IT of certain assets related to the
Company's wound care business. The $1.6 million cash received, net of related
expenses, is recorded as Other Income in the three and six months ended
September 30, 1998.
<TABLE>
<CAPTION>
In thousands, except per share data THREE MONTHS ENDED SIX MONTHS ENDED
SEPT. 30, 1998 SEPT. 30, 1998
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<S> <C> <C>
Gain on sale of wound care $1,597 $1,597
Provision for income taxes related to gain 639 639
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Gain on sale, net of income taxes $ 958 $ 958
====== ======
Income per common share, diluted, related to gain on
sale of wound care business $ .10 $ .10
====== ======
</TABLE>
12. Subsequent to September 30, 1999, the Company and selling shareholders
issued to the public 2,629,599 and 700,401 shares of common stock, respectively,
for cash of $21.25 per share. In connection with this offering, the Company paid
underwriters a fee of $1.17 per share and incurred approximately $500,000 in
legal, accounting, and other expenses. The net proceeds to the Company from this
offering, after deducting underwriting fees, were $52.8 million and after
expenses, were $52.3 million. The Company used $21.8 million of the proceeds to
retire $20.0 million of long-term debt and to pay an early payment premium of
approximately $1.8 million. The balance of the proceeds from this offering will
be used for working capital and general corporate purposes.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
PolyMedica sells specialty medical products primarily in three business
segments.
Liberty Medical Supply, Inc. ("Liberty Medical") is a national
direct-to-consumer provider of diabetes supplies to seniors covered by Medicare.
The Company's consumer healthcare segment also holds a leading position in the
urinary health market through its consumer healthcare division and sells fever
thermometers through that division. The Company's professional products segment
is comprised of two categories of prescription products. The Company (i)
manufactures, distributes and sells prescription urological and suppository
products under its own brands and (ii) has recently entered the respiratory
products market focused on providing direct-to-consumer products and services to
Medicare-eligible seniors suffering from chronic obstructive pulmonary disease
("COPD").
Since acquiring Liberty Medical in 1996, the Company has devoted a large
part of its resources to the growth of its diabetes supplies business, resulting
in substantial increases in the revenues of that business in each of its 1999,
1998 and 1997 fiscal years. The Company intends to continue this emphasis on
Liberty Medical and other direct-to-consumer businesses in the future.
The Company recognizes revenues upon shipment of its products. Expense
items include cost of sales and selling, general and administrative expenses.
- Cost of sales consists primarily of purchasing finished goods for sale in
the Company's diabetes supplies business and, to a lesser extent, materials and
overhead costs for products that it manufactures in its 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.
The Company capitalizes direct-response advertising and related costs and
amortizes those costs on an accelerated basis during the first two years of a
four-year period. Under this method, the Company amortizes 55% of the costs in
the two years after the date they are incurred, and amortizes 45% on a straight
line basis over the next two years. The Company 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 those assets to the
probable remaining future net benefits expected to result directly from such
advertising.
Diabetes Supplies
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 from name-brand manufacturers. Liberty Medical has
over 220,000 active customers and, the Company believes, the country's largest
proprietary database of seniors with diabetes. This group of active customers
12
<PAGE> 13
represents 3.5% of an estimated 6.3 million seniors who have diabetes in the
United States. Liberty Medical offers a wide array of products from a full range
of name-brand manufacturers, contacts the patient's doctor to obtain the
required prescription information and written documentation, files the
appropriate insurance forms and bills Medicare and private insurers directly.
This service frees the patient from paying for his or her diabetes-related
upfront expenses and offers the convenience of free home delivery of supplies.
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. From its acquisition by PolyMedica through
September 30, 1999, Liberty Medical has invested $31.3 million in
direct-response advertising.
In May 1999, the Health Care Financing Administration revised the document
requirements for claims to allow for faxed doctor's order authorizations for
diabetes supplies which relieves Liberty Medical of the expense of obtaining a
mailed, original written doctor's order.
