<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 total number of shares of the registrant's Common Stock issued and
outstanding as of November 13, 2000, was 13,270,854.
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POLYMEDICA CORPORATION
TABLE OF CONTENTS
<TABLE>
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Page
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PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Financial Statements
Consolidated Balance Sheets at
September 30, 2000 and March 31, 2000 3
Consolidated Statements of Operations
for the three and six months ended
September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows
for the six months ended
September 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 12
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 23
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 24
Item 6 - Exhibits and Reports on Form 8-K 25
Signatures 26
Exhibit Index 27
</TABLE>
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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>
SEPTEMBER 30,
2000 MARCH 31,
(UNAUDITED) 2000
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,262 $ 40,687
Marketable securities 20,300 --
Accounts receivable (net of allowances of
$12,045 and $10,745 as of September 30 and
March 31, 2000, respectively) 44,492 39,763
Inventories 7,682 8,979
Deferred tax asset 4,389 4,389
Prepaid expenses and other
current assets 1,221 905
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Total current assets 98,346 94,723
Property, plant and equipment, net 20,613 16,557
Intangible assets, net 33,862 35,000
Direct response advertising, net 35,896 28,078
Other assets 2,845 1,238
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Total assets $191,562 $175,596
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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POLYMEDICA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 MARCH 31,
(UNAUDITED) 2000
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<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,349 $ 14,082
Accrued expenses 11,296 8,118
Current portion of long-term debt and capital lease
obligations 616 564
--------- ---------
Total current liabilities 24,261 22,764
Long-term debt and capital lease obligations 2,547 2,768
Deferred income taxes 13,914 13,914
Other long-term liabilities 1,079 --
--------- ---------
Total liabilities 41,801 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; 13,186,935 and 13,108,667 issued
as of September 30 and March 31, 2000,
respectively 132 131
Treasury stock, at cost, (2,326 and 2,203 shares as of
September 30 and March 31, 2000, respectively) (84) (68)
Additional paid-in capital 113,626 113,488
Retained earnings 36,087 22,599
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Total shareholders' equity 149,761 136,150
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Total liabilities and shareholders' equity $ 191,562 $ 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 SIX MONTHS ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 54,469 $ 35,919 $ 105,639 $ 67,499
Cost of sales 19,602 15,137 38,338 28,852
--------- --------- --------- ---------
Gross margin 34,867 20,782 67,301 38,647
Selling, general and administrative
expenses 23,931 15,227 46,733 28,588
--------- --------- --------- ---------
Income from operations 10,936 5,555 20,568 10,059
Other income and expense:
Investment income 732 110 1,366 199
Interest expense (79) (579) (148) (1,182)
Other expense (247) -- (274) --
--------- --------- --------- ---------
406 (469) 944 (983)
Income before income taxes 11,342 5,086 21,512 9,076
Income tax provision 4,231 1,959 8,024 3,495
--------- --------- --------- ---------
Net income $ 7,111 $ 3,127 $ 13,488 $ 5,581
========= ========= ========= =========
Net income per weighted average share:
Basic $ .54 $ .33 $ 1.03 $ .60
Diluted $ .52 $ .30 $ .99 $ .55
Weighted average shares, basic 13,182 9,397 13,157 9,275
Weighted average shares, diluted 13,622 10,487 13,619 10,188
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
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POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPT. 30,
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,488 $ 5,581
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 2,507 1,736
Amortization of direct-response advertising 8,506 3,640
Direct-response advertising (16,324) (7,679)
Provision for inventory obsolescence 1,240 125
Provision for bad debts 7,833 4,368
Provision for sales allowances 6,218 3,887
Changes in assets and liabilities:
Accounts receivable (18,780) (11,275)
Inventories (1,339) (666)
Prepaid expenses and other assets 442 (477)
Accounts payable (1,734) (887)
Accrued expenses 4,511 5,660
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Total adjustments (6,920) (1,568)
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Net cash flows from operating activities 6,568 4,013
