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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 0-19842
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PolyMedica Corporation
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3033368
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
11 State Street, Woburn, Massachusetts 01801
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 933-2020
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the registrant's class of Common Stock
as of August 10, 2000 was 13,186,935, which includes 9,578 shares held in
treasury.
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POLYMEDICA CORPORATION
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets at
June 30 (unaudited) and March 31, 2000 3
Unaudited Consolidated Statements of Operations
for the three months ended
June 30, 2000 and 1999 5
Unaudited Consolidated Statements of Cash Flows
for the three months ended
June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 21
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit Index 24
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PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
POLYMEDICA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
JUNE 30,
2000 MARCH 31,
(UNAUDITED) 2000
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $38,837 $40,687
Accounts receivable (net of allowances of
$11,758 and $10,745 as of June 30 and
March 31, 2000, respectively) 43,332 39,763
Inventories 8,143 8,979
Deferred tax asset 4,389 4,389
Prepaid expenses and other
current assets 1,364 905
-------- --------
Total current assets 96,065 94,723
Property, plant and equipment, net 20,038 16,557
Intangible assets, net 34,431 35,000
Direct response advertising, net 32,719 28,078
Other assets 1,879 1,238
-------- --------
Total assets $185,132 $175,596
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
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POLYMEDICA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
JUNE 30,
2000 MARCH 31,
(UNAUDITED) 2000
----------- ---------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $14,987 $14,082
Accrued expenses 8,912 8,118
Current portion of long-term debt and capital lease
obligations 602 564
--------- ---------
Total current liabilities 24,501 22,764
Long-term debt and capital lease obligations 2,704 2,768
Deferred income taxes 13,914 13,914
Other long-term liabilities 931 --
--------- ---------
Total liabilities 42,050 39,446
Commitments
Shareholders' equity:
Preferred stock $0.01 par value; 2,000,000 shares
authorized, none issued or outstanding -- --
Common stock $.01 par value; 20,000,000 shares
authorized; 13,186,435 and 13,108,667 issued
as of June 30 and March 31, 2000,
respectively 132 131
Treasury stock, at cost (2,203 shares as of
June 30 and March 31, 2000, respectively) (68) (68)
Additional paid-in capital 114,042 113,488
Retained earnings 28,976 22,599
--------- ---------
Total shareholders' equity 143,082 136,150
--------- ---------
Total liabilities and shareholders' equity $185,132 $175,596
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements
4
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POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
Net revenues $51,170 $31,580
Cost of sales 18,735 13,715
-------- --------
Gross margin 32,435 17,865
Selling, general and administrative
expenses 22,803 13,361
-------- --------
Income from operations 9,632 4,504
Other income and expense:
Investment income 634 89
Interest expense (69) (603)
Other (27) --
-------- --------
538 (514)
Income before income taxes 10,170 3,990
Income tax provision 3,793 1,536
-------- --------
Net income $6,377 $2,454
======== ========
Net income per weighted average share:
Basic $.49 $.27
Diluted $.47 $.25
Weighted average shares, basic 13,133 9,152
Weighted average shares, diluted 13,616 9,890
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
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POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
2000 1999
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $6,377 $2,454
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 1,208 851
Amortization of direct-response advertising 3,881 1,687
Capitalized direct-response advertising (8,522) (3,032)
Provision for inventory obsolescence 700 125
Provision for bad debts 3,688 2,127
Provision for sales allowances 2,887 1,793
Changes in assets and liabilities:
Accounts receivable (10,143) (3,278)
Inventories 136 (590)
Prepaid expenses and other assets 205 (396)
Accounts payable 904 (2,809)
Accrued expenses and other long-term liabilities 1,754 2,985
-------- --------
Total adjustments (3,302) (537)
-------- --------
Net cash flows from operating activities 3,075 1,917
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (4,024) (2,524)
-------- --------
Net cash flows from investing activities (4,024) (2,524)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 547 355
Contributions to deferred compensation plan (1,306) --
Reduction of obligations under capital leases (129) --
Proceeds from/(repayment of) senior debt and notes payable (13) 1,417
Repayment of line of credit -- (1,000)
Repayment of officer notes receivable -- 67
-------- --------
Net cash flows from financing activities (901) 839
-------- --------
Net increase/(decrease) in cash and cash equivalents (1,850) 232
Cash and cash equivalents at beginning of period 40,687 10,191
-------- --------
Cash and cash equivalents at end of period $38,837 $10,423
======== ========
Supplemental disclosure of cash flow information:
Assets purchased under capital lease $116 --
Disposition of fully depreciated fixed assets 18 --
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements
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POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited consolidated financial statements included herein have been
prepared by PolyMedica Corporation ("PolyMedica" or the "Company"), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission and include, in the opinion of management, all adjustments,
consisting of normal, recurring adjustments, necessary for a fair presentation
of interim period results. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes, however, that its disclosures are adequate to
make the information presented not misleading. The results for the interim
periods presented are not necessarily indicative of results to be expected for
the full fiscal year. It is suggested that these interim consolidated financial
statements be read in conjunction with the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended March 31, 2000.
