<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 December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 0-19842
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 February 9, 2000 was 12,986,974, which includes 2,203 shares held in
treasury.
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<TABLE>
<CAPTION>
POLYMEDICA CORPORATION
TABLE OF CONTENTS
Page
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Financial Statements
Consolidated Balance Sheets at
December 31 and March 31, 1999 .................................. 3
Consolidated Statements of Operations
for the three and nine months
ended December 31, 1999 and 1998 ................................ 5
Consolidated Statements of Cash Flows
for the nine months ended
December 31, 1999 and 1998 ...................................... 6
Notes to Consolidated Financial Statements ............................... 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................ 12
Item 3 - Quantitative and Qualitative Disclosures About Market Risk ............... 22
PART II - OTHER INFORMATION
Item 5 - Other Information ........................................................ 23
Item 6 - Exhibits and Reports on Form 8-K ......................................... 23
Signatures ................................................................................. 24
Exhibit Index .............................................................................. 25
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
POLYMEDICA CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 41,201 $ 10,191
Accounts receivable (net of allowances of 34,430 32,251
$9,574 and $7,330 as of December 31 and
March 31, 1999, respectively)
Inventories 7,872 6,909
Deferred tax asset 2,708 2,708
Prepaid expenses and other
current assets 1,840 721
-------- -------
Total current assets 88,051 52,780
Property, plant and equipment, net 10,700 6,856
Intangible assets, net 35,570 37,278
Direct response advertising, net 22,210 15,678
Other assets 636 347
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Total assets $157,167 $112,939
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</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
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POLYMEDICA CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 9,638 $12,527
Accrued expenses 11,621 4,781
Current portion of long-term debt and notes payable, net 51 3,083
------- -------
Total current liabilities 21,310 20,391
Long-term debt and notes payable, net 1,344 21,583
Deferred income taxes 7,920 7,920
------- -------
Total liabilities 30,574 49,894
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; 12,945,286 and 9,197,075 issued
as of December 31 and March 31, 1999,
respectively 129 92
Treasury stock, at cost, (78,003 shares as of
March 31, 1999) -- (458)
Additional paid-in capital 109,844 56,557
Retained earnings 16,620 7,480
Notes receivable from officers -- (626)
------- ------
Total shareholders' equity 126,593 63,045
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Total liabilities and shareholders' equity $157,167 $112,939
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements
4
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POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $42,437 $28,791 $109,936 $74,275
Cost of sales 17,569 13,965 46,422 35,764
------ ------ ------ ------
Gross margin 24,868 14,826 63,514 38,511
Selling, general and administrative
expenses 17,303 11,394 45,890 29,383
------ ------ ------ ------
Income from operations 7,565 3,432 17,624 9,128
Other income and expense:
Gain on sale of wound care business -- -- -- 1,597
Investment income 487 105 686 358
Interest expense (101) (627) (1,283) (1,877)
------ ------ ------ ------
386 (522) (597) 78
Income before income taxes 7,951 2,910 17,027 9,206
Income tax provision 3,061 1,164 6,555 3,683
----- ----- ----- -----
Income before extraordinary loss 4,890 1,746 10,472 5,523
Extraordinary loss on retirement of debt,
net of related taxes (1,332) -- (1,332) --
------ ------ ------ ------
Net income $3,558 $1,746 $9,140 $5,523
====== ====== ====== ======
Net income per weighted average share:
Basic, before extraordinary loss on
retirement of debt $.38 $.20 $1.00 $.62
Basic $.28 $.20 $.88 $.62
Diluted, before extraordinary loss on
retirement of debt $.37 $.18 $.94 $.57
Diluted $.27 $.18 $.82 $.57
Weighted average shares, basic 12,762 8,933 10,437 8,844
Weighted average shares, diluted 13,192 9,832 11,190 9,774
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
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<TABLE>
<CAPTION>
POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED DECEMBER 31,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,140 $ 5,523
Adjustments to reconcile net income to net cash flows
from operating activities:
Gain on sale of wound care business -- (1,597)
Depreciation and amortization 2,710 2,446
Amortization of direct-response advertising 6,170 3,869
Direct-response advertising (12,702) (7,126)
Deferred income taxes -- 3,291
Extraordinary loss on retirement of debt 2,165 --
Provision for bad debts 7,536 4,628
Provision for sales allowances 6,448 2,302
Other 247 --
Changes in assets and liabilities:
Accounts receivable (16,162) (14,908)
Inventories (1,214) (2,206)
Prepaid expenses and other assets (1,314) (1,018)
Accounts payable (3,066) 2,054
Accrued expenses 6,839 692
-------- --------
Total adjustments (2,343) (7,573)
Net cash flows from operating activities 6,797 (2,050)
-------- --------
Cash flows from investing activities:
Proceeds from sale of wound care business, net of related expenses -- 1,597
Purchase of property, plant and equipment (4,787) (1,218)
-------- --------
Net cash flows from investing activities (4,787) 379
-------- --------
Cash flows from financing activities:
Borrowings under revolving credit facility -- 5,000
Net proceeds from secondary offering 52,205 --
Proceeds from issuance of common stock 2,139 656
Repayment of long-term debt and notes payable (23,606) (1,329)
Premium paid on debt extinguishment (1,806) --
Repayment of officer notes receivable 68 68
-------- --------
Net cash flows from financing activities 29,000 4,395
-------- --------
Net increase in cash and cash equivalents 31,010 2,724
-------- --------
Effect of exchange rate changes on cash -- (7)
Cash and cash equivalents at beginning of period 10,191 6,440
-------- --------
Cash and cash equivalents at end of period $ 41,201 $ 9,157
======== ========
</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, 1999 and its unaudited Quarterly Reports on Form 10-Q for the
periods ended June 30 and September 30, 1999.
