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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
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. 1-13690
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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Securities registered pursuant to Section 12(b) of the Act: None
COMMON STOCK, $.01 PAR VALUE PER SHARE
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(Title of class)
PREFERRED STOCK PURCHASE RIGHTS
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(Title of class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [ ]
The aggregate market value of voting Common Stock held by nonaffiliates
of the registrant was $80,161,000 based on the closing price of the Common Stock
as reported by the American Stock Exchange on June 26, 1998.
The number of shares issued of the registrant's class of Common Stock
as of June 26, 1998 was 8,913,476 which includes 120,620 shares held in
treasury.
Documents incorporated by reference: Proxy Statement for the 1998
Annual Meeting of Shareholders--Part III.
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PART I
ITEM 1. BUSINESS
THE COMPANY
General
PolyMedica Corporation ("the Company") is a leading provider of
targeted medical products and services primarily focused in the diabetes
supplies and consumer healthcare markets. The Company holds a leading position
in several expanding markets. The Company's products and services are grouped
within the following businesses: Diabetes Supplies; Consumer Healthcare, which
includes OTC ("over-the-counter") Medical Devices and Urinary Discomfort
Products; and Professional Products, which include Prescription Urologicals.
I. Diabetes Supplies
The Company entered the Diabetes Supplies business with its August 1996
acquisition of Liberty Medical Supply, Inc. ("Liberty Medical"). Liberty Medical
has grown to be the leading direct mail distributor of diabetes testing supplies
for senior citizens covered by Medicare. Liberty Medical's patient-focused
services serve more than 80,000 active customers throughout the United States.
Liberty Medical is headquartered in Palm City, Florida and was founded
in 1989. Liberty Medical is a participating Medicare provider which directly
bills and is paid by Medicare and/or the patient's medi-gap insurer, rather than
the patient. This procedure benefits the patient by assuring automatic and
timely delivery of supplies, while avoiding the need for the patient to prepare
paperwork and pay the cost of the supplies while awaiting subsequent
reimbursement.
Liberty Medical pioneered the development of sophisticated media
advertising to reach an untapped portion of the Medicare-eligible diabetes
patient market. Approximately $13 million has been spent primarily to accumulate
over 80,000 active customers and on building the Liberty Medical trade name
through a wide variety of media, principally television, but also including
print, direct mail, and radio.
Approximately 16 million people, or roughly 6% of the total United
States population, are afflicted with diabetes, with about half of them having
actually been diagnosed. Approximately 1.2 million of these patients fall within
Liberty Medical's target market of senior citizens using insulin and eligible
for Medicare. This patient population is growing rapidly, with more than 650,000
new cases diagnosed each year in the entire population. Diabetes is a chronic
disease in which the body's metabolism of glucose is ineffective due to
inadequate production of insulin. Frequent monitoring of blood glucose has been
documented as an important part of managing diabetes to help avoid serious
medical complications, such as coronary artery disease, glaucoma, and
circulatory problems which can lead to limb amputation. The cost to manage
diabetes is high; the average person with diabetes spends $1,200 per year on
supplies to test and control the disease.
Medicare currently reimburses up to 80% of the cost of testing supplies
for eligible diabetics, but does not reimburse for insulin or syringes and does
not reimburse non-insulin using diabetics. The 1997 Balanced Budget Act expands
Medicare coverage to include diabetics who do not use insulin. As a result, on
July 1, 1998, the market for Liberty Medical's services will grow by
approximately 2 million patients. According to statistics from the American
Diabetes Association (ADA), this change to cover non-insulin using patients will
increase the number of Medicare-eligible seniors with diabetes to approximately
3.2 million.
II. Consumer Healthcare
The Consumer Healthcare Group operating out of the Company's
subsidiary, PolyMedica Healthcare, Inc. or "PMH", focuses on female urinary
discomfort products, digital thermometry, medication compliance products, and
home health aid products. PMH holds the number one private label market position
in digital thermometry and the number two overall market position. These
products are sold through an extensive network to major retailers, including
most of the largest drug store chains and mass merchandisers. Sales of the
Company's digital thermometry products continue to grow through customer
expansion and new product introduction. The Company's urinary Discomfort
Products for women include AZO STANDARD(R), which is currently the number one
selling product in a growing market segment; AZO CRANBERRY(R), a dietary
supplement which helps maintain a healthy urinary tract; and the new AZO TEST
STRIPS(TM), a home diagnostic test kit for urinary tract infections.
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III. Professional Products
PolyMedica's Professional Products Group operating out of the Company's
subsidiary, PolyMedica Pharmaceuticals (U.S.A.), Inc. or "PMP", represents one
of the broadest lines of prescription urology products available (excluding
anti-infectives), including urinary analgesics, antispasmodics, topical
anesthetics and suppositories. The Company's URISED(R), ANESTACON(R),
CYSTOSPAZ(R) and CYSTOSPAZ-M(R) analgesics and antispasmodics provide effective
symptomatic relief for urinary pain, burning and spasms. B&O(R) and
AQUACHLORAL(R) suppositories are used by patients unable to tolerate oral
dosages of systemic analgesics and sedatives.
Sale of Wound Care Business
In July 1997, the Company sold certain assets of its U.S. and U.K.
wound care operations. Under the terms of the sale, the purchaser, Innovative
Technologies Group Plc ("IT"), paid the Company $9.00 million in cash and issued
to the Company an unsecured promissory note in the face amount of $4.00 million.
The Company could realize an additional $4.50 million if IT achieves certain
milestones, based on the performance of IT's stock and the performance of the
acquired business. The Company will recognize additional proceeds in excess of
the $9.00 million cash received only when and to the extent realized. The
Company's fiscal year ended March 31, 1998 statement of operations includes a
$4.13 million pretax gain on the sale of the wound care business.
Business Strategies
The Company's overall strategy is to transition from a
technology-driven company to a market-driven company. The May 1996 spinoff of
CardioTech, the August 1996 acquisition and subsequent expansion of Liberty
Medical, and the July 1997 sale of the wound care business were key components
of this strategy. The Company's strategy includes:
Expand leadership position in providing diabetes supplies to senior
citizens. Since the August 1996 acquisition of Liberty Medical, the Company
invested in an ongoing program of television advertising to reach a much larger
portion of the Medicare-eligible diabetes patient market. This campaign has
resulted in a significant increase in sales as Liberty Medical has increased its
active customers from 17,000 to more than 80,000. The Company continues to seek
opportunities to deliver new products to a broader customer base by leveraging
its efficient, mail-order distribution system and software for billing and
customer monitoring. To manage its growth effectively, Liberty Medical continues
to expand, upgrade and develop its operations and information systems to
continue its high level of customer service.
The July 1, 1998 expansion of Medicare reimbursement includes, for the
first time, non-insulin using patients; these patients represent a major
opportunity for the Company to leverage its current leading position in
direct-mail distribution to insulin using seniors. In addition, the Company has
begun re-contacting its existing database of more than 40,000 non-insulin using
seniors with diabetes in order to generate more repeat business and has produced
and is market-testing new television advertising which is targeted to both
insulin and non-insulin using customers.
The Company is also exploring other expansion opportunities such as the
trend in managed care towards outsourcing diabetes care services to other payors
and providers.
Grow the consumer healthcare business. Fueled by the growth in demand
for the Company's urinary discomfort products, as well as by the strength of
sales of the Company's digital thermometers, the consumer healthcare group
achieved a record level of sales in fiscal 1998. Continued growth in the
consumer healthcare market is a strategic objective as the Company seeks to
leverage leading positions in its core markets of urinary discomfort, digital
thermometry and medication compliance products.
Acquire complementary businesses. In order to take advantage of
economies of scale in production and marketing, the Company continues to
evaluate opportunities for the acquisition of businesses and products which
complement the Company's existing product lines. In selecting and evaluating
acquisition candidates, the Company examines the potential market opportunities
for products that can be distributed through the Company's existing marketing
infrastructure by utilizing its strengths in sales, marketing and distribution.
Existing Products
Diabetes Supplies. Liberty Medical ships to more than 80,000 customers
in the U.S., making it the largest direct-mail provider of diabetes testing
products in the country to Medicare-eligible seniors. Liberty Medical sells more
than 200 name-brand products supplied by Lifescan, Boehringer Mannheim, Bayer,
and others. These products include glucose test strips and monitors,
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lancets, insulin, syringes, and other products. Sales of glucose test strips
represented 51.9% of the Company's consolidated revenues for the fiscal year
ended March 31, 1998.
Consumer Healthcare Products. PMH focuses on female urinary tract
discomfort, digital thermometry, and medication compliance products.
The Company's three principal non-prescription pharmaceutical products
are AZO STANDARD(R), which provides relief from urinary tract discomfort; AZO
CRANBERRY(R), a dietary supplement which helps maintain a healthy urinary tract;
and the new AZO TEST STRIP(TM), a home diagnostic test kit for urinary tract
infections. As of March 31, 1998, the AZO line of products held the dominant
share of the OTC female urinary tract discomfort market (over 46%), despite a
new competitive entry with a large promotional budget.
The Company markets a line of thermometers which includes products with
traditional mercury and digital displays. Sales of the Company's glass and
digital thermometers, both branded and private label represented 14.9% and 12.2%
of the Company's consolidated revenues for the fiscal years ended March 31, 1996
and 1997, respectively. The Company has the number one private-label market
thermometer position and number two overall market position. The Company custom
manufactures and/or distributes its other consumer healthcare products under the
brand names of BASIS(R), MEDI-AID(R), PolyMedica and PeeDee Dose(TM).
Items in the Company's consumer healthcare product line are either
manufactured by the Company or by others to the Company's specifications or are
purchased by the Company for resale. In addition, the Company provides private
label products for many national retailers. The Company's major customers in the
United States include most of the top pharmacy chains, major supermarkets and
mass merchandisers, including CVS, Eckerd, Rite-Aid and Walgreen Co. as well as
the four largest drug wholesalers. The Company's consumer products are sold in
retail pharmacies in the beauty aid, cough and cold, baby and incontinence skin
care sections.
Professional Products. PMP continues to generate significant cash flow.
The Company is able to achieve significant margins on its prescription
pharmaceutical products without extensive advertising and promotion. Net product
sales of URISED(R), the leading prescription pharmaceutical product, more than
doubled for the year ended March 31, 1998, as compared to the year ended March
31, 1997. The Company believes this increase is a result of a reduction in the
supply of generic products in the marketplace. Professional products represents
one of the broadest lines of prescription urology products available (excluding
anti-infectives), including urinary analgesics, antispasmodics, topical
anesthetics and suppositories. URISED(R), CYSTOSPAZ(R) and CYSTOSPAZ-M(R)
analgesics and antispasmodics provide effective symptomatic relief for urinary
pain, burning and spasms.
Products Under Development
The Company is currently developing new thermometry products and is
considering new urinary discomfort products in its AZO family.
Major Customers
For the fiscal year ended March 31, 1996, total revenues from Mylan
Laboratories, Inc., McKesson Drug Company, Bergen Brunswig Drug Company and
Bristol-Myers Squibb were 12.9%, 11.7%, 10.8%, and 11.2%, respectively, of total
consolidated revenues. For the fiscal years ended March 31, 1998 and 1997, no
customer represented more than 10% of the Company's consolidated revenues.
Patents and Trade Secrets
The Company has proprietary manufacturing processes and trade secrets
related to its in-house pharmaceutical production. The Company owns one patent
for the Flexible Tip Digital Thermometer with Fever Alarm(TM).
Manufacturing
The Company's pharmaceutical products are currently manufactured
in-house and by others on its behalf. The Company purchases a majority of its
consumer healthcare products from other manufacturers.
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By April 1997, all of the steps to validate, manufacture and sell
pharmaceutical products made at the Company's Woburn facility were completed.
With receipt of an FDA Establishment Registration Number, in-house manufacturing
is now underway for several established products, including AQUACHLORAL(R),
B&O(R) and URISED(R). The Company's state-of-the-art automated suppository
machine forms, fills and seals automatically and the computer-controlled,
hands-off equipment provides improved manufacturing efficiency.
Government Regulation
Political, economic and regulatory influences are resulting in
fundamental changes in the healthcare industry in the United States. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative healthcare delivery systems and payment methods. Sales of a
large portion of the Company's products depend to a significant extent on the
availability of reimbursement to the Company's customers by government and
private insurance plans.
Any further reduction in the reimbursement provisions currently in
effect for the Company's diabetes supplies products which are reimbursable under
Medicare would reduce the Company's revenues and earnings.
The production and marketing of the Company's products and its ongoing
research and development activities are subject to regulation by numerous
governmental authorities in the United States.The Company cannot predict the
extent to which government regulations or changes thereto might have an adverse
effect on the production and marketing of the Company's existing or future
products. Products that the Company may develop in the future may require
clearance by the Food and Drug Administration ("FDA") in the United States.
Although the Company believes each of these products, if successfully developed,
will obtain FDA clearance, no assurance can be made that each will obtain such
clearance, or that the process of clearance will be without undue delay or
expense.
The Company is subject to numerous federal, state and local laws
relating to such matters as controlled drug substances, safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. For example, the Drug
Enforcement Administration ("DEA") regulates controlled drug substances, such as
narcotics, under the Controlled Substances Act and the Controlled Substances
Import and Export Act. Manufacturers, distributors and dispensers of controlled
substances must be registered and inspected by the DEA, and are subject to
inspection, labeling and packaging, export, import, security, production quota
and record keeping, and reporting requirements. The Company currently markets
two prescription drug products containing controlled drug subjects, and
therefore is subject to the DEA regulatory requirements. In addition, labeling
and promotional activities relating to medical devices and drugs are, in certain
instances, subject to regulations by the Federal Trade Commission. There can be
no assurance that the Company will not be required to incur significant costs to
comply with such laws and regulations in the future or that such laws or
regulations will not have a material adverse effect upon the Company's ability
to do business.
