<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 3, 1999
REGISTRATION STATEMENT NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
POLYMEDICA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MASSACHUSETTS 04-3033368
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
11 STATE STREET
WOBURN, MASSACHUSETTS 01801
(781) 933-2020
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
STEVEN J. LEE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
POLYMEDICA CORPORATION
11 STATE STREET
WOBURN, MASSACHUSETTS 01801
(781) 933-2020
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN K.P. STONE, III, ESQ. LESLIE E. DAVIS, ESQ.
THOMAS L. BARRETTE, JR., ESQ. TESTA, HURWITZ & THIBEAULT, LLP
HALE AND DORR LLP 125 HIGH STREET
60 STATE STREET BOSTON, MASSACHUSETTS 02110
BOSTON, MASSACHUSETTS 02109 TELEPHONE: (617) 248-7000
TELEPHONE: (617) 526-6000 TELECOPY: (617) 248-7100
TELECOPY: (617) 526-5000
</TABLE>
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ].
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
[ ].
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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- ---------------------------------------------------------------------------------------------------------------------------------
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TITLE OF SHARES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, $0.01 par value per
share.............................. 3,335,000 $24.3125 $81,082,187.50 $22,541
- ---------------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act and based upon the average of the
high and low prices on the Nasdaq National Market on September 2, 1999.
THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
SHALL DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED SEPTEMBER 3, 1999
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS DECLARED EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
2,900,000 SHARES
POLYMEDICA LOGO
COMMON STOCK
$ 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 September 2, 1999, the closing sale price of the common stock on
Nasdaq was $26.00 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............................................. $ $
Underwriting discount.......................................
Proceeds to PolyMedica......................................
Proceeds to selling shareholders............................
</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 CAPITAL MARKETS CORP.
The date of this prospectus is , 1999.
<PAGE> 3
[Inside Front Cover]
In the upper left 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 brand-name
manufacturers."
In the lower right corner 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 provides home delivery and bills Medicare directly
for eligible patients."
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<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> 5
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 200,000 active Medicare-eligible customers to whom it sells
name-brand diabetes products. PolyMedica also holds leading positions in the
urinary health and fever thermometer markets through our consumer healthcare
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 has earned its position by
meeting the needs of seniors with diabetes through:
- 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 200,000 active Medicare-eligible customers,
Liberty Medical serves approximately 3% 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> 6
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........................... 12,457,157 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> 7
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 $ 68,892
Cash and cash equivalents................................... 10,423 42,777
Total assets................................................ 116,607 148,961
Total long-term debt and notes payable, net................. 22,018 4,413
Total liabilities........................................... 50,686 29,070
Shareholders' equity........................................ 65,921 119,891
</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 based upon an assumed public offering price of $26.00 per
share, the application of the net proceeds, the payment to PolyMedica by
executive officers and a director of an aggregate of $670,622 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> 8
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> 9
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 then 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 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> 10
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> 11
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 (through September 2, 1999).................. 29 5/8 9 11/16
</TABLE>
On September 2, 1999, the last reported sale price of our common stock on the
Nasdaq National Market was $26.00 per share. As of September 2, 1999, PolyMedica
had 422 shareholders of record.
10
<PAGE> 12
USE OF PROCEEDS
The net proceeds from the sale of the 2,250,000 shares of common stock offered
by us will be approximately $54,782,500 at the assumed public offering price of
$26.00 per share, 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
$1.6 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.
11
<PAGE> 13
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 at an assumed public offering price
of $26.00 per share, after deducting the estimated underwriting discounts
and our estimated offering expenses, the issuance of an aggregate of
435,189 shares upon the cashless exercise by John Hancock Mutual Life
Insurance Company and Barnett & Co. of their warrants, the exercise by the
other selling shareholders of options for 214,811 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 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 435,189 shares upon the cashless exercise
by John Hancock Mutual Life Insurance Company and Barnett & Co. of their
warrants.
<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................................ 57,099 112,523
Retained earnings......................................... 9,934 8,451
Notes receivable from officers............................ (559) --
------- --------
Total shareholders' equity............................. 65,921 119,891
------- --------
Total capitalization................................. $87,939 $124,304
======= ========
</TABLE>
12
<PAGE> 14
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.
13
<PAGE> 15
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> 16
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. Our consumer healthcare division holds the leading positions in the
urinary health and fever thermometer markets. 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> 17
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> 18
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> 19
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 product sales, PolyMedica's overall gross margins were
51.8% in the fiscal year ended March 31, 1998 and 54.5% 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 38.7% for the fiscal year ended March 31, 1998 as compared with
40.4% for the fiscal year ended March 31, 1997. Selling, general and
administrative expenses increased by 131.8% in the fiscal year ended March 31,
1998 to $28.6 million as compared with $12.3 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> 20
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 $2.78
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, and were, 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, 1998. 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> 21
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 inability 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 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 remediation and the ability of third
parties with whom we have business relationships to successfully address 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> 22
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 200,000 active Medicare-eligible customers to whom it sells
name-brand diabetes products. PolyMedica also holds leading positions in the
urinary health and fever thermometer markets through our consumer healthcare
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 200,000 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 has earned its position by effectively meeting the needs of
seniors with diabetes through:
- 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 200,000.
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> 23
Diabetes Market
In the United States, there are approximately 6.3 million seniors who have
diabetes. With our database of over 200,000 active Medicare-eligible customers,
Liberty Medical serves approximately 3% 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 40. 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 200,000 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> 24
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> 25
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
regulations 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> 26
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 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 August 31, 1999, we had 688 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.
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<PAGE> 27
MANAGEMENT
The following table lists our executive officers and directors as of September
2, 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....................... 58 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 1984 to 1986, Dr.
Siciliano served as President of Microfluidics Corporation, a high technology
equipment manufacturer and a subsidiary of the Biotechnology Development
Corporation, and then helped found a subsidiary, MediControl Corporation, and
served as its President from 1986 to 1989. 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> 28
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> 29
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information regarding beneficial ownership of our
common stock as of August 31, 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 August 31, 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(1) NUMBER OF SHARES AFTER OFFERING(1)
------------------------ OF COMMON STOCK ------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE BEING OFFERED NUMBER PERCENTAGE
------------------------ ---------- ----------- ---------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
5% SHAREHOLDERS
Safeco Corporation(2)
Safeco Plaza
Seattle, WA 98185................. 1,429,900 15.0% -- 1,429,900 11.5%
John Hancock Mutual Life Insurance
Company(3)
200 Clarendon Street
Boston, MA 02116.................. 435,189 4.4 435,189 -- --
DIRECTORS AND EXECUTIVE OFFICERS
Steven J. Lee(4).................... 676,195 6.8 97,641 578,554 4.5
Arthur A. Siciliano(5).............. 405,187 4.2 73,231 331,956 2.6
Eric G. Walters(6).................. 236,332 2.4 39,057 197,275 1.6
W. Keith Trowbridge(7).............. 6,249 * -- 6,249 *
Thomas S. Soltys(8)................. 117,625 1.2 -- 117,625 *
Daniel S. Bernstein(9).............. 40,737 * 4,882 35,855 *
Marcia J. Hooper(10)................ 33,788 * -- 33,788 *
Frank W. LoGerfo(11)................ 27,750 * -- 27,750 *
Peter K. Hoffman(12)................ 9,760 * -- 9,760 *
All directors and executive officers
as a group (9 persons)(13)........ 1,553,623 14.9 214,811 1,338,812 10.2
</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:
28
<PAGE> 30
<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 17,273 561,281 4.11%
Arthur A. Siciliano 12,955 319,001 2.5
Eric G. Walters 6,909 190,366 1.5
David S. Bernstein 863 34,992 *
</TABLE>
(2) Based on a Schedule 13G filed by Safeco Corporation and affiliated entities
filed 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 and its affiliate Barnett & Co. upon the cashless
exercise of currently exercisable stock purchase warrants at an exercise
price of $5.18 per share based on the $26.00 per share closing sale price
of our common stock on September 2, 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 17,625 Presently Exercisable Options held by Mr. Soltys.
(9) Includes 33,000 Presently Exercisable Options and 4,620 shares held by Dr.
Bernstein in an IRA account.
(10) Includes 33,000 Presently Exercisable Options held by Ms. Hooper.
(11) Includes 27,750 Presently Exercisable Options held by Dr. LoGerfo.
(12) Includes 9,760 Presently Exercisable Options held by Mr. Hoffman.
(13) Includes 892,377 Presently Exercisable Options beneficially owned prior to
this offering, gives effect to the exercise of options for 214,811 shares
and the sale of those shares in the offering and, therefore, includes
677,566 Presently Exercisable Options beneficially owned after the
offering.
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<PAGE> 31
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. ...................................
First Union Capital Markets Corp. ..........................
--------
Total.............................................
========
</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 $ per share. The underwriters may
also allow, and such dealers may reallow, a concession not in excess of $
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 $ million, and the total proceeds to PolyMedica and the selling
shareholders will be approximately $ million and $ 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.
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.................................. $ $ $
Selling shareholders........................
-------- -------- --------
Total............................. $ $ $
======== ======== ========
</TABLE>
PolyMedica will pay all of the expenses of the offering, excluding the
underwriting discount, which we estimate to be approximately $500,000.
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<PAGE> 32
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 ability of the
underwriters to bid for or purchase 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.
31
<PAGE> 33
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> 34
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> 35
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> 36
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> 37
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> 38
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> 39
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> 40
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> 41
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> 42
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> 43
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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
[Inside back cover]
Centered on the page is a photograph of several of our AZO brand products.
Underneath the photograph is the following text: "The AZO family of products
for women."
<PAGE> 64
- --------------------------------------------------------------------------------
[POLYMEDICA LOGO]
POLYMEDICA CORPORATION
2,900,000 SHARES
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
, 1999
CIBC WORLD MARKETS
FIRST UNION CAPITAL MARKETS CORP.
- --------------------------------------------------------------------------------
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.
<PAGE> 65
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses to be incurred in connection
with the sale and distribution of the securities being registered hereby, all of
which will be borne by PolyMedica (except for underwriting discounts and
commissions and fees and expenses of legal counsel for the selling shareholders,
which will be borne by the selling shareholders). All amounts shown are
estimates except the Securities and Exchange Commission registration fee, the
NASDAQ National Market listing fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration Fee -- Securities and Exchange Commission...... $ 22,541
NASDAQ National Market listing fee.......................... 17,500
NASD filing fee............................................. 9,171
Blue Sky Fees............................................... 5,000
Legal fees and expenses of PolyMedica....................... 250,000
Accounting fees and expenses................................ 75,000
Printing.................................................... 100,000
Miscellaneous expenses...................................... 20,788
--------
Total Expenses.................................... $500,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 13(b)(1) of Chapter 156B of the Massachusetts General Laws allows a
corporation to eliminate or limit the personal liability of a director of a
corporation to the corporation or its shareholders for monetary damages for a
breach of fiduciary duty as a director notwithstanding any provision of law
imposing such liability, except where the director breached his duty of loyalty,
failed to act in good faith, engaged in intentional misconduct or knowingly
violated a law, authorized the payment of an improper distribution or loan to an
insider or obtained an improper personal benefit. PolyMedica has included such a
provision in its restated articles of organization.
Section 67 of Chapter 156B of the Massachusetts General Laws ("Section 67")
provides that a corporation may indemnify its directors and officers to the
extent specified in or authorized by: (i) the articles of organization, (ii) a
by-law adopted by the shareholders, or (iii) a vote adopted by the holders of a
majority of the shares of stock entitled to vote on the election of directors.
In all instances, the extent to which a corporation provides indemnification to
its directors and officers under Section 67 is optional. The Restated Articles
of Organization of PolyMedica contain provisions to the effect that each
director, officer and employee of PolyMedica shall be indemnified by PolyMedica
against expenses, judgments and fines incurred in connection with any legal
proceedings to which he may be made a party or with which he may become involved
or threatened by reason of having been an officer, director or employee of
PolyMedica or of any other organization at the request of PolyMedica. The
provisions include indemnification with respect to matters covered by a
settlement. Any such indemnification shall be made unless it is determined by a
majority vote of a quorum of the Board of Directors, a majority vote of a quorum
of disinterested stockholders, independent legal counsel or a court, that
indemnification is improper in the circumstances because the person seeking
indemnification has not met the applicable standards of conduct. It must be
determined that the director, officer or employee acted in good faith with the
reasonable belief that his action was in the best interests of PolyMedica, and,
with respect to any criminal action or proceeding, that he had no reasonable
cause to believe his conduct was unlawful.
II-1
<PAGE> 66
PolyMedica has purchased directors' and officers' liability insurance which
would indemnify its directors and officers against damages arising out of
certain kinds of claims which might be made against them based on their
negligent acts or omissions while acting in their capacity as such.
The Underwriting Agreement provides that the underwriters are obligated, under
certain circumstances, to indemnify directors, officers and controlling persons
of the Company against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. Reference is made to the form of
Underwriting Agreement filed as Exhibit 1.1 hereto.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Underwriting Agreement
5.1 Opinion of Hale and Dorr LLP
21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Hale and Dorr LLP (Included in Exhibit 5.1 filed
herewith)
24.1 Power of Attorney (See page II-3 of this Registration
Statement)
</TABLE>
ITEM 17. UNDERTAKINGS.
Item 512(b) of Regulation S-K. The Registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act, each filing of
the Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in this Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
Item 512(h) of Regulation S-K. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the indemnification provisions
described herein, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Item 512(i) of Regulation S-K. The undersigned registrant hereby undertakes
that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-2
<PAGE> 67
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF WOBURN, COMMONWEALTH OF MASSACHUSETTS, ON SEPTEMBER
3, 1999.