For the fiscal year ending March 31, 2000, the Company will record the
tax benefit for stock options exercised during the calendar year ended December
31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from those estimates. In addition, certain
amounts in the prior period financial statements have been reclassified to
conform with the current year presentation.
2. Inventories consist of the following: (In thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
---- ----
<S> <C> <C>
Raw materials $ 792 $ 739
Work in process 571 594
Finished goods 6,509 5,576
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$7,872 $6,909
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</TABLE>
3. In accordance with Statement of Position 93-7, the Company capitalized
direct-response advertising of $5.02 million and $1.58 million in the three
months ended December 31, 1999 and 1998, respectively. A total of $2.53 million
and $1.41 million in direct-response advertising was amortized and charged to
selling, general and administrative expense for the three months ended December
31, 1999 and 1998, respectively. A total of $12.70 million and $7.13 million of
direct-response advertising was capitalized in the nine months ended December
31, 1999 and 1998, respectively. A total of $6.17 million and $3.87 million in
direct-response advertising was amortized and charged to selling, general and
administrative expense in the nine months ended December 31, 1999 and 1998,
respectively. As of December 31 and March 31, 1999, accumulated amortization was
7
<PAGE> 8
$14.10 million and $7.92 million, which resulted in a net capitalized
direct-response advertising asset of $22.21 million and $15.68 million,
respectively.
4. As of December 31, 1999, gross unbilled receivables included in
accounts receivable, net were $17.78 million as compared with $15.35 million as
of March 31, 1999.
5. Calculations of earnings per share are as follows:
<TABLE>
<CAPTION>
(In thousands, except per share data) Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 3,558 $ 1,746 $ 9,140 $ 5,523
BASIC:
Weighted average common stock outstanding,
net of treasury stock, end of period 12,762 8,933 10,437 8,844
Net income per common share, basic $ .28 $ .20 $ .88 $ .62
====== ===== ====== =====
DILUTED:
Weighted average common stock outstanding,
net of treasury stock, end of period 12,762 8,933 10,437 8,844
Weighted average common stock equivalents 430 899 753 930
------ ----- ------ -----
Weighted average common stock outstanding,
net of treasury stock, end of period 13,192 9,832 11,190 9,774
Net income per common share, diluted $ .27 $ .18 $ .82 $ .57
====== ===== ====== =====
</TABLE>
Options to purchase 209,000 and 240,604 shares of common stock were
outstanding during the three months ended December 31, 1999 and 1998,
respectively, but were not included in the computation of diluted earnings per
share because the options' exercise price was greater than the average market
price of the common shares. During the nine months ended December 31, 1999 and
1998, options to purchase 234,000 and 240,604 shares of common stock,
respectively, were outstanding, but not included in the computation of diluted
earnings per share for the same reason.
6. The Company's total net income and comprehensive income was $3.56
million and $1.75 million for the three months ended December 31, 1999 and 1998,
respectively.
7. The Company has three reportable segments:
Diabetes Supplies - Liberty Medical Supply, Inc. is a direct-to-
consumer provider of diabetes testing supplies to seniors who have Medicare
coverage.
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Consumer Healthcare - The Company's consumer healthcare segment offers
the AZO line of products which includes OTC ("over-the-counter") female urinary
tract discomfort products and home medical diagnostic kits; and is a
manufacturer and distributor of private-label and branded digital thermometers.
Professional Products - The Company's professional products segment
consists of: (i) prescription branded urology products, including urinary
analgesics, anti-spasmodics, local anesthetics and suppositories, and (ii)
respiratory products, for Medicare-eligible seniors suffering from chronic
obstructive pulmonary disease ("COPD").
All Other consists of operations associated with the Company's
corporate headquarters.