Competition
The Company is engaged in rapidly evolving and highly competitive
fields. Many major pharmaceutical, medical product and personal care companies
in the United States and abroad seek to develop competitive products.
Competition from medical device manufacturers, pharmaceutical companies and
others is intense and expected to increase. Many of these companies have
substantially greater capital resources, research and development staffs and
facilities and experience in obtaining regulatory approvals, as well as in the
marketing and distribution of products, than the Company.
In the diabetes supply market, Universal Self Care, Inc. and Transworld
Home Healthcare, Inc., are publicly-held companies which compete with Liberty
Medical in the direct-mail supply business. There are several smaller
privately-held companies which also compete in this market.
In the consumer healthcare products market, the Company competes with
various other suppliers for retail shelf space and consumer purchase. While
there are numerous companies that manufacture and market consumer healthcare
products, the Company believes that no single company is readily identifiable by
consumers as a maker of products which attempt to detect or monitor medical
problems in the home. The Company believes that it offers consumers practical,
easy-to-use products at reasonable prices. In the urinary discomfort category,
the Company's AZO STANDARD(R) urinary analgesic is one of the category leaders.
Competitors include Numark Laboratories, Inc. (Cystex(TM)), Breckenridge
Pharmaceutical, Inc. (Prodium(TM)) and Johnson & Johnson (Uristat(TM)).
In the professional market, numerous pharmaceutical companies develop
and market prescription products which compete with the Company's products on a
branded and generic basis. The Company's principal branded competitors include:
Astra USA, Inc.
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(Xylocaine(R) vs. ANESTACON(R)); G & W Labs, Inc. (chloral hydrate vs.
AQUACHLORAL(R)); Parke-Davis, a division of Warner-Lambert., (Pyridium(R) vs.
URISED(R)); Schwarz-Pharma (Levsin(TM) line vs. CYSTOSPAZ(R) line); and
Wyeth-Ayerst Laboratories, a division of American Home Products Corp.
(belladonna and opium vs. B&O(R) SUPPRETTES(R)).
Employees
As of March 31, 1998, the Company had 349 full-time employees. The
Company expects to employ additional personnel as it expands its operations. The
Company believes that its relations with its employees are good.
ITEM 2. PROPERTIES
The Company's facilities are located in Woburn, Massachusetts; Palm
City and Stuart, Florida and Golden, Colorado. The Company's corporate
headquarters are located in Woburn in a 60,000 square foot facility which the
Company owns. The Company also leases approximately 50,000 square feet at its
facilities in Palm City and Stuart, Florida and approximately 30,000 square feet
at its Golden, Colorado facility.
The Company believes that its current facilities will be adequate for
its current and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company,
through solicitations of proxies or otherwise, during the last quarter of the
fiscal year ended March 31, 1998.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
Steven J. Lee.......................... 51 Chairman and Chief Executive Officer
Arthur A. Siciliano, Ph.D.............. 55 President; President, PolyMedica Pharmaceuticals
(U.S.A.), Inc.
Eric G. Walters........................ 46 Chief Financial Officer, Treasurer and Clerk
Randy M. Sloan......................... 41 Vice President of Marketing; Group Executive,
PolyMedica Healthcare, Inc.
Mark A. Libratore...................... 47 Vice President; President, Liberty Medical Supply, Inc.
Robert J. Zappa . . . . . ............. 54 Vice President; President, PolyMedica Healthcare, Inc.
Mr. Lee has been Chairman of the Company since June 1996 and Chief
Executive Officer and a director of the Company since May 1990. Mr. Lee served
as President of the Company from May 1990 through June 1996. From March 1990 to
May 1990, Mr. Lee was a Manager in the Mergers and Acquisitions practice at
Coopers & Lybrand. From November 1987 to March 1990, Mr. Lee was President and a
director of Shawmut National Ventures, the venture capital division of Shawmut
Bank, N.A. From 1984 to 1986, he was President, Chief Executive Officer and a
director of RepliGen Corporation, a biotechnology company. Mr. Lee also spent
eleven years in venture capital as President of Venture Management Advisors and
at Bankers Trust Company. Mr. Lee currently serves as a director of Commonwealth
BioVentures, Inc. and Fibersense Technology Company.
Dr. Siciliano has been President of the Company since June 1996,
Executive Vice President since July 1994, Senior Vice President since January
1993, Vice President, Pharmaceutics of the Company since July 1991 and served as
Vice President, Manufacturing from June 1990 to July 1991. From the Company's
inception until June 1990, he served as Chief Operating Officer. From 1984 to
1986, Dr. Siciliano served as President of Microfluidics Corporation, a high
technology equipment manufacturer and a subsidiary of the Biotechnology
Development Corporation and then helped found a subsidiary, MediControl
Corporation, and served as its President from 1986 to 1989. He served as
President of the Heico Chemicals Division of the Whittaker Corporation from 1982
to 1984, as General Manager of Reheis Chemicals (Ireland), Ltd. during 1981 and
as Technical Director for Reheis Chemical Co., a division of Revlon Inc., from
1975 to 1982. Dr. Siciliano also served as Director of Corporate Research for
Kolmar Laboratories, Inc. from 1973 to 1975 and as Senior Scientist for The
Gillette Company from 1969 to 1973.
Mr. Walters joined the Company in August 1990 as Chief Financial
Officer and Treasurer. From 1987 to 1990, Mr. Walters served in various
positions at John Hancock Capital Growth Management, Inc., most recently as
Assistant Treasurer. From 1983 to 1987, Mr. Walters served as Controller of
Venture Founders Corporation and from 1979 to 1983, he was employed at Coopers &
Lybrand, most recently as an Audit Supervisor. Mr. Walters is a Certified Public
Accountant.
Mr. Sloan has served as Vice President of Marketing of the Company
since October 1996 and Group Executive since March 1997. From 1984 to 1996, Mr.
Sloan served in various positions at Ciba Self-Medication, Inc., a division of
Ciba-Geigy, most recently as Vice President of Marketing. From 1980 to 1984, Mr.
Sloan was employed at Colgate Palmolive Company, most recently as a Product
Manager in their Household Products Group. Mr. Sloan holds an M.B.A. from the
University of Chicago and a B.S. in Finance and Accounting from the University
of Pennsylvania.
Mr. Libratore has served as President of Liberty Medical Supply, Inc.
since 1989. He has managed this business from its inception. Mr. Libratore has
23 years of medical experience and has been a respected member of the medical
community for many years. Mr. Libratore is a graduate of the Hartford Hospital
School of Respiratory Therapy of the University of Connecticut.
Mr. Zappa has been a Vice President of the Company since June 1996 and
was named President of PolyMedica Healthcare, Inc. in September 1992. He has
over 25 years of experience in all aspects of sales and distribution. Mr. Zappa
served as President, Chief Operating Officer and Director of American CDI, Inc.
from June 1991 to September 1992. From 1981 until April 1990, he was President
and Chief Executive Officer of R. J. Zappa Distributing, Inc. ("RJZ Dist."), a
distributor of home appliances, personal care products and electronics. Mr.
Zappa sold all of the shares of RJZ Dist. to JRE Holdings Co. ("JRE") in
November 1988. Prior to 1982, Mr. Zappa was Vice President and Partner in a
privately held distribution company from 1975 to 1982.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
SELECTED FINANCIAL DATA
At March 31, 1998, the Company's Common Stock was held by 514 holders
of record. The Company believes that the actual number of beneficial owners of
the Company's Common Stock is substantially greater than the stated number of
holders of record because a substantial portion of the Common Stock outstanding
is held in "street name."
The following table sets forth the high and low sales price per share
of Common Stock on the American Stock Exchange:
FISCAL YEAR 1997
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HIGH LOW
---- ---
1st Quarter 9 3/4 5
2nd Quarter 5 7/8 4 5/8
3rd Quarter 5 5/8 3 3/8
4th Quarter 6 3/8 3 5/8
FISCAL YEAR 1998
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HIGH LOW
---- ---
1st Quarter 8 7/8 4 1/4
2nd Quarter 14 1/4 7 3/4
3rd Quarter 14 15/16 9 1/16
4th Quarter 13 1/2 9 3/4
The Company has never declared or paid any cash dividends on its common
stock. For the foreseeable future, the Company expects to retain its earnings to
finance the growth of its business.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED MARCH 31, 1998 1997 1996 1995 1994
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Statement of Operations Data
Total revenues $73,825 $30,453 $24,763 $26,609 $22,194
Income from continuing operations 7,619 2,322 3,075 2,394 275
Net income (loss) 7,619 2,322 274 1,789 (415)
Income (loss) per common share, diluted .79 .27 .04 .26 (.06)
Weighted average number of common
shares outstanding, diluted 9,691 8,618 7,492 6,790 6,866
Balance Sheet Data
Cash and cash equivalents $6,440 $11,028 $23,302 $14,006 $10,305
Total assets 92,401 75,233 72,573 65,753 64,532
Total liabilities 39,473 31,861 29,293 29,027 29,188
Total debt 22,906 25,476 24,400 24,433 24,360
Shareholders= equity 52,928 43,372 43,280 36,726 35,344
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In connection with the distribution of CardioTech International, Inc.
shares to PolyMedica shareholders in June 1996, CardioTech's operations are
accounted for as discontinued operations in the Company's 1996 and prior
statements of operations.
In 1997, the Company determined that it is more likely than not that
certain deferred tax assets will be realized and accordingly eliminated the
related valuation allowance. Realization of the net deferred tax assets is
dependent on generating sufficient taxable income prior to the expiration of
loss carryforwards. Although realization is not assured, management believes
that it is more likely than not that such net deferred tax assets will be
realized. As a result, the Company recorded a tax benefit in 1997.
In 1998, net income included $2.74 million, or $0.29 per common share,
diluted, related to the gain on the July 1997 sale of the Company's wound care
business.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FUTURE OPERATING RESULTS
This Annual Report contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes", "anticipates", "plans", "expects", and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated or suggested by such forward-looking
statements. These factors include, without limitation, those set forth below in
the section titled, "Factors Affecting Future Operating Results" in this Annual
Report.
OVERVIEW
Business
PolyMedica is a leading provider of targeted medical products and
services primarily focused in the diabetes supplies and consumer healthcare
markets. PolyMedica sells diabetes supplies through its wholly-owned subsidiary
Liberty Medical Supply, Inc. Liberty Medical is a leading patient-focused,
direct-mail distributor of more than 200 name-brand diabetes products to
insulin-using, Medicare-eligible seniors with diabetes. PolyMedica also holds a
leading position in the over-the-counter urinary health market and distributes a
broad range of other medical products, including digital thermometers and
compliance products, primarily to food and drug retailers and mass merchandisers
nationwide. The Company also markets, manufactures and distributes a line of
prescription urological and suppository products.
In September 1997, the Company changed its name from PolyMedica
Industries, Inc. to PolyMedica Corporation.
Diabetes Supplies
Liberty Medical is the leading mail-order distributor of diabetes
testing supplies to patients who use insulin and have Medicare or private
insurance coverage. Liberty Medical provides a simple, reliable way for seniors
to obtain their diabetes testing supplies and the Medicare and insurance
benefits to which they are entitled. 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.
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 two products are
AZO-STANDARD(R), which provides relief from urinary tract discomfort, and
AZO-CRANBERRY(R), a dietary supplement which helps maintain a healthy urinary
tract. During the three months ended March 31, 1998, the Company introduced AZO
TEST STRIPS(TM), an in-home urinary tract infection testing kit which allows
patients to call their doctors with testing results.
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 new flexible tip thermometer that became available for the
1997-1998 cough and cold season. The Company custom manufacturers and/or
distributes its other consumer healthcare products under private label and under
the brand names of BASIS(R), MEDI-AID(R), PolyMedica and PeeDee Dose(TM).
Professional Products
PolyMedica's professional products represent one of the broadest lines
of prescription urology products excluding anti-infectives, available, including
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.
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Recent Transactions
In May 1996, the Company's board of directors declared a stock dividend
for the purpose of making a distribution (the "Distribution") to the Company's
shareholders of all its shares of CardioTech International, Inc. ("CardioTech").
CardioTech's operations are accounted for as discontinued operations in the
Company's 1996 statements of operations, and accordingly, its operations are
segregated in the accompanying consolidated statements of operations for the
1996 and prior periods presented. Net sales, operating costs and expenses, and
other income and expense have been reclassified for amounts associated with
CardioTech's discontinued operations.
In August 1996, the Company acquired all of the outstanding stock of
Liberty Medical in a transaction accounted for under the purchase method of
accounting. Accordingly, the net assets and operations of Liberty Medical have
been included in the Company's financial statements since the date of
acquisition.
In July 1997, the Company sold certain assets of its U.S. and U.K.
wound care operations. Under the terms of the sale, the purchaser, Innovative
Technologies Group Plc ("IT"), paid the Company $9.00 million in cash and issued
to the Company an unsecured promissory note in the face amount of $4.00 million.
The Company could realize an additional $4.50 million if IT achieves certain
milestones, based on the performance of IT's stock and the performance of the
acquired business. The Company will recognize additional proceeds in excess of
the $9.00 million cash received only when and to the extent realized. The
Company's fiscal year ended March 31, 1998 statement of operations includes a
$4.13 million pretax gain on the sale of the wound care business.