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.
2. Included in other assets is restricted cash of $1.31 million and $0 as of
June 30 and March 31, 2000, respectively, represents amounts set aside by the
Company under a deferred compensation plan. The related liability is included in
other long-term liabilities.
3. Inventories consist of the following:
(In thousands)
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
---- ----
<S> <C> <C>
Raw materials $ 854 $ 848
Work in process 302 505
Finished goods 6,987 7,626
------ ------
$8,143 $8,979
====== ======
</TABLE>
4. In accordance with Statement of Position 93-7 ("SOP 93-7"), the Company
incurred and capitalized direct-response advertising of $8.52 million and $3.03
million in the three months ended June 30, 2000 and 1999, respectively. The
Company expenses in the period all other advertising that does not meet the
requirements of SOP 93-7. A total of $3.88 million and $1.69 million in
direct-response advertising was amortized and charged to selling, general and
administrative expense for the three months ended June 30, 2000 and 1999,
respectively. Management assesses the realizability
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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.
5. Sales allowances are recorded for estimated product returns using
historical write-off data and are recorded as a reduction of revenue. These
allowances are adjusted monthly to reflect actual returns and collection
history. During the three months ended June 30, 2000 and 1999 the Company
provided for sales allowances at a rate of approximately 5.3% and 5.4% of gross
sales, respectively.
6. Approximately $36.39 million and $18.63 million of revenues for the three
months ended June 30, 2000 and 1999, respectively, were billed to Medicare on
behalf of the Company's customers for products and services provided Medicare
beneficiaries.
7. As of June 30, 2000, gross unbilled receivables included in gross accounts
receivable of $55.09 were $19.24 million as compared with $20.16 million
included in gross accounts receivable of $50.51 million as of March 31, 2000.
Approximately $15.18 million and $15.62 million of the total unbilled receivable
balances as of June 30 and March 31, 2000, respectively, represent Medicare
receivables.
8. Calculations of earnings per share are as follows:
<TABLE>
<CAPTION>
(In thousands, except per share data) Three Months Ended
June 30, June 30,
2000 1999
-------- --------
<S> <C> <C>
Net income $6,377 $2,454
BASIC:
Weighted average common stock outstanding,
net of treasury stock, end of period 13,133 9,152
Net income per common share, basic $ .49 $ .27
====== ======
DILUTED:
Weighted average common stock outstanding,
net of treasury stock, end of period 13,133 9,152
Weighted average common stock equivalents 483 738
------ ------
Weighted average common stock outstanding,
net of treasury stock, end of period 13,616 9,890
Net income per common share, diluted $ .47 $ .25
====== ======
</TABLE>
Options to purchase 0 and 200,437 shares of common stock were outstanding
during the three months ended June 30, 2000 and 1999, respectively, but were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares.
9. The Company's total net income and comprehensive income was $6.38 million
and $2.45 million for the three months ended June 30, 2000 and 1999,
respectively.