This segment information may not be indicative of the financial
position or results of operations that would have been achieved had these
segments operated as unaffiliated entities. Information concerning the
operations in these reportable segments is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31 December 31, December 31, December 31,
(In thousands) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET REVENUES:
Diabetes Supplies $ 34,063 $ 22,092 $ 89,673 $ 56,511
Consumer Healthcare 3,724 4,133 10,739 10,549
Professional Products 4,650 2,566 9,524 7,215
-------- -------- -------- --------
Total $ 42,437 $ 28,791 $109,936 $ 74,275
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
DEPRECIATION AND AMORTIZATION:
Diabetes Supplies $ 2,556 $ 1,692 $ 6,829 $ 4,692
Consumer Healthcare 17 20 46 50
Professional Products 913 513 1,959 1,535
All Other 17 13 46 38
-------- -------- -------- --------
Total $ 3,503 $ 2,238 $ 8,880 $ 6,315
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
INCOME BEFORE INCOME TAXES:
Diabetes Supplies $ 5,928 $ 1,516 $ 12,914 $ 5,173
Consumer Healthcare 677 902 1,956 2,133
Professional Products 1,346 492 2,157 1,900
-------- -------- -------- --------
Total $ 7,951 $ 2,910 $ 17,027 $ 9,206
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
<S> <C> <C>
SEGMENT ASSETS:
Diabetes Supplies $ 68,179 $ 62,922
Consumer Healthcare 7,686 6,263
Professional Products 39,784 39,337
All Other 41,518 4,417
-------- --------
Total $157,167 $112,939
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</TABLE>
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8. The Company will adopt Statement of Financial Accounting Standards No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities"
in the fiscal year beginning April 1, 2000. On July 7, 1999, the Financial
Accounting Standards Board issued Statement of Accounting Standards No. 137
("SFAS 137"), "Accounting for Derivative Instruments and Hedging Activities
Deferral of the Effective Date of FASB Statement No. 133." SFAS 137 delayed the
implementation of SFAS 133 by one year. SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Under the new statement, the accounting for changes in the fair value of a
derivative (that is, gains or losses) depends on the intended use of the
derivative. The Company believes that adoption of the statement will not have a
material effect on the financial statements.
9. During the nine months ended December 31, 1999, certain officers
transferred 19,400 shares of their PolyMedica common stock to repay to
PolyMedica, loans aggregating $558,958, resulting in an increase in treasury
stock of 19,400 shares. In connection with the offering, the Company issued
169,291 shares of treasury stock which reduced additional paid-in capital by
$2.7 million.
10. Long-Term Debt
In October 1999, the Company repaid all amounts due to John Hancock
Mutual Life Insurance Company ("Hancock") under its $25 million of Guaranteed
Senior Secured Notes due January 31, 2003 (the "Hancock Notes"). See Note 12.
As of December 31, 1999, the Company had no outstanding balance under
its existing $10.0 million revolving credit facility. Under the terms of the
credit facility, the Company is required to be and was in compliance with
certain financial covenants. The interest rate was 8.50% as of December 31,
1999.
To support Liberty Medical's growth, in May 1999 the Company purchased
a 66,000 square foot building in Port St. Lucie, Florida for $2.0 million,
financed by a $1.4 million mortgage. Under the terms of this mortgage, the
Company is required to repay all principal balances by May 2006 using a 15-year
amortization period. The mortgage is collateralized by the land, building,
future improvements and permanent fixtures. Under this mortgage, the Company is
required to be and was in compliance with certain financial covenants. The
interest rate is 8.07% per annum.
11. In July 1998, the Company realized $1.6 million in cash from Innovative
Technologies Group plc ("IT") in a prepayment agreement as full and final
settlement of a $4.0 million unsecured promissory note issued to the Company in
connection with the July 1997 sale to IT of certain assets related to the
Company's wound care business. The $1.6 million cash received, net of related
expenses, is recorded as Other Income in the nine months ended December 31,
1998.
<TABLE>
<CAPTION>
Nine Months Ended
(In thousands, except per share data) December 31, 1998
-----------------
<S> <C>
Gain on sale of wound care $1,597
Provision for income taxes related to gain 639
---
Gain on sale, net of income taxes $958
===
Income per common share, diluted, related to
gain on sale of wound care business $.10
===
</TABLE>
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12. In October 1999, the Company and selling shareholders issued to the
public 2,629,599 and 700,401 shares of common stock, respectively, for cash of
$21.25 per share. In connection with the Company's sale of shares in the
offering the Company paid underwriters a fee of $1.17 per share or $3.1 million
and incurred approximately $600,000 in legal, accounting, and other expenses.
The net proceeds to the Company from this offering, after deducting underwriting
fees and expenses, were $52.2 million, which was recorded as additional paid-in
capital. The Company used $21.8 million of the proceeds to retire $20.0 million
of long-term debt and to pay an early payment premium of approximately $1.8
million. The balance of the proceeds from this offering will be used for working
capital and general corporate purposes.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
PolyMedica sells specialty medical products primarily in three
business segments.
Liberty Medical Supply, Inc. ("Liberty Medical") is a national
direct-to-consumer provider of diabetes supplies to seniors covered by Medicare.
The Company's consumer healthcare segment also holds a leading position in the
urinary health market through its consumer healthcare division and sells fever
thermometers. The Company's professional products segment is comprised of two
categories of prescription products. The Company (i) manufactures, distributes
and sells prescription urological and suppository products under its own brands
and (ii) has recently entered the respiratory products market focused on
providing direct-to-consumer products and services to Medicare-eligible seniors
suffering from chronic obstructive pulmonary disease ("COPD").
Since acquiring Liberty Medical in 1996, the Company has devoted a
large part of its resources to the growth of its diabetes supplies business,
resulting in substantial increases in the revenues and earnings of that business
in each of its 1999, 1998 and 1997 fiscal years. In addition, the Company
intends to continue this emphasis on other direct-to-consumer businesses in the
future.
The Company recognizes revenues upon shipment of its products. Expense
items include cost of sales and selling, general and administrative expenses.