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Cash flows from investing activities:
Purchase of marketable securities (20,300) --
Proceeds from sale of certain assets of the healthcare business 300 --
Purchase of property, plant and equipment (5,502) (3,160)
-------- --------
Net cash flows from investing activities (25,502) (3,160)
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Cash flows from financing activities:
Proceeds from issuance of common stock 889 1,044
Repurchase of common stock (766) --
Contributions to deferred compensation plan (1,329) --
Reduction of obligations under capital leases (258) --
Proceeds from/(repayment of) senior debt and notes payable (27) 408
Proceeds from/(repayment of) line of credit -- (1,500)
Repayment of officer notes receivable -- 67
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Net cash flows from financing activities (1,491) 19
-------- --------
Net increase/(decrease) in cash and cash equivalents (20,425) 872
-------- --------
Cash and cash equivalents at beginning of period 40,687 10,191
-------- --------
Cash and cash equivalents at end of period $ 20,262 $ 11,063
======== ========
Supplemental disclosure of cash flow information:
Receipt of long-term note receivable from sale of certain assets of its
thermometry and compliance business $ 1,125 --
Assets purchased under capital leases 116 --
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
6
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POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited consolidated financial statements included herein have been
prepared by PolyMedica Corporation ("PolyMedica" or the "Company"), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission and include, in the opinion of management, all adjustments,
consisting of normal, recurring adjustments, necessary for a fair presentation
of interim period results. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes, however, that its disclosures are adequate to
make the information presented not misleading. The results for the interim
periods presented are not necessarily indicative of results to be expected for
the full fiscal year. It is suggested that these interim consolidated financial
statements be read in conjunction with the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended March 31, 2000 and it's unaudited Quarterly Report on Form 10-Q for the
period ended June 30, 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 $1.33 million and $0 as of
September 30 and March 31, 2000, respectively, which represents amounts set
aside by the Company under 401(k) Shadow and Pension Plans. The related
liability is included in other long-term liabilities.
3. Inventories consist of the following:
(In thousands)
<TABLE>
<CAPTION>
Sept. 30, March 31,
2000 2000
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<S> <C> <C>
Raw materials $ 370 $ 848
Work in process 374 505
Finished goods 6,938 7,626
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$7,682 $8,979
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</TABLE>
4. In accordance with Statement of Position 93-7 ("SOP 93-7"), the Company
incurred and capitalized direct-response advertising of $7.80 million and $4.65
million in the three months ended September 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 $4.63 million and $1.95 million in
direct-response advertising was amortized and charged to selling, general and
administrative expense for the three months ended September 30, 2000 and 1999,
respectively. A total of $16.32 million and $7.68 million of direct-response
advertising was capitalized in the six
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months ended September 30, 2000 and 1999, respectively. A total of $8.51 million
and $3.64 million was amortized and charged to selling, general and
administrative expense for the six months ended September 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.
5. Sales allowances are recorded for estimated product returns using
historical return data and are recorded as a reduction of revenue. These
allowances are adjusted quarterly to reflect actual returns and trends. During
the three months ended September 30, 2000 and 1999, the Company provided for
sales allowances at a rate of approximately 5.8% and 5.5% of gross sales,
respectively. During the six months ended September 30, 2000 and 1999, the
Company provided for sales allowances at a rate of approximately 5.6% and 5.4%
of gross sales, respectively.
6. Approximately $38.74 million and $21.65 million of revenues for the three
months ended September 30, 2000 and 1999, respectively, were billed to Medicare
on behalf of the Company's customers for products and services provided by the
Company to Medicare beneficiaries. For the six months ended September 30, 2000
and 1999, respectively, $75.13 million and $40.27 million of revenues were
billed to Medicare on behalf of the Company's customers for products and
services provided by the Company to Medicare beneficiaries.