Other
Advertising, promotional, and other marketing costs are charged to
earnings in the period in which they are incurred. Promotional and sample costs
whose benefit is expected to assist future sales are expensed as the related
materials are used. In accordance with Statement of Position 93-7,
direct-response advertising and related costs for all periods presented are
capitalized and amortized to selling, general and administrative expense on an
accelerated basis during the first two years of a four-year period. The
amortization rate is such that 55% of such costs are expensed after two years
from the date they are incurred, and the remaining 45% is expensed on a straight
line basis over the next two years. Revenues generated from new customers as a
result of direct-response advertising have historically resulted in a revenue
stream lasting seven years. Management has selected a more conservative
four-year amortization period, in consideration of the "Factors Affecting Future
Operating Results" described herein. 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.
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, distribution and research and
development facilities located in Massachusetts, Florida and Colorado. Virtually
all of the Company's product sales are denominated in U.S. dollars. The
Company's research and development activities are funded from ongoing operations
and relate to the manufacture of pharmaceutical products.
Period to period comparisons of changes in net product sales are not
necessarily indicative of results to be expected for any future period.
RESULTS OF OPERATIONS
Year Ended March 31, 1998 Compared to Year Ended March 31, 1997
Total revenues increased by 142.5% to $73.83 million in the fiscal year
ended March 31, 1998 as compared with $30.45 million in the fiscal year ended
March 31, 1997. This increase is primarily the result of the growth in Liberty
Medical revenues which were generated for the twelve months during the fiscal
year ended March 31, 1998.
Net product sales of diabetes supplies were $48.71 million in the
fiscal year ended March 31, 1998. This performance compares with $8.65 million
in the fiscal year ended March 31, 1997 for the seven month period beginning
with the August 1996 acquisition of Liberty Medical by the Company. This growth
is largely a result of the Company's increased direct-response advertising
spending, including its initiation of television advertising at the end of the
fiscal year ended March 31, 1997. The Company currently expects its promotional
and direct-response advertising spending to continue in order to further the
expansion of Liberty Medical's customer base.
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12
Net product sales of consumer healthcare products increased by 8.3% to
$11.15 million in the fiscal year ended March 31, 1998 as compared with $10.30
million in the fiscal year ended March 31, 1997. Sales of advanced thermometry
products increased during the fiscal year ended March 31, 1998, offset by a
decline in sales of AZO STANDARD(R). The Company has added to its product line
by introducing its Flexible-Tip Digital Thermometer with Fever Alarm(TM) which
began shipping in August 1997. The Company believes that the decline in sales of
AZO STANDARD(R) experienced during the first nine months of the year ended March
31, 1998 was due to an inventory oversupply at the distribution level. As shown
by strong sales of AZO STANDARD(R) in the fourth quarter of the year ended March
31, 1998, the Company believes that the inventory oversupply has ended. In
addition, the Company introduced AZO TEST STRIPS(TM), an in-home urinary tract
infection testing kit which allows patients to call their doctors with testing
results. Shipments of AZO TEST STRIPS(TM) began during the three months ended
March 31, 1998.
Net product sales of the Company's professional products increased by
21.4% to $13.97 million in the fiscal year ended March 31, 1998 as compared with
$11.51 million in the fiscal year ended March 31, 1997. Professional products
include a full year of wound care product sales in the fiscal year ended March
31, 1997. The 21.4% increase in professional products sales is primarily due to
additional shipments of URISED(R) in the fiscal year ended March 31, 1998, which
the Company believes is the result of a reduction in the supply of generic
products in the marketplace, partially offset by a lower level of wound care
related sales in the fiscal year ended March 31, 1998 due to the sale of certain
assets of the wound care division in July 1997.
As a percentage of net product sales, overall gross margins were 51.8%
in the fiscal year ended March 31, 1998 and 54.5% in the fiscal year ended March
31, 1997. Gross margins in the fiscal year ended March 31, 1998 decreased due to
the inclusion of significant sales of diabetes-related products, whose gross
margins are lower than the Company average for products sold in the fiscal year
ended March 31, 1997, partially offset by improving margins and higher revenues
of professional products.
As a percentage of total revenues, selling, general and administration
expenses ("SG&A expenses") were 38.7% for the fiscal year ended March 31, 1998
as compared with 40.4% for the fiscal year ended March 31, 1997. SG&A expenses
increased by 131.8% in the fiscal year ended March 31, 1998 to $28.55 million as
compared with $12.32 million in the fiscal year ended March 31, 1997. This
increase is primarily attributable to SG&A expenses related to the expansion of
Liberty Medical, and marketing and advertising costs related to its consumer
healthcare products.
Research and development expenses were $280,000 in the fiscal year
ended March 31, 1998 as compared with $670,000 in the fiscal year ended March
31, 1997. This decrease in research and development costs is a result of the
Company's July 1997 sale of certain assets related to its wound care business.
Investment income decreased by 27.2% to $629,000 in the fiscal year
ended March 31, 1998 as compared with $864,000 in the fiscal year ended March
31, 1997 as the Company earned interest on lower average cash balances in the
fiscal year ended March 31, 1998 due to cash paid for the purchase of Liberty
Medical in August 1996 and investments in direct-response advertising. This use
of cash was partially offset by cash received in July 1997 in connection with
the sale of certain assets related to the Company's wound care business.
Interest expense was $2.69 million in the fiscal year ended March 31, 1998 as
compared with $2.77 million in the fiscal year ended March 31, 1997, as the
Company accrued interest expense in both periods on Guaranteed Senior Secured
Notes due January 31, 2003 (the "Hancock Notes") to the John Hancock Mutual Life
Insurance Company ("Hancock").
Pretax income was $11.49 million in the fiscal year ended March 31,
1998. Excluding the $4.13 million pretax gain described above, pretax income was
$7.36 million as compared with $1.96 million in the fiscal year ended March 31,
1997. The Company's net income was $7.62 million, or $0.79 per diluted common
share, in the fiscal year ended March 31, 1998. Excluding the $2.74 million
after tax gain from the sale of the wound care business, or $0.29 per diluted
common share, income was $4.88 million, or $0.50 per diluted common share. This
performance compares to net income of $2.32 million, or $0.27 per diluted common
share, in the fiscal year ended March 31, 1997.
Year Ended March 31, 1997 Compared to Year Ended March 31, 1996
Total revenues increased by 23% to $30.45 million in the fiscal year
ended March 31, 1997 as compared with $24.76 million in the fiscal year ended
March 31, 1996.
Net product sales of diabetic supplies were $8.65 million in the fiscal
year ended March 31, 1997, for the seven month period beginning with the August
1996 acquisition of Liberty Medical by the Company.
Net product sales of consumer healthcare products increased by 16.7% to
$10.30 million in the fiscal year ended March 31, 1997 as compared with $8.82
million in the fiscal year ended March 31, 1996. Most of the increase in net
product sales in the fiscal year ended March 31, 1997 was due to increased
shipments of thermometry products and AZO STANDARD(R).
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Net product sales of professional products decreased by 29.5% to $10.93
million in the fiscal year ended March 31, 1997 as compared with $15.50 million
in the fiscal year ended March 31, 1996. Net product sales of prescription
urologicals, which comprised approximately two-thirds of professional product
sales, declined by 10.4% in the fiscal year ended March 31, 1997 as compared to
the fiscal year ended March 31, 1996. Net product sales of wound dressings
declined by 53.9% in the fiscal year ended March 31, 1997 as compared with the
fiscal year ended March 31, 1996. Net product sales of wound dressings
represented 10.5% of Company-wide net product sales as in the fiscal year ended
March 31, 1997 as compared with 28.0% in the fiscal year ended March 31, 1996.
This decline was primarily due to changes in Medicare reimbursement and resulted
in the early termination of the Company's MITRAFLEX(R) supply contract with
Bristol-Myers Squibb.
Royalty, exclusivity, development and license fees increased by 31.7%
to $573,000 in the fiscal year ended March 31, 1997 as compared with $435,000 in
the fiscal year ended March 31, 1996. This increase is primarily due to the
inclusion in the fiscal year ended March 31, 1997 of a fee from Perstorp AB in
connection with the establishment of Perstorp as the exclusive pan-European
distributor of SPYROSORB(R), offset by a decline in royalties earned from
shipments of MITRAFLEX(R) by Bristol-Myers Squibb.
As a percentage of net product sales, overall gross margins were 54.5%
in the fiscal year ended March 31, 1997 and 58.0% in the fiscal year ended March
31, 1996. Gross margins in the fiscal year ended March 31, 1997 decreased
primarily due to the inclusion of significant sales of diabetes related
products, whose gross margins are lower than the Company average for other
products in the fiscal year ended March 31, 1996.
As a percentage of total revenues, SG&A expenses were 40.4% for the
fiscal year ended March 31, 1997 as compared with 36.3% for the fiscal year
ended March 31, 1996. SG&A expenses increased by 37.0% in the fiscal year ended
March 31, 1997 to $12.32 million as compared with $8.99 million in the fiscal
year ended March 31, 1996. This increase is primarily attributable to SG&A
expenses related to the expansion of Liberty Medical, and marketing and
advertising costs related to its consumer healthcare products.
Research and development expenses increased by 3.2% to $670,000 in the
fiscal year ended March 31, 1997 as compared with $649,000 in the fiscal year
ended March 31, 1996.
Investment income decreased by 3.1% to $864,000 in fiscal 1997 as
compared with $892,000 in the fiscal year ended March 31, 1996, as the Company
earned interest on lower average cash balances, in part due to the spinoff of
CardioTech and the purchase of Liberty Medical. Interest expense was $2.77
million in the fiscal year ended March 31, 1997, as compared with $2.68 million
in the fiscal year ended March 31, 1996, as the Company accrued and paid
interest expense in both periods on the Hancock Notes.
The Company's net income increased to $2.32 million, or $0.27 per
diluted common share, in fiscal year ended March 31, 1997. This performance
compares to net income of $274,000, or $0.04 per diluted common share, reported
in the fiscal year ended March 31, 1996. Before taking into account the effect
of discontinued operations, income from continuing operations was $3.07 million,
or $0.41 per diluted common share in the fiscal year ended March 31, 1996. There
were no discontinued operations reported in the fiscal year ended March 31,
1997.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has raised $53.46 million in gross
equity capital, of which $7.16 million was from venture capital financing 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
common stock and $2.75 million from a March 1996 private placement of common
stock. In January 1993, the Company sold to Hancock $25.00 million of Hancock
Notes.
As of March 31, 1998, the Company had working capital of $21.07
million, including cash and cash equivalents of $6.44 million, which compares
with working capital of $14.63 million as of March 31, 1997. The primary reason
for the increase in working capital as of March 31, 1998, when compared to March
31, 1997, was the receipt by the Company in July 1997 of $9.00 million in cash
in connection with the sale of certain assets related to its wound care
business, and increased sales of diabetes supplies.
Accounts receivable -- trade were $21.2 million and $6.2 million as of
March 31, 1998 and 1997, respectively. The increase is primarily a result of the
overall growth of Liberty Medical's sales in the fiscal year ended March 31,
1998, record shipments to new customers by Liberty Medical in December 1997
which required time to process, and delayed billing in the first six weeks of
calendar 1998. During the fiscal year ending March 31, 1999, the Company expects
days sales outstanding to decrease from the March 31, 1998 balance.
The Company expects that its current working capital 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
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complementary businesses, products or technologies, the Company may require
substantial additional funding beyond currently available working capital and
funds generated from operations. The Company is conducting an active search for
the strategic acquisition of complementary businesses, products or technologies
which leverage its marketing, sales and distribution infrastructure. The Company
currently has no commitments or agreements with respect to any such acquisition.
YEAR 2000 COMPLIANCE
The Company has conducted a review of its computer systems to identify
the systems that are affected by the year 2000. The year 2000 problem is the
result of computer programs being written using two digits rather than four to
define the applicable year. The Company intends to upgrade its systems over the
next 12-18 months in an effort to make more detailed data available on a system
wide basis in a timely manner. Such costs will be capitalized and amortized over
the useful life of the new software. The Company believes that with
modifications to existing software and conversions, the year 2000 issue will not
pose significant operational problems for the Company's computer systems. The
Company will continue to address any further year 2000 issues and believes that
any costs relating to such issues will not be material to the Company's
financial condition or results of operations.
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 possible future expansion of
diabetes coverage under Medicare; 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; and statements regarding future acquisitions. All forward-looking
statements included in this Report are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward-looking statements. It is important to note that the Company's
actual results could differ materially from those in such forward-looking
statements.
The future operating results of the Company remain difficult to
predict. The Company continues to face many risks and uncertainties which could
affect its operating results, including without limitation, those described
below.
Healthcare Reimbursement
Political, economic and regulatory influences are resulting in
fundamental changes in the healthcare industry in the United States. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative healthcare delivery systems and payment methods. Sales of a
large portion of the Company's products depend to a significant extent on the
availability of reimbursement to the Company's customers by government and
private insurance plans.
Any further reduction in the reimbursement provisions currently in
effect for the Company's diabetes supplies products which are reimbursable under
Medicare would reduce the Company's revenues and earnings.
The processing of third-party reimbursements is a labor-intensive
effort, and delays in processing claims for reimbursement may increase working
capital requirements. Final determination of reimbursements are subject to audit
by Medicare. Medicare audits of the Company to date have not resulted in any
significant adjustments. Future audits may, however, result in retroactive
adjustments for past charges for products and services, and such adjustments
could affect the future operations and earnings of the Company. The Balanced
Budget Act of 1997 expands Medicare coverage to seniors with diabetes who do not
use insulin. Any delay in the expected July 1998 implementation of this
legislation would correspondingly delay the anticipated expansion of Liberty
Medical's market.
