-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HpjagrGB1XoaDLlrB8izkdao30ug9FECZ89hRRoXx0k24U4K4BqsPyQPt9TNIXdz 6Pd9D7+Z8DXu2UW+94a8aQ== 0000950135-99-004437.txt : 19990915 0000950135-99-004437.hdr.sgml : 19990915 ACCESSION NUMBER: 0000950135-99-004437 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19990914 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLYMEDICA CORP CENTRAL INDEX KEY: 0000878748 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 043033368 STATE OF INCORPORATION: MA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-86575 FILM NUMBER: 99711479 BUSINESS ADDRESS: STREET 1: 11 STATE ST CITY: WOBURN STATE: MA ZIP: 01801 BUSINESS PHONE: 6179332020 MAIL ADDRESS: STREET 1: 11 STATE STREET CITY: WOBURN STATE: MA ZIP: 01801 FORMER COMPANY: FORMER CONFORMED NAME: POLYMEDICA INDUSTRIES INC DATE OF NAME CHANGE: 19930328 S-3/A 1 POLYMEDICA CORPORATION 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 14, 1999 REGISTRATION STATEMENT NO. 333-86575 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ POLYMEDICA CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MASSACHUSETTS 04-3033368 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION)
11 STATE STREET WOBURN, MASSACHUSETTS 01801 (781) 933-2020 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------- STEVEN J. LEE CHAIRMAN AND CHIEF EXECUTIVE OFFICER POLYMEDICA CORPORATION 11 STATE STREET WOBURN, MASSACHUSETTS 01801 (781) 933-2020 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: JOHN K.P. STONE, III, ESQ. LESLIE E. DAVIS, ESQ. THOMAS L. BARRETTE, JR., ESQ. TESTA, HURWITZ & THIBEAULT, LLP HALE AND DORR LLP 125 HIGH STREET 60 STATE STREET BOSTON, MASSACHUSETTS 02110 BOSTON, MASSACHUSETTS 02109 TELEPHONE: (617) 248-7000 TELEPHONE: (617) 526-6000 TELECOPY: (617) 248-7100 TELECOPY: (617) 526-5000
------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after this Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------- CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF TITLE OF SHARES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE(2) - --------------------------------------------------------------------------------------------------------------------------------- Common Stock, $0.01 par value per share.............................. 3,335,000 $27.0625 $90,253,437.50 $25,091 - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) under the Securities Act and based upon the average of the high and low prices on the Nasdaq National Market on September 2, 1999. (2) The Company previously paid $22,541 in connection with its original filing on September 3, 1999. THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), SHALL DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 SUBJECT TO COMPLETION, DATED SEPTEMBER 14, 1999 THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS DECLARED EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. 2,900,000 SHARES POLYMEDICA LOGO COMMON STOCK $ PER SHARE - -------------------------------------------------------------------------------- PolyMedica is offering 2,250,000 shares and the selling shareholders identified in this prospectus are offering 650,000 shares with this prospectus. We will not receive any proceeds from the sale of the shares by the selling shareholders. This is a firm commitment underwriting. Our common stock is traded on the Nasdaq National Market under the symbol "PLMD." On September 13, 1999, the closing sale price of the common stock on Nasdaq was $27.125 per share. INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 7.
PER SHARE TOTAL --------- ----- Price to public............................................. $ $ Underwriting discount....................................... Proceeds to PolyMedica...................................... Proceeds to selling shareholders............................
PolyMedica and some of the selling shareholders have granted an over-allotment option to the underwriters. Under this option, the underwriters may elect to purchase a maximum of 435,000 additional shares from PolyMedica and the participating selling shareholders within 30 days following the date of this prospectus to cover over-allotments. - -------------------------------------------------------------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CIBC WORLD MARKETS FIRST UNION CAPITAL MARKETS CORP. The date of this prospectus is , 1999. 3 [Inside Front Cover] In the upper right corner is a photograph of a selection of our products for glucose monitoring. Directly underneath the photograph is the following text: "Liberty Medical offers a full range of diabetes products from name-brand manufacturers." In the left side of the same page is a photograph of the actress who appears in a number of our television commercials. In her right hand the actress is holding a box containing several of our diabetes-care products, and in her left hand she is holding one of those products. To the left of the photograph is the following text: "Liberty Medical provides home delivery and bills Medicare directly for eligible patients." In the lower right corner is a photograph of several of our AZO brand products. Directly underneath the photograph is the following text: "The AZO family of products addresses urinary discomfort, where it is the market leader, as well as symptoms of menopause and incontinence." 4 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 4 Risk Factors................................................ 7 Forward-Looking Information................................. 10 Common Stock Market Price Data.............................. 10 Use of Proceeds............................................. 11 Dividend Policy............................................. 11 Capitalization.............................................. 12 Selected Consolidated Financial Data........................ 13 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 15 Business.................................................... 21 Management.................................................. 26 Principal and Selling Shareholders.......................... 28 Underwriting................................................ 30 Legal Matters............................................... 32 Experts..................................................... 32 Where You Can Find More Information......................... 32 Index to Consolidated Financial Statements.................. F-1
------------------------ PolyMedica Corporation was incorporated as Emerging Sciences, Inc. in Massachusetts in November 1988, and commenced commercial operations in October 1989. In July 1990, we changed our name to PolyMedica Industries, Inc., and in September 1997, we changed our name to PolyMedica Corporation. Our executive offices are located at 11 State Street, Woburn, Massachusetts, and our telephone number is (781) 933-2020. Our World Wide Web site addresses are www.polymedica.com and www.libertymedical.com. The information in our Web sites is not a part of this prospectus and is not incorporated by reference into this prospectus. Unless the context otherwise requires, references in this prospectus to "PolyMedica," "we," "us," and "our" refer to PolyMedica Corporation and its subsidiaries. We have registered the trademarks "AZO STANDARD," "AZO CRANBERRY," "CYSTOSPAZ," "CYSTOSPAZ-M," "SUPPRETTES" and "AQUACHLORAL" on the Principal Register of the United States Patent and Trademark Office. This prospectus also contains other product names, trade names and trademarks that belong to us or to other organizations. Unless otherwise stated, all information contained in this prospectus assumes no exercise of the over-allotment option granted to the underwriters. The underwriters are offering the shares subject to various conditions and may reject all or part of any order. 3 5 PROSPECTUS SUMMARY This summary highlights information contained in other parts of this prospectus or incorporated by reference in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors." Information contained on our Web sites is not part of this prospectus and is not incorporated by reference into this prospectus. OUR BUSINESS Liberty Medical Supply, a PolyMedica company, is a national direct-mail provider of diabetes supplies to seniors covered by Medicare. Liberty Medical has a database of over 220,000 active Medicare-eligible customers to whom it sells name-brand diabetes products. PolyMedica also holds a leading position in the urinary health market through our consumer healthcare division and sells fever thermometers through that division. We sell our line of over-the-counter women's urinary health products under the AZO brand. We manufacture, distribute and sell prescription urological and suppository products under our own brands through our professional products division. As a participating Medicare provider and third-party insurance biller, Liberty Medical provides a simple, reliable way for seniors to obtain their diabetes testing supplies. Liberty Medical delivers diabetes testing supplies to customers' homes and bills Medicare and private insurance directly for those supplies that are reimbursable. Liberty Medical meets the needs of seniors with diabetes by: - providing mail order delivery of supplies direct to our customers' homes; - billing Medicare or private insurance directly; - providing 24-hour telephone support to customers; and - using sophisticated software and advanced order fulfillment systems to provide products and support quickly and efficiently. In the United States, there are approximately 6.3 million seniors who have diabetes. With our database of over 220,000 active Medicare-eligible customers, Liberty Medical serves approximately 3.5% of the marketplace. While many of the 6.3 million seniors with diabetes are covered by managed care or are resident in extended care facilities, we believe that the balance are potential customers of Liberty Medical. Liberty Medical recently initiated a program offering inhalation products to its Medicare-eligible customers with diabetes who also suffer from chronic respiratory conditions. We believe that our expertise in selling diabetes testing supplies will be a significant advantage to us in entering this new market. In addition, we also plan to initiate marketing efforts through advertising and promotions to add customers who have respiratory problems but who do not have diabetes. Our consumer healthcare division primarily sells over-the-counter female urinary discomfort products and fever thermometers. We sell our urinary discomfort products for women under the AZO brand name and hold the number one position in this market for these types of products. Our thermometers include digital flexible tip, digital and glass thermometers. We sell our consumer healthcare products through an extensive network to large drug store chains, major supermarkets, mass merchandisers and drug wholesalers in the United States. We also offer a broad line of prescription urology products, excluding non-anti-infectives but including urinary analgesics, antispasmodics, local anesthetics and analgesic suppositories. Our primary customers for these products are large drug wholesalers in the United States. 