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10. The Company has three reportable segments:
Chronic Care - The Company sells diabetes supplies and adult nutrition
supplies through its Chronic Care segment. It offers a wide array of diabetes
products from a full range of name-brand manufacturers, contacts the patient's
doctor to obtain the required prescription information and written
documentation, files the appropriate insurance forms and bills Medicare and
private insurers directly. This service frees the patient from paying for his or
her chronic disease-related upfront expenses and offers the convenience of free
home delivery of supplies.
Professional Products - The Company develops, manufactures, and distributes
prescription urology products and sells respiratory products to
Medicare-eligible seniors.
Consumer Healthcare - The Company offers the AZO line of products which
includes "over-the-counter" female urinary tract discomfort products and home
medical diagnostic kits; and is a distributor of private-label and branded
digital thermometers.
Depreciation and amortization expense attributable to the Company's
corporate headquarters are allocated to the operating segments according to the
segments' relative percentage of total revenue. However, segment assets
belonging to the Company's corporate headquarters are not allocated, as they are
considered separately for management evaluation purposes. As a result of these
allocations, 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. Information concerning the
operations in these reportable segments is as follows:
<TABLE>
<CAPTION>
June 30, June 30,
(In thousands) 2000 1999
------- --------
<S> <C> <C>
NET REVENUES:
Chronic Care $39,113 $26,365
Professional Products 9,120 2,286
Consumer Healthcare 2,937 2,929
------- -------
Total $51,170 $31,580
======= =======
DEPRECIATION AND AMORTIZATION EXPENSE:
Chronic Care $3,326 $2,006
Professional Products 1,748 516
Consumer Healthcare 15 16
------- -------
Total $5,089 $2,538
======= =======
INCOME BEFORE INCOME TAXES:
Chronic Care $6,845 $2,857
Professional Products 3,035 567
Consumer Healthcare 290 566
------- -------
Total $10,170 $3,990
======= =======
</TABLE>
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<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
-------- --------
<S> <C> <C>
SEGMENT ASSETS:
Chronic Care $86,857 $81,513
Professional Products 49,952 44,384
Consumer Healthcare 5,425 6,504
Corporate Headquarters 42,898 43,195
-------- --------
Total $185,132 $175,596
======== ========
</TABLE>
11. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. We will adopt SFAS No.
133 as required by SFAS No. 137, "Deferral of the Effective Date of SFAS No.
133", in 2001. The adoption of SFAS No. 133 is not expected to have a material
impact on the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101), subsequently updated by SAB 101B. SAB 101 and SAB 101B summarize certain
of the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company is required to adopt
SAB 101 no later than the fourth quarter of fiscal year 2001. The effects of
applying this guidance, if any, will be reported as a cumulative effect
adjustment resulting from a change in accounting principle. The adoption of SAB
101 is not expected to have a material impact on the Company's financial
position or results of operations.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of previously fixed stock options or awards, and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The adoption
of FIN 44 is not expected to have a material impact on the Company's financial
position or results of operations.
12. As of June 30, 2000, the Company had no outstanding balance under its
existing $10.0 million revolving credit facility. Under this facility, the
Company is required to be and was in compliance with certain financial
covenants. The interest rate is tied to the Company's funded debt to EBITDA
ratio and was 9.50% as of June 30, 2000.
13. In June 2000, the Company's board of directors authorized the repurchase of
up to 1,000,000 shares of the Company's common stock on the open market. No
shares were repurchased under this program during the quarter ended June 30,
2000. In July 2000, the Company began repurchasing shares under this program.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Business
PolyMedica Corporation is a leading national provider of direct-to-consumer
specialty medical products and services, conducting business in the Chronic
Care, Professional Products and Consumer Healthcare markets. We sell diabetes
supplies and adult nutrition supplies through our Chronic Care segment. Our AZO
brand holds a leading position in the "over-the-counter" urinary health market
and we distribute a broad range of other medical products, including digital
thermometers and compliance products, primarily to food and drug retailers and
mass merchandisers nationwide, through our Consumer Healthcare segment. We also
market, manufacture and distribute a broad line of prescription urological and
suppository products and provide direct-to-consumer prescription respiratory
supplies and services to Medicare-eligible seniors suffering from chronic
obstructive pulmonary disease ("COPD") through our Professional Products
segment.