POLYMEDICA CORPORATION
By:
/s/ STEVEN J. LEE
------------------------------------
Steven J. Lee
Chief Executive Officer and
Chairman of the Board of Directors
SIGNATURES AND POWER OF ATTORNEY
We, the undersigned officers and directors of PolyMedica Corporation, hereby
severally constitute and appoint Steven J. Lee, Arthur A. Siciliano, Eric
Walters, and John K.P. Stone, III, and Thomas L. Barrette, Jr. and each of them
singly, our true and lawful attorneys with full power to any of them, and to
each of them singly, to sign for us and in our names in the capacities indicated
below the Registration Statement on Form S-3 filed herewith and any and all
pre-effective and post-effective amendments to said Registration Statement, and
any subsequent Registration Statement for the same offering which may be filed
under Rule 462(b), and generally to do all such things in our name and on our
behalf in our capacities as officers and directors to enable PolyMedica
Corporation to comply with the provisions of the Securities Act of 1933, as
amended, and all requirements of the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys, or any of them, to said Registration Statement and any and all
amendments thereto or to any subsequent Registration Statement for the same
offering which may be filed under Rule 462(b).
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON SEPTEMBER 3, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ STEVEN J. LEE Chief Executive Officer and Chairman of the
- --------------------------------------------------- Board of Directors (Principal Executive
STEVEN J. LEE Officer)
/s/ ERIC G. WALTERS Chief Financial Officer
- --------------------------------------------------- (Principal Financial Officer and Principal
ERIC G. WALTERS Accounting Officer)
/s/ DANIEL S. BERNSTEIN Director
- ---------------------------------------------------
DANIEL S. BERNSTEIN
/s/ PETER K. HOFFMAN Director
- ---------------------------------------------------
PETER K. HOFFMAN
</TABLE>
II-3
<PAGE> 68
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
Director
- ---------------------------------------------------
MARCIA J. HOOPER
/s/ FRANK W. LOGERFO Director
- ---------------------------------------------------
FRANK W. LOGERFO
/s/ THOMAS S. SOLTYS Director
- ---------------------------------------------------
THOMAS S. SOLTYS
</TABLE>
II-4
<PAGE> 69
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1.1 Underwriting Agreement
5.1 Opinion of Hale and Dorr LLP
21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Hale and Dorr LLP (Included in Exhibit 5.1 filed
herewith)
24.1 Power of Attorney (See page II-3 of this Registration
Statement)
</TABLE>
<PAGE> 1
EXHIBIT 1.1
2,900,000 Shares
POLYMEDICA CORPORATION
Common Stock
UNDERWRITING AGREEMENT
, 1999
CIBC World Markets Corp.
First Union Capital Markets Corp.
c/o CIBC World Markets Corp.
One World Financial Center
New York, New York 10281
On behalf of the Several Underwriters named on Schedule I attached hereto.
Ladies and Gentlemen:
PolyMedica Corporation, a Delaware corporation (the "Company")
and the stockholders of the Company named in Schedule II to this Agreement (the
"Selling Stockholders"), propose, subject to the terms and conditions contained
herein, to sell to you and the other underwriters named on Schedule I to this
Agreement (the "Underwriters"), for whom you are acting as Representatives (the
"Representatives"), an aggregate of 2,900,000 shares (the "Firm Shares") of the
Company's Common Stock, $0.01 par value (the "Common Stock"). Of the 2,900,000
Firm Shares, 2,250,000 are to be issued and sold by the Company, _______ are to
be sold by the Selling Stockholders listed under the heading "Institutional
Selling Stockholders" on Schedule II to this Agreement (the "Institutional
Selling Stockholders") and _______ are to be sold by the Selling Stockholders
listed under the heading "Non-Institutional Selling Stockholders" on Schedule II
to this Agreement (the "Non-Institutional Selling Stockholders"). The respective
amounts of the Firm Shares to be purchased by each of the several Underwriters
are set forth opposite their names on Schedule I hereto. In addition, the
Company and the Non-Institutional Selling Stockholders propose to grant to the
Underwriters an option to purchase up to an additional 435,000 shares (the
"Option Shares") of Common Stock from them for the purpose of covering
over-allotments in connection with the sale of the Firm Shares. Of the 435,000
Option Shares, _______ are to be issued and sold by the Company and ______ are
to be sold by the Non-Institutional Selling Stockholders. The Firm Shares and
the Option Shares are together called the "Shares."
<PAGE> 2
1. Sale and Purchase of the Shares.
On the basis of the representations, warranties and agreements
contained in, and subject to the terms and conditions of, this Agreement:
(a) The Company agrees to issue and sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at a price of $_____ per share
(the "Initial Price"), the number of Firm Shares set forth opposite the
name of such Underwriter under the column "Number of Firm Shares to be
Purchased from the Company" on Schedule I to this Agreement, subject to
adjustment in accordance with Section 11 hereof. Each of the Selling
Stockholders agrees, severally and not jointly, to sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Selling Stockholders, at the Initial
Price, the number of Firm Shares set forth opposite the name of such
Underwriter under the column "Number of Firm Shares to be Purchased
from the Selling Stockholders" on Schedule I to this Agreement, subject
to adjustment in accordance with Section 11 hereof.
(b) The Company and each of the Non-Institutional Selling
Stockholders, as and to the extent indicated in Schedule II hereto,
grants to the several Underwriters an option to purchase, severally and
not jointly, all or any part of the Option Shares at the Initial Price.
The number of Option Shares to be purchased by each Underwriter shall
be the same percentage (adjusted by the Representatives to eliminate
fractions) of the total number of Option Shares to be purchased by the
Underwriters as such Underwriter is purchasing of the Firm Shares. The
Option Shares to be sold shall be allocated among the Company and the
Non-Institutional Selling Stockholders in proportion to the maximum
number of Option Shares to be sold by the Company and each
Non-Institutional Selling Stockholder as set forth in Schedule II
hereto. Such option may be exercised only to cover over-allotments in
the sales of the Firm Shares by the Underwriters and may be exercised
in whole or in part at any time on or before 12:00 noon, New York City
time, on the business day before the Firm Shares Closing Date (as
defined below), and from time to time thereafter within 30 days after
the date of this Agreement, in each case upon written, facsimile or
telegraphic notice, or verbal or telephonic notice confirmed by
written, facsimile or telegraphic notice, by the Representatives to the
Company no later than 12:00 noon, New York City time, on the business
day before the Firm Shares Closing Date or at least two business days
before the Option Shares Closing Date (as defined below), as the case
may be, setting forth the number of Option Shares to be purchased and
the time and date (if other than the Firm Shares Closing Date) of such
purchase.
2. Delivery and Payment. Delivery by the Company and the
Selling Stockholders of the Firm Shares to the Representatives for the
respective accounts of the Underwriters, and payment of the purchase price by
certified or official bank check or checks payable in New York Clearing House
(same day) funds drawn to the order of the Company for the shares purchased from
the Company and to the Selling Stockholders for the shares purchased from the
Selling Stockholders, against delivery of the respective certificates therefor
to the Representatives, shall take place at the offices of CIBC World Markets
Corp., One World Financial
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<PAGE> 3
Center, New York, New York 10281, at 10:00 a.m., New York City time, on the
third business day following the date of this Agreement, or at such time on such
other date, not later than 10 business days after the date of this Agreement, as
shall be agreed upon by the Company and the Representatives (such time and date
of delivery and payment are called the "Firm Shares Closing Date").
In the event the option with respect to the Option Shares is
exercised in whole or in part on one or more occasions, delivery by the Company
and the Non-Institutional Selling Stockholders of the Option Shares to the
Representatives for the respective accounts of the Underwriters and payment of
the purchase price thereof in immediately available funds by wire transfer or by
certified or official bank check or checks payable in New York Clearing House
(same day) funds to the Company for the shares purchased from the Company and to
the Non-Institutional Selling Stockholders for the shares purchased from the
Non-Institutional Selling Stockholders, against delivery of the respective
certificates therefor to the Representatives, shall take place at the offices of
CIBC World Markets Corp. specified above at the time and on the date (which may
be the same date as, but in no event shall be earlier than, the Firm Shares
Closing Date) specified in the notice referred to in Section 1(b) (such time and
date of delivery and payment are called the "Option Shares Closing Date"). The
Firm Shares Closing Date and the Option Shares Closing Date are called,
individually, a "Closing Date" and, together, the "Closing Dates."
Certificates evidencing the Shares shall be registered in such
names and shall be in such denominations as the Representatives shall request at
least two full business days before the Firm Shares Closing Date or, in the case
of Option Shares, on the day of notice of exercise of the option as described in
Section l(b) and shall be made available to the Representatives for checking and
packaging, at such place as is designated by the Representatives, on the full
business day before the Firm Shares Closing Date (or the Option Shares Closing
Date in the case of the Option Shares).
3. Registration Statement and Prospectus; Public Offering. The
Company has prepared and filed in conformity with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the published
rules and regulations thereunder (the "Rules") adopted by the Securities and
Exchange Commission (the "Commission") a Registration Statement (as hereinafter
defined) on Form S-3 (No. 333-_____), including a preliminary prospectus
relating to the Shares, and such amendments thereof as may have been required to
the date of this Agreement. Copies of such Registration Statement (including all
amendments thereof) and of the related Preliminary Prospectus (as hereinafter
defined) have heretofore been delivered by the Company to you. The term
"Preliminary Prospectus" means any preliminary prospectus (as described in Rule
430 of the Rules) included at any time as a part of the Registration Statement
or filed with the Commission by the Company with the consent of the
Representatives pursuant to Rule 424(a) of the Rules. The term "Registration
Statement" as used in this Agreement means the initial registration statement
(including all exhibits, financial schedules and information deemed to be a part
of the Registration Statement through incorporation by reference or otherwise),
as amended at the time and on the date it becomes effective (the "Effective
Date") including the information (if any) deemed to be part thereof at the time
of effectiveness pursuant to Rule 430A of the Rules, and as thereafter amended
by post-effective amendments. If the Company has filed an abbreviated
registration statement to register additional Shares pursuant to Rule 462(b)
under the Rules (the "462(b) Registration Statement") then any reference herein
to the Registration Statement shall also be
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<PAGE> 4
deemed to include such 462(b) Registration Statement. The term "Prospectus" as
used in this Agreement means the prospectus in the form included in the
Registration Statement at the time of effectiveness or, if Rule 430A of the
Rules is relied on, the term Prospectus shall also include the final prospectus
filed with the Commission pursuant to Rule 424(b) of the Rules.
The Company and the Selling Stockholders understand that the
Underwriters propose to make a public offering of the Shares, as set forth in
and pursuant to the Prospectus, as soon after the Effective Date and the date of
this Agreement as the Representatives deem advisable. The Company and the
Selling Stockholders hereby confirm that the Underwriters and dealers have been
authorized to distribute or cause to be distributed each Preliminary Prospectus
and are authorized to distribute the Prospectus (as from time to time amended or
supplemented if the Company furnishes amendments or supplements thereto to the
Underwriters).
4. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter and to each Institutional Selling
Stockholder as follows:
(a) On the Effective Date, the Registration Statement
complied, and on the date of the Prospectus, the date any
post-effective amendment to the Registration Statement becomes
effective, the date any supplement or amendment to the Prospectus is
filed with the Commission and each Closing Date, the Registration
Statement and the Prospectus (and any amendment thereof or supplement
thereto) will comply, in all material respects, with the applicable
provisions of the Securities Act and the Rules and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations of the Commission thereunder. The Registration
Statement did not, as of the Effective Date, contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading; and on the Effective Date and the
other dates referred to above neither the Registration Statement nor
the Prospectus, nor any amendment thereof or supplement thereto, will
contain any untrue statement of a material fact or will omit to state
any material fact required to be stated therein or necessary in order
to make the statements therein not misleading. When any related
preliminary prospectus was first filed with the Commission (whether
filed as part of the Registration Statement or any amendment thereto or
pursuant to Rule 424(a) of the Rules) and when any amendment thereof or
supplement thereto was first filed with the Commission, such
preliminary prospectus as amended or supplemented complied in all
material respects with the applicable provisions of the Securities Act
and the Rules and did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading.
Notwithstanding the foregoing, none of the representations and
warranties in this paragraph 4(a) shall apply to statements in, or
omissions from, the Registration Statement or the Prospectus made in
reliance upon, and in conformity with, information herein or otherwise
furnished in writing by the Representatives on behalf of the several
Underwriters for use in the Registration Statement or the Prospectus.
With respect to the preceding sentence, the Company acknowledges that
the only information furnished in writing by the Representatives on
behalf of the several Underwriters for use in the Registration
-4-
<PAGE> 5
Statement or the Prospectus is the paragraph with respect to
stabilization on the inside front cover page of the Prospectus and the
statements contained under the caption "Underwriting" in the
Prospectus.
(b) The Registration Statement is effective under the
Securities Act and no stop order preventing or suspending the
effectiveness of the Registration Statement or suspending or preventing
the use of the Prospectus has been issued and no proceedings for that
purpose have been instituted or are threatened under the Securities
Act. Any required filing of the Prospectus and any supplement thereto
pursuant to Rule 424(b) of the Rules has been or will be made in the
manner and within the time period required by such Rule 424(b).