- Cost of sales consists primarily of purchasing finished goods for
sale in the Company's diabetes supplies business and, to a lesser extent,
materials and overhead costs for products that it manufactures in its facility;
and
- Selling, general and administrative expenses consist primarily of
expenditures for personnel and benefits, as well as allowances for bad debts,
rent, amortization of capitalized direct-response advertising costs and other
amortization and depreciation.
Diabetes Supplies
As a participating Medicare provider and third-party insurance biller,
Liberty Medical provides a simple, reliable way for Medicare-eligible seniors to
obtain their diabetes testing supplies from name-brand manufacturers. Liberty
Medical has over 250,000 active customers and, the Company believes, the
country's largest proprietary database of seniors with diabetes. This group of
active customers represents 4.0% of an estimated 6.3 million Medicare-eligible
seniors who have diabetes in the United States. Liberty Medical offers a wide
array of products from a full range of name-brand manufacturers, contacts the
patient's doctor to obtain the required prescription information and written
documentation, files the appropriate insurance forms and bills Medicare and
private insurers directly. This service frees the patient from paying for his or
her diabetes-related upfront expenses and offers the convenience of free home
delivery of supplies.
Liberty Medical's rapid growth has been due to innovations in
identifying, qualifying and retaining its customers. In 1997, Liberty Medical
launched its direct-response advertising program
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using national television advertisements targeting seniors with diabetes. Since
its acquisition by PolyMedica through December 31, 1999, Liberty Medical has
invested $34.0 million in direct-response advertising to senior diabetics.
Consumer Healthcare
The Company's consumer healthcare products are focused on three areas:
female urinary tract discomfort, digital thermometers and medication compliance
products. In the urinary tract discomfort area, the Company's three products
include AZO-STANDARD, which provides relief from urinary tract discomfort,
AZO-CRANBERRY, a dietary supplement which helps maintain a healthy urinary tract
and AZO TEST STRIPS, an in-home urinary tract infection testing kit which allows
patients to call their doctors with testing results. In April 1999, the Company
began shipping two new homeopathic botanical products, AZO MENOPAUSE and AZO
CONFIDENCE. AZO MENOPAUSE offers relief from hot flashes and related symptoms.
AZO CONFIDENCE is used for the relief of symptoms of incontinence.
The Company's consumer healthcare products also include digital,
digital flexible tip, basal and glass thermometers, as well as approximately 40
other home-use diagnostic and compliance products. PolyMedica has patented and
introduced a flexible tip thermometer. The Company sells its consumer healthcare
products through an extensive network to large drug store chains, major
supermarkets, mass merchandisers and drug wholesalers.
Professional Products
The Company's professional products segment is comprised of two
categories: urology prescription drug products and respiratory prescription drug
products and devices.
The Company owns one of the broadest lines of branded prescription
urology products (excluding anti-infectives). The urology products include
urinary analgesics, anti-spasmodics, local anesthetics and suppositories.
URISED, CYSTOSPAZ and CYSTOSPAZ-M analgesics and anti-spasmodics provide
effective symptomatic relief for urinary pain, burning and spasms. Many urology
offices, as well as hospitals, purchase the local anesthetic ANESTACON for use
in diagnostic procedures and the catheterization process. B&O and AQUACHLORAL
suppositories are used by patients unable to tolerate oral dosages of systemic
analgesics and sedatives.
In August 1999, the Company initiated a program offering reimbursable
respiratory prescription drug products and devices, consisting of albuterol,
ipratropium and nebulizers to its Medicare-eligible customers with diabetes who
also suffer from COPD. It believes that its database of over 250,000 active
diabetes supply customers and expertise in selling diabetes testing supplies
will be a significant advantage in entering this new market.
The Company believes it can capitalize on its expertise in selling
products eligible for Medicare and private insurance reimbursement by expanding
into other chronic disease states, as it has done in the diabetes marketplace.
To implement this strategy, in October 1999 the Company initiated a national
direct-to-consumer television advertising campaign to attract customers who have
respiratory problems but who do not have diabetes. In 1998, total Medicare
reimbursements in the COPD marketplace were similar to the diabetes strips
market.
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Growth Strategy
The Company's growth strategy includes the following elements:
- continue growth in the Company's diabetes supplies business by
expanding its customer base;
- sell products addressing other chronic disease categories;
- create alliances with national retailers;
- begin e-commerce marketing; and
- add complementary products and businesses.
Other
Although the use of certain of the Company's products is somewhat
seasonal in nature, the Company does not believe its net product sales, in the
aggregate, are generally subject to material seasonal fluctuations.
The Company operates from manufacturing and distribution facilities
located in Massachusetts, Florida and Colorado. Virtually all of the Company's
product sales are denominated in U.S. dollars.
Period to period comparisons of changes in net product sales are not
necessarily indicative of results to be expected for any future period.
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RESULTS OF OPERATIONS
Three Months Ended December 31, 1999 Compared to Three Months Ended December 31,
1998
Total net revenues increased by 47.4% to $42.44 million in the three
months ended December 31, 1999, as compared with $28.79 million in the three
months ended December 31, 1998. This increase was primarily the result of the
increase in the Company's diabetes supplies business.