7. As of September 30, 2000, gross unbilled receivables included in gross
accounts receivable of $56.54 million were $17.88 million as compared with
$20.16 million included in gross accounts receivable of $50.51 million as of
March 31, 2000. Approximately $14.27 million and $15.62 million of the total
unbilled receivable balances as of September 30, 2000 and March 31, 2000,
respectively, represent Medicare receivables.
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8. Calculations of earnings per share are as follows:
<TABLE>
<CAPTION>
(In thousands, except per share data) Three Months Ended Six Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net income $ 7,111 $ 3,127 $13,488 $ 5,581
BASIC:
Weighted average common stock outstanding, net of treasury stock,
end of period 13,182 9,397 13,157 9,275
Net income per common share, basic $ .54 $ .33 $ 1.03 $ .60
======= ======= ======= =======
DILUTED:
Weighted average common stock outstanding, net of treasury stock,
end of period 13,182 9,397 13,157 9,275
Weighted average common stock equivalents 440 1,090 462 913
------- ------- ------- -------
Weighted average common stock and common stock equivalents
outstanding, net of treasury stock, end of period 13,622 10,487 13,619 10,188
Net income per common share, diluted $ .52 $ .30 $ .99 $ .55
======= ======= ======= =======
</TABLE>
Options to purchase 652,500 and 77,500 shares of common stock were
outstanding during the three months ended September 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. During the six months ended September 30, 2000 and
1999, options to purchase 0 and 102,500 shares of common stock, respectively,
were outstanding, 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 $7.11 million
and $3.13 million for the three months ended September 30, 2000 and 1999,
respectively. For the six months ended September 30, 2000 and 1999, total net
income and comprehensive income was $13.49 million and $5.58 million,
respectively.
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.
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<PAGE> 10
Consumer Healthcare - The Company offers the AZO line of products which
includes OTC ("over-the-counter") female urinary tract discomfort products and
home medical diagnostic kits; and, until September 2000, was a distributor of
private-label and branded digital thermometers. In September 2000, the Company
sold certain assets of its Consumer Healthcare segment. (See Note 14 for
information on the sale.)
Depreciation and amortization expense attributable to the Company's
corporate headquarters are allocated to the operating segments according to the
segment's 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>
Three months ended Six months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(In thousands) 2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET REVENUES:
Chronic Care $ 40,711 $ 29,245 $ 79,824 $ 55,610
Professional Products 10,500 2,587 19,620 4,873
Consumer Healthcare 3,258 4,087 6,195 7,016
--------- --------- --------- ---------
Total $ 54,469 $ 35,919 $ 105,639 $ 67,499
--------- --------- --------- ---------
DEPRECIATION AND AMORTIZATION:
Chronic Care $ 3,661 $ 2,291 $ 6,987 $ 4,297
Professional Products 2,252 531 4,000 1,048
Consumer Healthcare 11 16 26 31
--------- --------- --------- ---------
Total $ 5,924 $ 2,838 $ 11,013 $ 5,376
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES:
Chronic Care $ 9,113 $ 4,131 $ 15,968 $ 6,988
Professional Products 3,355 240 6,382 808
Consumer Healthcare (1,126) 715 (838) 1,280
--------- --------- --------- ---------
Total $ 11,342 $ 5,086 $ 21,512 $ 9,076
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
Sept. 30, March 31,
2000 2000
--------- ---------
<S> <C> <C>
SEGMENT ASSETS:
Chronic Care $ 91,340 $ 81,513
Professional Products 52,017 44,384
Consumer Healthcare 3,020 6,504
Corporate Headquarters 45,185 43,195
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Total $191,562 $175,596
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</TABLE>
11. In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("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
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activities. In June 2000, the FASB issued SFAS No. 138 "Accounting for
Derivative and Certain Hedging Activities, an Amendment of SFAS No. 133". This
accounting standard amended the accounting and reporting standards of SFAS No.
133 for certain derivative and hedging activities. We will adopt SFAS No. 133,
as amended, 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.