Ability to Manage Growth
The Company has expanded its operations rapidly, which has created
significant demands on the Company's systems, its administrative, operational,
development and financial personnel and its other resources. Additional
expansion by the Company may further strain the Company's management, financial
and other resources, including its working capital resources, as a result of
delays in processing claims for third-party reimbursement. Although the Company
has recently upgraded its systems and other steps have been taken to address
these issues, there can be no assurance that such steps will be effective.
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Direct-Response Advertising
In accordance with Statement of Position 93-7, direct-response
advertising and related costs for all periods presented are capitalized and
amortized to selling, general and administrative expense on an accelerated basis
during the first two years of a four-year period. The amortization rate is such
that 55% of such costs are expensed after two years from the date they are
incurred. Revenues generated from new customers as a result of direct-response
advertising have historically resulted in a revenue stream lasting seven years.
Management has selected a more conservative four-year amortization period.
Management assesses the realizability of the amounts of direct-response
advertising costs reported as assets at each balance sheet date by comparing the
carrying amounts of such assets to the probable remaining future net benefits
expected to result directly from such advertising. The Company can expect
fluctuations in its advertising costs to attract and retain new customers. The
Company expects that it will continue to incur substantial direct-response
advertising and related costs in connection with the further expansion of its
diabetes supplies business.
Competition
The Company is engaged in rapidly evolving and highly competitive
fields. Competition from other sellers of diabetes supplies, manufacturers of
healthcare products, pharmaceutical companies and other competitors is intense
and expected to increase. Many of these companies have substantially greater
capital resources, research and development staffs, facilities and experience in
marketing and distribution of products than does the Company. There can be no
assurance that the Company's competitors will not succeed in developing products
and services that are more effective than any that are being developed or sold
by the Company.
The Company believes that the principal competitive factors in the
healthcare products industry include the ability to identify and respond to
customer needs, quality and breadth of service and product offerings, price and
technical expertise. The Company believes that its ability to compete also
depends in part on a number of competitive factors outside its control,
including the ability to hire and retain employees, the development by others of
products and services that are competitive with the Company's products and
services, the price at which others offer comparable products and services and
the extent of its competitors' responsiveness to customer needs.
Dependence on Reorders - Change in Demand for Diabetes Supplies
The Company generally incurs negative cash flow with respect to the
first order for its diabetes supplies from a customer due primarily to customer
acquisition costs, including advertising and Medicare and secondary insurance
compliance costs. Accordingly, the profitability of the Company's diabetes
supplies business depends on recurring orders. Reorder rates are inherently
uncertain and are subject to several factors, many of which are outside of the
Company's control, including customer shifts to nursing homes or other forms of
managed care, customer mortality, changing customer preferences, general
economic conditions and customer satisfaction. Furthermore, efforts are underway
to improve treatment of, and to seek a cure for, diabetes. Significant
developments in either area could substantially reduce or eliminate the demand
for the diabetes supplies sold by the Company.
Dependence on Suppliers
The Company purchases several of its consumer healthcare products,
including its thermometers, from suppliers based in the People's Republic of
China, usually using molds and tooling owned by or committed exclusively to the
Company. To date, the Company has not experienced difficulties in obtaining
timely delivery from these suppliers. Although the Company believes there are
alternate sources available for these products, there can be no assurance that
the Company would be able to acquire products from other sources on a timely or
cost-effective basis in the event current foreign suppliers were unable to
supply these products on a timely basis.
Although the Company has three long-term purchase contracts with
respect to its diabetes supplies business, it operates principally on a
purchase-order basis. Each of the Company's over-the-counter products for
urinary tract discomfort and urinary tract health is manufactured by a single
supplier. Some of the Company's professional products also are manufactured by
single suppliers. PolyMedica is currently taking steps to provide alternate
sources of supply for both of these lines of products, but such efforts are not
yet complete.
Dependence on Single Manufacturing Facility for Professional Products
A majority of the Company's professional products is manufactured at
its headquarters facility in Woburn, Massachusetts. While the Company maintains
business interruption insurance, any prolonged inability to utilize this
facility as a result of fire, natural disaster or other event would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company complies with Good Manufacturing Practices
("GMP") regulations, prescribed by the Food and Drug Administration ("FDA"), in
its internal manufacturing facilities. The FDA enforces the GMP regulations
through its plant inspection program. If the
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Company fails to comply with GMP regulations, the Company could be required to
make material expenditures and could experience manufacturing delays to return
to compliance.
Product Liability
The testing, manufacturing, marketing and sale of medical and consumer
products entail an inherent risk that product liability claims will be asserted
against the Company or its third-party distributors. Certain manufacturers of
healthcare products have been subjected to significant claims for damages
allegedly resulting from their products. The Company currently maintains product
liability insurance coverage which it believes to be adequate for its present
purposes, but there can be no assurance that in the future the Company will be
able to maintain such coverage on acceptable terms or that current insurance or
insurance subsequently obtained will provide adequate coverage against any or
all potential claims.
Reliance on Distributors for Consumer Healthcare and Professional
Products; Limited Direct Marketing Experience
The Company has a limited direct marketing and sales organization, and
relies on its current distributors, for the sale of consumer healthcare and
professional products. The Company's ability to sell its consumer healthcare and
professional products will depend in part on its ability to enter into marketing
and distribution agreements with pharmaceutical, medical device, personal care
and other distributors in the United States and other countries. If the Company
enters into any such agreements, there can be no assurance that the Company's
third-party distributors will be able to market the Company's products
effectively.
Integration of Other Businesses, Products and Technologies
As part of its growth strategy, the Company currently intends to expand
through the acquisition of other businesses, products and technologies. The
Company regularly reviews such potential acquisitions, some of which may be
material. There can be no assurance that the Company will successfully acquire
any businesses, products or technologies, or that any such acquired businesses,
products or technologies will be profitable. The Company does not currently have
any commitments or agreements with respect to any such acquisition.
Government Regulation
Political, economic and regulatory influences are resulting in
fundamental changes in the healthcare industry in the United States. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative healthcare delivery systems and payment methods. Sales of a
large portion of the Company's products depend to a significant extent on the
availability of reimbursement to the Company's customers by government and
private insurance plans.
Any further reduction in the reimbursement provisions currently in
effect for the Company's diabetes supplies products which are reimbursable under
Medicare would reduce the Company's revenues and earnings.
The processing of third-party reimbursements is a labor-intensive
effort, and delays in processing claims for reimbursement may increase working
capital requirements. Final determination of reimbursements are subject to audit
by Medicare. Medicare audits of the Company to date have not resulted in any
significant adjustments. Future audits may, however, result in retroactive
adjustments for past charges for products and services, and such adjustments
could affect the future operations and earnings of the Company. The Balanced
Budget Act of 1997 expands Medicare coverage to seniors with diabetes who do not
use insulin. Any delay in the expected July 1998 implementation of this
legislation would correspondingly delay the anticipated expansion of Liberty
Medical's market.
Certain aspects of the Company's business are subject to federal and
state regulation. Federal regulation covers, among other things, reimbursement
for diabetes testing supplies and the manufacturing, distribution and sale of
the Company's drugs and medical devices. The Company believes that its
operations comply with applicable federal and state laws and regulations in all
material respects. However, changes in the law or new interpretations of
existing laws could have a material adverse effect on the market for the
Company's products and services on permissible activities of the Company, and
the relative costs associated with doing business.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) The following documents are filed as part of this Annual Report on
Form 10-K.
1. INDEX TO FINANCIAL STATEMENTS PAGE
----
Report of Independent Accountants 18
Consolidated Balance Sheets as of March 31, 1998 and 1997 19
Consolidated Statements of Operations for the years ended
March 31, 1998, 1997, and 1996 20
Consolidated Statements of Shareholders' Equity for the
years ended March 31, 1998, 1997, and 1996 21
Consolidated Statements of Cash Flows for the years ended
March 31, 1998, 1997, and 1996 22
Notes to Consolidated Financial Statements 23
2. All schedules are omitted because the required information
is either inapplicable or is presented in the consolidated
financial statements or related notes thereto.
3. The Exhibit Index immediately preceding the Exhibits
filed as part of this Annual Report on Form 10-K is
incorporated herein by reference.
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REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF POLYMEDICA CORPORATION:
We have audited the accompanying consolidated balance sheets of
PolyMedica Corporation as of March 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended March 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audit, the financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of PolyMedica Corporation as of March 31, 1998 and 1997, and
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
---------------------------
Coopers & Lybrand L.L.P.
Boston, Massachusetts
May 6, 1998
19
POLYMEDICA CORPORATION
(Dollars in thousands, except share and per share amounts)
CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31,
1998 1997
ASSETS ---------------------------------
Current assets:
Cash and cash equivalents $ 6,440 $ 11,028
Accounts receivable -- trade (net of allowances
of $3,914 and $1,061 in 1998 and 1997, respectively) 21,207 6,202
Inventories 4,857 5,481
Deferred tax asset 2,075 --
Prepaid expenses and other current assets 845 958
------- --------
Total current assets 35,424 23,669
Property, plant, and equipment, net 6,285 6,271
Intangible assets, net 39,555 42,024
Direct response advertising, net 10,899 1,620
Deferred tax asset -- 1,133
Other assets, net 238 516
------- --------
Total assets $92,401 $ 75,233
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade $ 8,221 $ 2,982
Accrued expenses 3,805 3,403
Senior debt and notes payable 2,329 2,658
------- --------
Total current liabilities 14,355 9,043
Senior debt and notes payable, net 20,577 22,818
Deferred income taxes 4,541 --
------- --------
Total liabilities 39,473 31,861
------- --------
Commitments (Note L)
Shareholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized, none issued or outstanding -- --
Common stock, $.01 par value; 20,000,000 shares
authorized; 8,909,718 and 8,583,001 shares
issued in 1998 and 1997, respectively 89 86
Treasury stock, at cost (129,560 and 172,559 shares
in 1998 and 1997, respectively) (706) (1,115)
Additional paid-in capital 54,498 53,338
Accumulated deficit (164) (7,783)
Notes receivable from officers (789) (929)
Currency translation adjustment -- (225)
------- --------
Total shareholders' equity 52,928 43,372
------- --------
Total liabilities and shareholders' equity $92,401 $ 75,233
======= ========
The accompanying notes are an integral part of the consolidated
financial statements.
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20
POLYMEDICA CORPORATION
(In thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31, 1998 1997 1996
----------------------------------------------------------------------------------------------------------
Revenues:
Net product sales $ 73,825 $ 29,880 $ 24,328
Royalties, exclusivity, development
and license fees -- 573 435
--------- --------- ---------
Total revenues 73,825 30,453 24,763
Cost of product sales 35,575 13,603 10,210
--------- --------- ---------
Total revenues, less cost of product sales 38,250 16,850 14,553
Operating expenses:
Selling, general and administrative 28,546 12,315 8,988
Research and development 280 670 649
--------- --------- ---------
28,826 12,985 9,637
--------- --------- ---------
Income from operations 9,424 3,865 4,916
Other income and expense:
Gain on sale of wound care business 4,126 -- --
Investment income 629 864 892
Interest expense (2,688) (2,774) (2,678)
--------- --------- ---------
2,067 (1,910) (1,786)
Income from continuing operations
before income taxes 11,491 1,955 3,130
Income tax provision (benefit) 3,872 (367) 55
--------- --------- ---------
Income from continuing operations 7,619 2,322 3,075
Discontinued operations:
Loss from operations -- -- (923)
Loss on disposal -- -- (1,878)
--------- --------- ---------
-- -- (2,801)
--------- --------- ---------
Net income $ 7,619 $ 2,322 $ 274
========= ========= =========
Income (loss) per weighted average share, basic:
Income from continuing operations $ .88 $ .28 $ .43
Discontinued operations -- -- (.39)
--------- --------- ---------
Net income per weighted average share, basic $ .88 $ .28 $ .04
========= ========= =========
Income (loss) per weighted average share, diluted:
Income from continuing operations $ .79 $ .27 $ .41
Discontinued operations -- -- (.37)
--------- --------- ---------
Net income per weighted average share, diluted: $ .79 $ .27 $ .04
========= ========= =========
Weighted average shares, basic 8,652 8,259 7,096
Weighted average shares, diluted 9,691 8,618 7,492
The accompanying notes are an integral part of the consolidated
financial statements.