(c) The documents incorporated by reference in the
Registration Statement and the Prospectus, at the time they were filed
with the Commission, complied in all material respects with the
requirements of the Exchange Act and, when read together and with the
other information in the Registration Statement and the Prospectus, do
not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading, except to the extent that any
statements in such documents have been superseded by statements
specifically set forth in the Registration Statement and the
Prospectus.
(d) The financial statements of the Company (including all
notes and schedules thereto) included or incorporated by reference in
the Registration Statement and Prospectus present fairly the financial
position, the results of operations, the statements of cash flows and
the statements of stockholders' equity and the other information
purported to be shown therein of the Company at the respective dates
and for the respective periods to which they apply; and such financial
statements and related schedules and notes have been prepared in
conformity with generally accepted accounting principles, consistently
applied throughout the periods involved, and all adjustments necessary
for a fair presentation of the results for such periods have been made.
The summary and selected financial data included in the Prospectus
present fairly the information shown therein as at the respective dates
and for the respective periods specified and the summary and selected
financial data have been presented on a basis consistent with the
consolidated financial statements so set forth in the Prospectus and
other financial information.
(e) PricewaterhouseCoopers LLP, whose reports are filed with
the Commission as a part of the Registration Statement, are and, during
the periods covered by their reports, were independent public
accountants as required by the Securities Act and the Rules.
(f) Exhibit 21.1 to the Registration Statement contains a
true, correct and complete list of all of the subsidiaries of the
Company controlled directly or indirectly by the Company (collectively,
"Subsidiaries"). The Company and each of its Subsidiaries is a
corporation duly organized, validly existing and in good standing under
the laws of
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<PAGE> 6
its jurisdiction of its incorporation. The Company and each of its
Subsidiaries is duly qualified to do business and is in good standing
as a foreign corporation in each jurisdiction in which the nature of
the business conducted by it or location of the assets or properties
owned, leased or licensed by it requires such qualification, except for
such jurisdictions where the failure to so qualify would not have a
material adverse effect on the assets or properties, business, results
of operations or financial condition of the Company (a "Material
Adverse Effect"). The Company and each of its Subsidiaries have all
requisite corporate power and authority, and all necessary
authorizations, approvals, consents, orders, licenses, certificates and
permits of and from all governmental or regulatory bodies or any other
person or entity (collectively, the "Permits"), to own, lease and
license its assets and properties and conduct its business, all of
which are valid and in full force and effect, as described in the
Registration Statement and the Prospectus, except where the lack of
such Permits, individually or in the aggregate, would not have a
Material Adverse Effect. The Company and each of its Subsidiaries have
fulfilled and performed in all material respects all of their material
obligations with respect to such Permits and no event has occurred that
allows, or after notice or lapse of time would allow, revocation or
termination thereof or results in any other material impairment of the
rights of the Company or such Subsidiaries thereunder. Except as may be
required under the Securities Act and state and foreign Blue Sky laws,
no other Permits are required to enter into, deliver and perform this
Agreement and to issue and sell the Shares.
(g) The Company and each of its Subsidiaries owns or possesses
adequate and enforceable rights to use all trademarks, trademark
applications, trade names, service marks, copyrights, copyright
applications, licenses, know-how and other similar rights and
proprietary knowledge (collectively, "Intangibles") described in the
Prospectus as being owned by it necessary for the conduct of its
business. Neither the Company nor any of its Subsidiaries has received
any notice of, or is not aware of, any infringement of or conflict with
asserted rights of others with respect to any Intangibles.
(h) The Company and each of its Subsidiaries has good and
marketable title in fee simple to all items of real property and good
and marketable title to all personal property described in the
Prospectus as being owned by it. Any real property and buildings
described in the Prospectus as being held under lease by the Company
and each of its Subsidiaries is held by it under valid, existing and
enforceable leases, free and clear of all liens, encumbrances, claims,
security interests and defects, except such as are described, or
incorporated by reference, in the Registration Statement and the
Prospectus or would not have a Material Adverse Effect.
(i) There are no litigation or governmental proceedings to
which the Company or its Subsidiaries are subject or which are pending
or, to the knowledge of the Company, threatened, against the Company or
any of its Subsidiaries, which, individually or in the aggregate, might
have a Material Adverse Effect, affect the consummation of this
Agreement or which are required to be disclosed in the Registration
Statement and the Prospectus that are not so disclosed.
-6-
<PAGE> 7
(j) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, except as
described therein, (a) there has not been any material adverse change
with regard to the assets or properties, business, results of
operations or financial condition of the Company; (b) neither the
Company nor its Subsidiaries has sustained any loss or interference
with its assets, businesses or properties (whether owned or leased)
from fire, explosion, earthquake, flood or other calamity, whether or
not covered by insurance, or from any labor dispute or any court or
legislative or other governmental action, order or decree which would
have a Material Adverse Effect; and (c) since the date of the latest
balance sheet included in the Registration Statement and the
Prospectus, except as reflected therein, neither the Company nor its
Subsidiaries has (i) issued any securities or incurred any liability or
obligation, direct or contingent, for borrowed money, except such
liabilities or obligations incurred in the ordinary course of business,
(ii) entered into any transaction not in the ordinary course of
business or (iii) declared or paid any dividend or made any
distribution on any shares of its stock or redeemed, purchased or
otherwise acquired or agreed to redeem, purchase or otherwise acquire
any shares of its stock.
(k) There is no document, contract or other agreement of a
character required to be described in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement
which is not described or filed as required by the Securities Act or
Rules. Each description of a contract, document or other agreement in
the Registration Statement and the Prospectus accurately reflects in
all respects the terms of the underlying document, contract or
agreement. Each agreement described in the Registration Statement and
Prospectus or listed in the Exhibits to the Registration Statement or
incorporated by reference is in full force and effect and is valid and
enforceable by and against the Company or any of its the Subsidiaries,
as the case may be, in accordance with its terms. Neither the Company
nor any Subsidiary, if any Subsidiary is a party, nor to the Company's
knowledge, any other party is in default in the observance or
performance of any term or obligation to be performed by it under any
such agreement, and no event has occurred which with notice or lapse of
time or both would constitute such a default, in any such case which
default or event, individually or in the aggregate, would have a
Material Adverse Effect. No default exists, and no event has occurred
which with notice or lapse of time or both would constitute a default,
in the due performance and observance of any term, covenant or
condition, by the Company or any of its Subsidiaries, if any of its
Subsidiaries is a party thereto, of any other agreement or instrument
to which the Company or any of such Subsidiaries is a party or by which
the Company, any of its Subsidiaries or their properties or businesses
may be bound or affected which default or event, individually or in the
aggregate, would have a Material Adverse Effect.
(l) Neither the Company nor any of its Subsidiaries is in
violation of any term or provision of its charter or by-laws or of any
franchise, license, permit, judgment, decree, order, statute, rule or
regulation, where the consequences of such violation, individually or
in the aggregate, would have a Material Adverse Effect.
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<PAGE> 8
(m) Neither the execution, delivery and performance of this
Agreement by the Company nor the consummation of any of the
transactions contemplated hereby (including, without limitation, the
issuance and sale by the Company of the Shares) will give rise to a
right to terminate or accelerate the due date of any payment due under,
or conflict with or result in the breach of any term or provision of,
or constitute a default (or an event which with notice or lapse of time
or both would constitute a default) under, or require any consent or
waiver under, or result in the execution or imposition of any lien,
charge or encumbrance upon any properties or assets of the Company or
any of its Subsidiaries pursuant to the terms of, any indenture,
mortgage, deed of trust or other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which either the
Company or any of its Subsidiaries or any of their properties or
businesses is bound, or any franchise, license, permit, judgment,
decree, order, statute, rule or regulation applicable to the Company or
any of its Subsidiaries or violate any provision of the charter or
by-laws of the Company or any of its Subsidiaries, except for such
consents or waivers which have already been obtained and are in full
force and effect and except where such event would not have a Material
Adverse Effect.
(n) The Company has authorized and outstanding capital stock
as set forth under the caption "Capitalization" in the Prospectus. The
certificates evidencing the Shares are in due and proper legal form and
have been duly authorized for issuance by the Company. All of the
issued and outstanding shares of Common Stock have been duly and
validly issued and are fully paid and nonassessable. There are no
statutory preemptive or other similar rights to subscribe for or to
purchase or acquire any shares of Common Stock of the Company or its
Subsidiaries or any such rights pursuant to its Certificate of
Incorporation or by-laws or any agreement or instrument to or by which
the Company or any of its Subsidiaries is a party or bound. The Shares,
when issued and sold pursuant to this Agreement, will be duly and
validly issued, fully paid and nonassessable and none of them will be
issued in violation of any preemptive or other similar right. Except as
disclosed in the Registration Statement and the Prospectus, there is no
outstanding option, warrant or other right calling for the issuance of,
and there is no commitment, plan or arrangement to issue, any share of
stock of the Company or its Subsidiaries or any security convertible
into, or exercisable or exchangeable for, such stock. The Common Stock
and the Shares conform in all material respects to all statements in
relation thereto contained in the Registration Statement and the
Prospectus. All outstanding shares of capital stock of each Subsidiary
have been duly authorized and validly issued, and are fully paid and
nonassessable and are owned directly by the Company or by another
wholly-owned subsidiary of the Company free and clear of any security
interests, liens, encumbrances, equities or claims, other than those
described in the Prospectus, except that the Company owns 89% of the
outstanding capital stock of Liberty Home Pharmacy Corp. and 89% of the
outstanding capital stock of Liberty Direct Services Corp.
(o) Except for the Institutional Selling Stockholders and
certain stockholders of the Company having rights under warrants
originally issued to Jeffries & Co. in 1995, no holder of any security
of the Company has the right to have any security owned by such holder
included in the Registration Statement or to demand registration of any
security owned by such holder during the period ending 90 days after
the date of this
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<PAGE> 9
Agreement (the "Lock-Up Period"). Each stockholder of the Company
(other than the Institutional Selling Stockholders) known to the
Company who, as of the expiration date of the Lock-Up Period, will own
beneficially 25,000 shares or more of Common Stock and each director
and executive officer of the Company, has delivered to the
Representatives his enforceable written lock-up agreement in the form
attached to this Agreement ("Lock-Up Agreement").
(p) All necessary corporate action has been duly and validly
taken by the Company to authorize the execution, delivery and
performance of this Agreement and the issuance and sale of the Shares
by the Company. This Agreement has been duly and validly authorized,
executed and delivered by the Company and constitutes and will
constitute the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except as
the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and by general equitable
principles.
(q) Neither the Company nor any of its Subsidiaries is
involved in any labor dispute nor, to the knowledge of the Company, is
any such dispute threatened, which dispute would have a Material
Adverse Effect. The Company is not aware of any existing or imminent
labor disturbance by the employees of any of its principal suppliers or
contractors which would have a Material Adverse Effect. The Company is
not aware of any threatened or pending litigation between the Company
or its Subsidiaries and any of its executive officers which, if
adversely determined, could have a Material Adverse Effect and has no
reason to believe that such officers will not remain in the employment
of the Company.
(r) No transaction has occurred between or among the Company
and any of its officers or directors or five percent shareholders or
any affiliate or affiliates of any such officer or director or five
percent shareholders that is required to be described in and is not
described in the Registration Statement and the Prospectus.
(s) The Company has not taken, nor will it take, directly or
indirectly, any action designed to or which might reasonably be
expected to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation
of the price of the Common Stock to facilitate the sale or resale of
any of the Shares.
(t) Each of the Company and its Subsidiaries has filed all
Federal, state, local and foreign tax returns which are required to be
filed through the date hereof, or has received extensions thereof, and
has paid all taxes shown on such returns and all assessments received
by it to the extent that the same are material and have become due.
There are no tax audits or investigations pending, which if adversely
determined would have a Material Adverse Effect; nor are there any
material proposed additional tax assessments against the Company and
any of its Subsidiaries.
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<PAGE> 10
(u) The Shares have been duly authorized for quotation on the
National Association of Securities Dealers Automated Quotation
("Nasdaq") National Market System, subject to official Notice of
Issuance. A registration statement has been filed on Form 8-A pursuant
to Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which registration statement complies in all material
respects with the Exchange Act.
(v) The Company has complied with all of the requirements and
filed the required forms as specified in Florida Statutes Section
517.075.
(w) The books, records and accounts of the Company and its
Subsidiaries accurately and fairly reflect, in reasonable detail, the
transactions in, and dispositions of, the assets of, and the results of
operations of, the Company and its Subsidiaries. The Company and each
of its Subsidiaries maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(x) Each of the Company and its Subsidiaries is insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are customary in the businesses in which
they are engaged or propose to engage after giving effect to the
transactions described in the Prospectus; all policies of insurance and
fidelity or surety bonds insuring the Company or any of its
Subsidiaries or the Company's or its Subsidiaries' respective
businesses, assets, employees, officers and directors against such
losses and risks are in full force and effect; the Company and each of
its Subsidiaries are in compliance with the terms of such policies and
instruments in all material respects; and neither the Company nor any
Subsidiary of the Company has any reason to believe that it will not be
able to renew its existing insurance coverage against such losses and
risks as and when such coverage expires or to obtain similar coverage
from similar insurers as may be necessary to continue its business at a
cost that would not have a Material Adverse Effect. Neither the Company
nor any Subsidiary has been denied any insurance coverage against such
losses and risks which it has sought or for which it has applied.