Consumer Healthcare
The Company's consumer healthcare products are focused on three areas:
female urinary tract discomfort, digital thermometers and medication compliance
products. In the urinary tract discomfort area, the Company's three products
include AZO-STANDARD, which provides relief from urinary tract discomfort,
AZO-CRANBERRY, a dietary supplement which helps maintain a healthy urinary tract
and AZO TEST STRIPS, an in-home urinary tract infection testing kit which allows
patients to call their doctors with testing results. In April 1999, the Company
began shipping two new homeopathic botanical products, AZO MENOPAUSE and AZO
CONFIDENCE. AZO MENOPAUSE offers relief from hot flashes and related symptoms.
AZO CONFIDENCE is used for the relief of symptoms of incontinence.
The Company's consumer healthcare products also include digital, digital
flexible tip, basal and glass thermometers, as well as approximately 40 other
home-use diagnostic and compliance products. PolyMedica has patented and
introduced a flexible tip thermometer. The Company sells its consumer healthcare
products through an extensive network to large drug store chains, major
supermarkets, mass merchandisers and drug wholesalers.
Professional Products
The Company's professional products segment is comprised of two categories:
urology prescription drug products and respiratory prescription drug products
and devices.
The Company owns one of broadest lines of branded prescription urology
products (excluding anti-infectives). The urology products include urinary
analgesics, anti-spasmodics, local anesthetics and suppositories. URISED,
CYSTOSPAZ and CYSTOSPAZ-M analgesics and anti-spasmodics provide effective
symptomatic relief for urinary pain, burning and spasms. Many urology offices,
as well as hospitals, purchase the local anesthetic ANESTACON for use in
diagnostic procedures and the catheterization process. B&O and AQUACHLORAL
suppositories are used by patients unable to tolerate oral dosages of systemic
analgesics and sedatives.
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<PAGE> 14
During the three months ended September 30, 1999, the Company initiated a
program offering reimbursable respiratory prescription drug products and
devices, consisting of albuterol, ipratropium and nebulizers to its
Medicare-eligible customers with diabetes who also suffer from COPD. It believes
that its database of over 220,000 active diabetes supply customers and expertise
in selling diabetes testing supplies will be a significant advantage in entering
this new market.
The Company believes it can capitalize on its expertise in selling products
eligible for Medicare and private insurance reimbursement by expanding into
other chronic disease states, as it has done in the diabetes marketplace. To
implement this strategy, in October 1999 the Company initiated a national
direct-to-consumer television advertising campaign to add customers who have
respiratory problems but who do not have diabetes. In 1998, total Medicare
reimbursements in the COPD marketplace were similar to the diabetes market.
Growth Strategy
The Company's growth strategy includes the following elements:
- continue growth in the Company's diabetes supplies business by
expanding its customer base;
- sell products addressing other chronic disease categories;
- create alliances with national retailers;
- begin e-commerce marketing; and
- add complementary products and businesses.
Other
Although the use of certain of the Company's products is somewhat seasonal
in nature, the Company does not believe its net product sales, in the aggregate,
are generally subject to material seasonal fluctuations.
The Company operates from manufacturing and distribution facilities located
in Massachusetts, Florida and Colorado. Virtually all of the Company's product
sales are denominated in U.S. dollars. The Company's research and development
activities are funded from ongoing operations and relate to the manufacture of
pharmaceutical products.
Period to period comparisons of changes in net product sales are not
necessarily indicative of results to be expected for any future period.
14
<PAGE> 15
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Total net revenues increased by 44.7% to $35.92 million in the three months
ended September 30, 1999, as compared with $24.82 million in the three months
ended September 30, 1998. This increase was primarily the result of the increase
in the Company's diabetes supplies business.
Pretax income doubled to $5.09 million in the three months ended September
30, 1999, as compared with $2.54 million in the three months ended September 30,
1998, excluding a $1.6 million gain from the sale of the wound care business in
the 1998 period. The Company's net income increased by 104.9% to $3.13 million
in the three months ended September 30, 1999, as compared with $1.53 million in
the three months ended September 30, 1998, excluding the gain on the sale. Net
income, including the gain on the sale, was $2.48 million in the three months
ended September 30, 1998.