We recognize revenues upon shipment of our products. Expense items include
cost of sales and selling, general and administrative expenses.
- Cost of sales consists primarily of purchased finished goods for sale
in our markets 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.
Chronic Care
We are a national direct-mail provider of diabetes and adult nutrition
supplies through our Chronic Care segment. Since acquiring Liberty Medical
Supply, Inc. ("Liberty") in August 1996, we have devoted a large part of our
resources to the growth of our Chronic Care segment, resulting in substantial
increases in revenues and earnings generated from the segment in each of the
2000, 1999, 1998 and 1997 fiscal years. We intend to continue this emphasis in
the future.
We have over 500,000 customer records in our database and over 265,000
active Medicare-eligible diabetes customers, many of whom suffer from other
chronic diseases, to whom we sell name-brand products. We deliver products to
customers' homes and bill Medicare and private insurance directly for those
supplies that are reimbursable. We meet the needs of seniors suffering from
these diseases by:
* providing mail order delivery of supplies direct to our customers' homes;
* billing Medicare and/or private insurance directly;
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* 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 over 265,000 active Medicare-eligible diabetes customers, we
serve approximately 4.2% of the diabetes marketplace. While many of the 6.3
million seniors with diabetes are covered by managed care or reside in extended
care facilities, we believe that the balance are potential customers of ours.
In the quarter ended March 31, 2000, we entered the adult nutrition market,
with our primary focus on supplying enteral feeding supplies to seniors covered
by Medicare. Many of our adult nutrition patients suffer from cancer and receive
chemotherapy and therefore require enteral (tube) feeding. We believe that our
expertise in selling diabetes testing supplies will be a significant advantage
to us in marketing these products, and we have begun market testing, including
television advertisements, to add customers for them.
Professional Products
We are a national direct-mail provider of prescription respiratory supplies
and also market, manufacture and distribute a broad line of prescription
urological and suppository products through our Professional Products segment.
Similar to the service we provide in our Chronic Care segment, we deliver
products to customers' homes and bill Medicare and private insurance directly
for those prescription respiratory supplies that are reimbursable. As a
participating Medicare provider and third-party insurance biller, we provide a
simple, reliable way for seniors to obtain their supplies for respiratory
disease treatment. In 1998, Medicare expenditures for two key drugs for the
treatment of respiratory disease, albuterol and ipratropium, were in excess of
$400 million. We estimate that 10% of our customers for diabetes supplies also
suffer from respiratory disease. As of June 30, 2000, we had over 18,000 active
customers for our respiratory disease supplies.
We also own one of the broadest lines of branded prescription urology
products (excluding anti-infectives). Our urology products include urinary
analgesics, anti-spasmodics, local anesthetics and suppositories. URISED(R),
CYSTOSPAZ(R) and CYSTOSPAZ-M(R) analgesics and anti-spasmodics provide effective
symptomatic relief for urinary pain, burning and spasms. Many urology offices,
as well as hospitals, purchase the local anesthetic ANESTACON(R) for use in
diagnostic procedures and the catheterization process. B&O(R) and AQUACHLORAL(R)
suppositories are used by patients unable to tolerate oral dosages of systemic
analgesics and sedatives. Our primary customers for these urology products are
large drug wholesalers in the United States.
Consumer Healthcare
Our Consumer Healthcare products are focused on three areas: female urinary
tract discomfort, digital thermometers and medication compliance products. In
the urinary tract discomfort area, three of our products include
AZO-STANDARD(R), which provides relief from urinary tract discomfort,
AZO-CRANBERRY(R), a dietary supplement which helps maintain a healthy urinary
tract and AZO TEST STRIPS(TM), an in-home urinary tract infection testing kit
which
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allows patients to call their doctors with testing results. In April 1999, we
began shipping two new homeopathic botanical products, AZO MENOPAUSE(TM) and AZO
CONFIDENCE(TM). AZO MENOPAUSE offers relief from hot flashes and related
symptoms. AZO CONFIDENCE is used for the relief of symptoms of incontinence. An
additional two products, AZO YEAST(TM) and AZO PMS(TM) were introduced in the
year ended March 31, 2000, which serve to provide relief from yeast infections
and pre-menstrual syndrome, respectively.