(y) Each approval, consent, order, authorization, designation,
declaration or filing of, by or with any regulatory, administrative or
other governmental body necessary in connection with the execution and
delivery by the Company of this Agreement and the consummation of the
transactions herein contemplated required to be obtained or performed
by the Company (except such additional steps as may be required by the
National Association of Securities Dealers, Inc. (the "NASD") or may be
necessary to qualify the Shares for public offering by the Underwriters
under the state securities or Blue Sky laws) has been obtained or made
and is in full force and effect.
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<PAGE> 11
(z) There are no affiliations with the NASD among the
Company's officers, directors or, to the best of the knowledge of the
Company, any five percent or greater stockholder of the Company, except
as set forth in the Registration Statement or otherwise disclosed in
writing to the Representatives.
(aa) (i) Each of the Company and its Subsidiaries is in
compliance in all material respects with all rules, laws and
regulations relating to the use, treatment, storage and disposal of
toxic substances and protection of health or the environment
("Environmental Law") which are applicable to its business; (ii)
neither the Company nor its Subsidiaries has received any notice from
any governmental authority or third party of an asserted claim under
Environmental Laws; (iii) each of the Company and its Subsidiaries has
received all permits, licenses or other approvals required of it under
applicable Environmental Laws to conduct its business and is in
compliance with all terms and conditions of any such permit, license or
approval; (iv) to the Company's knowledge, no facts currently exist
that will require the Company or its Subsidiaries to make future
material capital expenditures to comply with Environmental Laws; and
(v) no property which is or has been owned, leased or occupied by the
Company or its Subsidiaries has been designated as a Superfund site
pursuant to the Comprehensive Environmental Response, Compensation of
Liability Act of 1980, as amended (42 U.S.C. Section 9601, et. seq.)
("CERCLA") or otherwise designated as a contaminated site under
applicable state or local law. Neither the Company nor any of its
Subsidiaries has been named as a "potentially responsible party" under
CERCLA.
(bb) In the ordinary course of its business, the Company
periodically reviews the effect of Environmental Laws on the business,
operations and properties of the Company and its subsidiaries, in the
course of which the Company identifies and evaluates associated costs
and liabilities (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws, or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties). On the basis of such review, the Company
has reasonably concluded that such associated costs and liabilities
would not, singly or in the aggregate, have a Material Adverse Effect.
(cc) The Company is not and, after giving effect to the
offering and sale of the Shares and the application of proceeds thereof
as described in the Prospectus, will not be an "investment company"
within the meaning of the Investment Company Act of 1940, as amended
(the "Investment Company Act").
(dd) The Company, its Subsidiaries or any other person
associated with or acting on behalf of the Company or its Subsidiaries
including, without limitation, any director, officer, agent or employee
of the Company or its Subsidiaries has not, directly or indirectly,
while acting on behalf of the Company or its Subsidiaries (i) used any
corporate funds for unlawful contributions, gifts, entertainment or
other unlawful expenses relating to political activity; (ii) made any
unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or
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<PAGE> 12
campaigns from corporate funds; (iii) violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any
other unlawful payment.
(ee) The Company has reviewed its operations and that of its
Subsidiaries to evaluate the extent to which the business or operations
of the Company or any of its subsidiaries will be affected by the Year
2000 Problem (that is, any significant risk that computer hardware or
software applications used by the Company and its subsidiaries will
not, in the case of dates or time periods occurring after December 31,
1999, function at least as effectively as in the case of dates or time
periods occurring prior to January 1, 2000); as a result of such
review, (i) the Company has no reason to believe, and does not believe,
that (A) there are any issues related to the Company's preparedness to
address the Year 2000 Problem that are of a character required to be
described or referred to in the Registration Statement or Prospectus
which have not been accurately described in the Registration Statement
or Prospectus and (B) the Year 2000 Problem will have a Material
Adverse Effect, or result in any material loss or interference with the
business or operations of the Company and its subsidiaries, taken as a
whole; and (ii) the Company reasonably believes, after due inquiry,
that the suppliers, vendors, customers or other material third parties
used or served by the Company and such subsidiaries are addressing or
will address the Year 2000 Problem in a timely manner, except to the
extent that a failure to address the Year 2000 by a supplier, vendor,
customer or material third party would not have a Material Adverse
Effect.
5. Representations and Warranties of the Non-Institutional
Selling Stockholders. Each of the Non-Institutional Selling
Stockholders, severally and not jointly, hereby represents and warrants
to each Underwriter as follows:
(a) Such Non-Institutional Selling Stockholder has caused
certificates for the number of Shares to be sold by such
Non-Institutional Selling Stockholder hereunder to be delivered to
_______________ (the "Custodian"), endorsed in blank or with blank
stock powers duly executed, with a signature appropriately guaranteed,
such certificates to be held in custody by the Custodian for delivery,
pursuant to the provisions of this Agreement and an agreement dated
____________, 1999 among the Custodian and such Non-Institutional
Selling Stockholder (the "Custody Agreement").
(b) Such Non-Institutional Selling Stockholder has granted an
irrevocable power of attorney (the "Power of Attorney") to the person
named therein, on behalf of such Non-Institutional Selling Stockholder,
to execute and deliver this Agreement and any other document necessary
or desirable in connection with the transactions contemplated hereby
and to deliver the shares to be sold by such Non-Institutional Selling
Stockholder pursuant hereto.
(c) This Agreement, the Custody Agreement, the Power of
Attorney and the Lock-Up Agreement have each been duly authorized,
executed and delivered by or on behalf of such Non-Institutional
Selling Stockholder and, assuming due authorization, execution and
delivery by the other parties hereto, constitutes the valid and legally
binding agreement of such Non-Institutional Selling Stockholder,
enforceable against
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<PAGE> 13
such Non-Institutional Selling Stockholder in accordance with its
terms, except as may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and other similar laws
now or hereafter in effect relating to creditors' rights generally, and
subject to general principles of equity.
(d) The execution and delivery by such Non-Institutional
Selling Stockholder of this Agreement and the performance by such
Non-Institutional Selling Stockholder of its obligations under this
Agreement (i) will not contravene any provision of applicable law,
statute, regulation or filing or any agreement or other instrument
binding upon such Non-Institutional Selling Stockholder or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over such Non-Institutional Selling Stockholder,
(ii) does not require any consent, approval, authorization or order of
or registration or filing with any court or governmental agency or body
having jurisdiction over it, except such as may be required by the Blue
Sky laws of the various states in connection with the offer and sale of
the Shares which have been or will be effected in accordance with this
Agreement, (iii) does not and will not violate any statute, law,
regulation or filing or judgment, injunction, order or decree
applicable to such Non-Institutional Selling Stockholder or (iv) will
not result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of such Non-Institutional
Selling Stockholder pursuant to the terms of any agreement or
instrument to which such Non-Institutional Selling Stockholder is a
party or by which such Non-Institutional Selling Stockholder may be
bound or to which any of the property or assets of such
Non-Institutional Selling Stockholder is subject.
(e) Such Non-Institutional Selling Stockholder has, and on the
Firm Shares Closing Date will have, valid and unencumbered title to the
Shares to be sold by such Non-Institutional Selling Stockholder free
and clear of any lien, claim, security interest or other encumbrance,
including, without limitation, any restriction on transfer, except as
otherwise described in the Registration Statement and Prospectus.
(f) Such Non-Institutional Selling Stockholder has, and on the
Firm Shares Closing Date will have, full legal right, power and
authorization, and any approval required by law, to sell, assign,
transfer and deliver the Shares to be sold by such Non-Institutional
Selling Stockholder in the manner provided by this Agreement.
(g) Upon delivery of and payment for the Shares to be sold by
such Non-Institutional Selling Stockholder pursuant to this Agreement,
the several Underwriters will receive valid and unencumbered title to
such Shares free and clear of any lien, claim, security interest or
other encumbrance, provided, such Underwriters are without notice of
any "adverse claim" (as such term is defined in Section 8-102(a)(1) of
the New York Uniform Commercial Code (the "NYUCC")) and are otherwise
bona fide purchasers for purposes of the NYUCC.
(h) All information relating to such Non-Institutional Selling
Stockholder furnished in writing by such Non-Institutional Selling
Stockholder expressly for use in the Registration Statement and
Prospectus is, and on each Closing Date will be, true, correct, and
complete, and does not, and on each Closing Date will not, contain any
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<PAGE> 14
untrue statement of a material fact or omit to state any material fact
necessary to make such information not misleading.
(i) Such Non-Institutional Selling Stockholder has reviewed
the Registration Statement and Prospectus and, although such
Non-Institutional Selling Stockholder has not independently verified
the accuracy or completeness of all the information contained therein,
nothing has come to the attention of such Non-Institutional Selling
Stockholder that would lead such Non-Institutional Selling Stockholder
to believe that (i) on the Effective Date, the Registration Statement
contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein in order to make the
statements made therein not misleading and (ii) on the Effective Date
the Prospectus contained and, on each Closing Date contains, no untrue
statement of a material fact or omitted or omits to state any material
fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(j) The sale of Shares by such Non-Institutional Selling
Stockholder pursuant to this Agreement is not prompted by such
Non-Institutional Selling Stockholder's knowledge of any material
information concerning the Company or its Subsidiaries which is not set
forth in the Prospectus.
(k) Such Non-Institutional Selling Stockholder has not taken
and will not take, directly or indirectly, any action designed to or
that might reasonably be expected to cause or result in stabilization
or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares.
(l) Such Non-Institutional Selling Stockholder has no actual
knowledge that any representation or warranty of the Company set forth
in Section 4 above is untrue or inaccurate in any material respect.
(m) The representations and warranties of such
Non-Institutional Selling Stockholder in the Custody Agreement are and
on each Closing Date will be, true and correct.
6. Representations and Warranties of the Institutional Selling
Stockholders. Each of the Institutional Selling Stockholders, severally
and not jointly, hereby represents and warrants to each Underwriter as
follows:
(a) Such Institutional Selling Stockholder has caused
certificates for the number of Shares to be sold by such Institutional
Selling Stockholder hereunder to be delivered to _______________ (the
"Custodian"), endorsed in blank or with blank stock powers duly
executed, with a signature appropriately guaranteed, such certificates
to be held in custody by the Custodian for delivery, pursuant to the
provisions of this Agreement and an agreement dated ____________, 1999
among the Custodian and such Institutional Selling Stockholder (the
"Custody Agreement").
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<PAGE> 15
(b) Such Institutional Selling Stockholder has granted an
irrevocable power of attorney (the "Power of Attorney") to the person
named therein, on behalf of such Institutional Selling Stockholder, to
execute and deliver this Agreement and any other document necessary or
desirable in connection with the transactions contemplated hereby and
to deliver the shares to be sold by such Institutional Selling
Stockholder pursuant hereto.
(c) This Agreement, the Custody Agreement and the Power of
Attorney have each been duly authorized, executed and delivered by or
on behalf of such Institutional Selling Stockholder and, assuming due
authorization, execution and delivery by the other parties hereto,
constitutes the valid and legally binding agreement of such
Institutional Selling Stockholder, enforceable against such
Institutional Selling Stockholder in accordance with its terms, except
as may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer and other similar laws now or hereafter
in effect relating to creditors' rights generally, including without
limitation, the rights and priorities of creditors provided in Chapter
175, Sections 180A through 180L of the Mass. Gen. Laws in any
rehabilitation or liquidation proceeding begun in the Commonwealth of
Massachusetts against an insolvent Massachusetts insurer, and subject
to general principles of equity.
(d) The execution and delivery by such Institutional Selling
Stockholder of this Agreement and the performance by such Institutional
Selling Stockholder of its obligations under this Agreement (i) will
not contravene any provision of applicable law, statute, regulation or
filing or any agreement or other instrument binding upon such
Institutional Selling Stockholder or any judgment, order or decree of
any governmental body, agency or court having jurisdiction over such
Institutional Selling Stockholder, (ii) does not require any consent,
approval, authorization or order of or registration or filing with any
court or governmental agency or body having jurisdiction over it,
except such as may be required by the Blue Sky laws of the various
states in connection with the offer and sale of the Shares which have
been or will be effected in accordance with this Agreement, (iii) does
not and will not violate any statute, law, regulation or filing or
judgment, injunction, order or decree applicable to such Institutional
Selling Stockholder or (iv) will not result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of such Institutional Selling Stockholder pursuant to the terms
of any agreement or instrument to which such Institutional Selling
Stockholder is a party or by which such Institutional Selling
Stockholder may be bound or to which any of the property or assets of
such Institutional Selling Stockholder is subject.
(e) Such Institutional Selling Stockholder has, and on the
Firm Shares Closing Date will have, valid and unencumbered title to the
Shares to be sold by such Institutional Selling Stockholder free and
clear of any lien, claim, security interest or other encumbrance,
including, without limitation, any restriction on transfer, except as
otherwise described in the Registration Statement and Prospectus.
(f) Such Institutional Selling Stockholder has, and on the
Firm Shares Closing Date will have, full legal right, power and
authorization, and any approval required by
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<PAGE> 16
law, to sell, assign, transfer and deliver the Shares to be sold by
such Institutional Selling Stockholder in the manner provided by this
Agreement.
(g) Upon delivery of and payment for the Shares to be sold by
such Institutional Selling Stockholder pursuant to this Agreement, the
several Underwriters will receive valid and unencumbered title to such
Shares free and clear of any lien, claim, security interest or other
encumbrance, provided, such Underwriters are without notice of any
"adverse claim" (as such term is defined in the NYUCC) and are
otherwise bona fide purchasers for purposes of the NYUCC.
(h) All information relating to such Institutional Selling
Stockholder furnished in writing by such Institutional Selling
Stockholder expressly for use in the Registration Statement and
Prospectus is, and on each Closing Date will be, true, correct, and
complete, and does not, and on each Closing Date will not, contain any
untrue statement of a material fact or omit to state any material fact
necessary to make such information not misleading.