4 6 - -------------------------------------------------------------------------------- OUR STRATEGY Our principal strategy is to expand the business of Liberty Medical. This strategy includes the following elements: - continue growth in our diabetes supply business by expanding our customer base; - sell products addressing other chronic disease categories; - create alliances with national retailers; - begin e-commerce marketing; and - add complementary products and businesses. THE OFFERING Common stock offered by PolyMedica...... 2,250,000 shares Common stock offered by selling shareholders............................ 650,000 shares Common stock to be outstanding after this offering........................... 12,459,155 shares* Use of proceeds......................... Repayment of promissory notes to John Hancock Mutual Life Insurance Company and Barnett & Co. and early payment premium, working capital and other general corporate purposes, including potential acquisitions and strategic investments. See "Use of Proceeds." Nasdaq National Market symbol........... PLMD - --------------- * Assumes exercise of warrant by John Hancock Mutual Life Insurance Company. - -------------------------------------------------------------------------------- 5 7 - -------------------------------------------------------------------------------- SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share data)
THREE MONTHS ENDED YEAR ENDED MARCH 31, JUNE 30, ------------------------------ ------------------ 1997 1998 1999 1998 1999 ------- ------- -------- ------- ------- (UNAUDITED) STATEMENT OF CONTINUING OPERATIONS DATA: Net revenues: Diabetes supplies..................... $ 8,652 $48,708 $ 80,597 $15,681 $26,365 Consumer healthcare................... 10,296 11,149 14,275 2,598 2,929 Professional products................. 11,505 13,968 9,953 2,382 2,286 ------- ------- -------- ------- ------- Total......................... 30,453 73,825 104,825 20,661 31,580 Cost of sales........................... 13,603 35,575 49,605 9,921 13,715 ------- ------- -------- ------- ------- Gross margin............................ 16,850 38,250 55,220 10,740 17,865 Selling, general and administrative expenses.............................. 12,985 28,826 42,185 8,062 13,361 ------- ------- -------- ------- ------- Income from operations.................. 3,865 9,424 13,035 2,678 4,504 Other income and expense: Gain on sale of wound care business... -- 4,126 1,597 -- -- Investment income..................... 864 629 434 114 89 Interest expense...................... (2,774) (2,688) (2,555) (637) (603) ------- ------- -------- ------- ------- Income before income taxes.............. 1,955 11,491 12,511 2,155 3,990 Income tax provision (benefit).......... (367) 3,872 4,867 862 1,536 ------- ------- -------- ------- ------- Net income.............................. $ 2,322 $ 7,619 $ 7,644 $ 1,293 $ 2,454 ======= ======= ======== ======= ======= Earnings per share: Basic................................. $ 0.28 $ 0.88 $ 0.86 $ 0.15 $ 0.27 Diluted............................... $ 0.27 $ 0.79 $ 0.78 $ 0.13 $ 0.25 Weighted average shares outstanding: Basic................................. 8,259 8,652 8,898 8,789 9,152 Diluted............................... 8,618 9,691 9,786 9,771 9,890 Earnings per share excluding gain on sale of wound care business, diluted(1)............................ $ 0.27 $ 0.50 $ 0.68 $ 0.13 $ 0.25
JUNE 30, 1999 ------------------------- ACTUAL AS ADJUSTED(2) -------- -------------- (UNAUDITED) BALANCE SHEET DATA: Working capital............................................. $ 32,767 $ 71,507 Cash and cash equivalents................................... 10,423 45,152 Total assets................................................ 116,607 151,336 Total long-term debt and notes payable, net................. 22,018 4,413 Total liabilities........................................... 50,686 29,070 Shareholders' equity........................................ 65,921 122,266
- --------------------------- (1) Adjusted to give effect to the after tax gain of $2,736,000 in 1998 and $976,000 in 1999. (2) Adjusted to give effect to the receipt of the estimated net proceeds of this offering based upon an assumed public offering price of $27.125 per share, the application of the net proceeds, the payment to PolyMedica by executive officers and a director of an aggregate of $654,419 to exercise options for shares to be sold by those officers in this offering, and the use by executive officers of 19,400 shares of their PolyMedica common stock to repay to PolyMedica loans aggregating $558,958. - -------------------------------------------------------------------------------- 6 8 RISK FACTORS You should carefully consider the following factors and other information in this prospectus before deciding to invest in our common stock. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer, the market price of our common stock could decline, and you could lose all or part of the money you paid to buy our common stock. WE COULD EXPERIENCE SIGNIFICANTLY REDUCED PROFITS IF MEDICARE CHANGES, DELAYS OR DENIES REIMBURSEMENT Sales of a significant portion of our diabetes-related products will depend on the continued availability of reimbursement of our customers by government and private insurance plans. Any reduction in Medicare reimbursement currently available for our products would reduce our revenues. Without a corresponding reduction in the cost of such products, the result would be a reduction in our overall profit margin. Similarly, any increase in the cost of such products would reduce our overall profit margin unless there were a corresponding increase in Medicare reimbursement. Our profits could also be affected by the imposition of more stringent regulatory requirements for Medicare reimbursement. Any failure to comply with required Medicare reimbursement procedures could result in delays or loss of reimbursement and other sanctions, including fines and loss of Medicare provider status. WE PLAN TO CONTINUE OUR RAPID EXPANSION; IF WE DO NOT MANAGE OUR GROWTH SUCCESSFULLY, OUR GROWTH AND PROFITABILITY MAY SLOW OR STOP We have expanded our operations rapidly and plan to continue to expand. This expansion has created significant demands on our administrative, operational and financial personnel and other resources. Additional expansion in existing or new markets could strain these resources and increase our need for capital. Our personnel, systems, procedures, controls and existing space may not be adequate to support further expansion. THE PROFITABILITY OF OUR DIABETES SUPPLY BUSINESS WILL DECREASE IF WE DO NOT RECEIVE RECURRING ORDERS FROM CUSTOMERS We generally incur losses and negative cash flow with respect to the first order for diabetes supplies from a customer, due primarily to the marketing and regulatory compliance costs associated with initial customer qualification. Accordingly, the profitability of our diabetes supply business depends on recurring and sustained reorders. Reorder rates are inherently uncertain due to several factors, many of which are outside our control, including changing customer preferences, competitive price pressures, customer transition to extended care facilities, customer mortality and general economic conditions. WE COULD EXPERIENCE SIGNIFICANTLY REDUCED PROFITS FROM OUR DIABETES SUPPLY BUSINESS IF IMPROVED TECHNOLOGIES THAT ELIMINATE THE NEED FOR CONSUMABLE TESTING SUPPLIES ARE DEVELOPED FOR GLUCOSE MONITORING The majority of our diabetes supply products sales are of consumable testing supplies used to draw and test small quantities of blood for the purpose of measuring and monitoring glucose levels. Numerous research efforts are underway to develop more convenient and less intrusive glucose measurement techniques. The commercialization and widespread acceptance of new technologies that eliminate or reduce the need for consumable testing supplies could negatively affect Liberty Medical's business. WE COULD BE LIABLE FOR HARM CAUSED BY PRODUCTS THAT WE SELL The sale of medical products entails the risk that users will make product liability claims. A product liability claim could be expensive. Our insurance may not provide adequate coverage against these claims. 