Our Consumer Healthcare products also include digital, digital flexible
tip, basal and glass thermometers, as well as approximately 40 other home-use
diagnostic and compliance products. We have patented and introduced a flexible
tip thermometer. 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.
Growth Strategy
Our growth strategy includes the following elements:
- continue growth in our Chronic Care and Professional Products segments
by expanding our customer base;
- begin e-commerce marketing; and
- add complementary products and businesses.
Other
Although the use of certain of our products is somewhat seasonal in nature,
we do not believe our net product sales, in the aggregate, are generally subject
to material seasonal fluctuations.
In accordance with Statement of Position 93-7, direct response advertising
and associated costs for all periods presented are capitalized and amortized to
selling, general and administrative expenses on an accelerated basis. 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.
Other advertising, promotional, and 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.
We operate from manufacturing and distribution facilities located in
Massachusetts, Florida and Colorado. Virtually all of our product sales are
denominated in U.S. dollars.
Period to period comparisons of changes in net revenues are not necessarily
indicative of results to be expected for any future period.
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RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Total net revenues increased by 62.0% to $51.17 million in the three months
ended June 30, 2000 as compared with $31.58 million in the three months ended
June 30, 1999. This increase is primarily the result of the growth in revenues
from our Chronic Care and Professional Products segments which increased 48.4%
and 299.0%, respectively, in the three months ended June 30, 2000 as compared
with the three months ended June 30, 1999. See Note 10 for segment information.
Net revenues in the Chronic Care segment increased by 48.4% to $39.11
million in the three months ended June 30, 2000 as compared with $26.36 million
in the three months ended June 30, 1999. This growth is due to new customer
sales as a result of our direct-response advertising spending, as well as
recurring shipments to existing customers. We currently expect our promotional
and direct-response advertising spending to continue in order to further the
expansion of our Chronic Care segment.
Net revenues from Professional Products increased 299.0% to $9.12 million
in the three months ended June 30, 2000 as compared with $2.29 million in the
three months ended June 30, 1999. This increase is mainly attributable to
shipments of respiratory products in the three months ended June 30, 2000, due
to new customer sales as a result of our direct-response advertising spending.
As with our Chronic Care segment, we currently expect our promotional and
direct-response advertising spending to continue in order to further the
expansion of our Professional Products segment.
Net revenues from Consumer Healthcare products remained consistent at $2.94
million in the three months ended June 30, 2000 as compared with $2.93 million
in the three months ended June 30, 1999.
As a percentage of total net revenues, overall gross margins were 63.4% in
the three months ended June 30, 2000 and 56.6% in the three months ended June
30, 1999. Gross margins in the three months ended June 30, 2000 increased due to
improved gross margins in the Chronic Care and Professional Products segments,
resulting from favorable product mix and period promotional pricing from
suppliers, partially offset by reduced gross margins in our Consumer Healthcare
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segment resulting from an additional provision for inventory obsolescence
recorded in the three months ended June 30, 2000.
As a percentage of total net revenues, selling, general and administrative
expenses were 44.6% for the three months ended June 30, 2000 as compared with
42.3% for the three months ended June 30, 1999. Selling, general and
administrative expenses increased by 70.7% in the three months ended June 30,
2000 to $22.80 million as compared with $13.36 million in the three months ended
June 30, 1999. This increase is primarily attributable to $1.41 million of
advertising incurred in the three months ended June 30, 2000, that was expensed
and charged to selling, general and administrative expense in our Chronic Care
segment.
Investment income increased by 612.4% to $634,000 in the three months ended
June 30, 2000 as compared with $89,000 in the three months ended June 30, 1999
as we earned interest on higher average cash balances primarily as a result of
proceeds from our October 1999 secondary public offering. Interest expense
decreased by 88.6% to $69,000 in the three months ended June 30, 2000 as
compared with $603,000 in the three months ended June 30, 1999, due to the
October 1999 retirement of the Guaranteed Senior Secured Notes due January 31,
2003 to the John Hancock Mutual Life Insurance Company.