(i) Such Institutional Selling Stockholder has not taken and
will not take, directly or indirectly, any action designed to or that
might reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Shares.
(j) The representations and warranties of such Institutional
Selling Stockholder in the Custody Agreement are and on each Closing
Date will be, true and correct.
7. Conditions of the Underwriters' Obligations. The
obligations of the Underwriters under this Agreement are several and not joint.
The respective obligations of the Underwriters to purchase the Shares are
subject to each of the following terms and conditions:
(a) Notification that the Registration Statement has become
effective shall have been received by the Representatives and the
Prospectus shall have been timely filed with the Commission in
accordance with Section 8(a) of this Agreement.
(b) No order preventing or suspending the use of any
preliminary prospectus or the Prospectus shall have been or shall be in
effect and no order suspending the effectiveness of the Registration
Statement shall be in effect and no proceedings for such purpose shall
be pending before or threatened by the Commission, and any requests for
additional information on the part of the Commission (to be included in
the Registration Statement or the Prospectus or otherwise) shall have
been complied with to the satisfaction of the Commission and the
Representatives.
(c) The representations and warranties of the Company and the
Selling Stockholder contained in this Agreement and in the certificates
delivered pursuant to Section 7(d) shall be true and correct when made
and on and as of each Closing Date as if made on such date. The Company
and the Selling Stockholder shall have performed all
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<PAGE> 17
covenants and agreements and satisfied all the conditions contained in
this Agreement required to be performed or satisfied by them at or
before such Closing Date.
(d) The Representatives shall have received on each Closing
Date a certificate, addressed to the Representatives and dated such
Closing Date, of the chief executive or chief operating officer and the
chief financial officer or chief accounting officer of the Company to
the effect that (i) the signers of such certificate have carefully
examined the Registration Statement, the Prospectus and this Agreement
and that the representations and warranties of the Company in this
Agreement are true and correct on and as of such Closing Date with the
same effect as if made on such Closing Date and the Company has
performed all covenants and agreements and satisfied all conditions
contained in this Agreement required to be performed or satisfied by it
at or prior to such Closing Date, and (ii) no stop order suspending the
effectiveness of the Registration Statement has been issued and to the
best of their knowledge, no proceedings for that purpose have been
instituted or are pending under the Securities Act.
(e) The Representatives shall have received on each Closing
Date a certificate, addressed to the Representatives and dated such
Closing Date, from each of the Non-Institutional Selling Stockholders,
to the effect that such Non-Institutional Selling Stockholder has
carefully examined the Registration Statement, the Prospectus and this
Agreement and that the representations and warranties of such
Non-Institutional Selling Stockholder in this Agreement are true and
correct on and as of such Closing Date with the same effect as if made
on such Closing Date and such Non-Institutional Selling Stockholder has
performed all covenants and agreements and satisfied all conditions
contained in this Agreement required to be performed or satisfied by
him at or prior to such Closing Date.
(f) The Representatives shall have received on the Firm Shares
Closing Date a certificate, addressed to the Representatives and dated
such Closing Date, from each of Institutional Selling Stockholders, to
the effect that such Institutional Selling Stockholder has carefully
examined the information concerning such Institutional Selling
Stockholder contained in the Registration Statement, the Prospectus and
this Agreement and that the representations and warranties of such
Institutional Selling Stockholder in this Agreement are true and
correct on and as of such Closing Date with the same effect as if made
on such Closing Date and such Institutional Selling Stockholder has
performed all covenants and agreements and satisfied all conditions
contained in this Agreement required to be performed or satisfied by it
at or prior to such Closing Date.
(g) The Representatives shall have received, at the time this
Agreement is executed and on each Closing Date a signed letter from
PricewaterhouseCoopers LLP addressed to the Representatives and dated,
respectively, the date of this Agreement and each such Closing Date, in
form and substance reasonably satisfactory to the Representatives,
confirming that they are independent accountants within the meaning of
the Securities Act and the Rules, that the response to Item 10 of the
Registration Statement is correct insofar as it relates to them and
stating in effect that:
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<PAGE> 18
(i) in their opinion the audited financial statements included
or incorporated by reference in the Registration Statement and the
Prospectus and reported on by them comply as to form in all material
respects with the applicable accounting requirements of the Securities
Act and the Rules;
(ii) on the basis of a reading of the amounts included in the
Registration Statement and the Prospectus under the headings "Summary
Consolidated Financial Data" and "Selected Consolidated Financial
Data," carrying out certain procedures (but not an examination in
accordance with generally accepted auditing standards) which would not
necessarily reveal matters of significance with respect to the comments
set forth in such letter, a reading of the minutes of the meetings of
the stockholders and directors of the Company, and inquiries of certain
officials of the Company who have responsibility for financial and
accounting matters of the Company as to transactions and events
subsequent to the date of the latest audited financial statements,
except as disclosed in the Registration Statement and the Prospectus,
nothing came to their attention which caused them to believe that:
(A) the amounts in "Summary Consolidated Financial
Information," and "Selected Consolidated Financial Data"
included in the Registration Statement and the Prospectus do
not agree with the corresponding amounts in the audited and
unaudited financial statements from which such amounts were
derived; or
(B) with respect to the Company, there were, at a
specified date not more than five business days prior to the
date of the letter, any increases in the current liabilities
and long-term liabilities of the Company or any decreases in
net income or in working capital or the stockholders' equity
in the Company, as compared with the amounts shown on the
Company's unaudited balance sheet as of June 30, 1999 and on
the Company's unaudited statement of operations for the three
months ended June 3, 1999 included in the Registration
Statement;
(iii) they have performed certain other procedures as may be
permitted under Generally Acceptable Auditing Standards as a result of
which they determined that certain information of an accounting,
financial or statistical nature (which is limited to accounting,
financial or statistical information derived from the general
accounting records of the Company) set forth in the Registration
Statement and the Prospectus and reasonably specified by the
Representatives agrees with the accounting records of the Company; and
(iv) based upon the procedures set forth in clauses (ii) and
(iii) above and a reading of the amounts included in the Registration
Statement under the headings "Summary Consolidated Financial Data" and
"Selected Consolidated Financial Data" included in the Registration
Statement and Prospectus and a reading of the financial statements from
which certain of such data were derived,
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<PAGE> 19
nothing has come to their attention that gives them reason to believe
that the "Summary Consolidated Financial Data" and "Selected
Consolidated Financial Data" included in the Registration Statement and
Prospectus do not comply as to the form in all material respects with
the applicable accounting requirements of the Securities Act and the
Rules or that the information set forth therein is not fairly stated in
relation to the financial statements included in the Registration
Statement or Prospectus from which certain of such data were derived
are not in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
financial statements included in the Registration Statement and
Prospectus.
References to the Registration Statement and the Prospectus in
this paragraph (g) are to such documents as amended and supplemented at
the date of the letter.
(h) The Representatives shall have received on each Closing Date from
Hale and Dorr LLP, counsel for the Company, an opinion, addressed to the
Representatives and dated such Closing Date and stating that the Institutional
Selling Stockholders may rely on such opinion, and stating in effect that:
(i) Each of the Company and its Subsidiaries has been duly
organized and is validly existing as a corporation in good standing
under the laws of its jurisdiction of its incorporation. Each of the
Company and its Subsidiaries is duly qualified and in good standing as
a foreign corporation in each jurisdiction listed in a schedule to the
opinion.
(ii) Each of the Company and its Subsidiaries has all
requisite corporate power and authority to own, lease and license its
assets and properties and conduct its business as now being conducted
and as described in the Registration Statement and the Prospectus and,
with respect to the Company, to enter into, deliver and perform this
Agreement and to issue and sell the Shares other than those required
under the state and foreign Blue Sky laws.
(iii) The Company has authorized and issued capital stock as
set forth in the Registration Statement and the Prospectus under the
caption "Capitalization"; the certificates evidencing the Shares are in
due and proper legal form and have been duly authorized for issuance by
the Company; all of the outstanding shares of Common Stock of the
Company have been duly and validly authorized and issued and are fully
paid and nonassessable and none of them was issued in violation of any
preemptive or other similar right. The Shares when issued and sold
pursuant to this Agreement will be duly and validly issued,
outstanding, fully paid and nonassessable and none of them will have
been issued in violation of any preemptive or other similar right. To
such counsel's knowledge, except as disclosed in the Registration
Statement and the Prospectus, there are no preemptive or other rights
to subscribe for or to purchase or any restriction upon the voting or
transfer of any securities of the Company
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<PAGE> 20
pursuant to the Company's Certificate of Incorporation or by-laws. To
such counsel's knowledge based upon a review by such counsel of the
minute books of the Company and the documents filed by the Company with
the Securities and Exchange Commission, except as disclosed in the
Registration Statement and the Prospectus, there is no outstanding
option, warrant or other right calling for the issuance of, and no
commitment, plan or arrangement to issue, any share of stock of the
Company or any security convertible into, exercisable for, or
exchangeable for stock of the Company. The Common Stock and the Shares
conform in all material respects to the descriptions thereof contained
in the Registration Statement and the Prospectus. The issued and
outstanding shares of capital stock of each of the Company's
Subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable and are owned by the Company or by another
wholly owned subsidiary of the Company as set forth in a schedule to
the opinion and none of the documents filed as exhibits to the
Registration Statement or incorporated by reference into the
Registration Statement (including documents filed as exhibits to
document so incorporated by reference into the Registration Statement
creates any security interest, lien, encumbrance, equity or claim,
other than as described in the Registration Statement and the
Prospectus.
(iv) All necessary corporate action has been duly and validly
taken by the Company to authorize the execution, delivery and
performance of this Agreement and the issuance and sale of the Shares.
This Agreement has been duly and validly authorized, executed and
delivered by the Company.
(v) Neither the execution, delivery and performance of this
Agreement by the Company nor the consummation of any of the
transactions contemplated hereby (including, without limitation, the
issuance and sale by the Company of the Shares) will give rise to a
right to terminate or accelerate the due date of any payment due under,
or conflict with or result in the breach of any term or provision of,
or constitute a default (or any event which with notice or lapse of
time, or both, would constitute a default) under, or require consent or
waiver under, or result in the execution or imposition of any lien,
charge, claim, security interest or encumbrance upon any properties or
assets of the Company or any of its Subsidiaries pursuant to the terms
of any agreement or instrument that is filed as an exhibit to the
Registration Statement or to any of the documents incorporated by
reference into the Registration Statement, or violate any provision of
the charter or by-laws of the Company or any of its Subsidiaries.
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<PAGE> 21
(vi) No consent, approval, authorization or order of any court
or governmental agency or regulatory body is required for the
execution, delivery or performance of this Agreement by the Company or
the consummation of the transactions contemplated hereby or thereby,
except such as have been obtained under the Securities Act and such as
may be required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the several
Underwriters.
(vii) To such counsel's knowledge, there is no litigation or
governmental or other proceeding or investigation, before any court or
before or by any public body or board pending or threatened against, or
involving the assets, properties or businesses of, the Company which
would have a Material Adverse Effect.
(viii) The statements (A) incorporated by reference into the
Prospectus under the caption "Description of Capital Stock" and (B) in
the Registration Statement in Item 15, in each case insofar as such
statements constitute summaries of documents referred to therein or
matters of law, fairly present the information required with respect to
such documents and matters of law and fairly summarize in all material
respects the matters required to be disclosed therein. To such
counsel's knowledge, there are no contracts or other documents that are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not described therein or filed as required.
(ix) The Registration Statement, all preliminary prospectuses
and the Prospectus and each amendment or supplement thereto (except for
the financial statements and schedules and other financial and
statistical data included therein, as to which such counsel expresses
no opinion) comply as to form in all material respects with the
requirements of the Securities Act and the Rules.
(x) The Registration Statement has become effective under the
Securities Act, and no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the
Securities Act.
(xi) The Shares have been authorized for quotation on the
Nasdaq National Market.
(xii) The Company is not, and after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended.
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<PAGE> 22
To the extent deemed advisable by such counsel, they may rely as to
matters of fact on certificates of responsible officers of the Company and
public officials and on the opinions of other counsel satisfactory to the
Representatives as to matters which are governed by laws other than the laws of
the Commonwealth of Massachusetts, the General Corporation Law of the State of
Delaware and the Federal laws of the United States; provided that such counsel
shall state that, in their opinion, the Underwriters and they are justified in
relying on such other opinions. Copies of such certificates and other opinions
shall be furnished to the Representatives and counsel for the Underwriters.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the Representatives and representatives of the
independent certified public accountants of the Company, at which conferences
the contents of the Registration Statement and the Prospectus and related
matters were discussed and, although such counsel is not passing upon and does
not assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement and the Prospectus (except as
specified in the foregoing opinion), on the basis of the foregoing, no facts
have come to the attention of such counsel which lead such counsel to believe
that the Registration Statement at the time it became effective (except with
respect to the financial statements and notes and schedules thereto and other
financial data, as to which such counsel need express no belief and after giving
effect to any changes incorporated pursuant to Section 430A under the Securities
Act) contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or that the Prospectus as amended or supplemented
(except with respect to the financial statements, notes and schedules thereto
and other financial data, as to which such counsel need make no statement) on
the date thereof contained any untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(i) The Representatives shall have received on the Firm Shares
Closing Date from Choate, Hall & Stewart, counsel for the Institutional
Selling Stockholders, an opinion, addressed to the Representatives and
dated such Closing Date, and stating in effect that:
(i) This Agreement, the Custody Agreement and the
Power of Attorney each constitute the valid and binding
obligation of each Institutional Selling Stockholder. The
Custody Agreement and the Power of Attorney are enforceable
against such Institutional Selling Stockholder in accordance
with their respective terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and other similar laws now or hereafter in
effect relating to creditors' rights generally, including
without limitation, the rights and priorities of creditors
provided in Chapter 175, Sections 180A through 180L of the
Mass. Gen. Laws in any rehabilitation or liquidation
proceeding begun in the Commonwealth of Massachusetts against
an insolvent Massachusetts insurer, and subject to general
principles of equity.