7 9 WE COULD LOSE CUSTOMERS AND REVENUES TO NEW OR EXISTING COMPETITORS WHO HAVE GREATER FINANCIAL OR OPERATING RESOURCES Competition from other sellers of diabetes supplies, manufacturers of healthcare products, pharmaceutical companies and other competitors is intense and expected to increase. Many of our competitors and potential competitors are large companies with well known names and substantial resources. These companies may develop products and services that are more effective than any that we are developing or selling. They may also promote and market these products more successfully than we promote and market our products. LOSS OF USE OF MANUFACTURING FACILITIES WOULD SIGNIFICANTLY REDUCE REVENUES AND PROFITS FROM OUR CONSUMER HEALTHCARE AND PROFESSIONAL PRODUCTS We manufacture substantially all of our professional products and many of our AZO products at our facility in Woburn, Massachusetts. We also have most of our thermometers manufactured at one facility in China. If we cannot use either facility as a result of Food and Drug Administration, Occupational Safety and Health Administration or other regulatory action, fire, natural disaster or other event, our revenues and profits from the sale of those products will decrease significantly. We might also incur significant expense in remedying the problem or securing an alternative manufacturing source. IF WE OR OUR SUPPLIERS DO NOT COMPLY WITH APPLICABLE GOVERNMENT REGULATIONS, WE MAY BE PROHIBITED FROM SELLING OUR PRODUCTS Many of the products that we sell are regulated by the Food and Drug Administration and other regulatory agencies. If any of these agencies mandate a suspension of production or sales of our products or mandate a recall, we may lose sales and incur expense until we are in compliance with the regulations or change to another acceptable supplier. WE COULD HAVE DIFFICULTY SELLING OUR CONSUMER HEALTHCARE AND PROFESSIONAL PRODUCTS IF WE CANNOT MAINTAIN AND EXPAND OUR SALES TO DISTRIBUTORS We rely on third party distributors to market and sell our consumer healthcare and professional products. Our sales of consumer healthcare and professional products will therefore depend in part on our maintaining and expanding marketing and distribution relationships with pharmaceutical, medical device, personal care and other distributors and on the success of those distributors in marketing and selling our products. SHORTENING OR ELIMINATING AMORTIZATION OF OUR DIRECT-RESPONSE ADVERTISING COSTS COULD ADVERSELY AFFECT OUR OPERATING RESULTS Any accounting or business change that shortens or eliminates the four year amortization of our direct-response advertising costs could result in accelerated charges against our earnings. OUR QUARTERLY REVENUES OR OPERATING RESULTS COULD VARY, WHICH MAY CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE We have experienced fluctuations in our quarterly operating results and anticipate that such fluctuations could continue. Results may vary significantly depending on a number of factors, including: - changes in reimbursement guidelines and amounts; - changes in regulations affecting the healthcare industry; - changes in the mix or cost of our products; - the timing of customer orders; - the timing and cost of our advertising campaigns; and - the timing of the introduction or acceptance of new products and services offered by us or our competitors. 8 10 WE MAY MAKE ACQUISITIONS THAT WILL STRAIN OUR FINANCIAL AND OPERATIONAL RESOURCES We regularly review potential acquisitions of businesses and products. Acquisitions involve a number of risks that might adversely affect our financial and operational resources, including: - diversion of the attention of senior management from important business matters; - amortization of substantial goodwill; - difficulty in retaining key personnel of an acquired business; - failure to assimilate operations of an acquired business; - failure to retain the customers of an acquired business; - possible operating losses and expenses of an acquired business; - exposure to legal claims for activities of an acquired business prior to acquisition; and - incurrence of debt and related interest expense. WE MAY FAIL TO LOCATE ALTERNATIVE SUPPLIERS FOR OUR THERMOMETERS IF OUR SOLE SUPPLIER IN CHINA CANNOT MEET OUR DEMANDS We purchase most of our thermometers from a sole supplier based in China. The delivery of products from this supplier is subject to changing risks associated with political developments and restrictions on trade. In the event that this supplier does not meet our demands, we cannot be certain that we could acquire products from other sources on a timely or cost effective basis. YEAR 2000 PROBLEMS MAY ADVERSELY AFFECT OUR BUSINESS The Year 2000 problem could adversely affect all aspects of our business, including the: - manufacture and distribution of products; - maintenance of communications with our customers and suppliers; and - conduct of financial and administrative operations. Although we have completed asking vendors, major customers, service suppliers and banks to verify their Year 2000 readiness, not all have responded. We have not yet completed our Year 2000 contingency plan. OUR STOCK PRICE COULD BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS PURCHASING SHARES IN THIS OFFERING The trading price of our common stock has been volatile and is likely to continue to be volatile. The stock market in general, and the market for healthcare-related companies in particular, has experienced extreme volatility. This volatility has often been unrelated to the operating performance of particular companies. Investors may not be able to sell their common stock at or above our public offering price. Prices for the common stock will be determined in the marketplace and may be influenced by many factors, including variations in our financial results, changes in earnings estimates by industry research analysts, investors' perceptions of us and general economic, industry and market conditions. 9 11 FORWARD-LOOKING INFORMATION This prospectus contains or incorporates forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. You can identify these forward-looking statements by our use of the words "believes," "anticipates," "plans," "expects," "may," "will," "would," "intends," "estimates" and similar expressions, whether in the negative or affirmative. We cannot guarantee that we actually will achieve these plans, intentions or expectations. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements in this prospectus, particularly under the heading "Risk Factors," that we believe could cause our actual results to differ materially from the forward-looking statements that we make. The forward-looking statements do not reflect the potential impact of any future acquisitions, mergers or dispositions. We do not assume any obligation to update any forward-looking statement we make. COMMON STOCK MARKET PRICE DATA Our common stock is quoted on the Nasdaq National Market under the symbol "PLMD." Prior to January 11, 1999 our common stock was quoted on the American Stock Exchange under the symbol "PM." The following table sets forth, for the periods indicated, the high and low sale prices per share of our common stock as reported on the Nasdaq National Market.
HIGH LOW ----- --- FISCAL YEAR ENDED MARCH 31, 1998 First Quarter............................................... 8 7/8 4 1/4 Second Quarter.............................................. 14 1/4 7 3/4 Third Quarter............................................... 14 15/16 9 1/16 Fourth Quarter.............................................. 13 1/2 9 3/4 FISCAL YEAR ENDED MARCH 31, 1999 First Quarter............................................... 12 3/8 8 1/2 Second Quarter.............................................. 11 1/4 7 1/4 Third Quarter............................................... 11 1/2 7 5/8 Fourth Quarter.............................................. 11 3/16 5 FISCAL YEAR ENDING MARCH 31, 2000 First Quarter............................................... 11 1/8 7 1/2 Second Quarter (through September 13, 1999)................. 29 5/8 9 11/16
On September 13, 1999, the last reported sale price of our common stock on the Nasdaq National Market was $27.125 per share. As of September 13, 1999, PolyMedica had 413 shareholders of record. 10 12 USE OF PROCEEDS The net proceeds from the sale of the 2,250,000 shares of common stock offered by us will be approximately $57,174,500 at the assumed public offering price of $27.125 per share, after deducting the underwriting discount and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares by the selling shareholders. We intend to use $20.0 million of the net proceeds of this offering to retire all of the Guaranteed Senior Secured Notes due January 31, 2003 held by John Hancock Mutual Life Insurance Company and Barnett & Co. These notes bear interest at the rate of 10.90% per annum. In addition, we will pay approximately $1.9 million as an early payment premium. We will use the balance of the net proceeds of this offering for working capital and general corporate purposes. We have discussions on an ongoing basis regarding possible acquisitions or investments in businesses or products that are complementary to our business. Although we may use a portion of the net proceeds for these kinds of investments, there are no current agreements or commitments in this regard. We may, however, change the allocation of these proceeds in response to developments or changes that affect our business or our industry. Pending use of the net proceeds for the above purposes, we plan to invest such funds in short-term, investment grade, interest-bearing securities. DIVIDEND POLICY We have never paid cash dividends on our common stock. We presently intend to retain earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. In addition, our revolving credit agreement restricts the payment of cash dividends. 11 13 CAPITALIZATION The following table sets forth the capitalization of PolyMedica as of June 30, 1999: - On an actual basis; and - On an as adjusted basis to reflect our issuance and sale of 2,250,000 shares of common stock in this offering at an assumed public offering price of $27.125 per share, after deducting the estimated underwriting discounts and our estimated offering expenses, the issuance of an aggregate of 439,680 shares upon the cashless exercise by John Hancock Mutual Life Insurance Company of its warrants at an exercise price of $5.18 per share based on the $27.125 per share closing sale price of our common stock on September 13, 1999, the exercise by the other selling shareholders of options for 210,320 shares to be sold by those shareholders in this offering, the application of the net proceeds of the offering to repay debt having a principal amount of $20 million and pay an early payment premium, and the use by executive officers of 19,400 shares of their PolyMedica common stock to repay to PolyMedica loans aggregating $558,958, resulting in an increase in treasury stock of 19,400 shares. The actual column of the following table is based on the number of shares outstanding as of June 30, 1999 and excludes: - 1,607,957 shares subject to options outstanding at a weighted average exercise price of $5.83 per share; and - the issuance of an aggregate of 439,680 shares upon the cashless exercise by John Hancock Mutual Life Insurance Company of its warrants at an exercise price of $5.18 per share based on the $27.125 per share closing sale price of our common stock on September 13, 1999.