We have determined that SAB 101 will result in a deferral of revenue recognition
for products shipped to new customers from whom the Company has not yet received
a written Authorization of Benefits form, which is required to bill Medicare and
other third-party payers. The Company will record the cumulative effect, if any,
of this change in accounting principle as of April 1, 2000. PolyMedica and its
independent accountants are continuing to review whether the implementation of
SAB 101 will have a material effect on the Company's net financial results.
In March 2000, the FASB 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 was 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 does not have a material impact on the
Company's financial position or results of operations.
12. As of September 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 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 September 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. In the
three months ended September 30, 2000, 20,000 shares were repurchased under this
program for $766,000.
14. In September 2000, the Company sold certain assets of its thermometry and
compliance products business which were included in the Consumer Healthcare
segment. Under the terms of the sale, the purchaser paid the Company $300,000 in
cash and issued to the Company a promissory note in the face amount of $1.12
million at a 7% interest rate, maturing September 20, 2003. The transaction
resulted in an immaterial loss which was included in Other expense on the
Company's Consolidated Statements of Operations.
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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 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
and adult nutrition supplies through our Chronic Care segment. Our AZO brand
holds a leading position in the over-the-counter urinary health market. We
distribute AZO female urinary discomfort and similar AZO products to food and
drug retailers 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 280,000
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;
- providing 24-hour telephone support to customers; and
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- 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 280,000 active Medicare-eligible diabetes
customers, we serve approximately 4.4% 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 commenced marketing studies and
began shipping products in the adult nutrition market. After analyzing early
experience in the adult nutrition market, we have concluded that it does not
meet our business model requirements. We will stop shipping adult nutrition
products in the quarter ending December 31, 2000.
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
prescription respiratory supplies to customers' homes and bill Medicare and
private insurance directly for reimbursable supplies. 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.
As of September 30, 2000, we had over 20,000 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 female urinary tract
discomfort. 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 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.
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<PAGE> 14
In September 2000, the Company sold certain assets of its thermometry and
compliance products business which were included in the Consumer Healthcare
segment. Under the terms of the sale, the purchaser paid the Company $300,000 in
cash and issued to the Company a promissory note in the face amount of $1.12
million at a 7% interest rate, maturing September 20, 2003. The transaction
resulted in an immaterial loss which was included in Other expense on the
Company's Consolidated Statements of Operations.
Growth Strategy
Our growth strategy includes the following elements:
- continue growth in our Chronic Care and Professional Products segments
by expanding our customer base;
- expand non-Medicare initiatives; 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 or distribution facilities located in
Massachusetts and Florida. 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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<PAGE> 15
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Total net revenues increased by 51.6% to $54.47 million in the three months
ended September 30, 2000 as compared with $35.92 million in the three months
ended September 30, 1999. This increase is primarily the result of the growth in
revenues from our Chronic Care and Professional Products segments which
increased 39.2% and 305.9%, respectively, in the three months ended September
30, 2000 as compared with the three months ended September 30, 1999. (See Note
10 for segment information.)
Net revenues in the Chronic Care segment increased by 39.2% to $40.71
million in the three months ended September 30, 2000 as compared with $29.24
million in the three months ended September 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 305.9% to $10.50 million
in the three months ended September 30, 2000 as compared with $2.59 million in
the three months ended September 30, 1999. This increase is mainly attributable
to shipments of respiratory products in the three months ended September 30,
2000, due to new customer sales as a result of our direct-response advertising
spending. Sales of respiratory products commenced in August 1999. 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 decreased 20.3% to $3.26
million in the three months ended September 30, 2000 as compared with $4.09
million in the three months ended September 30, 1999, as a result of declining
revenues in our thermometry and compliance products business which was sold in
September 2000. (See Note 14 for information on the sale.)
Pretax income was $11.34 million in the three months ended September 30,
2000, a 123.0% increase as compared with $5.09 million in the three months ended
September 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 $7.11 million, or $0.52 per diluted common share, for
the three months ended September 30, 2000 as compared with $3.13 million, or
$0.30 per diluted common share, in the three months ended September 30, 1999.