Pretax income increased by 173.2% to $7.95 million in the three months
ended December 31, 1999, as compared with $2.91 million in the three months
ended December 31, 1998. The Company's income before extraordinary loss on
retirement of debt, increased by 180.0% to $4.89 million in the three months
ended December 31, 1999, as compared with $1.75 million in the three months
ended December 31, 1998. Net income was $3.56 million in the three months ended
December 31, 1999.
Net revenues from diabetes supplies increased by 54.2% to $34.06
million in the three months ended December 31, 1999, as compared with $22.09
million in the three months ended December 31, 1998. This growth was primarily
due to shipments to non-insulin using (Type II) diabetics which represent the
largest population of Medicare-eligible seniors. These customers became eligible
for reimbursement on July 1, 1998. Shipments to insulin using (Type I) diabetic
customers also increased.
Net revenues of consumer healthcare products decreased by 10.0% to
$3.72 million in the three months ended December 31, 1999, as compared with
$4.13 million in the three months ended December 31, 1998. This decrease is
primarily due to stocking orders of flexible-tip digital thermometers for new
customers during the three months ended December 31, 1998.
In the professional products segment, net revenues increased by 81.7%
to $4.65 million in the three months ended December 31, 1999, as compared with
$2.57 million in the three months ended December 31 1998. This increase was
attributable to shipments of respiratory products in the three months ended
December 31, 1999.
As a percentage of net revenues, overall gross margins were 58.6% in
the three months ended December 31, 1999 and 51.5% in the three months ended
December 31, 1998. Gross margins in the three months ended December 31, 1999
increased due to improved product mix from sales of diabetes related products.
As a percentage of net revenues, selling, general and administration
expenses ("SG&A expenses") were 40.8% for the three months ended December 31,
1999 as compared with 39.6% for the three months ended December 31, 1998. SG&A
expenses increased by 51.9% in the three months ended December 31, 1999 to
$17.30 million as compared with $11.39 million in the three months ended
December 31, 1998. This dollar increase was primarily attributable to the
expansion of Liberty Medical.
15
<PAGE> 16
Investment income increased by 362.3% to $487,000 in the three months
ended December 31, 1999 as compared with $105,000 in the three months ended
December 31, 1998 as the Company earned interest on higher average cash balances
as a result of proceeds from the Company's October 1999 secondary public
offering. Interest expense decreased by 83.9% to approximately $101,000 in the
three months ended December 31, 1999, as compared with approximately $627,000 in
the three months ended December 31, 1998, due to the October 1999 retirement of
the Guaranteed Senior Secured Notes due January 31, 2003 to the John Hancock
Mutual Life Insurance Company.
Nine Months Ended December 31, 1999 Compared to Nine Months Ended December 31,
1998
Total net revenues increased by 48.0% to $109.94 million in the nine
months ended December 31, 1999, as compared with $74.28 million in the nine
months ended December 31, 1998. This increase was primarily the result of the
increase in Liberty Medical sales.
Pretax income increased by 85.0% to $17.03 million in the nine months
ended December 31, 1999 as compared with $9.21 million in the nine months ended
December 31, 1998. The Company's income before extraordinary loss on retirement
of debt, increased by 89.6% to $10.47 million in the nine months ended December
31, 1999, as compared with $5.52 million in the nine months ended December 31,
1998. Net income was $9.14 million in the nine months ended December 31, 1999.
Net revenues from diabetes supplies increased by 58.7% to $89.67
million in the nine months ended December 31, 1999, as compared with $56.51
million in the nine months ended December 31, 1998. This growth is primarily due
to shipments to non-insulin using (Type II) diabetics which represent the
largest population of Medicare-eligible seniors. These customers became eligible
for reimbursement on July 1, 1998. Shipments to insulin using (Type I) diabetic
customers also increased.
Net revenues of consumer healthcare products increased by 1.8% to
$10.74 million in the nine months ended December 31, 1999, as compared with
$10.55 million in the nine months ended December 31, 1998. Sales of both the AZO
product line and digital thermometry products increased during the nine months
ended December 31, 1999.
In the professional products segment, net revenues increased by 32.0%
to $9.52 million in the nine months ended December 31, 1999, as compared with
$7.22 million in the nine months ended December 31, 1998. This increase is
attributable to shipments of respiratory products which commenced in the quarter
ended September 30, 1999.
As a percentage of net revenues, overall gross margins were 57.8% in
the nine months ended December 31, 1999 and 51.8% in the nine months ended
December 31, 1998. Gross margins in the nine months ended December 31, 1999
increased due to an improved product mix from sales of diabetes related
products.
As a percentage of net revenues, SG&A expenses were 41.7% for the nine
months ended December 31, 1999 as compared with 39.6% for the nine months ended
December 31, 1998. SG&A expenses increased by 56.2% in the nine months ended
December 31, 1999 to $45.89 million as
16
<PAGE> 17
compared with $29.38 million in the nine months ended December 31, 1998. This
dollar increase is primarily attributable to the expansion of Liberty Medical.