Net revenues from diabetes supplies increased by 56.1% to $29.24 million in
the three months ended September 30, 1999, as compared with $18.74 million in
the three months ended September 30, 1998. This growth was primarily due to
shipments to non-insulin using (Type II) diabetics which represent the largest
population of Medicare-eligible seniors. These customers became eligible for
reimbursement on July 1, 1998. Shipments to insulin using (Type I) diabetic
customers also increased.
Net revenues of consumer healthcare products increased by 7.0% to $4.09
million in the three months ended September 30, 1999, as compared with $3.82
million in the three months ended September 30, 1998. Sales of both the AZO
product line and digital thermometry products increased during the three months
ended September 30, 1999. The Company added to its 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 September 30, 1998.
In the professional products segment, net revenues, which included
first-time shipments of respiratory products, increased by 14.1% to $2.59
million in the three months ended September 30, 1999, as compared with $2.27
million in the three months ended September 30, 1998.
As a percentage of net revenues, overall gross margins were 57.9% in the
three months ended September 30, 1999 and 52.1% in the three months ended
September 30, 1998. Gross margins in the three months ended September 30, 1999
increased due to improved product mix from sales of diabetes related products.
As a percentage of net revenues, selling, general and administration
expenses ("SG&A expenses") were 42.4% for the three months ended September 30,
1999 as compared with 40.0% for the three months ended September 30, 1998. SG&A
expenses increased by 53.4% in the three months ended September 30, 1999 to
$15.23 million as compared with $9.93 million in the three months ended
September 30, 1998. This dollar increase is primarily attributable to the
expansion of Liberty Medical.
15
<PAGE> 16
Investment income decreased by approximately 20.9% to $110,000 in the three
months ended September 30, 1999 as compared with $139,000 in the three months
ended September 30, 1998 as the Company earned interest on lower average cash
balances. Interest expense decreased by 5.5% to approximately $579,000 in the
three months ended September 30, 1999, as compared with approximately $613,000
in the three months ended September 30, 1998, primarily reflecting lower
outstanding principal on the Guaranteed Senior Secured Notes due January 31,
2003 (the "Hancock Notes") to the John Hancock Mutual Life Insurance Company
("Hancock").
Six Months Ended September 30, 1999 Compared to Six Months Ended September 30,
1998
Total net revenues increased by 48.4% to $67.50 million in the six months
ended September 30, 1999, as compared with $45.48 million in the six months
ended September 30, 1998. This increase was primarily the result of the increase
in Liberty Medical sales.
Pretax income increased 93.2% to $9.08 million in the six months ended
September 30, 1999 as compared with $4.70 million in the six months ended
September 30, 1998, excluding the gain on sale of the wound care business in the
1998 period. The Company's net income increased by 98.0% to $5.58 million in the
six months ended September 30, 1999, as compared with $2.82 million in the six
months ended September 30, 1998, excluding the gain on the sale. Net income,
including the gain on the sale, was $3.78 million in the three months ended
September 30, 1998.
Net revenues from diabetes supplies increased by 61.6% to $55.61 million in
the six months ended September 30, 1999, as compared with $34.42 million in the
six months ended September 30, 1998. This growth is primarily due to shipments
to non-insulin using (Type II) diabetics which represent the largest population
of Medicare-eligible seniors. These customers became eligible for reimbursement
on July 1, 1998. Shipments to insulin using (Type I) diabetic customers also
increased.
Net revenues of consumer healthcare products increased by 9.3% to $7.02
million in the six months ended September 30, 1999, as compared with $6.42
million in the six months ended September 30, 1998. Sales of both the AZO
product line and digital thermometry products increased during the six months
ended September 30, 1999.
In the professional products segment, net revenues, which included
first-time shipments of respiratory products, increased by 4.8% to $4.87 million
in the six months ended September 30, 1999, as compared with $4.65 million in
the six months ended September 30, 1998.
As a percentage of net revenues, overall gross margins were 57.3% in the
six months ended September 30, 1999 and 52.1% in the six months ended September
30, 1998. Gross margins in the six months ended September 30, 1999 increased due
to an improved product mix from sales of diabetes related products.
As a percentage of net revenues, SG&A expenses were 42.4% for the six
months ended September 30, 1999 as compared with 39.6% for the six months ended
September 30, 1998. SG&A expenses increased by 58.9% in the six months ended
September 30, 1999 to $28.59 million as compared with $17.99 million in the six
months ended September 30, 1998. This dollar increase is primarily attributable
to the expansion of Liberty Medical.