20
21
POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1996, 1997, AND 1998
(DOLLARS IN THOUSANDS)
COMMON STOCK TREASURY STOCK ADDITIONAL
NUMBER OF NUMBER OF PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------------------------- ------------------------- -------
Balance at March 31, 1995 6,967,292 $69 (143,965) $ (935) $48,555
Exercise of stock options 13,406 1 63
Issuance of common stock 1,131,937 11 6,272
Purchase of common stock (34,700) (270)
Issuance of treasury stock under the
1992 Employee Stock Purchase Plan 18,760 169 (83)
Amendment to warrant issued in
connection with Hancock Notes 110
Currency translation adjustment
Net Income
--------- -- ------- ------ ------
Balance at March 31, 1996 8,112,635 $81 (159,905) $(1,036) $54,917
Exercise of stock options 245,966 3 (11,880) (110) 924
Issuance of common stock 224,400 2 1,115
Purchase of common stock (8,900) (38)
Officer notes receivable
Payment of officer note receivable (9,832) (93)
Issuance of treasury stock under the
1992 Employee Stock Purchase Plan 17,958 162 (70)
Distribution of CardioTech stock to
PolyMedica Shareholders (3,548)
Currency translation adjustment
Net Income
--------- -- ------- ------ ------
Balance at March 31, 1997 8,583,001 86 (172,559) (1,115) 53,338
Exercise of stock options 326,717 3 1,450
Issuance of common stock 11,471 125 (125)
Payment of officer notes receivable (3,282) (30)
Issuance of treasury stock under the
1992 Employee Stock Purchase Plan 34,810 314 (165)
Currency translation adjustment
Net Income
Balance at March 31, 1998 8,909,718 $89 (129,560) $ (706) $54,498
========= == ========= ====== ======
NOTES CURRENCY TOTAL
ACCUMULATED RECEIVABLE TRANSLATION SHAREHOLDER'S
DEFICIT FROM OFFICERS ADJUSTMENT EQUITY
------- ------------- ---------- ------
Balance at March 31, 1995 $(10,379) $(415) $(169) $36,726
Exercise of stock options 64
Issuance of common stock 6,283
Purchase of common stock (270)
Issuance of treasury stock under the
1992 Employee Stock Purchase Plan 86
Amendment to warrant issued in
connection with Hancock Notes 110
Currency translation adjustment 7 7
Net Income 274 274
------- --- --- ------
Balance at March 31, 1996 $(10,105) $(415) $(162) $43,280
Exercise of stock options 817
Issuance of common stock 1,117
Purchase of common stock (38)
Officer notes receivable (607) (607)
Payment of officer note receivable 93
Issuance of treasury stock under the
1992 Employee Stock Purchase Plan 92
Distribution of CardioTech stock to
PolyMedica shareholders (3,548)
Currency translation adjustment (63) (63)
Net Income 2,322 2,322
------- --- --- ------
Balance at March 31, 1997 (7,783) (929) (225) 43,372
Exercise of stock options 1,453
Issuance of common stock
Payment of officer notes receivable 140 110
Issuance of treasury stock under the
1992 Employee Stock Purchase Plan 149
Currency translation adjustment 225 225
Net Income 7,619 7,619
------- --- --- ------
Balance at March 31, 1998 $ (164) $(789) $ 0 $52,928
======= === === ======
The accompanying notes are an integral part of the consolidated
financial statements.
21
22
POLYMEDICA CORPORATION
(In Thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31, 1998 1997 1996
---------------------------------------------------------------------------------------------------------
Cash flows from continuing operating activities:
Net income $ 7,619 $ 2,322 $ 274
Loss from discontinued operations -- -- 2,801
Adjustments to reconcile net income
to net cash flows from operating activities:
Depreciation and amortization 3,243 3,045 2,708
Amortization of direct-response advertising 2,423 120 --
Direct-response advertising (11,702) (1,740) --
Deferred income taxes 3,604 (1,138) --
Write-off of intangible assets -- -- 142
Loss (gain) on disposal of fixed assets (60) 4 (6)
Provision for bad debts 3,138 237 37
Provision for sales allowances 4,846 1,369 915
Provision for inventory obsolescence 12 71 288
Gain on sale of wound care business (4,126) -- --
Changes in assets and liabilities:
Accounts receivable -- trade (22,988) (3,650) (861)
Inventories (1,390) (1,051) 628
Prepaid expenses and other assets 141 (389) 144
Accounts payable -- trade 5,240 589 (143)
Accrued expenses 125 459 465
------ ------ ------
Total adjustments (17,494) (2,074) 4,317
------ ------ ------
Net cash flows from continuing operations (9,875) 248 7,392
Net cash flows used for discontinued operations -- (389) (2,581)
------ ------ ------
Net cash flows from operating activities (9,875) (141) 4,811
------ ------ ------
Cash flows from investing activities:
Proceeds from sale of wound care business 8,428 -- --
Spinoff of CardioTech International, Inc. -- (3,830) --
Acquisition, net of cash acquired -- (7,375) --
Purchase of property, plant, and equipment (2,303) (913) (1,782)
Proceeds from sale of equipment 100 -- 123
------ ------ -------
Net cash flows from investing activities 6,225 (12,118) (1,659)
------ ------ -------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,606 905 6,432
Purchase of common stock -- (38) (270)
Repayment (issuance) of officer notes receivable 110 (607) --
Repayment of senior debt and notes payable (2,658) (312) --
------ ------ ------
Net cash flows from financing activities (942) (52) 6,162
------ ------ ------
Net (decrease) increase in cash and cash equivalents (4,592) (12,311) 9,314
------ ------ ------
Effect of exchange rate changes on cash 4 37 (18)
Cash and cash equivalents at beginning of period 11,028 23,302 14,006
------ ------ ------
Cash and cash equivalents at end of period $ 6,440 $11,028 $23,302
====== ====== ======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,728 $ 2,769 $ 2,667
Income taxes paid 25 10 5
The accompanying notes are an integral part of the consolidated
financial statements.
22
23
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS:
PolyMedica Corporation (the "Company") was incorporated as Emerging
Sciences, Inc. in Massachusetts on November 16, 1988, and commenced commercial
operations in October 1989. In July 1990, the Company changed its name to
PolyMedica Industries, Inc. In June 1996, the Company distributed to its
shareholders all of its shares of CardioTech International, Inc. ("CardioTech")
in a transaction that qualified as a tax free spinoff. In August 1996, the
Company purchased Liberty Medical Supply, Inc., a diabetes supply company. In
July 1997, the Company sold certain assets of its U.S. and U.K. professional
wound care operations. In September 1997, the Company changed its name to
PolyMedica Corporation. The Company and its subsidiaries operate from
manufacturing, distribution, and laboratory facilities located in Massachusetts,
Florida, and Colorado.
The Company generates sales from Diabetic Supplies; Consumer
Healthcare, which includes OTC medical devices and urinary discomfort products;
and Professional Products, which include prescription urologicals.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-and majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
The operations of CardioTech are accounted for as discontinued
operations in 1996, and accordingly, its operations are segregated in the
accompanying consolidated statements of operations for the 1996 period
presented. Net revenues, operating costs and expenses, and other income and
expense have been reclassified for amounts associated with CardioTech's
discontinued operations. See Note E.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from those estimates.
EARNINGS PER COMMON SHARE
In its fiscal quarter ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Share", which
modifies the calculation of earnings per share ("EPS"). The Standard replaced
the previous presentation of primary and fully diluted EPS to basic and diluted
EPS. Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS includes the dilution of common stock equivalents,
and is computed similarly to fully diluted EPS pursuant to APB Opinion 15. All
prior periods presented have been restated to reflect this adoption. See Note M.
UNCERTAINTIES
The Company is subject to risks common to companies in the healthcare
industry, including but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, receipt of third party health care
reimbursement, and compliance with FDA government regulations.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid short-term investments
purchased with an initial maturity of three months or less to be cash
equivalents. The Company places its cash and cash equivalents with high credit
quality financial institutions.
23
24
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS
In 1998 and 1997, the Company invested primarily in commercial paper
with initial maturities of 90 days or less and classifies all investments as
held-to-maturity. All investments held as of March 31, 1998 and 1997 have been
classified as cash equivalents and are carried at amortized cost which
approximates market value.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out
method) or market.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
INTANGIBLE ASSETS
The Company capitalizes and includes in intangible assets the costs of
acquiring patents on its products, a customer list, a covenant-not-to-compete,
and goodwill, which is the cost in excess of the fair value of the net assets of
acquired companies and product lines. All amortization is computed on the
straight-line basis over the shorter of the economic life of the asset or the
term of the underlying agreement. Patents, a customer list, a
covenant-not-to-compete, and goodwill are amortized over seventeen, seven, ten,
and seven to thirty years, respectively.
LONG-LIVED ASSETS
Management's policy is to evaluate the recoverability of its long-lived
assets when the facts and circumstances suggest that these assets may be
impaired. The test of such recoverability is a comparison of the book value of
the asset to expected cumulative (undiscounted) operating cash flows resulting
from the underlying asset over its remaining life. If the book value of the
long-lived asset exceeds undiscounted cumulative operating cash flows, the
write-down is computed as the excess of the asset over the present value of the
operating cash flow discounted at the Company's weighted average cost of capital
over the remaining amortization period.
MARKETING AND PROMOTIONAL COSTS
Advertising, promotional, and other marketing costs are charged to
earnings in the period in which they are incurred. Promotional and sample costs
whose benefit is expected to assist future sales are expensed as the related
materials are used.
DIRECT-RESPONSE ADVERTISING
In accordance with Statement of Position 93-7, direct-response
advertising and related costs for all periods presented are capitalized and
amortized to selling, general and administrative expense on an accelerated basis
during the first two years of a four-year period. The amortization rate is such
that 55% of such costs are expensed after two years from the date they are
incurred, and the remaining 45% is expensed on a straight line basis over the
next two years. Revenues generated from new customers as a result of
direct-response advertising have historically resulted in a revenue stream
lasting seven years. Management has selected a more conservative four-year
amortization period, in consideration of the "Factors Affecting Future Operating
Results" in Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in this Annual Report. Management assesses the
realizability of the amounts of direct-response advertising costs reported as
assets at each balance sheet date by comparing the carrying amounts of such
assets to the probable remaining future net benefits expected to result directly
from such advertising.
The Company capitalized direct-response advertising of $11.70 million
and $1.74 million in 1998 and 1997, respectively. As of March 31, 1998 and 1997,
accumulated amortization was $2.54 million and $120,000, which resulted in a net
capitalized direct-response advertising asset of $10.90 million and $1.62
million, respectively. A total of $2.42 million and $120,000 in direct-response
advertising was amortized and charged to selling, general and administrative
expense in 1998 and 1997, respectively.
24
25
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OTHER ASSETS
Other assets consist principally of senior debt issuance costs and
deposits for equipment yet to be placed in service. Senior debt issuance costs
are being amortized over ten years.
FOREIGN CURRENCY TRANSLATION
In accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation", assets and liabilities of the Company's foreign
subsidiaries are translated into U.S. dollars using current exchange rates at
the balance sheet date, and revenues and expenses are translated at average
exchange rates prevailing during the period. The resulting translation
adjustments are recorded in a separate component of Shareholders' Equity. As
result of the inactivity of foreign subsidiaries caused by the sale of the U.S.
and U.K. wound care business in July 1997, all foreign currency translation
adjustments were expensed.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Depreciation is
computed using the straight-line method based on the estimated useful lives of
the various assets which range from five to twelve years. Amortization of
leasehold improvements is computed using the straight-line method based on
estimated useful lives or terms of the lease, whichever is shorter. Upon
retirement or disposal of fixed assets, the costs and accumulated depreciation
are removed from the accounts, and any gain or loss is reflected in income.
Expenditures for repairs and maintenance are charged to expense as incurred.
Construction in progress is not depreciated until placed in service.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based on
temporary differences between the financial statements and tax basis of assets
and liabilities using enacted tax rates expected to be in effect when they are
realized.
REVENUE RECOGNITION
For product sales, the Company recognizes revenue upon shipment.
Contracted development fees from corporate partners are recognized upon
completion of service or the attainment of technical benchmarks, as appropriate.
Royalty revenue from product sales is recognized based upon the terms of the
royalty agreement, principally upon sale by the Company's distributors to end
users.
Included as reductions to gross accounts receivable -- trade are a
sales allowance for returned goods and an allowance for bad debts. The Company
recorded sales returns and bad debt write-offs of $5.13 million and $1.01
million in the fiscal years ended March 31, 1998 and 1997, respectively.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. This statement requires the classification
of items of comprehensive income by their nature in a financial statement and
the accumulated balance of other comprehensive income separately from retained
earnings, additional paid-in capital and the equity section of the balance
sheet. Management has not yet evaluated the effects of this change on its
reporting of income. The Company will adopt SFAS No. 130 for its fiscal year
ending March 31, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information," which supercedes FASB Statement No.
14, "Financial Reporting for Segments of a Business Enterprise" and changes the
way public companies report information about operating segments. SFAS No. 131,
which is based on the management approach to segment reporting, establishes
requirements to report selected segment information quarterly and to report
entity-wide disclosures about products and services, major customers and the
material countries in which the entity holds assets and reports revenue.
Management is currently evaluating the effects of this change on its reporting
of segment information. The Company will adopt SFAS No. 131 for its fiscal year
ending March 31, 1999.
25
26
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATIONS
Certain amounts in the prior financial statements have been
reclassified to conform with the current year presentation.
C. SALE OF WOUND CARE BUSINESS:
In July 1997, the Company sold certain assets of its U.S. and U.K.
wound care operations. Under the terms of the sale, the purchaser, Innovative
Technologies Group Plc ("IT"), paid the Company $9 million in cash and issued to
the Company an unsecured promissory note in the face amount of $4 million. The
Company could realize an additional $4.5 million if IT achieves certain
milestones, based on the performance of IT's stock and the performance of the
acquired business. The Company will recognize as income additional proceeds in
excess of the $9 million cash received only when and to the extent realized. The
net book value of assets sold and pretax gain as a result of this transaction
were $4.9 million and $4.1 million, respectively. Gain on the sale for the year
ended March 31, 1998 was as follows:
Gain on sale of wound care business $4,126
Provision for income taxes related to gain 1,390
-----
Gain on sale, net of income taxes $2,736
=====
Income per common share, diluted $ .29
=====
D. PURCHASE OF LIBERTY MEDICAL SUPPLY, INC.:
On August 30, 1996, the Company acquired all of the outstanding stock
of Liberty Medical Supply, Inc. in a transaction accounted for under the
purchase method of accounting. Accordingly, the net assets and operations of
Liberty Medical have been included in the Company's financial statements since
the date of acquisition. The acquisition agreement, as amended on March 26,
1997, for an aggregate purchase price of $10.26 million (including $490,000 of
related expenses), which was comprised of (i) $7.35 million in cash, (ii)
two-year 7% subordinated promissory notes in the aggregate amount of $1.30
million and (iii) 224,400 shares of the Company's common stock.