Investment income increased by 91.6% to $686,000 in the nine months
ended December 31, 1999 as compared with approximately $358,000 in the nine
months ended December 31, 1998 as the Company earned interest on higher average
cash balances as a result of proceeds from the Company's October 1999 secondary
public offering. Interest expense decreased by 31.6% to $1.28 million in the
nine months ended December 31, 1999, as compared with $1.88 million in the nine
months ended December 31, 1998, due to repayment of the Hancock Notes.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has raised $109.34 million in gross
equity capital, of which $7.16 million was from venture capital financings
before the Company's initial public offering, $39.00 million from its March 1992
initial public offering, $4.55 million from a November 1995 public offering of
700,000 shares of common stock, $2.75 million from the March 1996 sale of
431,937 shares of its common stock pursuant to Regulation S promulgated under
the Securities Act of 1933, and $55.88 million from the October 1999 sale of
2,629,599 shares of common stock.
During the three months ended December 31, 1999, PolyMedica and selling
shareholders issued to the public 2,629,599 and 700,401 shares of common stock,
respectively, for cash of $21.25 per share. In connection with this offering,
the Company paid underwriters a fee of $1.17 per share and incurred
approximately $600,000 in legal, accounting, and other expenses. The net
proceeds to the Company from this offering, after deducting underwriting fees
and expenses, were $52.2 million.
As of December 31, 1999, working capital was $66.74 million, as
compared with working capital of $32.39 million as of March 31, 1999. Cash and
cash equivalents were $41.20 million and $10.19 million as of December 31 and
March 31, 1999, respectively.
As of December 31, 1999, the Company had no outstanding balance under
its $10.0 million collateralized revolving credit facility. Under the terms of
this facility, the Company is required to repay all principal balances on March
31, 2001. This facility is collateralized by certain assets. Under this
facility, the Company is obligated to be, and is in compliance with certain
financial covenants. The interest rate was 8.50% as of December 31, 1999.
In October 1999, the Company used $21.8 million of the proceeds of its
public offering to retire $20.0 million of the Hancock Notes and to pay a
related early payment premium of approximately $1.8 million.
To support Liberty Medical's growth, in May 1999 the Company purchased
a 66,000 square foot building in Port St. Lucie, Florida for $2.0 million,
financed by a $1.4 million mortgage. Under the terms of this mortgage, the
Company is required to repay all principal balances by May 2006 using a 15-year
amortization period. The mortgage is collateralized by the land, building,
future improvements and permanent fixtures. Under this mortgage, the Company is
required to be, and is in compliance with certain financial covenants. The
interest rate is 8.07% per annum.
17
<PAGE> 18
Accounts receivable, net was $34.43 million and $32.25 million as of
December 31 and March 31, 1999, respectively. This increase as of December 31,
1999 was the result of record shipments by Liberty Medical and receivables
related to the new respiratory products business. As of December 31, 1999, gross
unbilled receivables included in accounts receivable, net were $17.78 million as
compared with $15.35 million as of March 31, 1999.
The Company expects that its current working capital, revolving credit
facility and funds generated from future operations will be adequate to meet its
liquidity and capital requirements for current operations. In the event that the
Company undertakes to make acquisitions of complementary businesses or products,
the Company may require substantial additional funding beyond currently
available working capital and funds generated from operations. Currently, the
Company is conducting an active search for the strategic acquisition of
complementary businesses or products. The Company has no present commitments or
agreements with respect to any such acquisition.
YEAR 2000 COMPLIANCE
Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 to mean the
year 1900 instead. If not corrected, those programs could cause date-related
transaction failures. The Company implemented a program to address this problem
prior to 2000 and has not experienced any problems to date since January 1,
2000.
External and internal costs specifically associated with modifying
internal use software for Year 2000 compliance were expensed as incurred. To
date, expenditures related to the Year 2000 problem have been less than
$200,000. Such costs do not include normal system upgrades and replacements.
Although the Company has not experienced any problems since the
beginning of the year 2000, such problems may still arise. If they do arise,
these problems could have a material adverse effect on the Company's business.
All Year 2000 statements contained herein are designated as "Year 2000
Readiness Disclosures" pursuant to the Year 2000 Information and Readiness
Disclosures Act (P.L. 105-271).
FACTORS AFFECTING FUTURE OPERATING RESULTS
The statements contained in this Report that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including, but not limited to, statements regarding the Company's expectations,
hopes, intentions or strategies regarding the future. Forward-looking statements
include, among others: statements regarding future benefits from the Company's
advertising and promotional expenditures; statements regarding future product
revenue levels; statements regarding product development, introduction and
marketing; statements regarding future acquisitions; and statements regarding
Year 2000 compliance. All forward-looking statements included in this Report are
based on information available to the Company on the date hereof, and the
Company assumes
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<PAGE> 19
no obligation to update any such forward-looking statements. It is important to
note that the Company's actual results could differ materially from those in
such forward-looking statements.
We could experience significantly reduced profits if Medicare changes, delays or
denies reimbursement
Sales of a significant portion of our diabetes-related products will
depend on the continued availability of reimbursement of our customers by
government and private insurance plans. Any reduction in Medicare reimbursement
currently available for our products would reduce our revenues. Without a
corresponding reduction in the cost of such products, the result would be a
reduction in our overall profit margin. Similarly, any increase in the cost of
such products would reduce our overall profit margin unless there were a
corresponding increase in Medicare reimbursement. Our profits could also be
affected by the imposition of more stringent regulatory requirements for
Medicare reimbursement. Any failure to comply with required Medicare
reimbursement procedures could result in delays or loss of reimbursement and
other sanctions, including fines and loss of Medicare provider status.