(ii) All of the rights of each Institutional Selling
Stockholder in the Shares to be sold by such Institutional
Selling Stockholder pursuant to this Agreement,
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have been transferred to the Underwriters who have severally purchased
such Shares pursuant to this Agreement, free and clear of adverse
claims, assuming for purposes of this opinion that the Underwriters
purchased the same in good faith without notice of any adverse claims.
To the extent deemed advisable by such counsel, they may rely as to
matters of fact on certificates of the Institutional Selling Stockholders and on
the opinions of other counsel satisfactory to the Representatives as to matters
which are governed by laws other than the laws of the Commonwealth of
Massachusetts, the General Corporation Law of the State of Delaware or the
Federal laws of the United States; provided that such counsel shall state that,
in their opinion, the Underwriters and they are justified in relying on such
other opinions. Copies of such certificates and other opinions shall be
furnished to the Representatives and counsel for the Underwriters.
(j) The Representatives shall have received on the Firm Shares
Closing Date from internal legal counsel of John Hancock Mutual Life
Insurance Company, counsel for the Institutional Selling Stockholders,
an opinion, addressed to the Representatives and dated such Closing
Date, and stating in effect that:
(i) This Agreement has been duly and validly executed
and delivered by or on behalf of the Institutional Selling
Stockholders.
(ii) Each Institutional Selling Stockholder has full
legal right and authority to enter into this Agreement and to
sell, transfer and deliver in the manner provided in this
Agreement, the Shares to be sold by such Institutional Selling
Stockholder hereunder.
(iii) The transfer and sale by each Institutional
Selling Stockholder of the Shares to be sold by such
Institutional Selling Stockholder as contemplated by this
Agreement will not conflict with, result in a breach of, or
constitute a default under any agreement or instrument known
to such counsel to which such Institutional Selling
Stockholder is a party or by which such Institutional Selling
Stockholder or any of its properties may be bound, or any
franchise, license, permit, judgment, decree, order, statute,
rule or regulation.
(iv) No consent, approval, authorization, license,
certificate, permit or order of any court, governmental or
regulatory agency, authority or body or financial institution
is required in connection with the performance of this
Agreement by the Institutional Selling Stockholders or the
consummation of the transactions contemplated hereby,
including the delivery and sale of the Shares to be delivered
and sold by the Institutional Selling Stockholders, except
such as may be required under state securities or blue sky
laws in connection with the purchase and distribution of the
Shares by the several Underwriters.
To the extent deemed advisable by such counsel, they may rely as to
matters of fact on certificates of the Institutional Selling Stockholders and on
the opinions of other counsel satisfactory to the Representatives as to matters
which are governed by laws other than the laws of the
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<PAGE> 24
Commonwealth of Massachusetts, the General Corporation Law of the State of
Delaware or the Federal laws of the United States; provided that such counsel
shall state that, in their opinion, the Underwriters and they are justified in
relying on such other opinions. Copies of such certificates and other opinions
shall be furnished to the Representatives and counsel for the Underwriters.
(k) The Representatives shall have received on the each
Closing Date from Hale and Dorr LLP, counsel for the
Non-Institutional Selling Stockholders, an opinion, addressed to
the Representatives and dated such Closing Date, and stating in
effect that:
(i) This Agreement has been duly and validly
executed and delivered by or on behalf of the Non-Institutional
Selling Stockholders.
(ii) This Agreement, the Custody Agreement, the
Power of Attorney and the Lock-Up Agreement each constitute the
valid and binding obligation of each Non-Institutional Selling
Stockholder. The Custody Agreement, the Power of Attorney and the
Lock-up Agreement are enforceable against such Non-Institutional
Selling Stockholder in accordance with their respective terms,
except as may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and other similar
laws now or hereafter in effect relating to creditors' rights
generally, and subject to general principles of equity; and each
Non-Institutional Selling Stockholder has full legal right and
authority to enter into this Agreement and to sell, transfer and
deliver in the manner provided in this Agreement, the Shares to be
sold by such Non-Institutional Selling Stockholder hereunder.
(iii) The transfer and sale by each
Non-Institutional Selling Stockholder of the Shares to be sold by
such Non-Institutional Selling Stockholder as contemplated by this
Agreement will not conflict with, result in a breach of, or
constitute a default under any agreement or instrument known to
such counsel to which such Non-Institutional Selling Stockholder is
a party or by which such Non-Institutional Selling Stockholder or
any of its properties may be bound, or any franchise, license,
permit, judgment, decree, order, statute, rule or regulation.
(iv) All of the rights of each Non-Institutional
Selling Stockholder in the Shares to be sold by such the
Non-Institutional Selling Stockholder pursuant to this Agreement,
have been transferred to the Underwriters who have severally
purchased such Shares pursuant to this Agreement, free and clear of
adverse claims, assuming for purposes of this opinion that the
Underwriters purchased the same in good faith without notice of any
adverse claims.
(v) No consent, approval, authorization, license,
certificate, permit or order of any court, governmental or
regulatory agency, authority or body or financial institution is
required in connection with the performance of this Agreement by
the Non-Institutional Selling Stockholders or the consummation of
the transactions contemplated hereby, including the delivery and
sale of the Shares to be delivered and sold by the
Non-Institutional Selling Stockholders, except such as may be
required under state securities or blue sky laws in connection with
the purchase and distribution of the Shares by the several
Underwriters.
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<PAGE> 25
To the extent deemed advisable by such counsel, they may rely as to
matters of fact on certificates of the Non-Institutional Selling Stockholders
and on the opinions of other counsel satisfactory to the Representatives as to
matters which are governed by laws other than the laws of the Commonwealth of
Massachusetts, the General Corporation Law of the State of Delaware or the
Federal laws of the United States; provided that such counsel shall state that,
in their opinion, the Underwriters and they are justified in relying on such
other opinions. Copies of such certificates and other opinions shall be
furnished to the Representatives and counsel for the Underwriters.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the Representatives and representatives of the
independent public accountants of the Company, at which conferences the contents
of the Registration Statement and the Prospectus and related matters were
discussed. While such counsel has not undertaken to independently verify and
does not assume any responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement and the Prospectus
(except as specified in the foregoing opinion), on the basis of the foregoing,
no facts have come to the attention of such counsel which lead such counsel to
believe that the Registration Statement at the time it became effective (except
with respect to the financial statements, notes and schedules thereto and other
financial data, as to which such counsel need express no belief and after giving
effect to any changes incorporated pursuant to Section 430A under the Securities
Act) contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or that the Prospectus as amended or supplemented
(except with respect to the financial statements, notes and schedules thereto
and other financial data, as to which such counsel need make no statement) on
the date thereof and the date of such opinion contained any untrue statement of
a material fact or omitted to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading.
(l) All proceedings taken in connection with the sale of
the Firm Shares and the Option Shares as herein contemplated shall
be reasonably satisfactory in form and substance to the
Representatives, and their counsel and the Underwriters shall have
received on each Closing Date from Testa Hurwitz & Thibeault LLP a
favorable opinion, addressed to the Representatives, with respect
to the Shares, the Registration Statement and the Prospectus, and
such other related matters, as the Representatives may reasonably
request, and the Company shall have furnished to Testa Hurwitz &
Thibeault LLP such documents as they may reasonably request for the
purpose of enabling them to pass upon such matters.
(m) If the Shares have been qualified for sale in Florida,
the Representatives shall have received on each Closing Date
certificates, addressed to the Representatives, and dated such
Closing Date, of an executive officer of the Company, to the effect
that the signer of such certificate has reviewed and understands
the provisions of Section 517.075 of the Florida Statutes, and
represents that the Company has complied, and at all times will
comply, with all provisions of Section 517.075 and further, that as
of such Closing Date, neither the Company nor any of its affiliates
does business with the government of Cuba or with any person or
affiliate located in Cuba.
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<PAGE> 26
(n) The Representatives shall have received copies of the
Lock-up Agreements executed by each entity or person described in
Section 4(o).
(o) The Company and the Selling Stockholders shall have
furnished or caused to be furnished to the Representatives such
further certificates or documents as the Representatives shall have
reasonably requested.
8. Covenants of the Company.
(a) The Company covenants and agrees as follows:
(i) The Company will use its best efforts to cause
the Registration Statement, if not effective at the time
of execution of this Agreement, and any amendments
thereto, to become effective as promptly as possible. The
Company shall prepare the Prospectus in a form approved by
the Representatives and file such Prospectus pursuant to
Rule 424(b) under the Securities Act not later than the
Commission's close of business on the second business day
following the execution and delivery of this Agreement,
or, if applicable, such earlier time as may be required by
Rule 430A(a)(3) under the Securities Act.
(ii) The Company shall promptly advise the
Representatives in writing (A) when any amendment to the
Registration Statement shall have become effective, (B) of
any request by the Commission for any amendment of the
Registration Statement or the Prospectus or for any
additional information, (C) of the prevention or
suspension of the use of any preliminary prospectus or the
Prospectus or of the issuance by the Commission of any
stop order suspending the effectiveness of the
Registration Statement or the institution or threatening
of any proceeding for that purpose and (D) of the receipt
by the Company of any notification with respect to the
suspension of the qualification of the Shares for sale in
any jurisdiction or the initiation or threatening of any
proceeding for such purpose. The Company shall not file
any amendment of the Registration Statement or supplement
to the Prospectus unless the Company has furnished the
Representatives a copy for its review prior to filing and
shall not file any such proposed amendment or supplement
to which the Representatives reasonably object. The
Company shall use its best efforts to prevent the issuance
of any such stop order and, if issued, to obtain as soon
as possible the withdrawal thereof.
(iii) If, at any time when a prospectus relating
to the Shares is required to be delivered under the
Securities Act and the Rules, any event occurs as a result
of which the Prospectus as then amended or supplemented
would include any untrue statement of a material fact or
omit to state any material fact necessary to make the
statements therein in the light of the circumstances under
which they were made not misleading, or if it shall be
necessary to amend or supplement the Prospectus to comply
with the Securities Act or the Rules, the Company promptly
shall prepare and file with the Commission, subject to the
second sentence of
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<PAGE> 27
paragraph (ii) of this Section 7(a), an amendment or
supplement which shall correct such statement or omission or
an amendment which shall effect such compliance.
(iv) The Company shall make generally available to
its security holders and to the Representatives as soon as
practicable, but not later than 45 days after the end of the
12-month period beginning at the end of the fiscal quarter of
the Company during which the Effective Date occurs (or 90 days
if such 12-month period coincides with the Company's fiscal
year), an earnings statement (which need not be audited) of
the Company, covering such 12-month period, which shall
satisfy the provisions of Section 11(a) of the Securities Act
or Rule 158 of the Rules.
(v) The Company shall furnish to the Representatives
and counsel for the Underwriters, without charge, signed
copies of the Registration Statement (including all exhibits
thereto and amendments thereof) and to each other Underwriter
a copy of the Registration Statement (without exhibits
thereto) and all amendments thereof and, so long as delivery
of a prospectus by an Underwriter or dealer may be required by
the Securities Act or the Rules, as many copies of any
preliminary prospectus and the Prospectus and any amendments
thereof and supplements thereto as the Representatives may
reasonably request.
(vi) The Company shall cooperate with the
Representatives and their counsel in endeavoring to qualify
the Shares for offer and sale in connection with the offering
under the laws of such jurisdictions as the Representatives
may designate and shall maintain such qualifications in effect
so long as required for the distribution of the Shares;
provided, however, that the Company shall not be required in
connection therewith, as a condition thereof, to qualify as a
foreign corporation or to execute a general consent to service
of process in any jurisdiction or subject itself to taxation
as doing business in any jurisdiction.
(vii) Without the prior written consent of CIBC World
Markets Corp., for a period of 90 days after the date of this
Agreement, the Company and each of its individual directors
and executive officers shall not issue, sell or register with
the Commission (other than on Form S-8 or on any successor
form), or otherwise dispose of, directly or indirectly, any
equity securities of the Company (or any securities
convertible into, exercisable for or exchangeable for equity
securities of the Company), except for the issuance of the
Shares pursuant to the Registration Statement, the grant of
options and issuance of shares pursuant to the Company's
existing stock option plan or bonus plan and the issuance of
shares pursuant to options granted pursuant to the Company's
existing stock option plan, in each case as described, or
incorporated by reference, in the Registration Statement and
the Prospectus. In the event that during this period, (i) any
shares are issued pursuant to the Company's existing stock
option plan or bonus plan that are exercisable during
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<PAGE> 28
such 90 day period or (ii) any registration is effected on
Form S-8 or on any successor form relating to shares that are
exercisable during such 90 period, the Company shall obtain
the written agreement of such grantee or purchaser or holder
of such registered securities that, for a period of 90 days
after the date of this Agreement, such person will not,
without the prior written consent of CIBC World Markets Corp.,
offer for sale, sell, distribute, grant any option for the
sale of, or otherwise dispose of, directly or indirectly, or
exercise any registration rights with respect to, any shares
of Common Stock (or any securities convertible into,
exercisable for, or exchangeable for any shares of Common
Stock) owned by such person.