JUNE 30, 1999 -------------------------- ACTUAL AS ADJUSTED --------- ------------- (UNAUDITED, IN THOUSANDS) Long-term debt and notes payable, net....................... $22,018 $ 4,413 ======= ======== Shareholders' equity: Preferred stock $.01 par value; 2,000,000 shares authorized, none issued or outstanding................. -- -- Common stock $.01 par value; 20,000,000 shares authorized; 9,319,913 issued; 12,219,913 shares issued as adjusted............................................... 93 122 Treasury stock, at cost, (90,971 shares; 110,371 shares as adjusted).............................................. (646) (1,205) Additional paid-in capital................................ 57,099 114,898 Retained earnings......................................... 9,934 8,451 Notes receivable from officers............................ (559) -- ------- -------- Total shareholders' equity............................. 65,921 122,266 ------- -------- Total capitalization................................. $87,939 $126,679 ======= ========
12 14 SELECTED CONSOLIDATED FINANCIAL DATA This section presents selected consolidated financial data of PolyMedica. You should read carefully the consolidated financial statements included in this prospectus, including the notes to the consolidated financial statements. The selected consolidated financial data in this section is not intended to replace the consolidated financial statements. We derived the consolidated statement of operations data for the years ended March 31, 1997, 1998 and 1999 and consolidated balance sheet data as of March 31, 1998 and 1999 from the audited financial statements in this prospectus. Those consolidated financial statements were audited by PricewaterhouseCoopers LLP, independent accountants. We derived the consolidated statement of operations data for the years ended March 31, 1995 and 1996 and the consolidated balance sheet data as of March 31, 1995, 1996 and 1997 from consolidated audited financial statements that are not included in the prospectus. We derived the consolidated statement of operations data for the three months ended June 30, 1998 and 1999 and consolidated balance sheet data as of June 30, 1998 and 1999 from the unaudited consolidated financial statements included in this prospectus. We believe that the unaudited consolidated financial statements contain all adjustments needed to present fairly the information included in those statements, and that the adjustments made consist only of normal recurring adjustments. The selected consolidated financial data for the three months ended June 30, 1999 are not necessarily indicative of the results that may be expected in any future period. 13 15 SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS YEAR ENDED MARCH 31, ENDED JUNE 30, ------------------------------------------------ ----------------- 1995 1996 1997 1998 1999 1998 1999 ------- ------- ------- ------- -------- ------- ------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Net revenues................... $26,609 $24,763 $30,453 $73,825 $104,825 $20,661 $31,580 Cost of sales.................. 9,992 10,210 13,603 35,575 49,605 9,921 13,715 ------- ------- ------- ------- -------- ------- ------- Gross margin................... 16,617 14,553 16,850 38,250 55,220 10,740 17,865 Selling, general and administrative expenses...... 12,066 9,637 12,985 28,826 42,185 8,062 13,361 ------- ------- ------- ------- -------- ------- ------- Income from operations......... 4,551 4,916 3,865 9,424 13,035 2,678 4,504 Other income and expense: Gain on sale of wound care business.................. -- -- -- 4,126 1,597 -- -- Investment income............ 566 892 864 629 434 114 89 Interest expense............. (2,668) (2,678) (2,774) (2,688) (2,555) (637) (603) ------- ------- ------- ------- -------- ------- ------- (2,102) (1,786) (1,910) 2,067 (524) (523) (514) Income from continuing operations before income taxes........................ 2,449 3,130 1,955 11,491 12,511 2,155 3,990 Income tax provision (benefit).................... 55 55 (367) 3,872 4,867 862 1,536 ------- ------- ------- ------- -------- ------- ------- Income from continuing operations................... 2,394 3,075 2,322 7,619 7,644 1,293 2,454 Discontinued operations: Loss from operations of Cardio Tech International, Inc....................... (605) (923) -- -- -- -- -- Loss on disposal of Cardio Tech International, Inc....................... -- (1,878) -- -- -- -- -- ------- ------- ------- ------- -------- ------- ------- (605) (2,801) ------- ------- ------- ------- -------- ------- ------- Net income..................... $ 1,789 $ 274 $ 2,322 $ 7,619 $ 7,644 $ 1,293 $ 2,454 ======= ======= ======= ======= ======== ======= ======= Earnings per share from continuing operations: Basic........................ $ 0.27 $ 0.04 $ 0.28 $ 0.88 $ 0.86 $ 0.15 $ 0.27 Diluted...................... $ 0.26 $ 0.04 $ 0.27 $ 0.79 $ 0.78 $ 0.13 $ 0.25 Earnings per share from discontinued operations: Basic........................ $ (0.09) $ (0.39) -- -- -- -- -- Diluted...................... $ (0.09) $ (0.37) -- -- -- -- -- Weighted average shares outstanding: Basic........................ 6,642 7,096 8,259 8,652 8,898 8,789 9,152 Diluted...................... 6,790 7,492 8,618 9,691 9,786 9,771 9,890
MARCH 31, JUNE 30, ---------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1998 1999 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) BALANCE SHEET DATA: Working capital............ $ 17,664 $ 25,546 $ 14,626 $ 21,069 $ 32,389 $21,734 $32,767 Cash and cash equivalents.............. 14,006 23,302 11,028 6,440 10,191 9,759 10,423 Total assets............... 65,753 72,573 75,233 92,401 112,939 95,200 116,607 Total long-term debt and notes payable, net....... 24,433 24,400 22,818 20,577 21,583 20,599 22,018 Total liabilities.......... 29,027 29,293 31,861 39,473 49,894 40,885 50,686 Shareholders' equity....... 36,726 43,280 43,372 52,928 63,045 54,315 65,921
14 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We sell specialty medical products primarily in three areas. Liberty Medical is a national direct-mail provider of diabetes supplies to seniors covered by Medicare. Our consumer healthcare division holds the leading positions in the urinary health and fever thermometer markets. Our professional products division manufactures, distributes and sells prescription urological and suppository products under our own brands. Since acquiring Liberty Medical in 1996, we have devoted a large part of our resources to the growth of our diabetes supplies business, resulting in substantial increases in the revenues of that business in each of our 1997, 1998 and 1999 fiscal years. We intend to continue this emphasis on Liberty Medical in the future. We recognize revenues upon shipment of our products. Our expense items include cost of sales and selling, general and administrative expenses: - cost of sales consists primarily of purchasing finished goods for sale in our diabetes supplies business and, to a lesser extent, materials and overhead costs for products that we manufacture in our facility; and - selling, general and administrative expenses consist primarily of expenditures for personnel and benefits, as well as allowances for bad debts, rent, amortization of capitalized direct-response advertising costs and other amortization and depreciation. We capitalize direct-response advertising and related costs and amortize those costs on an accelerated basis during the first two years of a four-year period. Under this method, we amortize 55% of the costs in the two years after the date they are incurred, and we amortize 45% on a straight line basis over the next two years. We assess the realizability of the amounts of direct-response advertising costs reported as assets at each balance sheet date by comparing the carrying amounts of those assets to the probable remaining future net benefits expected to result directly from such advertising. RESULTS OF OPERATIONS The following table sets forth selected consolidated statement of operations data as a percentage of total net revenues for the periods indicated:
THREE MONTHS YEAR ENDED MARCH 31, ENDED JUNE 30, --------------------- -------------- 1997 1998 1999 1998 1999 ----- ----- ----- ----- ----- (UNAUDITED) Net revenues................................................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales............................................... 44.7 48.2 47.3 48.0 43.4 ----- ----- ----- ----- ----- Gross margin................................................ 55.3 51.8 52.7 52.0 56.6 Selling, general and administrative expenses................ 42.6 39.0 40.2 39.0 42.3 ----- ----- ----- ----- ----- Income from operations...................................... 12.7% 12.8% 12.5% 13.0% 14.3%
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998 Total net revenues increased by 52.9% to $31.6 million in the three months ended June 30, 1999, as compared with $20.7 million in the three months ended June 30, 1998. This increase was primarily the result of the increase in Liberty Medical sales. Net product sales of diabetes supplies increased by 68.1% to $26.4 million in the three months ended June 30, 1999, as compared with $15.7 million in the three months ended June 30, 1998. This growth was primarily due to shipments to Type II diabetics who were not eligible for Medicare reimbursement during 15 17 the three months ended June 30, 1998. These customers became eligible on July 1, 1998. Shipments to existing Type I diabetic customers also increased. Net product sales of consumer healthcare products increased by 12.7% to $2.9 million in the three months ended June 30, 1999, from $2.6 million in the three months ended June 30, 1998. Sales of both the AZO product line and thermometers increased during the three months ended June 30, 1999. We added to our consumer healthcare product line by introducing AZO MENOPAUSE and AZO CONFIDENCE in April 1999, sales of which were not included in the three months ended June 30, 1998. In the professional products division, net product sales decreased by 3.8% to $2.3 million in the three months ended June 30, 1999, as compared with $2.4 million in the three months ended June 30, 1998. This decrease was primarily a result of focusing our marketing resources on the diabetes and consumer healthcare segments. As a percentage of net product sales, overall gross margins were 56.6% in the three months ended June 30, 1999 and 52.0% in the three months ended June 30, 1998. Gross margins in the three months ended June 30, 1999 increased due to an improved gross margin on sales of diabetes products. As a percentage of net product sales, selling, general and administration expenses were 42.3% for the three months ended June 30, 1999 as compared with 39.0% for the three months ended June 30, 1998. Those expenses increased by 65.7% in the three months ended June 30, 1999 to $13.4 million as compared with $8.1 million in the three months ended June 30, 1998. This dollar increase was primarily attributable to the increase in personnel and expansion and improvement of operating