We plan to continue our rapid expansion; if we do not manage our growth
successfully; our growth and profitability may slow or stop
We have expanded our operations rapidly and plan to continue to expand.
This expansion has created significant 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 diabetes supply business will decrease if we do not
receive recurring orders from customers
We generally incur losses and negative cash flow with respect to the
first order for diabetes supplies from a customer, due primarily to the
marketing and regulatory compliance costs associated with initial customer
qualification. Accordingly, the profitability of our diabetes supply business
depends on recurring and sustained reorders. Reorder rates are inherently
uncertain due to several factors, many of which are outside our control,
including changing customer preferences, competitive price pressures, customer
transition to extended care facilities, customer mortality and general economic
conditions.
We could experience significantly reduced profits from our diabetes supply
business if improved technologies that eliminate the need for consumable testing
supplies are developed for glucose monitoring
The majority of our diabetes supply products sales are of consumable
testing supplies used to draw and test small quantities of blood for the purpose
of measuring and monitoring glucose levels. Numerous research efforts are
underway to develop more convenient and less intrusive glucose measurement
techniques. The commercialization and widespread acceptance of new technologies
that eliminate or reduce the need for consumable testing supplies could
negatively affect Liberty Medical's business.
19
<PAGE> 20
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 diabetes supplies, manufacturers of
healthcare products, pharmaceutical companies and other competitors is intense
and expected to increase. Many of our competitors and potential competitors are
large companies with well-known names and substantial resources. These companies
may develop products and services that are more effective than any that we are
developing or selling. They may also promote and market these products more
successfully than we promote and market our products segments.
Loss of use of manufacturing facilities would significantly reduce revenues and
profits from our consumer healthcare and professional products
We manufacture substantially all of our professional products and many
of our AZO products at our facility in Woburn, Massachusetts. We also have most
of our thermometers manufactured at one facility in China. If we cannot use
either facility as a result of Food and Drug Administration, Occupational Safety
and Health Administration or other regulatory action, fire, natural disaster or
other event, our revenues and profits from the sale of those products will
decrease significantly. We might also incur significant expense in remedying the
problem or securing an alternative manufacturing source.
If we or our suppliers do not comply with applicable government regulations, we
may be prohibited from selling our products
Many of the products that we sell are regulated by the Food and Drug
Administration and other regulatory agencies. If any of these agencies mandate a
suspension of production or sales of our products or mandate a recall, we may
lose sales and incur expense until we are in compliance with the regulations or
change to another acceptable supplier.
We could have difficulty selling our consumer healthcare and professional
products if we cannot maintain and expand our sales to distributors
We rely on third party distributors to market and sell our consumer
healthcare and professional products. Our sales of consumer healthcare and
professional products will therefore depend in part on our maintaining and
expanding marketing and distribution relationships with pharmaceutical, medical
device, personal care and other distributors and on the success of those
distributors in marketing and selling our products.
Shortening or eliminating amortization of our direct-response advertising costs
could adversely affect our operating results
20
<PAGE> 21
Any accounting or business change that shortens or eliminates the four
year amortization of our direct-response advertising costs could result in
accelerated charges against our earnings.
Our quarterly revenues or operating results could vary, which may cause the
market price of our common stock to decline
We have experienced fluctuations in our quarterly operating results and
anticipate that such fluctuations could continue. Results may vary significantly
depending on a number of factors, including:
- changes in reimbursement guidelines and amounts;
- changes in regulations affecting the healthcare industry;
- changes in the mix or cost of our products;
- the timing of customer orders;
- the timing and cost of our advertising campaigns; and
- the timing of the introduction or acceptance of new products and
services offered by us or our competitors.
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.
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
21
<PAGE> 22
operating performance of particular companies. Prices for the common stock will
be determined in the marketplace and may be influenced by many factors,
including variations in our financial results, changes in earnings estimates by
industry research analysts, investors' perceptions of us and general economic,
industry and market conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe that it has any material market risk
exposure with respect to derivative or other financial instruments that would
require disclosure under this item.
22
<PAGE> 23
PART II - OTHER INFORMATION
POLYMEDICA CORPORATION
ITEM 5. OTHER INFORMATION
On December 9, 1999, the Company's board of directors approved an
amendment to the Company's Shareholder Rights Plan. The amendment permits SAFECO
Corporation and its affiliates to acquire up to 20 percent of the Company's
Common Stock without triggering the Rights Plan.
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
December 31, 1999.
23
<PAGE> 24
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: February 14, 2000
24
<PAGE> 25
Exhibit Index
POLYMEDICA CORPORATION
Exhibit Description
- ------- -----------
10.62 - Amendment No. 1 dated December 9, 1999 amending the Rights
Agreement dated as of January 23, 1992 between the Registrant
and BankBoston, N.A.
27.1 - Financial Data Schedule - Nine Months Ended December 31, 1999.