The purchase price was allocated to net assets acquired based on their
fair value at the date of acquisition, and the excess of the purchase price over
the fair value of the assets acquired was recorded as attributable to a customer
list ($1.82 million, to be amortized over seven years) and goodwill ($6.82
million, to be amortized over twenty years).
If the acquisition had taken place at the beginning of the year ending
March 31, 1997, giving effect to adjustments for amortization of intangible
assets, interest income and interest expense for twelve months, the Company's
pro forma (unaudited) revenues, net income and net income per share for the
twelve months ended March 31, 1997 would have been $35.63 million, $2.50 million
and $.29, respectively. If the acquisition had taken place at the beginning of
the year ended March 31, 1996, the Company's pro forma revenues, net loss and
net loss per share for the twelve months ended March 31, 1996 would have been
$35.1 million, $228,000, and $.03, respectively.
E. DISCONTINUED OPERATIONS:
On March 1, 1996, the Company announced its strategic decision to
distribute to its shareholders all of its shares of CardioTech under a plan
which was approved by the Company's board of directors. In May 1996, the
Company's board of directors declared a stock dividend for the purpose of making
a distribution (the "Distribution") to the Company's shareholders of all of the
outstanding shares it owned in CardioTech. The Company believes that the
distribution of CardioTech Common Stock in the Distribution qualified as a
"tax-free" spinoff under Section 355 of the Internal Revenue Code of 1986, as
amended. CardioTech develops, manufactures and markets its polymer technologies
with particular emphasis on the development of implantable synthetic grafts for
a broad variety of applications, including vascular access grafts, peripheral
grafts and coronary artery bypass grafts.
Discontinued operations as shown on the consolidated statement of
operations for the year ended March 31, 1996 reflect two components. Loss from
discontinued operations, or $923,000, includes all CardioTech operating losses
from April 1, 1995 through February 20, 1996, the date the Company's board of
directors voted to proceed with the spinoff. Loss on disposal of CardioTech, or
$1,878,000, principally includes operating losses from February 1996 through the
June 1996 spinoff date and outside professional fees and other costs related to
the spinoff.
26
27
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenues and net loss for the fiscal year ended March 31, 1996 relating
to discoutinued operations, excluding loss on disposal, were $166,000 and
$983,000, respectively. Since CardioTech's inception, all facilities and support
services, including research and administrative support, have been provided by
the Company. In connection with the Distribution, CardioTech has entered into
the following agreements with the Company:
DISTRIBUTION AGREEMENT
This agreement allocates the costs related to the implementation of the
Distribution between the Company and CardioTech and provides that each company
will share equally any liabilities under the federal and any state securities
laws incurred as a result of the Distribution to shareholders of the Information
Statement.
LICENSE AGREEMENT
The Company has granted to CardioTech an exclusive, perpetual,
world-wide, royalty-free license for CardioTech to use all of the necessary
patent and other intellectual property owned by the Company in the implantable
devices and materials field (collectively, the "Licensed Technology"). The
Company, at its own expense, will file patent or other applications for the
protection of all new inventions formulated, made or conceived by the Company
during the term of the license that related to the Licensed Technology and all
such inventions will be part of the technology licensed to CardioTech.
CardioTech, at its own expense, will file patent or other applications for the
protection of all new inventions formulated, made, or conceived by CardioTech
during the term of the license that related to the Licensed Technology and all
such inventions shall be exclusively licensed to the Company for use by the
Company in fields other than the implantable devices and materials field.
F. ACCOUNTS RECEIVABLE -- TRADE:
As of March 31, 1998, Liberty Medical's gross unbilled receivables
included in accounts receivable -- trade were $10.82 million. The increase in
the unbilled receivables balance as of March 31, 1998 is primarily a result of
the overall growth of Liberty Medical's sales in the fiscal year ended March 31,
1998, record shipments to new customers by Liberty Medical in December 1997
which required time to process, and delayed billing in the first six weeks of
calendar 1998.
G. INVENTORIES:
(In thousands)
Inventories consist of the following:
March 31, March 31,
1998 1997
--------- ---------
Raw materials $1,058 $2,168
Work in process 296 845
Finished goods 3,503 2,468
----- -----
$4,857 $5,481
===== =====
27
28
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H. PROPERTY, PLANT, AND EQUIPMENT:
(In thousands)
Property, plant, and equipment consist of the following:
March 31, March 31,
1998 1997
--------- ---------
Manufacturing equipment $1,841 $3,273
Laboratory equipment 188 766
Land 663 663
Building 2,345 2,207
Leasehold improvements 343 585
Furniture, fixtures, and office 2,638 1,448
equipment
Construction in progress -- 1,818
----- -----
8,018 10,760
Less accumulated depreciation and (1,733) (4,489)
amortization ----- -----
$6,285 $6,271
===== =====
Depreciation and amortization expense from continuing operations for
property, plant, and equipment for the years ended March 31, 1998, 1997, and
1996, was approximately $838,000, $899,000, and $800,000, respectively.
I. INTANGIBLE ASSETS:
(In thousands)
Intangible assets consist of the following:
March 31, March 31,
1998 1997
--------- ---------
Goodwill $42,816 $43,460
Covenant-not-to-Compete 6,800 6,800
Customer list 1,816 1,816
Patents -- 258
------ ------
51,432 52,334
Less accumulated
amortization (11,877) (10,310)
------ ------
$39,555 $42,024
====== ======
28
29
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortization expense from continuing operations associated with
intangible assets for the years ended March 31, 1998, 1997, and 1996, was
$2,279,000, $2,117,000, and $1,811,000, respectively.
J. ACCRUED EXPENSES:
As of March 31, 1997, accrued expenses included $460,000 of accrued
interest. As of March 31, 1998 and 1997, accrued expenses included $1.04 million
and $771,000 respectively, of accrued taxes.
K. SENIOR DEBT:
In connection with the purchase of the WEBCON product line, in January
1993, the Company and its wholly-owned subsidiary, PolyMedica Pharmaceuticals
(U.S.A.), Inc. ("PMP USA") sold to the John Hancock Mutual Life Insurance
Company ("Hancock"), $25 million 10.65% Guaranteed Senior Secured Notes due
January 31, 2003, and a warrant for the purchase of up to 500,000 shares of
common stock of the Company at $13.50 each (the "Hancock Notes"). The effective
interest rate of the Hancock Notes was 10.97%. Interest is payable
semi-annually. At that time, the warrant was valued at $725,000 and was recorded
as a discount to the Hancock Notes, to be amortized to expense over the life of
the Hancock Notes. The warrant was exercisable beginning in January 1994. The
Company recorded $89,000 of amortization expense each for the years ended March
31, 1998 and 1997. As of March 31, 1998 and 1997, there was $423,000 and
$511,000, respectively, of unamortized discount, netted against senior debt.
Commencing on April 1, 1993, the Company and PMP USA are required to
maintain certain covenants, including certain financial ratios as described in
the loan documents. In addition, there are certain restrictions on the payment
of dividends by PMP USA to PolyMedica Corporation. Fees incurred in connection
with the Hancock Notes were $211,000, are classified as other assets, and are
being amortized over the ten year life of the Hancock Notes.
In January 1996, the Company and Hancock signed an amendment to the
Hancock Notes. Under the terms of the amendment, scheduled semi-annual
repayments of principal commence at $1.00 million each in fiscal 1998, increase
to $2.08 million each beginning in January 2000 and are completed with a $7.50
million payment at January 31, 2003. Pursuant to the amendment, the exercise
price for the Hancock warrant, exercisable for 536,993 shares of common stock of
the Company, was reduced from $8.38 to $7.00 per share and the interest rate of
the Hancock Notes was increased from 10.65% to 10.9%. In addition, the Company
obtained less restrictive dividend terms and revised financial covenants. This
amendment resulted in a revaluation of the warrant to $623,000, which compared
with a $513,000 unamortized value on January 1, 1996. The difference of $110,000
was recorded to additional paid-in capital.
As a result of a private placement of the Company's Common Stock in
March 1996 and the acquisition of Liberty Medical in August 1996, the exercise
price of the Hancock warrant was adjusted to $5.18 per share of common stock for
a total of 543,464 shares exercisable under the warrant.
Under the terms of the Hancock Notes, Hancock has a security interest
in all of the assets of PMP USA and its subsidiary PolyMedica Pharmaceuticals
(Puerto Rico), Inc. ("PMP PR").
The Hancock Notes are collateralized by all of the assets of PMP USA
and PMP PR, which amounted to approximately $44.9 million as of March 31, 1998.
Interest expense recorded for the Hancock Notes was $2,634,000,
$2,725,000, and $2,678,000 in the years ended March 31, 1998, 1997, and 1996,
respectively.
29
30
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L. COMMITMENTS:
The Company leases its facilities and certain equipment under operating
leases expiring through 2003. The annual future minimum lease and rental
commitments as of March 31, 1998, under all the Company's leases are:
(In thousands)
1999 $ 756
2000 620
2001 355
2002 166
2003 52
------
Total minimum lease payments $1,949
======
Rental expense from continuing operations under these leases amounted
to approximately $537,000, $368,000, and $330,000 for the years ended March 31,
1998, 1997, and 1996, respectively.
The Company had purchase commitments for equipment and building
improvements of $0 and $130,000 as of March 31, 1998 and 1997, respectively.
M. EARNINGS PER SHARE:
(In thousands, except per share amounts)
Calculation of per share earnings is as follows:
FISCAL YEAR ENDED MARCH 31,
1998 1997 1996
---- ---- ----
Net income $7,619 $2,322 $274
BASIC:
Weighted average common stock outstanding, net of
treasury stock, end of period 8,652 8,259 7,096
Net income per common share, basic $0.88 $0.28 $0.04
===== ===== =====
DILUTED:
Weighted average common stock outstanding, net of treasury
stock, end of period 8,652 8,259 7,096
Weighted average common stock equivalents 1,039 359 396
Weighted average common stock outstanding, net of treasury
stock, end of period 9,691 8,618 7,492
Net income per common share, diluted $0.79 $0.27 $0.04
===== ===== =====
N. SHAREHOLDERS' EQUITY:
In March 1992, the Company completed an initial public offering,
selling 3 million newly issued shares of its common stock, resulting in net
proceeds of $35.3 million. In November 1995, the Company completed a public
offering of its common stock, selling 700,000 shares, resulting in net proceeds
of $3.75 million. In March 1996, the Company sold 431,937 shares of its common
stock for net proceeds of $2.55 million, pursuant to Regulation S of the
Securities Act of 1933.
30
31
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each holder of outstanding common stock has a preferred stock purchase
right (a "Right") for each share of common stock. Each Right entitles the holder
to purchase from the Company one one-hundredth of a share of Series A junior
participating preferred stock at a cash exercise price to be determined by the
board of directors. Initially, the Rights will be attached to all common stock
certificates and will not be exercisable. The Rights will become exercisable
upon the earlier of certain events, including an acquisition by a person or
group of 15% or more of the outstanding common stock (an "Acquiring Person"), or
the commencement of a tender offer or exchange offer that would result in an
Acquiring Person beneficially owning 15% or more of the outstanding common
stock.
The Company will generally be entitled to redeem the Rights at $.01 per
share at any time until the tenth day following public announcement that a 15%
stock position has been acquired. The Rights will expire on January 23, 2002,
unless earlier redeemed or exchanged.
Between June 1992 and May 1994, the Company's board of directors
authorized the purchase of up to an aggregate of 1,750,000 shares of the
Company's common stock on the open market, with any shares to be held in
treasury. As of March 31, 1998, cumulative purchases of common stock totalled
239,193 for an aggregate of $1.69 million. The purpose of this purchase program
is, in part, to provide shares of common stock for issuance pursuant to the 1992
Stock Purchase Plan and upon the exercise of the warrant issued to Hancock.
In October 1994, the board of directors declared a 5% stock dividend
paid on October 28, 1994, to holders of record as of October 14, 1994. Earnings
per share for all periods presented have been restated to reflect the stock
dividend.
O. INCOME TAXES:
Income (loss) before income taxes was generated as follows in the years
ended March 31:
(In thousands) 1998 1997 1996
---- ---- ----
United States $10,291 $1,994 $820
Foreign 1,200 (39) (491)
------ ----- ---
$11,491 $1,955 $329
====== ===== ===
Income taxes related to discontinued operations are immaterial. The
provision (benefit) for income taxes consists of the following for the years
ended March 31:
(In thousands) 1998 1997 1996
---- ---- ----
Federal - current $ 216 $(275) $ 55
- deferred 2,495 -- --
----- ---- ----
- total $2,711 $(275) $ 55
----- ---- ----
State - current 52 65 --
- deferred 1,109 (157) --
----- ---- ----
- total $1,161 $ (92) --
----- ---- ----
Total Federal and State $3,872 $(367) $ 55
===== ==== ====
31
32
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation between the Company's effective tax rate for operations and the
U.S. statutory rate is as follows:
1998 1997 1996
---- ---- ----
U.S. statutory rate 34.0% 34.0% 34.0%
Change in valuation allowance (5.5%) (60.5%) (33.2%)
State income taxes, net of U.S. Federal 6.6% 6.5% --
Income Tax effect
Other (1.9%) 1.2% 1.0%
----- ----- ----
Effective tax rate 33.2% (18.8%) 1.8%
----- ----- ----
During fiscal 1998, the Company determined that it is more likely than
not, that tax assets remaining on March 31, 1998 will be realized. Realization
of the net deferred tax assets is dependent on generating sufficient taxable
income prior to the expiration of loss carryforwards. Although realization is
not assured, management believes that it is more likely than not that such net
deferred tax assets will be realized. The following is a summary of the
significant components of the Company's deferred tax assets and liabilities as
of March 31, 1998 and 1997:
(In thousands) 1998 1997
---- ----
Deferred tax assets (liabilities) - current:
Reserves $ 2,075 --
======= ======
Deferred tax assets (liabilities) - long term:
Federal and state net operating loss
carryforwards $ 1,558 $ 2,304
Foreign net operating loss carryforwards -- 643
Other assets -- 2,339
Intangible assets (1,291) (841)
Property, plant and equipment (419) (2,012)
Direct-response advertising (4,389) (657)
-------- ------
(4,541) 1,776
Valuation allowance -- (643)
Net deferred tax asset (liability) - long term $ (4,541) $1,133
======== ======
As of March 31, 1998, the Company had a net operating loss carryforward
for federal income tax purposes of approximately $5.0 million available to
offset future taxable income, expiring at various dates beginning in the year
2003 through 2013.