systems of Liberty Medical. Investment income decreased by 21.9% to $89,000 in the three months ended June 30, 1999 as compared with $114,000 in the three months ended June 30, 1998 as we earned interest on lower average cash balances due to investments in direct-response advertising and Liberty Medical infrastructure. Interest expense decreased by 5.3% to $603,000 in the three months ended June 30, 1999, as compared with $637,000 in the three months ended June 30, 1998, primarily reflecting a lower outstanding principal balance on the Guaranteed Senior Secured Notes held by John Hancock Mutual Life Insurance Company and Barnett & Co. Pretax income was $4.0 million in the three months ended June 30, 1999, as compared with $2.2 million in the three months ended June 30, 1998. Our net income was $2.5 million, or $0.25 per diluted common share, in the three months ended June 30, 1999. This performance compares with net income of $1.3 million, or $0.13 per diluted common share, in the three months ended June 30, 1998. The effective tax rate was 38.5% in the three months ended June 30, 1999 and 40% in the same period in 1998. YEAR ENDED MARCH 31, 1999 COMPARED TO YEAR ENDED MARCH 31, 1998 PolyMedica's total net revenues increased by 42.0% to $104.8 million in the fiscal year ended March 31, 1999 as compared with $73.8 million in the fiscal year ended March 31, 1998. This increase primarily resulted from the growth in Liberty Medical revenues during the fiscal year ended March 31, 1999. Liberty Medical's net product sales of diabetes supplies increased by 65.5% to $80.6 million in the fiscal year ended March 31, 1999 as compared with $48.7 million in the fiscal year ended March 31, 1998. This growth was largely a result of our direct-response advertising spending, as well as recurring shipments to existing customers. In addition, we shipped product to Type II diabetics for the first time beginning in July 1998. PolyMedica's net product sales of consumer healthcare products increased by 28.1% to $14.3 million in the fiscal year ended March 31, 1999 as compared with $11.1 million in the fiscal year ended March 31, 1998. Sales of both the AZO line of products and thermometers increased during the fiscal year ended March 31, 1999. We began shipping AZO TEST STRIPS, an in-home urinary tract infection testing kit, during the three months ended March 31, 1998. In addition, we added to our product line by introducing our Flexible-Tip Digital Thermometer with Fever Alarm which began shipping in August 1997. 16 18 In the professional products group, there were $1.0 million of nonrecurring net product sales of PolyMedica's institutional wound care products in the fiscal year ended March 31, 1998. Excluding these wound care product sales, recurring net product sales decreased by 23.1% to $10.0 million in the fiscal year ended March 31, 1999 as compared with $12.9 million in the fiscal year ended March 31, 1998. Our sales of professional products in the fiscal year ended March 31, 1998 were higher than expected because a competitor left the market for those products. That competitor later returned, resulting in lower revenues in 1999. As a percentage of net product sales, overall gross margins were 52.7% in the fiscal year ended March 31, 1999 and 51.8% in the fiscal year ended March 31, 1998. Gross margins in the fiscal year ended March 31, 1999 increased due to improved gross margins at Liberty Medical, resulting from a change in product mix and higher volume purchasing from suppliers, as well as improving margins of professional products. As a percentage of total revenues, selling, general and administrative expenses were 40.2% for the fiscal year ended March 31, 1999 as compared with 39.0% for the fiscal year ended March 31, 1998. Selling, general and administrative expenses increased by 46.3% in the fiscal year ended March 31, 1999 to $42.2 million as compared with $28.8 million in the fiscal year ended March 31, 1998. We attribute this increase primarily to expenditures for personnel in customer service, marketing and other areas as well as for enhancements of information technology systems related to our expansion of Liberty Medical. Our investment income decreased by 31.0% to $434,000 in the fiscal year ended March 31, 1999 as compared with $629,000 in the fiscal year ended March 31, 1998 as we earned interest on lower average cash balances in the fiscal year ended March 31, 1999. We faced interest expense of $2.6 million in the fiscal year ended March 31, 1999 as compared with $2.7 million in the fiscal year ended March 31, 1998, as we accrued interest expense in both periods on the Guaranteed Senior Secured Notes due January 31, 2003 held by John Hancock Mutual Life Insurance Company and Barnett & Co. Our pretax income was $12.5 million in the fiscal year ended March 31, 1999. Excluding the $1.6 million pretax gain related to the sale of the wound care business, pretax income from ongoing businesses was $10.9 million, a 48.2% increase as compared with $7.4 million in the fiscal year ended March 31, 1998. Our net income was $7.6 million, or $0.78 per diluted common share, in the fiscal year ended March 31, 1999. Net income, excluding the $976,000 after tax gain from the sale of the wound care business, or $0.10 per diluted common share, was $6.7 million, or $0.68 per diluted common share. This performance compares to net income, excluding the gain on the sale of the Company's wound care business, of $4.9 million, or $0.50 per diluted common share, in the fiscal year ended March 31, 1998. The effective tax rate was 38.9% in the fiscal year ended March 31, 1999 and 33.7% in the fiscal year ended March 31, 1998. YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997 PolyMedica's total net revenues increased by 142.5% to $73.8 million in the fiscal year ended March 31, 1998 as compared with $30.5 million in the fiscal year ended March 31, 1997. We attribute this increase primarily to the growth in Liberty Medical revenues, which were generated for twelve months during the fiscal year ended March 31, 1998 as compared to seven months during the fiscal year ended March 31, 1997. Liberty Medical's net product sales of diabetes supplies were $48.7 million in the fiscal year ended March 31, 1998. This performance compares with $8.7 million in the fiscal year ended March 31, 1997 for the seven month period beginning with the August 1996 acquisition of Liberty Medical by the Company. This growth was largely a result of our increased direct-response advertising spending, including our initiation of television advertising at the end of the fiscal year ended March 31, 1997. 17 19 PolyMedica's net product sales of consumer healthcare products increased by 8.3% to $11.1 million in the fiscal year ended March 31, 1998 as compared with $10.3 million in the fiscal year ended March 31, 1997. Sales of thermometers products increased during the fiscal year ended March 31, 1998, offset by a decline in sales of AZO STANDARD. Shipments of AZO TEST STRIPS, an in-home urinary tract infection testing kit, began during the three months ended March 31, 1998. PolyMedica's net product sales of professional products increased by 21.4% to $14.0 million in the fiscal year ended March 31, 1998 as compared with $11.5 million in the fiscal year ended March 31, 1997. Professional products include a full year of wound care product sales in the fiscal year ended March 31, 1997. The increase in professional products sales was primarily due to additional shipments of URISED in the fiscal year ended March 31, 1998. We believe that this increase was the result of the temporary departure of a competitor from the generic products market partially offset by a lower level of wound care related sales in the fiscal year ended March 31, 1998 due to the sale of certain assets of the wound care division in July 1997. As a percentage of net revenues, PolyMedica's overall gross margins were 51.8% in the fiscal year ended March 31, 1998 and 55.3% in the fiscal year ended March 31, 1997. Gross margins in the fiscal year ended March 31, 1998 decreased due to the inclusion of significant sales of diabetes-related products, which have gross margins that are lower than our average for products sold in the fiscal year ended March 31, 1997, partially offset by improving margins and higher revenues of professional products. As a percentage of total revenues, our selling, general and administrative expenses were 39.0% for the fiscal year ended March 31, 1998 as compared with 42.6% for the fiscal year ended March 31, 1997. Selling, general and administrative expenses increased by 122.0% in the fiscal year ended March 31, 1998 to $28.8 million as compared with $13.0 million in the fiscal year ended March 31, 1997. We attribute this increase primarily to general and administrative expenses related to the expansion of Liberty Medical, and marketing and advertising costs related to our consumer healthcare products. Investment income decreased by 27.2% to $629,000 in the fiscal year ended March 31, 1998 as compared with $864,000 in the fiscal year ended March 31, 1997 as we earned interest on lower average cash balances in the fiscal year ended March 31, 1998. Interest expense was $2.7 million in the fiscal year ended March 31, 1998 as compared with $2.8 million in the fiscal year ended March 31, 1997. We accrued this expense in both periods on the Guaranteed Senior Secured Notes due January 31, 2003 held by John Hancock Mutual Life Insurance Company and Barnett & Co. PolyMedica's pretax income was $11.5 million in the fiscal year ended March 31, 1998. Excluding the $4.1 million pretax gain from the sale of the wound care business, pretax income from ongoing businesses was $7.4 million, an increase of 275.5% as compared with $2.0 million in the fiscal year ended March 31, 1997. Our net income was $7.6 million, or $0.79 per diluted common share, in the fiscal year ended March 31, 1998. Net income, excluding the $2.7 million after tax gain from the sale of the wound care business, or $0.29 per diluted common share, was $4.9 million, or $0.50 per diluted common share. This performance compares to net income, excluding the gain on the sale of our wound care business, of $2.3 million, or $0.27 per diluted common share, in the fiscal year ended March 31, 1997. SELECTED QUARTERLY RESULTS OF OPERATIONS The following table sets forth a summary of our unaudited quarterly results of operations for each of the five quarters in the period ended June 30, 1999. These data have been derived from our unaudited interim financial statements which, in our opinion, have been prepared on substantially the same basis as the audited financial statements contained elsewhere in this prospectus and include all normal recurring adjustments necessary for a fair presentation of the financial information for the periods presented. These unaudited quarterly results should be read in conjunction with our consolidated financial statements and 18 20 notes thereto included elsewhere in this prospectus. The operating results in any quarter are not necessarily indicative of the results that may be expected for any future period. SELECTED QUARTERLY OPERATING RESULTS