Earnings per diluted common share increased 73.3% or $0.22 in the three months
ended September 30, 2000 as compared with the three months ended September 30,
1999.
As a percentage of total net revenues, overall gross margins were 64.0% in
the three months ended September 30, 2000 and 57.9% in the three months ended
September 30, 1999. Gross margins in the three months ended September 30, 2000
increased due to improved gross margins in
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<PAGE> 16
the Chronic Care and Professional Products segments, resulting from favorable
product mix and period promotional pricing from suppliers.
As a percentage of total net revenues, selling, general and administrative
expenses were 43.9% for the three months ended September 30, 2000 as compared
with 42.4% for the three months ended September 30, 1999. Selling, general and
administrative expenses increased by 57.2% in the three months ended September
30, 2000 to $23.93 million as compared with $15.23 million in the three months
ended September 30, 1999. This increase is primarily attributable to increased
advertising expense for our Chronic Care and Professional Products segments.
Investment income increased by 565.5% to $732,000 in the three months ended
September 30, 2000 as compared with $110,000 in the three months ended September
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 86.4% to $79,000 in the three months ended September 30,
2000 as compared with $579,000 in the three months ended September 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.
Six Months Ended September 30, 2000 Compared to Six Months Ended September 30,
1999
Total net revenues increased by 56.5% to $105.64 million in the six months
ended September 30, 2000 as compared with $67.50 million in the six months ended
September 30, 1999. This increase is primarily the result of the growth in
revenues from our Chronic Care and Professional Products segments, which
increased 43.5% and 302.6%, respectively, in the six months ended September 30,
2000 as compared with the six months ended September 30, 1999. (See Note 10 for
segment information.)
Net revenues in the Chronic Care segment increased by 43.5% to $79.82
million in the six months ended September 30, 2000 as compared with $55.61
million in the six months ended September 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 302.6% to $19.62 million
in the six months ended September 30, 2000 as compared with $4.87 million in the
six months ended September 30, 1999. This increase is mainly attributable to
shipments of respiratory products in the six months ended September 30, 2000,
due to new customer sales as a result of our direct-response advertising
spending. Sales of respiratory products commenced in August 1999. 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 decreased 11.7% to $6.19
million in the six months ended September 30, 2000 as compared with $7.02
million in the six months ended September 30, 1999, as a result of declining
revenues in our thermometry and compliance products business which was sold in
September 2000. (See Note 14 for information on the sale.)
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<PAGE> 17
Pretax income was $21.51 million in the six months ended September 30,
2000, a 137.0% increase as compared with $9.08 million in the six months ended
September 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 $13.49 million, or $0.99 per diluted common share, for
the six months ended September 30, 2000 as compared with $5.58 million, or $.55
per diluted common share, in the six months ended September 30, 1999. Earnings
per diluted common share increased 80% or $.44 in the six months ended September
30, 2000 as compared with the six months ended September 30, 1999.
As a percentage of total net revenues, overall gross margins were 63.7% in
the six months ended September 30, 2000 and 57.3% in the six months ended
September 30, 1999. Gross margins in the six months ended September 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 segment resulting from additional provisions for inventory
obsolescence.
As a percentage of total net revenues, selling, general and administrative
expenses were 44.2% for the six months ended September 30, 2000 as compared with
42.4% for the six months ended September 30, 1999. Selling, general and
administrative expenses increased by 63.5% in the six months ended September 30,
2000 to $46.73 million as compared with $28.59 million in the six months ended
September 30, 1999. This increase is primarily attributable to increased
advertising expense for our Chronic Care and Professional Products segments.
Investment income increased by 587.5% to $1.37 million in the six months
ended September 30, 2000 as compared with $199,000 in the six months ended
September 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 87.5% to $148,000 in the six months
ended September 30, 2000 as compared with $1.18 million in the six months ended
September 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.