32
33
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
P. MAJOR CUSTOMERS:
Customers comprising more than 10% of the Company's: (1) net product
sales, or (2) royalties, exclusivity, development and license fees, for the
years ended March 31 are shown below as follows:
NET PRODUCT SALES FEES
----------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
Customer A -- 10% 17% 58%
Customer B -- 12% -- --
Customer C -- 11% -- --
Customer D -- 13% -- 23%
Customer E -- -- -- 13%
Customer F -- -- 55% --
Customer G -- -- 23% --
Amounts due from Customer A were $13,000 as of March 31, 1997. As of
March 31, 1998 and 1997, the amounts due from Health Care Financing
Administration of the United States government related to Liberty Medical
revenues was $4.64 million and $1.08 million, respectively. For the fiscal years
ended March 31, 1998 and 1997, no customer represented more than 10% of the
Company's consolidated revenues.
Q. STOCK OPTIONS:
The Company issues stock options under two plans: the 1990 Stock Option
Plan (the "1990 Plan") and the 1992 Directors Stock Option Plan (the "Directors
Plan"). In addition, in connection with the acquisition of American CDI, Inc.,
the Company assumed American CDI, Inc.'s 1991 Stock Option Plan (the "CDI Plan")
(collectively, the "Plans").
The 1990 Plan and the Directors Plan provide for the grant to certain
individuals of stock options to purchase up to 2,400,000 and 200,000,
respectively, of the Company's common stock. The CDI Plan, as assumed by the
Company, provided for the grant of 61,905 shares of the Company's common stock.
All share numbers for the Plans have been adjusted to reflect the 5% stock
dividend declared and paid in October 1994.
Generally, when shares acquired pursuant to the exercise of incentive
stock options are sold within one year of exercise or within two years from the
date of grant, the Company derives a tax deduction measured by the amount that
the fair market value exceeds the option price at the date the options are
exercised. When non-qualified stock options are exercised, the Company derives a
tax deduction measured by the amount that the fair market value exceeds the
option price at the date the options are exercised.
33
34
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Option activity under the Plans is as follows:
Option Option
SHARES PRICES
------ ------
Outstanding, March 31, 1995 1,483,895 $ .95 - $13.33
Granted 238,425 5.75 - 9.19
Exercised (13,406) 2.86 - 5.48
Cancelled (34,355) 5.48 - 12.38
--------- --------------------
Outstanding, March 31, 1996 1,674,559 $ .95 - $13.33
Granted 1,983,212 .71 - 6.38
Exercised (245,966) 2.06 - 7.86
Cancelled (1,435,197) .95 - 13.33
--------- --------------------
Outstanding, March 31, 1997 1,976,608 $ .71 - $ 6.38
---------
Granted 271,360 4.87 - 13.75
Exercised (326,717) .71 - 5.38
Cancelled (46,736) 4.31 - 5.38
--------- --------------------
Outstanding, March 31, 1998 1,874,515 $ .71 - $13.75
=========
At March 31, 1998, 1,543,830 shares were exercisable and 330,685 shares
will vest principally over three years under the Plans. There were 14,293,
85,615 and -0- shares remaining that are authorized for future option grants
under the 1990 Plan, Directors Plan, and CDI Plan, respectively. The weighted
average exercise price of shares exercisable as of March 31, 1998 was $4.64.
At March 31, 1997, 1,635,615 shares were exercisable and 340,993 shares
will vest principally under the Plans. There were 199,157, 125,375, and -0-
shares remaining that are authorized for future option grants under the 1990
Plan, Directors Plan, and CDI Plan, respectively. The weighted average exercise
price of shares exercisable as of March 31, 1997 was $4.22.
In October 1996, the board of directors approved the cancellation of
prior grants of 1,172,355 options whose exercise prices ranged from $.95 to
$13.33 per common share. A total of 1,172,355 new options were granted whose
exercise prices ranged from $.71 to $5.38 per common share.
Supplemental Disclosures for Stock-Based Compensation
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for the Plans. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") issued in 1995, defined
a fair value method of accounting for stock options and other equity
instruments. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. The Company elected to
continue to apply the accounting provisions of APB Opinion No. 25 for stock
options. The required disclosures under SFAS 123 as if the Company had applied
the new method of accounting are made below.
34
35
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized information about stock options outstanding as of March 31,
1998, is as follows:
Number of
Number of Weighted Avg. Options Weighted-Avg.
Range of Exercise Options Remaining Weighted Avg. Outstanding- Exercise-Price
Prices Outstanding Contractual Life Exercise Price Exercisable Exercisable
- ----------------- ----------- ---------------- -------------- ------------ --------------
$ .71 - 1.05 10,500 2.76 $ 0.71 10,500 $ 0.71
$ 2.10 - 3.15 99,075 3.32 $ 2.14 99,075 $ 2.14
$ 3.30 - 4.95 1,080,744 7.75 $ 4.02 973,333 $ 4.01
$ 5.25 - 7.88 422,096 5.15 $ 5.43 386,822 $ 5.41
$ 10.00 - 13.75 262,100 9.47 $ 12.12 74,100 $ 12.71
The fair value of each option granted during 1998 and 1997 is estimated
on the date of grant using the Black-Scholes option pricing model with the
following assumptions:
1998 1997
---- ----
Dividend yield....................................... none none
Expected volatility.................................. 55.0% 55.0%
Risk-free interest rate.............................. 6.18% 6.05%
Expected life........................................ 4 4
Weighted average fair value of options granted at fair
value during:
1998 $5.80
1997 $2.13
Employee Stock Purchase Plan
In January 1992, the board of directors adopted the 1992 Employee Stock
Purchase Plan (the "1992 Plan"). Under the 1992 Plan, eligible employees of the
Company may purchase shares of common stock, through payroll deductions, at the
lower of 85% of fair market value of the stock at the beginning or the end of
the offering period. Shares are issued to participants twice a year after each
six-month offering period, which ends April 30 and October 31. The company
issued 34,810 and 17,958 in the years ended March 31, 1998 and 1997
respectively. The weighted average fair values of shares issued under the 1992
Plan during the years ended March 31, 1997 and 1996 were $2.06 and $1.79,
repectively.
Had compensation cost for the Company's 1998 and 1997 stock option
grants been determined consistent with SFAS 123, the Company's net income and
net income per share would approximate the pro forma amounts below:
Net Income Per
Net Income Fully Diluted Share
---------- -------------------
As reported:
1998 $7,619,000 $ .79
1997 $2,322,000 $ .27
Pro forma:
1998 $7,003,000 $ .72
1997 $1,134,000 $ .13
The effect of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards made prior to
1995. Additional awards in future years are anticipated.
36
36
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R. 401(k) PLAN:
The PolyMedica Corporation 401(k) Plan and Trust (the "401(k) Plan") is
a voluntary savings plan for all eligible employees which is intended to qualify
under Section 401(k) of the Internal Revenue Code. Each eligible employee may
elect to contribute to the 401(k) Plan, through payroll deductions, up to 15% of
his or her salary, subject to statutory limitations. The Company may make
matching contributions on behalf of participating employees of half of the
dollar amount of each participating employee's contribution, up to a maximum of
3% of an employee's total cash compensation, subject to certain limitations.
For the years ended March 31, 1998, 1997, and 1996, the Company paid
and accrued matching contributions of $108,000, $69,000, and $57,000,
respectively, for the 401(k) Plan participants.
S. INTERIM INFORMATION (UNAUDITED):
The following consolidated interim financial information is unaudited.
Such information reflects all adjustments, consisting solely of normal recurring
adjustments, which are in the opinion of management necessary for a fair
presentation.
(In thousands, except per share data)
YEAR ENDED MARCH 31, 1998
----------------------------------------------------
QTR. 1 QTR. 2* QTR. 3 QTR. 4
------ ------- ------ ------
Total revenue $13,958 $17,643 $20,668 $21,556
Total revenues less cost of product sales 7,230 9,664 10,448 10,908
Net income 831 3,915 1,383 1,490
Net income per weighted average share, basic $ 0.10 $ 0.45 $ 0.16 $ 0.17
Net income per weighted average share, diluted $ 0.09 $ 0.39 $ 0.14 $ 0.15
*includes net income of $2.74 million or $0.29 per diluted
share related to the gain on the sale of the wound care
business
YEAR ENDED MARCH 31, 1997
----------------------------------------------------
QTR. 1 QTR. 2 QTR. 3 QTR. 4
------ ------ ------ ------
Total revenues $4,993 $7,103 $9,011 $9,346
Total revenues less cost of product sales 3,166 4,412 4,683 4,589
Net income 486 613 411 812
Net income per weighed average share, basic: $ 0.06 $ 0.07 $ 0.05 $ 0.10
Net income per weighted average share, diluted $ 0.06 $ 0.07 $ 0.05 $ 0.09
T. RELATED PARTY TRANSACTIONS:
In December 1994 and January 1997, certain executive officers of the
Company purchased in the aggregate 100,000 and 100,000 shares, respectively, of
the Company's common stock on the open market. The purchases, valued at $415,000
and $607,000, respectively, were funded by a note issued by the Company to each
officer. The terms of the notes provide for each executive to repay the Company
with Company shares within five years from the date of the note at a market
value equal to the original principal of the note. The principal balance due is
shown as notes receivable from officers in Shareholders' Equity on the
Consolidated Balance Sheet.
36
37
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 1998, a total of $234,000 has been repaid, of which
$110,000 was repaid in cash and $123,000 was repaid in shares of the Company's
common stock, leaving a $789,000 balance.
U. SUBSEQUENT EVENT:
On April 30, 1998, the Company entered into a $7.5 million
collateralized revolving credit facility with BankBoston, N.A., with a maturity
date of March 31, 2001. The facility is collateralized by certain assets of the
Company. Under the new facility, the Company is obligated to maintain certain
financial covenants.
(b) There were no Current Reports on Form 8-K filed by the Company during
the last quarter of the period covered by this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements on accounting and financial disclosure
matters.
37
38
PART III
ITEMS 10-13.
The information required for Part III in the Annual Report on Form 10-K
is incorporated by reference from the Company's definitive proxy statement for
the Company's 1998 Annual Meeting of Shareholders. Such information will be
contained in the sections of such proxy statement captioned "Election of
Directors," "Board and Committee Meetings," "Compensation of Executive
Officers," "Directors' Compensation," "Report of the Compensation Committee,"
"Compensation Committee Interlocks and Insider Participation," "Comparative
Stock Performance," "SEC Reporting," "Security Ownership and Certain Beneficial
Owners and Management," and "Certain Transactions." Information regarding
executive officers of the Company is also furnished in Part I of this Annual
Report on Form 10-K under the heading "Executive Officers of the Registrant."
38
39
The following trademarks are used in this Annual Report on Form 10-K:
ChronoSphere, BASIS, PeeDee Dose, MEDI-AID, URISED, CYSTOSPAZ, ANESTACON,
CYSTOSPAZ-M, AZO STANDARD, AZO CRANBERRY, B&O, SUPPRETTES, and AQUACHLORAL are
registered trademarks of PolyMedica Corporation. AZO TEST STRIPS and Fever Alarm
are trademarks of PolyMedica Corporation. MITRAFLEX and SPYROSORB are registered
trademarks of Innovative Technologies, Ltd. Uristat is a trademark of Ortho
Pharmaceutical Corp., a division of Johnson & Johnson. Xylocaine is a registered
trademark of Astra USA, Inc. Pyridium is a registered trademark of Parke-Davis,
a division of Warner-Lambert Co. Levsin is a trademark of Schwarz-Pharma, Inc.
Cystex is a trademark of Numark Laboratories, Inc. Prodium is a trademark of
Breckenridge Pharmaceutical, Inc.
39
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: June 25, 1998 PolyMedica Corporation
By: /s/ STEVEN J. LEE
----------------------------------------------
Steven J. Lee
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Dated: June 25, 1998 /s/ STEVEN J. LEE
-----------------------------------------------
Steven J. Lee
Chairman, Chief Executive Officer and Director
(Principal Executive Officer)
Dated: June 25, 1998 /s/ ERIC G. WALTERS
-----------------------------------------------
Eric G. Walters
Chief Financial Officer, Treasurer and Clerk
(Principal Financial and Accounting Officer)
Dated: June 25, 1998 /s/ FRANK W. LOGERFO
-----------------------------------------------
Frank W. LoGerfo
Director
Dated: June 25, 1998 /s/ DANIEL S. BERNSTEIN
-----------------------------------------------
Daniel S. Bernstein
Director
Dated: June 25, 1998 /s/ MARCIA J. HOOPER
-----------------------------------------------
Marcia J. Hooper
Director
Dated: June 25, 1998 /s/ THOMAS S. SOLTYS
-----------------------------------------------
Thomas S. Soltys
Director
Dated: June 25, 1998 /s/ PETER K. HOFFMAN
---------------------------------------------------
Peter K. Hoffman
Director
40
41
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report on Form 10-K.