THREE MONTHS ENDED ------------------------------------------------------ JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, 1998 1998 1998 1999 1999 -------- --------- -------- --------- -------- (UNAUDITED, IN THOUSANDS) Net revenues....................................... $20,661 $24,823 $28,791 $30,550 $31,580 Cost of sales...................................... 9,921 11,878 13,965 13,841 13,715 ------- ------- ------- ------- ------- Gross margin....................................... 10,740 12,945 14,826 16,709 17,865 Selling, general and administrative expenses....... 8,062 9,927 11,394 12,802 13,361 ------- ------- ------- ------- ------- Income from operations............................. $ 2,678 $ 3,018 $ 3,432 $ 3,907 $ 4,504 ======= ======= ======= ======= ======= Depreciation and amortization, including amortization of direct-response advertising...... $ 1,956 $ 2,122 $ 2,237 $ 2,358 $ 2,538
LIQUIDITY AND CAPITAL RESOURCES Since PolyMedica's inception, we have raised $53.5 million in gross equity capital, of which $7.2 million was from venture capital financing before our initial public offering, $39.0 million was from our March 1992 initial public offering, $4.5 million was from our November 1995 public offering and $2.75 million was from our March 1996 private placement of common stock. In January 1993, we sold $25.0 million of Guaranteed Senior Secured Notes due January 31, 2003 to John Hancock Mutual Life Insurance Company. As of June 30, 1999, we had working capital of $32.7 million, including cash and cash equivalents of $10.4 million, which compares with working capital of $32.4 million, including cash and cash equivalents of $10.2 million, as of March 31, 1999. During the three months ended June 30, 1999, we repaid $1.0 million under our $10.0 million collateralized revolving credit facility. Under the terms of this facility, we are required to repay all principal balances on March 31, 2001. This facility is collateralized by specified assets. Under this facility, we are obligated to be in compliance with certain financial covenants including maintenance of net income, limitations on indebtedness and maintenance of certain accounts and inventory above a specified level. The interest rate is tied to our funded debt to EBITDA ratio and averaged 7.75% per annum during the three months ended June 30, 1999. To support Liberty Medical's growth we purchased a 66,000 square foot building in Port St. Lucie, Florida in May 1999 for $2.2 million, financed by a $1.4 million mortgage. Under the terms of this mortgage, we must repay all principal balances by May 2006. The mortgage is collateralized by the land, building, future improvements and permanent fixtures. The interest rate is 8.07% per annum. During this fiscal year we intend to make the investment necessary to improve and configure this building to meet Liberty Medical's operating requirements. Our net accounts receivable were $32.3 million as of March 31, 1999 and $31.6 million as of June 30, 1999. As of June 30, 1999, Liberty Medical's gross unbilled receivables included in accounts receivable were $16.6 million as compared with $15.3 million as of March 31, 1999. The increase was primarily a result of the overall growth of Liberty Medical's sales in the fiscal year ended March 31, 1999. We expect that the net proceeds of this offering, together with our current working capital, revolving credit facility and funds generated from future operations will be adequate to meet our liquidity and capital requirements for at least the next 18 months. In the event that we undertake to make acquisitions of 19 21 complementary businesses, products or technologies, or if we enter into alliances, we may require substantial additional funding beyond currently available funds. We currently have no commitments or agreements with respect to any such acquisition. YEAR 2000 READINESS DISCLOSURE Many older computer software programs refer to years in terms of their final two digits only. Such programs may interpret the year 2000 to mean the year 1900 instead. If not corrected, those programs could cause date-related transaction failures. Year 2000 problems could affect the manufacture and distribution of products, maintenance of communications with our customers and suppliers and conduct of financial and administrative operations. We are making programming modifications and upgrades to correct or replace the systems critical to our business which we have identified as non-Year 2000 compliant. In addition to our in-house efforts, we have asked, and are awaiting responses from, vendors, major customers, service suppliers, communications providers and banks whose systems failures potentially could have a significant impact on operations to verify Year 2000 readiness. We are testing such systems where appropriate and possible. We have not completed our Year 2000 contingency plan. External and internal costs specifically associated with modifying internal use software for Year 2000 compliance are expensed as incurred. To date, expenditures related to the Year 2000 problem have not been material. Such costs do not include normal system upgrades and replacements. We do not expect the future costs relating to Year 2000 compliance to have a material effect on our results of operations or financial condition. The above expectations are subject to uncertainties. For example, if we are unsuccessful in identifying or fixing all Year 2000 problems in our critical operations, or if we are affected by the failure of suppliers or major customers (such as a large drug wholesaler or distributor) to continue operations due to such a problem, our results of operations or financial condition could be materially and adversely impacted. The total costs that we incur in connection with the Year 2000 problems will be influenced by our successful identification of Year 2000 problems, the nature and amount of programming required to fix affected programs, the related labor and/or consulting costs for such remediation and the success of third parties with whom we have business relationships in addressing their own Year 2000 concerns. These and other unforeseen factors could have a material adverse effect on our business, results of operations or financial condition. The information presented above is based upon our estimates, which we made using assumptions of future events. Uncontrollable factors such as the compliance of the systems of third parties and the availability of resources could materially increase the cost of, or delay, remedying Year 2000 problems. All Year 2000 statements contained herein are designated as "Year 2000 Readiness Disclosures" pursuant to the Year 2000 Information and Readiness Disclosures Act (P.L. 105-271). 20 22 BUSINESS INTRODUCTION Liberty Medical Supply, a PolyMedica company, is a national direct-mail provider of diabetes supplies to seniors covered by Medicare. Liberty Medical has a database of over 220,000 active Medicare-eligible customers to whom it sells name-brand diabetes products. PolyMedica also holds a leading position in the urinary health market through our consumer healthcare division and sells fever thermometers through that division. We sell our line of over-the-counter women's urinary health products under our AZO brand. We manufacture, distribute and sell prescription urological and suppository products under our own brands through our professional products division. LIBERTY MEDICAL Diabetes Supplies We believe that Liberty Medical is the leading direct-mail provider of testing supplies to seniors with diabetes in the United States. As a participating Medicare provider and third-party insurance biller, Liberty Medical provides a simple, reliable way for seniors to obtain their diabetes testing supplies. Liberty Medical delivers diabetes testing supplies to customers' homes and bills Medicare and private insurance directly for those supplies that are reimbursable. Liberty Medical has over 220,000 active customers and, we believe, the country's largest proprietary database of seniors with diabetes. We define an active customer as one who has ordered products within the last six months. Liberty Medical meets the needs of seniors with diabetes by: - providing mail order delivery of supplies direct to our customers' homes; - billing Medicare or private insurance directly; - providing 24-hour telephone support to customers; and - using sophisticated software and advanced order fulfillment systems to provide products and support quickly and efficiently. Liberty Medical's rapid growth has been due to innovations in identifying, qualifying and retaining its customers. In 1997, Liberty Medical launched its direct-response advertising program using national television advertisements targeting seniors with diabetes. This advertising program introduced the convenience and simplicity of Liberty Medical's direct-to-customer delivery of diabetic supplies and the benefit of relieving customers of cumbersome reimbursement paperwork. From its acquisition by PolyMedica through June 30, 1999, Liberty Medical has invested $26.6 million in direct-response advertising. These advertisements have increased the number of Liberty Medical's active customers from approximately 18,700 to over 220,000. Liberty Medical's 122-person customer service staff communicates with active customers at least four times per year. Through this relationship, we remind our customers to reorder necessary testing supplies, we introduce new products and we maintain an informed and personal dialogue. Our database tracks each contact made by our customer service staff as well as each customer's order patterns and related medical documentation. This interactive, real-time data equips our representative with current knowledge of each customer's testing requirements. We have made significant investments in computer systems, telecommunications equipment and information technology staff. These investments allow us to provide efficient customer fulfillment and complete electronic billing to Medicare in accordance with Medicare regulations. We also maintain a 24-hour help line to respond to customer inquiries. Liberty Medical offers a full range of products from name-brand manufacturers including Johnson & Johnson, Roche, Bayer and Home Diagnostics. These products range from consumables, such as glucose test strips, lancets and syringes, to equipment, such as blood glucose monitors and lancing devices. 