Pretax income from recurring operations was $10.17 million in the three
months ended June 30, 2000, a 154.9% increase as compared with $3.99 million in
the three months ended June 30, 1999. This increase is primarily the result of
greater net revenues and improved gross margins (see below), partially offset by
increased selling, general and administrative expenses incurred to further our
expansion efforts.
Our net income was $6.38 million, or $0.47 per diluted common share, for
the three months ended June 30, 2000 as compared with $2.45 million, or $0.25
per diluted common share, in the three months ended June 30, 1999, increasing
159.9%. Earnings per diluted common share increased 88% or $0.22 in the three
months ended June 30, 2000 as compared with the three months ended June 30,
1999.
Liquidity and Capital Resources
Since our inception, we have raised $109.34 million in gross equity capital
through public offerings, of which $7.16 million was from venture capital
financings before our initial public offering, $39.00 million from our March
1992 initial public offering, $4.55 million from a November 1995 public offering
of common stock, $2.75 million from the March 1996 sale of 431,937 shares of our
common stock pursuant to Regulation S promulgated under the Securities Act of
1933, and $55.88 million from the October 1999 sale of 2,629,599 shares of
common stock.
As of June 30, 2000, we had working capital of $71.56 million, including
cash and cash equivalents of $38.84 million, which compares with working capital
of $71.96 million, including cash and cash equivalents of $40.69 million, as of
March 31, 2000.
Net accounts receivable were $43.33 million and $39.76 million as of June
30 and March 31, 2000, respectively. The increase in net accounts receivable is
primarily the result of record shipments in our Chronic Care segment. As of June
30, 2000, gross unbilled receivables included in overall gross accounts
receivable of $55.09 million, were $19.24 million as compared with $20.16
million included in gross accounts receivable of $50.51 million as of March 31,
2000.
We incurred and capitalized direct-response advertising of $8.52 million
and $3.03 million in the three months ended June 30, 2000 and 1999,
respectively. We expense in the period all other advertising that does not meet
the requirements of SOP 93-7. A total of $3.88 million and $1.69 million in
direct-response advertising was amortized and charged to selling, general and
administrative expense for the three months ended June 30, 2000 and 1999,
respectively. 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. As of
June 30 and
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March 31, 2000, accumulated amortization was $20.84 million and $16.96 million,
which resulted in a net capitalized direct-response advertising asset of $32.72
million and $28.08 million, respectively.
During May 2000, we filed a preliminary registration statement on Form S-3
to begin the registration process with the Securities and Exchange Commission
for the possible future issuance of $100.00 million of debt and equity
securities. This filing is not yet effective.
In June 2000, the Company's board of directors authorized the repurchase of
up to 1,000,000 shares of the Company's common stock on the open market. No
shares were repurchased under this program during the quarter ended June 30,
2000. In July 2000, the Company began repurchasing shares under this program.
We expect that our current working capital, revolving credit facility and
funds generated from future operations will be adequate to meet our liquidity
and capital requirements for current operations. In the event that we undertake
to make acquisitions of complementary businesses, products or technologies, we
may require substantial additional funding beyond currently available working
capital and funds generated from operations. We are conducting an active search
for the strategic acquisition of complementary businesses, products or
technologies which leverage our marketing, sales and distribution
infrastructure. We currently have no commitments or agreements with respect to
any such acquisition.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The statements contained in this Report that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including,
but not limited to, statements regarding our expectations, hopes, intentions or
strategies regarding the future. Forward-looking statements include, among
others: statements regarding future benefits from our advertising and
promotional expenditures; statements regarding future net revenue levels;
statements regarding product development, introduction and marketing; and
statements regarding future acquisitions. All forward-looking statements
included in this Report are based on information available to us on the date
hereof, and we assume no obligation to update any such forward-looking
statements. It is important to note that our actual results could differ
materially from those in such forward-looking statements.