EXHIBIT DESCRIPTION
NUMBER -----------
------
2.1 - Stock Purchase Agreement, dated as of August 30, 1996, among the Registrant, Liberty Medical Supply, Inc., and
the Shareholders of Liberty Medical Supply, Inc. (19)
2.2 - Amendments dated March 26, 1997, to the Stock Purchase Agreement dated as of August 30, 1996, among the
Registrant, Liberty Medical Supply, Inc. and the Shareholders' of Liberty Medical Supply, Inc.(22)
2.3 - Asset Purchase Agreement dated as of June 23, 1997 by and among the Registrant, PolyMedica Industries UK,
Ltd., Innovative Technologies Limited, Innovative Technologies (US) Inc., and Innovative Technologies Group
Plc.(22)
3.1 - Restated Articles of Organization of the Company. (1)
3.2 - Amended and Restated By-Laws of the Company. (14)
4.1 - Specimen certificate for shares of Common Stock, $.01 par value, of the Company. (1)
4.2 - Note and Warrant Agreement dated January 26, 1993 and $25,000,000 10.65% Guaranteed Senior Secured Notes due
January 31, 2003 of PolyMedica Pharmaceuticals (U.S.A.), Inc. and PolyMedica Pharmaceuticals (Puerto Rico),
Inc. and Warrant for 500,000 (subject to adjustment) shares of Common Stock, $0.01 per value, of the
Registrant. (6)
4.3 - Letter Agreement, Note Guarantee and Security Agreement, all dated April 27, 1993, by and among the
Registrant, PolyMedica Pharmaceuticals (U.S.A.), Inc., PolyMedica Pharmaceuticals (Puerto Rico), Inc.,
PolyMedica Securities, Inc., PolyMedica Pharmaceuticals Securities, Inc. and the John Hancock Mutual Life
Insurance Company. (9)
4.4 - Letter Agreement amending the Note and Warrant Agreement, dated June 15, 1993. (9)
4.5 - Letter Agreement amending the Note and Warrant Agreement dated March 29, 1994. (10)
4.6 - Letter Agreement amending the Note and Warrant Agreement dated June 17, 1994. (10)
4.7 - Letter Agreement amending the Note and Warrant Agreement dated June 30, 1994. (11)
4.8 - Letter Agreement amending the Note and Warrant Agreement dated October 27, 1994. (12)
4.9 - Letter Agreement amending the Note and Warrant Agreement dated June 27, 1995. (14)
4.10 - Letter Agreement amending the Note and Warrant Agreement dated October 18, 1995 (15)
4.11 - Letter Agreement amending the Note and Warrant Agreement dated June 19, 1996. (18)
4.12 - Letter Agreement amending the Note and Warrant Agreement dated August 2, 1996. (20)
4.13 - Letter Agreement amending the Note and Warrant Agreement dated October 30, 1996 (20)
4.14 - Letter Agreement amending the Note and Warrant Agreement dated January 23, 1997 (21)
10.01 - 1990 Stock Option Plan, as amended. (14)
10.02 - 1992 Employee Stock Purchase Plan, as amended. (14)
10.03 - 1992 Directors' Stock Option Plan, as amended. (10)
10.04 - Rights Agreement dated as of January 23, 1992 by and between the Company and the First National Bank of
Boston. (3)
10.05 - Secured Promissory Note, dated June 11, 1991, executed by the Company and delivered to the Flagship Bank and
Trust Company. (1)
10.06 - Employment Agreement by and between the Registrant and Steven J. Lee dated May 16, 1990, as amended by letter
agreements dated June 1, 1991 and December 5, 1991. (1)(26)
10.07 - Letter agreement amendment by and between the Registrant and Steven J. Lee dated April 3, 1996. (17)(26)
10.08 - Letter agreement amendment by and between the Registrant and Dr. Andrew M. Reed dated April 3, 1996. (17)(26)
10.09 - Employment Agreement by and between the Registrant and Dr. Arthur A. Siciliano dated September 1, 1990, as
amended by letter agreements dated June 1, 1991 and December 5, 1991. (1)(26)
41
42
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.10 - Employee Stock Purchase Agreement by and between the Registrant and Steven J. Lee dated May 16, 1990, as
amended. (1)(26)
10.11 - Letter agreement amendment by and between the Registrant and Dr. Arthur A. Siciliano dated April 3, 1996.
(17)(26)
10.12 - Letter agreement amendment by and between the Registrant and Robert J. Zappa dated April 3, 1996. (17)(26)
10.13 - Stock Restriction Agreement by and between the Registrant and Dr. Arthur A. Siciliano dated September 1, 1990,
as amended. (1)
10.14 - Sublease dated February 10, 1992 by and between Ampex Corporation and the Registrant.(1)
10.15 - Supply Agreement, dated as of May 27, 1992, by and between Medtronic, Inc. and the Company. (2)(22)
10.16 - Employment Agreement by and between the Registrant and Eric G. Walters dated June 1, 1991 as amended by letter
agreement dated December 5, 1991. (9)(26)
10.17 - Letter agreement amendment by and between the Registrant and Steven J. Lee dated March 18, 1993. (9)(26)
10.18 - Letter agreement amendment by and between the Registrant and Eric G. Walters dated April 3, 1996. (17)(26)
10.19 - Letter agreement amendment by and between the Registrant and Dr. Arthur A. Siciliano dated March 18, 1993.
(9)(26)
10.20 - Letter agreement amendment by and between the Registrant and Dr. Andrew M. Reed dated March 18, 1993. (9)(26)
10.21 - Letter agreement amendment by and between the Registrant and Eric G. Walters dated March 18, 1993. (9)(26)
10.22 - Letter Agreement dated July 15, 1993 between Alcon Laboratories Inc. and the Registrant. (7)
10.23 - Purchase and Sale Agreement between Allstate Life Insurance Company as Seller and PolyMedica Corporation as
Buyer as of August 13, 1993. (8)
10.24 - Letter agreement amendment by and between the Registrant and Steven J. Lee dated March 31, 1994. (10)(26)
10.25 - Letter agreement amendment by and between the Registrant and Dr. Arthur A. Siciliano dated March 31,
1994.(10)(26)
10.26 - Letter agreement amendment by and between the Registrant and Dr. Andrew M. Reed dated March 31, 1994. (10)(26)
10.27 - Letter agreement amendment by and between the Registrant and Eric G. Walters dated March 31, 1994. (10)(26)
10.28 - Employment Agreement between the Registrant and Robert J. Zappa dated August 23, 1992, as amended by letter
agreement dated March 18, 1993, and further amended by letter agreement dated March 31, 1994. (10)(26)
10.29 - Mortgage, Assignment of Leases and Rents and Security Agreement between PolyMedica Pharmaceuticals (U.S.A.),
Inc. and John Hancock Mutual Life Insurance Company dated May 31, 1994. (10)
10.30 - Processing Agreement dated December 11, 1992, by and between the Registrant and Alcon
(Puerto Rico) Inc. (10)(22)
10.31 - Processing Agreement dated December 11, 1992, by and between the Registrant and Alcon Laboratories, Inc.
(10)(22)
10.32 - Letter Agreement dated March 25, 1994 between Alcon (Puerto Rico) Inc. and the Registrant. (10)
10.33 - Letter Agreement amendment by and between the Registrant and Steven J. Lee dated April 11, 1995. (14) (26)
10.34 - Amended and Restated License Agreement between the Registrant and CardioTech dated May 13, 1996. (17)
10.35 - Letter Agreement amendment by and between the Registrant and Dr. Arthur A. Siciliano dated April 11, 1995.
(14) (26)
10.36 - Letter Agreement amendment by and between the Registrant and Eric G. Walters dated April 11, 1995. (14) (26)
42
43
EXHIBIT DESCRIPTION
NUMBER -----------
------
10.37 - Letter Agreement amendment by and between the Registrant and Robert J. Zappa dated April 11, 1995. (14) (26)
10.38 - Letter Agreement to the Lease Agreement, dated February 16, 1995, by and between Robert W. Murray, Trustee of
Constitution Park Trust Three and the Registrant for offices and laboratory space in Woburn, Massachusetts.
(14)
10.39 - Letter Agreement dated February 2, 1995, amending the Processing Agreement dated December 11, 1992, by and
between the Registrant and Alcon (Puerto Rico), Inc. (14) (22)
10.40 - Letter Agreement dated May 3, 1995, amending the Processing Agreement dated December 11, 1992, by and between
the Registrant and Alcon (Puerto Rico), Inc. (14) (22)
10.41 - Construction Agreements dated March 1, 1994, June 15, 1994, and September 28, 1994, by and between the
Registrant and Execuspace Construction Corp. (14)
10.42 - Construction Agreements dated June 6, 1994, and October 13, 1994, by and between the Registrant and Commercial
Air Control, Inc. (14)
10.43 - Letter Agreement, dated March 20, 1995, by and between the Registrant and Alcon Laboratories, Inc. (15)
10.44 - Form of Warrant issued by the Registrant to the John Hancock Mutual Life Insurance Company (17)
10.45 - Form of Promissory Note, dated December 13, 1994, executed by certain officers and delivered to the Registrant
(15)
10.46 - Form of Jefferies & Company, Inc. and Rodman & Renshaw, Inc. Warrant (15)
10.47 - Form of Promissory Note made in favor of the Company by certain officers of the Company (21)
10.48 - Employment Agreement between the Registrant and Randy M. Sloan dated October 1, 1996 (26)
10.49 - 1998 Executive Incentive Compensation Plan (23)(25)(26)
10.50 - Employment Agreement between the Registrant and Mark A. Libratore dated August 30, 1996, incorporated by
reference as Exhibit D1 to the Stock Purchase Agreement dated August 30, 1996 among the Registrant, Liberty
Medical Supply, Inc., and the Shareholders of Liberty Medical Supply, Inc. (19)
10.51 - Amendment No. 1 to the Employment Agreement between the Registrant and Mark A. Libratore dated March 26, 1997,
incorporated by reference into Amendments dated as of August 30, 1996, among the Registrant, Liberty Medical
Supply, Inc. and the Shareholders of Liberty Medical Supply, Inc. (22)
10.52 - Letter Agreement amendment by and between the Registrant and Steven J. Lee dated July 1, 1997. (23)(26)
10.53 - Letter Agreement amendment by and between the Registrant and Dr. Arthur A. Siciliano dated July 1, 1997.
(23)(26)
10.54 - Letter Agreement amendment by and between the Registrant and Eric G. Walters dated July 1, 1997. (23)(26)
10.55 - Letter Agreement amendment by and between the Registrant and Randy M. Sloan dated July 1, 1997. (23)(26)
10.56 - Letter Agreement amendment by and between the Registrant and Robert J. Zappa dated July 1, 1997. (23)(26)
10.57 - Letter Agreement amendment by and between the Registrant and Randy M. Sloan dated September 16, 1997.(24)(26)
10.58 - Letter Agreement amendment by and between the Registrant and Mark A. Libratore dated January 19, 1998.(26)
10.59 - Agented Loan and Security Agreement dated April 30, 1998 by and between the Registrant and BankBoston, N.A.
10.60 - Master Note dated April 30, 1998 by and between the Registrant and BankBoston, N.A.
21 - Subsidiaries of the Registrant
23.1 - Consent of Coopers & Lybrand L.L.P.
27.1 - Financial Data Schedule - Fiscal Year Ended March 31, 1998.
27.2 - Financial Data Schedule - Restated Fiscal Year Ended March 31, 1997.
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1 Incorporated herein by reference to the Company's Registration Statement on Form S-1 (File No. 33-45425).
2 Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended March 31, 1992
filed June 26, 1992.
3 Incorporated herein by reference to the Company's Current Report on Form 8-K filed March 13, 1992.
4 Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1992 filed August 13, 1992
5 Incorporated herein by reference to the Company's Current Report on Form 8-K filed December 26, 1992, as
amended by Amendment No. 1 on Form 8 filed February 24, 1993.
6 Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December
31, 1992 filed February 13, 1993.
7 Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1993, filed August 13, 1993.
8 Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993, filed November 9, 1993
9 Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended March 31,
1993, filed June 25, 1993.
10 Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended March 31,
1994, filed June, 29, 1994.
11 Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1994, filed August 12, 1994.
12 Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994, filed October 31, 1994.
13 Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December
31, 1994, filed February 2, 1995.
14 Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1995, filed June 29, 1995.
15 Incorporated herein by reference to the Company's Registration Statement on Form S-1 (File No. 33-97872).
16 Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December
31, 1995, filed February 9, 1996.
17 Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1996, filed June 26, 1996.
18 Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, filed August 14, 1996.
19 Incorporated herein by reference to the Company's Current Report on Form 8-K filed September 13, 1996.
20 Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, filed November 13, 1996.
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45
21 Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December
31, 1996, filed February 13, 1997.
22 Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1997, filed June 26, 1997.
23 Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997, filed July 31, 1997.
24 Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, filed October 31, 1997.
25 Confidential treatment granted as to certain portions.
26 Management contract or compensation plan or arrangement required to be filed as an exhibit pursuant to Item
14(c) of Form 10-K.
45