21 23 Diabetes Market In the United States, there are approximately 6.3 million seniors who have diabetes. With our database of over 220,000 active Medicare-eligible customers, Liberty Medical serves approximately 3.5% of the marketplace. While many of the 6.3 million seniors with diabetes are covered by managed care or are resident in extended care facilities, we believe that the balance are potential customers of Liberty Medical. Diabetes is a chronic disease in which the body's metabolism of glucose is ineffective due to inadequate production of insulin. People with diabetes are classified as Type I or Type II. In general, individuals with Type I diabetes must obtain insulin from injection, while individuals with Type II diabetes may control their disease with medication, exercise and diet. For all people with diabetes, frequent monitoring of blood glucose helps avoid serious medical complications. The cost of glucose monitoring is high. The average person with Type I diabetes spends $1,700 per year to control his or her disease. Diabetes testing supplies fall under Medicare Part B reimbursement. Medicare currently reimburses 80% of the cost of testing supplies such as test strips, lancets and glucometers, for eligible diabetics, but does not reimburse for insulin, syringes, oral medications and accessories. Medicare has historically reimbursed only people with Type I diabetes. On July 1, 1998, Medicare extended this coverage to people with Type II diabetes, expanding the number of people currently eligible to be reimbursed for purchases of diabetes testing supplies. The aging United States population is a key factor in the expected increase in the number of people diagnosed with diabetes. Type II diabetes usually appears after the age of 40. Industry analysts therefore expect the rapid growth of the over-40 population to drive the growth in the number of diagnosed diabetics. Approximately 18.4% of all people in the United States over the age of 65 have either Type I or Type II diabetes. As more people are diagnosed with diabetes, their doctors may recommend active disease management programs. This should significantly increase the demand for testing products. Many older diabetes patients today fail to buy the necessary supplies or test as frequently as they should because they believe that they cannot afford the supplies, have difficulty traveling to the local pharmacy or do not understand the Medicare reimbursement process. As a result, these patients may not monitor their blood sugar levels as closely as medical experts believe they should. Studies show that when people with diabetes maintain their blood glucose levels as close to normal as possible, the risk of complications such as eye disease, kidney disease, nerve disease and cardiovascular disease may be reduced by a range of 35% to more than 70%. Respiratory Products Liberty Medical has recently initiated a program offering inhalation products to its Medicare-eligible customers with diabetes who also suffer from chronic respiratory conditions. We believe that our database of over 220,000 active diabetes supply customers and our expertise in selling diabetes testing supplies will be a significant advantage to us in entering this new market. In addition, we intend to initiate marketing efforts through advertising and promotions to add customers who have respiratory problems but who do not have diabetes. CONSUMER HEALTHCARE Our consumer healthcare division primarily sells over-the-counter female urinary discomfort products and fever thermometers. We sell our urinary discomfort products for women under the AZO brand name. We acquired the AZO brand in 1992, and we continue our efforts to increase awareness of our over-the-counter urinary discomfort products through promotion and advertising. We sell our broad range of fever thermometers primarily on a private label basis. In the urinary discomfort area, our three principal products are AZO STANDARD, for the relief of urinary discomfort, AZO CRANBERRY, to help maintain a healthy urinary tract, and AZO TEST STRIPS, a home diagnostic kit for urinary tract infections. For the quarter ended June 30, 1999, the AZO line of products excluding our new products AZO CONFIDENCE and AZO MENOPAUSE, maintained 22 24 its leading market share with over 46% of the market. In April 1999, we began shipment of two new AZO brand products for women. AZO MENOPAUSE offers relief from hot flashes and related menopausal symptoms. It is estimated that, in the United States and Canada, approximately 4,000 women reach menopause daily. AZO CONFIDENCE provides temporary relief of incontinence, which is estimated to affect approximately 25% of women between the ages of 30 to 59. We manufacture AZO CRANBERRY, AZO MENOPAUSE and AZO CONFIDENCE in our Woburn facility. Our thermometers include digital flexible tip, digital and glass thermometers. A supplier in China in which we have a minority ownership interest custom manufactures our digital thermometers. We sell our consumer healthcare products through an extensive network to large drug store chains, major supermarkets, mass merchandisers and drug wholesalers. PROFESSIONAL PRODUCTS PolyMedica offers a broad line of prescription urology products, excluding non-anti-infectives but including urinary analgesics, antispasmodics, local anesthetics and analgesic suppositories. URISED, CYSTOSPAZ, and CYSTOSPAZ-M analgesics and antispasmodics provide symptomatic relief for urinary pain, burning and feelings of urgency, along with spasms. Many urology offices and hospitals purchase our local anaesthetic ANESTACON for use in diagnostic procedures or in the catheterization process. B&O SUPPRETTES and AQUACHLORAL suppositories are used by patients unable to tolerate oral analgesics and sedatives. Our primary customers for these products are large drug wholesalers in the United States. We currently manufacture URISED, AQUACHLORAL, B&O SUPPRETTES and CYSTOSPAZ in our Woburn facility and outsource the manufacturing of the other products. Our state-of-the-art, automated equipment provides manufacturing efficiency. BUSINESS STRATEGY Our strategy includes the following elements: - Continue growth in our diabetes supply business by expanding our customer base. We believe that we can significantly expand our customer base of Medicare-eligible seniors with diabetes through increased marketing and advertising. - Sell products addressing other chronic disease categories. Seniors with diabetes have higher incidences of other chronic conditions. We believe that we can capitalize on our expertise in selling products eligible for Medicare and private insurance reimbursement by expanding our product offerings to this group. Our planned entry into the market for respiratory products is our initial implementation of this strategy. - Create alliances with national retailers. We are seeking to create alliances with large drug store chains to service their customers who have diabetes. These alliances could add sales volume while leveraging our processing, customer service and fulfillment infrastructure. - Begin e-commerce marketing. We are developing a new web site to extend Liberty Medical's product offerings into the e-commerce market. Seniors are one of the fastest growing segments of computer and Internet users. - Add complementary businesses and products. We will consider adding businesses, manufacturing capabilities and new products that capitalize upon our established Liberty Medical and AZO brand franchises and that can take advantage of our strengths in sales, marketing and distribution. 23 25 GOVERNMENT REGULATION Medicare Medicare is a federally funded program that provides health insurance coverage for persons age 65 or older and for some disabled persons. Medicare provides reimbursement for some of the products that we sell. This portion of our business is therefore subject to extensive regulation. Medicare reimbursement payments are often lower than reimbursement payments of other third-party payers, such as traditional indemnity insurance companies. Effective July 1, 1998, testing supplies for Type II diabetics became reimbursable. In addition, on October 1, 1998, new Medicare reimbursement guidelines provided that quarterly orders of diabetes supplies to existing customers be administratively verified before shipment and that all doctor's orders for supplies are valid for a period of six months. In addition, the new regulations require that individuals with Type I diabetes who test more frequently than three times per day and individuals with Type II diabetes who test more frequently than one time per day visit their physician every six months and maintain a 30-day log book to verify frequency of testing. We accept assignment of Medicare claims, as well as claims with respect to other third-party payers, on behalf of our customers. We process claims, accept payments and assume the risks of delay or nonpayment. We also employ the administrative personnel necessary to transmit claims for product reimbursement directly to Medicare and private health insurance carriers. We seek payment for any unreimbursed amounts directly from our customers within the limits permitted by law and regulation. As a Medicare provider, we can provide medically necessary equipment and supplies to Medicare beneficiaries and obtain reimbursement directly from the Medicare intermediaries. Medicare reimburses 80% of the Medicare approved costs of Medicare covered equipment and supplies that meet its guidelines for reimbursement. Because we do not obtain full reimbursement through Medicare, our customers are personally responsible for the 20% balance of the cost either through secondary private insurance coverage or otherwise. The processing of third-party reimbursements is a labor-intensive effort, and delays in processing claims for reimbursement may increase working capital requirements. Final determination of the reimbursements that Medicare pays to us are subject to review. Routine Medicare document requests to date have not resulted in any audits or significant adjustments. Pharmacy Licensing In general, our pharmacy operations are regulated by the State of Florida Board of Pharmacy and the statutes of the State of Florida where we are licensed to do business as a pharmacy. Many of the states into which we deliver pharmaceuticals have laws and regulations governing our activities, although they generally permit our pharmaceutical activities so long as they are permitted under the laws and regulations of Florida. Nevertheless, we have applied for pharmacy licenses in 33 states and have been granted pharmacy licenses in 27 of them. An additional 10 states do not require non-resident pharmacy licenses. We believe that we are in compliance with the laws and regulations governing pharmaceutical activities in every state in which we deliver pharmaceuticals. General Numerous federal, state and local laws relating to controlled drug substances, safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances apply to portions of our operations. For example, the Drug Enforcement Administration, known as the DEA, regulates controlled drug substances, such as the narcotics used in some of our professional products, under the Controlled Substances Act and the Controlled Substances Import and Export Act. Manufacturers, distributors and dispensers of controlled substances must be registered and inspected by the DEA, and are subject to inspection, labeling and packaging, export, import, security, production quota, record keeping and reporting requirements. In addition, labeling and promotional activities relating to medical devices and drugs are, in certain instances, subject to regulation by the