16
<PAGE> 17
Investment income decreased by approximately 21.3% to $199,000 in the six
months ended September 30, 1999 as compared with approximately $253,000 in the
six months ended September 30, 1998 as the Company earned interest on lower
average cash balances. Interest expense decreased by 5.4% to $1.18 million in
the six months ended September 30, 1999, as compared with $1.25 million in the
six months ended September 30, 1998, primarily reflecting lower outstanding
principal on the Hancock Notes.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has raised $109.34 million in gross equity
capital, of which $7.16 million was from venture capital financings before the
Company's initial public offering, $39.00 million from its March 1992 initial
public offering, $4.55 million from a November 1995 public offering of 700,000
shares of common stock, $2.75 million from the March 1996 sale of 431,937 shares
of its common stock pursuant to Regulation S promulgated under the Securities
Act of 1933, and $55.88 million from the October 1999 sale of 2,629,599 shares
of common stock.
Subsequent to September 30, 1999, the Company and selling shareholders
issued to the public 2,629,599 and 700,401 shares of common stock, respectively,
for cash of $21.25 per share. In connection with this offering, the Company paid
underwriters a fee of $1.17 per share and incurred approximately $500,000 in
legal, accounting, and other expenses. The net proceeds to the Company from this
offering, after deducting underwriting fees and expenses, were $52.3 million.
As of September 30, 1999, working capital was $31.47 million, as compared
with working capital of $32.39 million as of March 31, 1999. Cash and cash
equivalents were $11.06 million and $10.19 million as of September 30, and March
31, 1999, respectively.
During the six months ended September 30, 1999, the Company reduced the
outstanding balance by $1.5 million to $2.5 million under its $10.0 million
collateralized revolving credit facility. Under the terms of this facility, the
Company is required to repay all principal balances on March 31, 2001. This
facility is collateralized by certain assets of the Company. Under this
facility, the Company is obligated to and was in compliance with certain
financial covenants. The interest rate is tied to the Company's funded debt to
EBITDA ratio and was 8.25% as of September 30, 1999. The Company additionally
paid $1.0 million on the Hancock Notes in July 1999, resulting in a $20 million
principal balance.
In October 1999, the Company used $21.8 million of the proceeds of its
public offering to retire $20.0 million of the Hancock Notes and to pay a
related early payment premium of approximately $1.8 million. In addition, the
Company reduced the revolving credit facility balance to zero. The Company's
remaining debt is a $1.4 million mortgage described below.
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 be, and is in compliance with certain financial covenants. The
interest rate is 8.07%.
17
<PAGE> 18
Accounts receivable, net was $35.27 million and $32.25 million as of
September 30 and March 31, 1999, respectively. This increase as of September 30,
1999 is the result of record shipments by Liberty Medical during the six months
ended September 30, 1999. As of September 30, 1999, Liberty Medical's gross
unbilled receivables included in accounts receivable, net were $16.80 million.
The Company expects that its current working capital, revolving credit
facility and funds generated from future operations will be adequate to meet its
liquidity and capital requirements for current operations. In the event that the
Company undertakes to make acquisitions of complementary businesses or products,
the Company may require substantial additional funding beyond currently
available working capital and funds generated from operations. Currently, the
Company is conducting an active search for the strategic acquisition of
complementary businesses or products. The Company has no present commitments or
agreements with respect to any such acquisition.
YEAR 2000 COMPLIANCE
Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 to mean the
year 1900 instead. If not corrected, those programs could cause date-related
transaction failures.
Year 2000 problems could affect the manufacture and distribution of
products, maintenance of communications with the Company's customers and
suppliers and conduct of financial and administrative operations. The Company is
making programming modifications and upgrades to correct or replace the systems
critical to its business which it has identified as non-Year 2000 compliant. In
addition to in-house efforts, the Company has 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. The Company is testing such systems
where appropriate and possible. The Company has not completed its 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 been less than $200,000. Such
costs do not include normal system upgrades and replacements. The Company does
not expect the future costs relating to Year 2000 compliance to have a material
effect on its results of operations or financial condition.