(viii) On or before completion of this offering, the
Company shall make all filings required under applicable
securities laws and by the Nasdaq National Market (including
any required registration under the Exchange Act).
(ix) The Company shall file timely and accurate
reports in accordance with the provisions of Florida Statutes
Section 517.075, or any successor provision, and any
regulation promulgated thereunder, if at any time after the
Effective Date, the Company or any of its affiliates commences
engaging in business with the government of Cuba or any person
or affiliate located in Cuba.
(x) The Company will apply the net proceeds from the
offering of the Shares in the manner set forth under "Use of
Proceeds" in the Prospectus.
(b) The Company agrees to pay, or reimburse if paid by the
Representatives and/or any Institutional Selling Stockholder, whether
or not the transactions contemplated hereby are consummated or this
Agreement is terminated, all costs and expenses incident to the public
offering of the Shares and the performance of the obligations of the
Company under this Agreement including those relating to: (i) the
preparation, printing, filing and distribution of the Registration
Statement including all exhibits thereto, each preliminary prospectus,
the Prospectus, all amendments and supplements to the Registration
Statement and the Prospectus, and the printing, filing and distribution
of this Agreement; (ii) the preparation and delivery of certificates
for the Shares to the Underwriters; (iii) the registration or
qualification of the Shares for offer and sale under the securities or
Blue Sky laws of the various jurisdictions referred to in Section
7(a)(vi), including the reasonable fees and disbursements of counsel
for the Underwriters and the Institutional Selling Stockholders in
connection with such registration and qualification and the
preparation, printing, distribution and shipment of preliminary and
supplementary Blue Sky memoranda; (iv) the furnishing (including costs
of shipping and mailing) to the Representatives and to the Underwriters
and the Institutional Selling Stockholders of copies of each
preliminary prospectus, the Prospectus and all amendments or
supplements to the Prospectus, and of the several documents required by
this Section to be so furnished, as may be reasonably requested for use
in connection with the offering and sale of the Shares by the
Underwriters or by dealers to whom Shares may be sold; (v) the filing
fees of the NASD in connection with its review of the terms of the
public offering and reasonable fees and disbursements of counsel for
the Underwriters in connection with such review; (vi) inclusion of the
Shares for quotation on the Nasdaq National Market; and (vii) all
transfer taxes, if any, with
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respect to the sale and delivery of the Shares by the Company to the
Underwriters. Subject to the provisions of Section 10, the Underwriters
agree to pay, whether or not the transactions contemplated hereby are
consummated or this Agreement is terminated, all costs and expenses
incident to the performance of the obligations of the Underwriters
under this Agreement not payable by the Company pursuant to the
preceding sentence, including, without limitation, the fees and
disbursements of counsel for the Underwriters.
(c) The Company agrees to pay, or reimburse if paid by the
Institutional Selling Stockholders, any transfer taxes incident to the
transfer to the Underwriters of the Shares being sold by the
Institutional Selling Stockholders. The Non-Institutional Selling
Stockholders will pay any transfer taxes incident to the transfer to
the Underwriters of the Shares being sold by the Non-Institutional
Selling Stockholders. Nothing herein shall alter the continuing
obligations of the Company to the Institutional Selling Stockholders
arising under that certain Note and Warrant Agreement dated January 26,
1993 (as amended, modified and supplemented, the "Note and Warrant
Agreement") and the other Operative Agreements (as defined in the Note
and Warrant Agreement), including, without limitation, sections 22 and
23 of the Note and Warrant Agreement.
9. Indemnification.
(a) The Company and the Selling Stockholders agree, jointly
and severally, to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act
against any and all losses, claims, damages and liabilities, joint or
several (including any reasonable investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement
of, any action, suit or proceeding or any claim asserted), to which
they, or any of them, may become subject under the Securities Act, the
Exchange Act or other Federal or state law or regulation, at common law
or otherwise, insofar as such losses, claims, damages or liabilities
arise out of or are based (i) upon any untrue statement or alleged
untrue statement of a material fact contained in any preliminary
prospectus, the Registration Statement or the Prospectus or any
amendment thereof or supplement thereto, or in any Blue Sky application
or other information or other documents executed by the Company filed
in any state or other jurisdiction to qualify any or all of the Shares
under the securities laws thereof (any such application, document or
information being hereinafter referred to as a "Blue Sky Application")
or arise out of or are based upon any omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) in whole
or in part upon any breach of the representations and warranties set
forth in Section 4 hereof, or (iii) in whole or in part upon any
failure of the Company to perform any of its obligations hereunder or
under law; provided, however, that (A) such indemnity shall not inure
to the benefit of any Underwriter (or any person controlling such
Underwriter) on account of any losses, claims, damages or liabilities
arising from the sale of the Shares to any person by such Underwriter
if such untrue statement or omission or alleged untrue statement or
omission was made in such preliminary prospectus, the Registration
Statement or the Prospectus, or such amendment or supplement thereto,
or in any Blue Sky Application and (1) such Underwriter failed to send
or give a copy of the Prospectus, as the same may then be supplemented
or amended, to such person within the time required by the Act and the
untrue statement or
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<PAGE> 30
omission (or alleged untrue statement or omission) was contained in the
Prospectus or (2) in reliance upon and in conformity with information
furnished in writing to the Company by the Representatives on behalf of
any Underwriter specifically for use therein, and (B) no Selling
Stockholder shall be liable or have any obligation except if and only
to the extent that such loss, claim, damage or liability arises out of
or is based upon an untrue statement (or alleged untrue statement) or
omission (or alleged omission) contained in (or omitted from) any such
document in reliance upon and in conformity with information furnished
in writing to the Company by such Selling Stockholder specifically for
use therein. Notwithstanding the foregoing, the liability of each
Selling Stockholder pursuant to the provisions of this Section 9(a) and
Section 10 shall be limited to the lesser of (i) an amount equal to the
aggregate net proceeds actually received by such Selling Stockholder
from the sale of such Shares sold by the Selling Stockholder hereunder
and (ii) that percentage of the total amount of such losses, claims,
damages or liabilities indemnified against by the Selling Stockholder
equal to the percentage obtained by dividing the total number of Shares
sold by the Selling Stockholder hereunder by the total number of shares
sold hereunder, including any Option Shares so sold. Notwithstanding
anything to the contrary contained in this Section 9(a), each
Underwriter agrees not to assert its rights to indemnity under this
Section 9(a) against any Selling Stockholder until (i) such Underwriter
has requested indemnification and reimbursement from the Company for
such losses, claims, damages, liabilities or expenses and (ii) the
Company does not within 90 days of such request (A) agree to so
indemnify such Underwriter and (B) reimburse in full such Underwriter
or controlling person for any such losses, claims, damages, liabilities
or expenses incurred. This indemnity agreement will be in addition to
any liability which the Company and the Selling Stockholders may
otherwise have.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, the Selling Stockholders and
each person, if any, who controls the Company or the Institutional
Selling Stockholders within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act, each director of the Company,
and each officer of the Company who signs the Registration Statement,
to the same extent as the foregoing indemnity from the Company and the
Selling Stockholders to each Underwriter, but only insofar as such
losses, claims, damages or liabilities arise out of or are based upon
any untrue statement or omission or alleged untrue statement or
omission which was made in any preliminary prospectus, the Registration
Statement or the Prospectus, or any amendment thereof or supplement
thereto, contained in the (i) concession and reallowance figures
appearing under the caption "Underwriting" and (ii) the stabilization
information contained under the caption "Underwriting" in the
Prospectus; provided, however, that the obligation of each Underwriter
to indemnify the Company or the Selling Stockholders (including any
controlling person, director or officer thereof) shall be limited to
the net proceeds received by the Company from such Underwriter.
(c) Any party that proposes to assert the right to be
indemnified under this Section (or contribution under Section 10, as
further provided in the last sentence to this Section 9(c)) will,
promptly after receipt of notice of commencement of any action, suit
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or proceeding against such party in respect of which a claim is to be
made against an indemnifying party or parties under this Section,
notify each such indemnifying party of the commencement of such action,
suit or proceeding, enclosing a copy of all papers served. No
indemnification provided for in Section 9(a) or 9(b) shall be available
to any party who shall fail to give notice as provided in this Section
9(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was prejudiced
by the failure to give such notice but the omission so to notify such
indemnifying party of any such action, suit or proceeding shall not
relieve it from any liability that it may have to any indemnified party
for contribution or otherwise than under this Section. In case any such
action, suit or proceeding shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate in,
and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof and the approval by the
indemnified party of such counsel, the indemnifying party shall not be
liable to such indemnified party for any legal or other expenses,
except as provided below and except for the reasonable costs of
investigation subsequently incurred by such indemnified party in
connection with the defense thereof. The indemnified party shall have
the right to employ its counsel in any such action, but the fees and
expenses of such counsel shall be at the expense of such indemnified
party unless (i) the employment of counsel by such indemnified party
has been authorized in writing by the indemnifying parties, (ii) the
indemnified party shall have been advised by counsel that there may be
one or more legal defenses available to it which are different from or
in addition to those available to the indemnifying party (in which case
the indemnifying parties shall not have the right to direct the defense
of such action on behalf of the indemnified party) or (iii) the
indemnifying parties shall not have employed counsel to assume the
defense of such action within a reasonable time after notice of the
commencement thereof, in each of which cases the fees and expenses of
counsel shall be at the expense of the indemnifying parties. No
indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement or compromise of, or consent
to the entry of any judgment with respect to, any pending or threatened
action, claim or proceeding in respect of which any indemnified party
is or could have been a party and indemnity could have been sought
hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on
claims that are the subject matter of such action, claim or proceeding
and does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of any indemnified
party. If an indemnifying party has agreed to assume the defense of any
claim against an indemnified party, the indemnified party shall provide
the indemnifying party with prior written notice of any proposed
settlement and shall not complete any settlement without the prior
written consent of the indemnifying party. An indemnifying party shall
not be liable for any settlement of any action, suit, proceeding or
claim effected without its written consent, which consent shall not be
unreasonably withheld or delayed. Proceedings with respect to
contribution obligations under section 10 shall be subject to the same
conditions as provided in this Section 9(c).
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<PAGE> 32
10. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for
in Section 9(a) or 9(b) is due in accordance with its terms but for any
reason is held to be unavailable to or insufficient to hold harmless an
indemnified party under Section 9(a) or 9(b), then each indemnifying
party shall contribute to the aggregate losses, claims, damages and
liabilities (including any investigation, legal and other expenses
reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted,
but after deducting any contribution received by any person entitled
hereunder to contribution from any person who may be liable for
contribution) to which the indemnified party may be subject in such
proportion as is appropriate to reflect the relative benefits received
by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other from the offering of the Shares or, if such
allocation is not permitted by applicable law or indemnification is not
available as a result of the indemnifying party not having received
notice as provided in Section 9 hereof, in such proportion as is
appropriate to reflect not only the relative benefits referred to above
but also the relative fault of the Company and the Selling Stockholders
on the one hand and the Underwriters on the other in connection with
the statements or omissions which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the
Company, the Selling Stockholders and the Underwriters shall be deemed
to be in the same proportion as (x) the total net proceeds from the
offering (net of underwriting discounts but before deducting expenses)
received by the Company or the Selling Stockholder, as set forth in the
table on the cover page of the Prospectus, bear to (y) the underwriting
discounts received by the Underwriters, as set forth in the table on
the cover page of the Prospectus. The relative fault of the Company and
the Selling Stockholders or the Underwriters shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact related to information supplied by the
Company and the Selling Stockholders or the Underwriters and the
parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The
Company, the Selling Stockholders and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this
Section 10 were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of
this Section 10, (i) in no case shall any Underwriter (except as may be
provided in the Agreement Among Underwriters) be liable or responsible
for any amount in excess of the underwriting discount applicable to the
Shares purchased by such Underwriter hereunder; (ii) the Company shall
be liable and responsible for any amount in excess of such underwriting
discount; and (iii) in no case shall any Selling Stockholder be liable
and responsible under Section 9 and this Section 10 for any amount in
excess of the lesser of (x) the aggregate net proceeds of the sale of
Shares received by such Selling Stockholder and (y) that percentage of
the total amount of such losses, claims, damages or liabilities
indemnified against by such Selling Stockholder equal to the percentage
obtained by dividing the total number of Shares sold by such Selling
Stockholder hereunder by the total number of Shares sold hereunder,
including any Option Shares so sold; provided, however, that no person
guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act)
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<PAGE> 33
shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section 10,
each person, if any, who controls an Underwriter or an Institutional
Selling Stockholder within the meaning of Section 15 of the Securities
Act or Section 20(a) of the Exchange Act shall have the same rights to
contribution as such Underwriter or Institutional Selling Stockholder,
and each person, if any, who controls the Company within the meaning of
the Section 15 of the Securities Act or Section 20(a) of the Exchange
Act, each officer of the Company who shall have signed the Registration
Statement and each director of the Company shall have the same rights
to contribution as the Company, subject in each case to clauses (i) and
(ii) in the immediately preceding sentence of this Section 10. Any
party entitled to contribution will, promptly after receipt of notice
of commencement of any action, suit or proceeding against such party in
respect of which a claim for contribution may be made against another
party or parties under this Section, notify such party or parties from
whom contribution may be sought, but the omission so to notify such
party or parties from whom contribution may be sought shall not relieve
the party or parties from whom contribution may be sought from any
other obligation it or they may have hereunder or otherwise than under
this Section. No party shall be liable for contribution with respect to
any action, suit, proceeding or claim settled without its written
consent. The Underwriter's obligations to contribute pursuant to this
Section 10 are several in proportion to their respective underwriting
commitments and not joint. The Selling Stockholders' obligations in
this Agreement, including without limitation obligations under Section
9 and this Section 10 to indemnify and/or contribute, are several and
not joint, and no Selling Stockholder shall be liable for any act or
omission of any other Selling Stockholder.