25
<PAGE> 1
EXHIBIT 10.62
AMENDMENT NO. 1 TO RIGHTS AGREEMENT
This Amendment No. 1 dated December 9, 1999 hereby amends the Rights
Agreement dated as of January 23, 1992 (the "Agreement"), between PolyMedica
Corporation (then PolyMedica Industries, Inc.), a Massachusetts corporation (the
"Company"), and BankBoston, N.A. (then The First National Bank of Boston), a
national banking association, as Rights Agent (the "Rights Agent").
W I T N E S S E T H:
WHEREAS, no Person has become an Acquiring Person as such terms are
defined in the Agreement; and
WHEREAS, the Company has directed the Rights Agent to enter into this
Amendment No. 1 pursuant to Section 27 of the Agreement;
NOW, THEREFORE, in consideration of the premises and mutual agreements
set forth herein, the parties hereby agree as follows:
1. Section 1(a) of the Agreement is hereby deleted in its entirety and the
following substituted in lieu thereof:
(a) "Acquiring Person" shall mean any Person who or which,
together with all Affiliates and Associates of such Person,
shall be the Beneficial Owner of 15% or more of the shares of
Common Stock then outstanding, but shall not include (i) the
Company, (ii) any Subsidiary of the Company, (iii) any
employee benefit plan of the Company or of any Subsidiary of
the Company, or any Person or entity organized, appointed or
established by the Company for or pursuant to the terms of any
such plan, (iv) any such Person who becomes the beneficial
owner of 15% or more of the shares of Common Stock then
outstanding as a result of a reduction in the number of shares
of Common Stock outstanding due to the repurchase of shares of
Common Stock by the Company unless and until such Person,
after becoming aware that such Person has become the
Beneficial Owner of 15% or more of the then outstanding shares
of Common Stock, acquires beneficial ownership of additional
shares of Common Stock representing 1% or more of the shares
of Common Stock then outstanding or (v) an Exempted Person.
Notwithstanding the foregoing, if the Board of Directors of
the Company determines in good faith that a Person who would
otherwise be an "Acquiring Person," as defined pursuant to the
foregoing provisions of this paragraph (a), has become such
inadvertently, and such Person divests as promptly as
practicable a sufficient number of shares of Common
26
<PAGE> 2
Stock so that such Person would no longer be the Beneficial
Owner of 10% or more of the shares of Common Stock then
outstanding, then such Person shall not be deemed to be an
"Acquiring Person" for any purposes of this Agreement unless
and until such Person shall again become an "Acquiring
Person."
2. Section 1 of the Agreement is hereby further amended by adding new
paragraph (m-1), immediately after paragraph (m), as follows:
(m-1) "Exempted Person" shall mean SAFECO Common Stock
Trust, SAFECO Resource Series Trust, SAFECO Asset
Management Company and SAFECO Corporation
(collectively, "SAFECO"), unless and until such time
as SAFECO, together with its Affiliates, directly or
indirectly, becomes the Beneficial Owner of 20% or
more of the Common Stock then outstanding, in which
event SAFECO immediately shall cease to be an
Exempted Person.
3. Section 11(a)(ii))B) of the Agreement is hereby deleted and the
following substituted in lieu thereof:
(B) any Person (other than the Company, any Subsidiary of
the company, any employee benefit plan of the Company
or of any Subsidiary of the Company, or any Person or
entity organized, appointed or established by the
Company for or pursuant to the terms of any such
plan), alone or together with its Affiliates and
Associates, shall, at any time after the Rights
Dividend Declaration Date, become the Beneficial
Owner of 15% or more (or, in the case of an Exempted
Person, 20% or more) of the shares of Common Stock
then outstanding, unless the event causing the 15%
threshold (or in the case of an Exempted Person, the
20% threshold) to be crossed is a transaction set
forth in Section 13(a) hereof, or is an acquisition
of shares of Common Stock pursuant to a tender offer
or an exchange offer for all outstanding shares of
Common Stock at a price and on terms determined by at
least a majority of the members of the Board of
Directors who are not officers of the Company and who
are not representatives, nominees, Affiliates or
Associates of an Acquiring Person, after receiving
advice from a nationally recognized investment
banking firm selected by the Board of Directors of
the Company, to be (a) at a price that is fair to
stockholders (taking into account all factors which
such members of the Board deem relevant including,
without limitation, prices which could reasonably be
achieved if the Company or its assets were sold on an
orderly basis designed to realize maximum value) and
(b) otherwise in the best interests of the Company
and its stockholders, or
27
<PAGE> 3
IN WITNESS WHEREOF, the parties have caused this Amendment No. 1 to
be duly executed and their respective corporate seals to be hereunto affixed and
attested as of the day and year first written above.
POLYMEDICA CORPORATION
Attest:
/s/ Eric G. Walters /s/ Steven J. Lee
_____________________________ By:______________________________________
Name: Eric G. Walters Name: Steven J. Lee
Title: Chief Financial Officer Title: Chairman of the Board
and Chief Executive Officer
Seal
BANKBOSTON, N.A.
Attest:
/s/ Patricia A. DeLuca /s/ Joshua P. McGinn
______________________________ By:______________________________________
Name: Patricia A. DeLuca Name: Joshua P. McGinn
Title: Account Manager Title: Senior Account Manager
28
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