Liquidity and Capital Resources
Since our inception, we have raised $109.34 million in gross equity capital
through public offerings, including $55.88 million from the October 1999 sale of
2,629,599 shares of common stock.
As of September 30, 2000, we had working capital of $74.09 million,
including cash and cash equivalents and marketable securities of $40.56 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 $44.49 million and $39.76 million as of
September 30 and March 31, 2000, respectively. The increase in net accounts
receivable is primarily the result of record shipments in our Chronic Care and
Professional Products segments. As of September 30, 2000, gross unbilled
receivables included in overall gross accounts receivable of $56.54 million,
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<PAGE> 18
were $17.88 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 $7.80 million
and $4.65 million in the three months ended September 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 $4.63 million and $1.95 million in
direct-response advertising was amortized and charged to selling, general and
administrative expense for the three months ended September 30, 2000 and 1999,
respectively. A total of $16.32 million and $7.68 million of direct-response
advertising was capitalized in the six months ended September 30, 2000 and 1999,
respectively. A total of $8.51 million and $3.64 million was amortized and
charged to selling, general and administrative expense for the six months ended
September 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 September 30 and March
31, 2000, accumulated amortization was $25.47 million and $16.96 million, which
resulted in a net capitalized direct-response advertising asset of $35.90
million and $28.08 million, respectively.
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. In the
three months ended September 30, 2000, 20,000 shares were repurchased under this
program for $766,000.
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.
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<PAGE> 19
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 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
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<PAGE> 20
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
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 some of our Professional Products and many of our AZO
products at our facility in Woburn, Massachusetts. 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 some of our 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.
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<PAGE> 21
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
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.
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
21
<PAGE> 22
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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<PAGE> 23
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.
23
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on September 14, 2000,
the following proposals were considered:
<TABLE>
<CAPTION>
Proposal
-------- For Against Abstain
--- ------- -------
<S> <C> <C> <C>
Election of Directors:
Daniel S. Bernstein, M.D 12,085,347 225,362(1)
Peter K. Hoffman 9,152,833 3,157,876(1)
To approve an amendment to the
Articles of Organization increasing
the number of authorized shares
of common stock and preferred
stock 4,919,840 5,639,859 25,471
To approve the adoption of
the Company's 2000 Stock
Incentive Plan, authorizing the
issuance of up to 1,200,000
shares of common stock 8,510,007 2,038,852 36,311
Ratification of
PricewaterhouseCoopers LLP
as the Company's independent
public accountants 12,270,425 31,584 8,700
</TABLE>
----------------------
(1) Represents votes "withheld" from each respective director.
24
<PAGE> 25
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
September 30, 2000.
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<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POLYMEDICA CORPORATION
------------------------------------
(registrant)
/s/ Steven J. Lee
------------------------------------
Steven J. Lee
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Eric G. Walters
------------------------------------
Eric G. Walters
Chief Financial Officer and Clerk
(Principal Financial and Accounting
Officer)
Dated: November 14, 2000
26
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
10.66 - Employment Agreement by and between the Registrant and Steven J. Lee dated
September 1, 2000.
10.67 - Employment Agreement by and between the Registrant and Dr. Arthur A. Siciliano
dated September 1, 2000.
10.68 - Employment Agreement by and between the Registrant and Eric G. Walters dated
September 1, 2000.
10.69 - Employment Agreement by and between the Registrant and Warren K. Trowbridge
dated September 1, 2000.
10.70 - Retention Agreement by and between the Registrant and Steven J. Lee dated
September 1, 2000.
10.71 - Retention Agreement by and between the Registrant and Dr. Arthur A. Siciliano
dated September 1, 2000.
10.72 - Retention Agreement by and between the Registrant and Eric G. Walters dated
September 1, 2000.
10.73 - Retention Agreement by and between the Registrant and Warren K. Trowbridge
dated September 1, 2000.
27.1 - Financial Data Schedule - Six Months Ended September 30, 2000.
</TABLE>
27