The above expectations are subject to uncertainties. For example, if the
Company is unsuccessful in identifying or fixing all Year 2000 problems in its
critical operations, or if it is affected by the failure of suppliers or major
customers (such as a large drug wholesaler or distributor) to continue
operations due to such a problem, its results of operations or financial
condition could be materially and adversely impacted.
The total costs that the Company incurs in connection with the Year 2000
problems will be influenced by its ability to successfully identify Year 2000
problems, the nature and amount of programming required to fix affected
programs, the related labor and/or consulting costs for such
18
<PAGE> 19
remediation, and the success of third parties with whom the Company has business
relationships in addressing their own Year 2000 concerns. These and other
unforeseen factors could have a material adverse effect on the Company's
business and results of operations or financial condition.
The information presented above is based on the Company's estimates, which
it 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).
FACTORS AFFECTING FUTURE OPERATING RESULTS
The statements contained in this Report that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including,
but not limited to, statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Forward-looking statements
include, among others: statements regarding future benefits from the Company's
advertising and promotional expenditures; statements regarding future product
revenue levels; statements regarding product development, introduction and
marketing; statements regarding future acquisitions; and statements regarding
Year 2000 compliance. All forward-looking statements included in this Report are
based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking statements. It
is important to note that the Company's actual results could differ materially
from those in such forward-looking statements.
19
<PAGE> 20
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 to 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.
20
<PAGE> 21
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.
21
<PAGE> 22
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.
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. 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.
22
<PAGE> 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe that it has any material market risk exposure
with respect to derivative or other financial instruments that would require
disclosure under this item.
23
<PAGE> 24
PART II - OTHER INFORMATION
POLYMEDICA CORPORATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on September 9, 1999,
the following proposals were adopted by the votes specified below:
<TABLE>
<CAPTION>
Proposal
- --------
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
Election of Directors:
Steven J. Lee 8,565,062 17,557(1)
Thomas S. Soltys 8,564,340 16,835(1)
To approve an amendment
to the Company's
1998 Stock Incentive Plan 6,004,524 1,673,939 903,434
Ratification of
PricewaterhouseCoopers LLP
as the Company's independent
public accountants 8,550,173 18,600 13,124
</TABLE>
- ----------------------
(1) Represents votes "withheld" from each respective director.
24
<PAGE> 25
PART II - OTHER INFORMATION
POLYMEDICA CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) See Exhibit Index immediately following this report and incorporated
herein by reference.
(2) There were no reports on Form 8-K filed during the three months ended
September 30, 1999.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PolyMedica Corporation
----------------------
(registrant)
/s/ Steven J. Lee
-------------------------------
Steven J. Lee
Chairman and Chief Executive
Officer (Principal Executive
Officer)
/s/ Eric G. Walters
-------------------------------
Eric G. Walters
Chief Financial Officer and
Clerk (Principal Financial and
Accounting Officer)
Dated: November 12, 1999
26
<PAGE> 27
Exhibit Index
POLYMEDICA CORPORATION
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
27.1 - Financial Data Schedule - Six months ended September 30, 1999
</TABLE>
27
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 11,063
<SECURITIES> 0
<RECEIVABLES> 35,271
<ALLOWANCES> 8,543
<INVENTORY> 7,451
<CURRENT-ASSETS> 57,950
<PP&E> 12,577
<DEPRECIATION> 3,105
<TOTAL-ASSETS> 123,533
<CURRENT-LIABILITIES> 26,475
<BONDS> 19,401
0
0
<COMMON> 96
<OTHER-SE> 69,641
<TOTAL-LIABILITY-AND-EQUITY> 123,533
<SALES> 67,499
<TOTAL-REVENUES> 67,499
<CGS> 28,852
<TOTAL-COSTS> 28,852
<OTHER-EXPENSES> 28,588
<LOSS-PROVISION> 4,368
<INTEREST-EXPENSE> 1,182
<INCOME-PRETAX> 9,076
<INCOME-TAX> 3,495
<INCOME-CONTINUING> 5,581
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,581
<EPS-BASIC> .60
<EPS-DILUTED> .55
</TABLE>