Our future operating results remain difficult to predict. We continue to
face many risks and uncertainties which could affect our operating results,
including without limitation, those described below.
We could experience significantly reduced profits if Medicare changes, delays or
denies reimbursement
Sales of a significant portion of our Chronic Care and Professional
Products supplies 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
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the cost of such products would reduce our overall profit margin unless there
was 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 demand 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 Chronic Care and Professional Products segments 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 Chronic Care and respiratory products, included in our Professional
Products segment, from a customer, due primarily to the marketing and regulatory
compliance costs associated with initial customer qualification. Accordingly,
the profitability of these segments depends in large part, 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 Chronic Care segment
if improved technologies that eliminate the need for consumable testing supplies
are developed for glucose monitoring
The majority of our Chronic Care net revenues are from 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 our Chronic Care 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.
We could lose customers and revenues to new or existing competitors who have
greater financial or operating resources
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Competition from other sellers of products offered through our Chronic
Care, Professional Products and Consumer Healthcare segments, 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 or less expensive than
any that we are developing or selling. They may also promote and market these
products more successfully than we promote and market our products.
Loss of use of manufacturing or data storage facilities would significantly
reduce revenues and profits from our Consumer Healthcare and Professional
Products businesses
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. In addition, we process
and store most of our customer data in our facility in Port St. Lucie, Florida.
If we cannot use any of these facilities as a result of the FDA, Occupational
Safety and Health Administration or other regulatory action, fire, natural
disaster or other event, our revenues and profits will decrease significantly.
We might also incur significant expense in remedying the problem or securing an
alternative manufacturing or data storage source.
If we or our suppliers do not comply with applicable government regulations, we
may be prohibited from selling our products
Many of our products that we sell are regulated by the FDA 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
amortization period 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 securities to decline
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We have experienced fluctuations in our quarterly operating results and
anticipate that such fluctuations could continue. Results may vary significantly
depending on a number of factors, including:
* changes in reimbursement guidelines and amounts;
* changes in regulations affecting the healthcare industry;
* changes in the mix or cost of our products;
* the timing of customer orders;
* the timing and cost of our advertising campaigns; and
* the timing of the introduction or acceptance of new products and
services offered by us or our competitors.
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.
We may issue one hundred million dollars of debt and equity securities
During May 2000, we filed a preliminary registration statement on Form S-3
to begin the registration process with the Securities and Exchange Commission
for the possible future issuance of $100.00 million of debt and equity
securities. The filing is not yet effective. If the market perceives any
registration of securities adversely, prices for our common stock may decline.
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Our stock price could be volatile, which could result in substantial losses for
investors
The trading price of our common stock has been volatile and is likely to
continue to be volatile. The stock market in general, and the market for
healthcare-related companies in particular, has experienced extreme volatility.
This volatility has often been unrelated to the operating performance of
particular companies. Investors may not be able to sell their common stock at or
above the price at which they purchased the stock. 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.
We may issue preferred stock with rights senior to the common stock
Our articles of organization authorize the issuance of up to 2,000,000
shares of preferred stock without stockholder approval. The shares may have
dividend, voting, liquidation and other rights and preferences that are senior
to the rights of the common stock. The rights and preferences of any such class
or series of preferred stock would be established by our board of directors in
its sole discretion.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not believe that we have any material market risk exposure with
respect to derivative or other financial instruments that would require
disclosure under this item.
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PART II - OTHER INFORMATION
POLYMEDICA CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index immediately following this report and incorporated herein
by reference.
(b) There were no reports on Form 8-K filed during the three months ended June
30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PolyMedica Corporation
-------------------------
(registrant)
/s/ Steven J. Lee
---------------------------------------------
Steven J. Lee
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Eric G. Walters
---------------------------------------------
Eric G. Walters
Chief Financial Officer and Clerk
(Principal Financial and Accounting Officer)
Dated: August 11, 2000
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Exhibit Index
POLYMEDICA CORPORATION
Exhibit Description
------- -----------
27.1 - Financial Data Schedule - Three Months Ended June 30, 2000.
24