11. Termination. This Agreement may be terminated with respect
to the Shares to be purchased on a Closing Date by the Representatives by
notifying the Company and the Selling Stockholders at any time:
(a) in the absolute discretion of the Representatives at or
before any Closing Date: (i) if on or prior to such date, any domestic
or international event or act or occurrence has materially disrupted,
or in the opinion of the Representatives will in the future materially
disrupt, the securities markets; (ii) if there has occurred any new
outbreak or material escalation of hostilities or other calamity or
crisis the effect of which on the financial markets of the United
States is such as to make it, in the judgment of the Representatives,
inadvisable to proceed with the offering; (iii) if there shall be such
a material adverse change in general financial, political or economic
conditions or the effect of international conditions on the financial
markets in the United States is such as to make it, in the judgment of
the Representatives, inadvisable or impracticable to market the Shares;
(iv) if trading in the Shares has been suspended by the Commission or
trading generally on the New York Stock Exchange, Inc., on the American
Stock Exchange, Inc. or the Nasdaq National Market has been suspended
or limited, or minimum or maximum ranges for prices for securities
shall have been fixed, or maximum ranges for prices for securities have
been required, by said exchanges or by order of the Commission, the
National Association of Securities Dealers, Inc., or any other
governmental or regulatory authority; or (v) if a banking moratorium
has been declared by any state or Federal
-33-
<PAGE> 34
authority; or (vi) if, in the judgment of the Representatives, there
has occurred a Material Adverse Effect, or
(b) at or before any Closing Date, that any of the conditions
specified in Section 6 shall not have been fulfilled when and as
required by this Agreement.
If this Agreement is terminated pursuant to any of its
provisions, neither the Company nor the Selling Stockholders shall be under any
liability to any Underwriter, and no Underwriter shall be under any liability to
the Company or any of the Selling Stockholders, except that (y) if this
Agreement is terminated by the Representatives or the Underwriters because of
any failure, refusal or inability on the part of the Company or the Selling
Stockholders to comply with the terms or to fulfill any of the conditions of
this Agreement, the Company will reimburse the Underwriters for all
out-of-pocket expenses (including the reasonable fees and disbursements of their
counsel) incurred by them in connection with the proposed purchase and sale of
the Shares or in contemplation of performing their obligations hereunder and (z)
no Underwriter who shall have failed or refused to purchase the Shares agreed to
be purchased by it under this Agreement, without some reason sufficient
hereunder to justify cancellation or termination of its obligations under this
Agreement, shall be relieved of liability to the Company, the Selling
Stockholders or to the other Underwriters for damages occasioned by its failure
or refusal.
12. Substitution of Underwriters. If one or more of the
Underwriters shall fail (other than for a reason sufficient to justify the
cancellation or termination of this Agreement under Section 11) to purchase on
any Closing Date the Shares agreed to be purchased on such Closing Date by such
Underwriter or Underwriters, the Representatives may find one or more substitute
underwriters to purchase such Shares or make such other arrangements as the
Representatives may deem advisable or one or more of the remaining Underwriters
may agree to purchase such Shares in such proportions as may be approved by the
Representatives, in each case upon the terms set forth in this Agreement. If no
such arrangements have been made by the close of business on the business day
following such Closing Date,
(a) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall not exceed 10% of the Shares
that all the Underwriters are obligated to purchase on such Closing
Date, then each of the nondefaulting Underwriters shall be obligated to
purchase such Shares on the terms herein set forth in proportion to
their respective obligations hereunder; provided, that in no event
shall the maximum number of Shares that any Underwriter has agreed to
purchase pursuant to Section 1 be increased pursuant to this Section 12
by more than one-ninth of such number of Shares without the written
consent of such Underwriter, or
(b) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall exceed 10% of the Shares that
all the Underwriters are obligated to purchase on such Closing Date,
then the Company shall be entitled to one additional business day
within which it may, but is not obligated to, find one or more
substitute underwriters reasonably satisfactory to the Representatives
to purchase such Shares upon the terms set forth in this Agreement.
-34-
<PAGE> 35
In any such case, either the Representatives or the Company
shall have the right to postpone the applicable Closing Date for a period of not
more than five business days in order that necessary changes and arrangements
(including any necessary amendments or supplements to the Registration Statement
or Prospectus) may be effected by the Representatives and the Company. If the
number of Shares to be purchased on such Closing Date by such defaulting
Underwriter or Underwriters shall exceed 10% of the Shares that all the
Underwriters are obligated to purchase on such Closing Date, and none of the
nondefaulting Underwriters or the Company shall make arrangements pursuant to
this Section within the period stated for the purchase of the Shares that the
defaulting Underwriters agreed to purchase, this Agreement shall terminate with
respect to the Shares to be purchased on such Closing Date without liability on
the part of any nondefaulting Underwriter to the Company or the Selling
Stockholders and without liability on the part of the Company, except in both
cases as provided in Sections 8(b), 9, 10 and 11. The provisions of this Section
shall not in any way affect the liability of any defaulting Underwriter to the
Company or the nondefaulting Underwriters arising out of such default. A
substitute underwriter hereunder shall become an Underwriter for all purposes of
this Agreement.
13. Miscellaneous. The respective agreements, representations,
warranties, indemnities and other statements of the Company or its officers, of
the Selling Stockholders and of the Underwriters set forth in or made pursuant
to this Agreement shall remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or the
Selling Stockholders or any of the officers, directors or controlling persons
referred to in Sections 9 and 10 hereof, and shall survive delivery of and
payment for the Shares. The provisions of Sections 8(b), 9, 10 and 11 shall
survive the termination or cancellation of this Agreement.
This Agreement has been and is made for the benefit of the
Underwriters, the Company and the Selling Stockholders and their respective
successors and assigns, and, to the extent expressed herein, for the benefit of
persons controlling any of the Underwriters, the Institutional Selling
Stockholders, or the Company, and directors and officers of the Company, and
their respective successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include any purchaser of Shares from any Underwriter merely
because of such purchase.
All notices and communications hereunder shall be in writing
and mailed or delivered or by telephone or telegraph if subsequently confirmed
in writing, (a) if to the Representatives, c/o CIBC World Markets Corp., One
World Financial Center, New York, New York 10281 Attention: Peter J. Crowley,
with a copy to Leslie E. Davis, Esq., Testa, Hurwitz & Thibeault, LLP, 125 High
Street, Boston, Massachusetts 02110 and (b) if to the Company, to its agent for
service as such agent's address appears on the cover page of the Registration
Statement with a copy to John K.P. Stone, Esq., Hale and Dorr LLP, 60 State
Street, Boston, Massachusetts 02108 (c) if to the Non-Institutional Selling
Stockholders to each of them at the addresses set forth in their respective
Custody Agreements with a copy to John K.P. Stone, Esq., Hale and Dorr LLP, 60
State Street, Boston, Massachusetts 02108 and (d) if to the Institutional
Selling Stockholders, c/o John Hancock Mutual Life Insurance Company, Bond and
Corporate Finance Department, 200 Clarendon Street, Boston, Massachusetts 02117
Attention: D. Dana Donovan, with a copy to W. Brewster Lee, Choate, Hall &
Stewart, Exchange Place, 53 State Street, Boston, Massachusetts 02109.
-35-
<PAGE> 36
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to principles
of conflict of laws.
This Agreement may be signed in any number of counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
-36-
<PAGE> 37
Please confirm that the foregoing correctly sets forth the
agreement among us.
Very truly yours,
POLYMEDICA CORPORATION
By:
---------------------------------
Title:
NON-INSTITUTIONAL
SELLING STOCKHOLDERS
By:
---------------------------------
Title: Attorney-In-Fact
JOHN HANCOCK MUTUAL
LIFE INSURANCE COMPANY
By:
---------------------------------
Title:
BARNETT & CO.
By:
---------------------------------
Title:
Confirmed:
CIBC WORLD MARKETS CORP.
FIRST UNION CAPITAL MARKETS CORP.
Acting severally on behalf of itself and as representative of the several
Underwriters named in Schedule I annexed hereto.
By: CIBC WORLD MARKETS CORP.
By:
---------------------------------
Title:
-37-
<PAGE> 38
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm Shares to Number of Firm Shares
Be Purchased From the to Be Purchased From
Name Company the Selling Stockholders
- ---- ------------------------ ------------------------
<S> <C> <C>
CIBC World Markets Corp.
First Union Capital Markets Corp.
------------------ ------------------
TOTAL
================== ==================
</TABLE>
-38-
<PAGE> 39
SCHEDULE II
<TABLE>
<CAPTION>
Number of Number of
Institutional Selling Stockholders Firm Shares Option Shares
- ---------------------------------- ----------- -------------
<S> <C> <C>
John Hancock Mutual Life Insurance Company
Barnett & Co.
Non-Institutional Selling Stockholders
Steven J. Lee
Arthur A. Siciliano
Eric G. Walters
Daniel F. Bernstein
----------- --------------
TOTAL
=========== ==============
</TABLE>
-39-
<PAGE> 1
EXHIBIT 5.1
HALE AND DORR LLP
COUNSELLORS AT LAW
60 STATE STREET, BOSTON, MASSACHUSETTS 02109
617-526-6000 - FAX 617-526-5000
September 3, 1999
PolyMedica Corporation
11 State Street
Woburn, MA 01801
Registration Statement on Form S-3
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration Statement on
Form S-3 (the "Registration Statement") to be filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), for the registration of an aggregate of
3,335,000 shares of Common Stock, $0.01 par value per share (the "Shares"), of
PolyMedica Corporation, a Massachusetts corporation (the "Company").
We have acted as counsel for the Company in connection with the sale by the
Company and certain shareholders of the Company of the Shares. We have examined
signed copies of the Registration Statement as filed with the Commission. We
have also examined and relied upon the minutes of meetings of the shareholders
and the Board of Directors of the Company as provided to us by the Company,
stock record books of the Company as provided to us by the Company, the Articles
of Organization and By-Laws of the Company, each as restated and/or amended to
date, and such other documents as we have deemed necessary for purposes of
rendering the opinions hereinafter set forth.
In our examination of the foregoing documents, we have assumed the genuineness
of all signatures, the authenticity of all documents submitted to us as
originals, the conformity to original documents of all documents submitted to us
as copies, the authenticity of the originals of such latter documents and the
legal competence of all signatories to such documents.
We assume that the appropriate action will be taken, prior to the offer and sale
of the Shares, to register and qualify the Shares for sale under all applicable
state securities or "blue sky" laws.
We express no opinion herein as to the laws of any state or jurisdiction other
than the state laws of the Commonwealth of Massachusetts and the federal laws of
the United States of America.
Based upon and subject to the foregoing, we are of the opinion that the Shares
have been duly authorized and are validly issued, fully paid and nonassessable.
<TABLE>
<S> <C> <C>
WASHINGTON, D.C. BOSTON, MA LONDON, UK*
- ---------------------------------------------------------------
HALE AND DORR LLP INCLUDES PROFESSIONAL CORPORATION
*BROBECK HALE AND DORR INTERNATIONAL (AN INDEPENDENT JOINT
VENTURE LAW FIRM)
</TABLE>
<PAGE> 2
PolyMedica Corporation
September 3, 1999
Page 2
It is understood that this opinion is to be used only in connection with the
offer and sale of the Shares while the Registration Statement is in effect.
Please note that we are opining only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our
name therein and in the related prospectus under the caption "Legal Matters." In
giving such consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations of the Commission.
Very truly yours,
/s/ HALE AND DORR LLP
HALE AND DORR LLP
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
State or
Other Jurisdiction
Subsidiary of Incorporation
- --------------------------- ------------------
<S> <C>
Liberty Medical Supply, Inc. Florida
- --------------------------------------------------------------------
Liberty Direct Services Corp. Delaware
- --------------------------------------------------------------------
Liberty Home Pharmacy Corp. Delaware
- --------------------------------------------------------------------
PolyMedica Healthcare, Inc. Delaware
- --------------------------------------------------------------------
PolyMedica Pharmaceuticals
(U.S.A.), Inc. Massachusetts
- --------------------------------------------------------------------
PolyMedica Pharmaceuticals
(Puerto Rico), Inc. Delaware
- --------------------------------------------------------------------
PolyMedica Securities, Inc. Massachusetts
- --------------------------------------------------------------------
PolyMedica Pharmaceuticals
Securities, Inc. Massachusetts
- --------------------------------------------------------------------
PolyMedica Industries UK, Ltd. England and Wales
- --------------------------------------------------------------------
PolyMedica Holdings, Inc. Delaware
- --------------------------------------------------------------------
DrAlt.com Corporation Delaware
- --------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion and incorporation by reference in this
Registration Statement on Form S-3 to register 2,900,000 shares of common stock
of our report dated May 6, 1999 relating to the financial statements of
PolyMedica Corporation, which appear in such Registration Statement and in the
1999 Annual Report on Form 10-K of PolyMedica Corporation. We also consent to
the reference to us under the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 3, 1999