Federal Trade Commission. To the extent we engage in new activities or expand current activities into new states, the cost of compliance with applicable regulations and licensing requirements could be 24 26 significant. In addition, our manufacturing facility is subject to the Good Manufacturing Practices regulations of the United States Food and Drug Administration. The FDA enforces these regulations through its plant inspection program. In addition, our drug products are subject to the requirements of the Food, Drug and Cosmetics Act and related regulations. COMPETITION We compete in highly competitive markets. Many of our competitors and potential competitors have substantially greater capital resources, purchasing power and advertising budgets, as well as more experience in marketing and distributing products. These competitors include: - retail pharmacies; - healthcare product distributors; - disease management companies; and - pharmacy benefit management companies. In the urinary discomfort category, our AZO STANDARD urinary analgesic is the category leader. Competitors include a number of major pharmaceutical companies. In the thermometer market, one very large medical device company has the dominant market share. In the professional products market, numerous pharmaceutical companies develop and market prescription products that compete with our products on a branded and generic basis. We believe that the principal competitive factors in the diabetes supply market include attracting new customers, identifying and responding to customer needs, the quality and breadth of service and product offerings, and expertise with respect to the reimbursement process. We believe that we compete effectively in all of these areas because of: - Liberty Medical's brand recognition supported by a national television advertising campaign; - our expertise in the Medicare reimbursement and compliance process; and - our significant investment in employee training, computer systems and order processing systems to assure high quality customer service and cost-effective order processing. EMPLOYEES As of August 31, 1999, we had 688 employees. We expect to employ additional personnel as we expand our operations. None of our employees is a member of a labor union. We believe that employee relations are good. PROPERTIES Our facilities are located in Woburn, Massachusetts; Palm City, Port St. Lucie and Stuart, Florida; and Golden, Colorado. Our corporate headquarters and our manufacturing facility are in Woburn in an approximately 60,000 square foot facility that we own. We also lease approximately 40,000 square feet at our Liberty Medical facilities in Palm City and Stuart, Florida and approximately 12,000 square feet at our distribution and sales facility in Golden, Colorado. We recently acquired and are currently configuring an approximately 66,000 square foot facility in Port St. Lucie, Florida to support the growth of our diabetes supply business. We believe that these facilities are adequate for our current needs. LEGAL PROCEEDINGS We are not a party to any material legal proceedings. 25 27 MANAGEMENT The following table lists our executive officers and directors as of September 14, 1999:
NAME AGE POSITION ---- --- -------- Steven J. Lee.......................... 52 Chairman and Chief Executive Officer, Director Arthur A. Siciliano.................... 56 President Eric G. Walters........................ 47 Chief Financial Officer and Clerk W. Keith Trowbridge.................... 48 Vice President; President, Liberty Medical Daniel S. Bernstein.................... 72 Director Peter K. Hoffman....................... 50 Director Marcia J. Hooper....................... 45 Director Frank W. LoGerfo....................... 59 Director Thomas S. Soltys....................... 51 Director
Mr. Lee has been Chairman since June 1996 and Chief Executive Officer and a director since May 1990. Mr. Lee served as President from May 1990 through June 1996. From March 1990 to May 1990, Mr. Lee was a manager in the Mergers and Acquisitions practice at Coopers & Lybrand. From November 1987 to March 1990, Mr. Lee was President and a director of Shawmut National Ventures, the venture capital division of Shawmut Bank, N.A. From 1984 to 1986, he was President, Chief Executive Officer and a director of RepliGen Corporation, a biotechnology company. Mr. Lee also spent eleven years in venture capital as President of Venture Management Advisors and at Bankers Trust Company. Mr. Lee currently serves as a director of Commonwealth BioVentures, Inc. and Fibersense Technology Corporation. Dr. Siciliano has been President since June 1996 and served as Executive Vice President from July 1994 to June 1996, Senior Vice President from January 1993 to July 1994, Vice President, Pharmaceutics from July 1991 to January 1993 and Vice President, Manufacturing from June 1990 to July 1991. From our inception until June 1990, he served as Chief Operating Officer. From 1986 to 1989, he served as President of MediControl Corporation, a subsidiary of Biotechnology Development Corporation that he helped found. 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. He served as President of the Heico Chemicals Division of the Whittaker Corporation from 1982 to 1984, as General Manager of Reheis Chemicals (Ireland), Ltd. during 1981 and as Technical Director for Reheis Chemical Co., a division of Revlon Inc., from 1975 to 1982. Dr. Siciliano also served as Director of Corporate Research for Kolmar Laboratories, Inc. from 1973 to 1975 and as Senior Scientist for The Gillette Company from 1969 to 1973. Mr. Walters joined us in August 1990 as Chief Financial Officer and Treasurer. From 1987 to 1990, Mr. Walters served in various positions at John Hancock Capital Growth Management, Inc., most recently as Assistant Treasurer. From 1983 to 1987, Mr. Walters served as Controller of Venture Founders Corporation and from 1979 to 1983, he was employed at Coopers & Lybrand, most recently as an Audit Supervisor. Mr. Walters is a Certified Public Accountant. Mr. Trowbridge was appointed President of Liberty Medical and was elected Vice President of PolyMedica in May 1999. He joined us in February 1999 as Chief Operating Officer of Liberty Medical. From December 1997 to February 1999, he served as President, and from November 1994 to December 1997, he served as Executive Vice President, of U.S. Operations for Transworld Healthcare, Inc., where he was responsible for three domestic operating units including MK Diabetes Support Services. From August 1991 to October 1994, Mr. Trowbridge served as Chairman and CEO of Medical Associates of America, a national integrated network of physician owned pharmacies. Mr. Trowbridge also served as Executive Vice President of T2 Medical from January 1988 to August 1991. Dr. Bernstein has been a director since 1992. Dr. Bernstein has been a physician at Brigham Medical Associates, Boston, Massachusetts since 1993, a lecturer at Harvard Medical School, Cambridge, Massachusetts since 1993 and Clinical Professor of Medicine Emeritus, Boston University School of Medicine since 1973. 26 28 Mr. Hoffman has been a director since 1997. Mr. Hoffman has served as President of Commercial Operations for the Duracell North Atlantic Group of The Gillette Company since January 1988. He served as Senior Vice President, Business Management, for the North Atlantic Group of The Gillette Company from 1988 to 1998. Mr. Hoffman joined The Gillette Company in 1972 and has held a variety of product management positions. Ms. Hooper has been a director since 1991. Currently, she is Vice President and Partner of Advent International Corporation. Ms. Hooper served as President of Viking Capital Corporation from 1993 to 1996. Ms. Hooper served as General Partner of three venture capital funds of Ampersand Ventures from 1985 to 1993 and is currently a limited partner of the general partner of three venture capital funds of Ampersand Ventures. Dr. LoGerfo has been a director since 1994. Dr. LoGerfo has been Attending Surgeon, Associate Chairman for Research, Department of Surgery, and Chief, Division of Vascular Surgery, Beth Israel Deaconess Medical Center since 1987. Dr. LoGerfo has served as William V. McDermott Professor of Surgery at Harvard Medical School since 1991. Mr. Soltys has been a director since 1996. Mr. Soltys has served as President of Boston Special Risks Insurance Agency, Inc. since 1988 and has been its sole owner since 1994. 27 29 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth information regarding beneficial ownership of our common stock as of August 31, 1999 by: - each person we know who beneficially owns more than 5% of the outstanding shares of our common stock; - each of our directors; - each of our most highly compensated executive officers in fiscal 1999; - all our current directors and executive officers as a group; and - each of the selling shareholders. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and includes voting or investment power with respect to shares. Shares of common stock issuable upon the exercise of stock options exercisable within 60 days after August 31, 1999, which we refer to as Presently Exercisable Options, are deemed outstanding for computing the percentage ownership of the person holding the options but are not deemed outstanding for computing the percentage ownership of any other person. Unless otherwise indicated below, to our knowledge, all persons named in the table have sole voting and investment power with respect to their shares of common stock, except to the extent authority is shared by spouses under applicable law. The inclusion of any shares in this table does not constitute an admission of beneficial ownership for the person named below.
SHARES OF COMMON SHARES OF COMMON STOCK STOCK BENEFICIALLY OWNED PRIOR TO BE BENEFICIALLY OWNED TO OFFERING NUMBER OF SHARES AFTER OFFERING(1) ------------------------ OF COMMON STOCK ------------------------ NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE BEING OFFERED(1) NUMBER PERCENTAGE ------------------------ ---------- ----------- ---------------- ---------- ----------- Safeco Corporation(2) Safeco Plaza Seattle, WA 98185................. 1,429,900 15.0% -- 1,429,900 11.5% John Hancock Mutual Life Insurance Company(3) 200 Clarendon Street Boston, MA 02116.................. 439,680 4.4 439,680 -- -- Steven J. Lee(4).................... 676,195 6.8 95,600 580,595 4.5 Arthur A. Siciliano(5).............. 405,187 4.2 71,700 333,487 2.6 Eric G. Walters(6).................. 236,332 2.4 38,240 198,092 1.6 W. Keith Trowbridge(7).............. 6,249 * -- 6,249 * Thomas S. Soltys(8)................. 117,625 1.2 -- 117,625 * Daniel S. Bernstein(9).............. 40,737 * 4,780 35,957 * Marcia J. Hooper(10)................ 33,788 * -- 33,788 * Frank W. LoGerfo(11)................ 27,750 * -- 27,750 * Peter K. Hoffman(12)................ 9,760 * -- 9,760 * All directors and executive officers as a group (9 persons)(13)........ 1,553,623 14.9 210,320 1,343,303 10.2
- --------------------------- * Less than 1% (1) If the underwriters' over-allotment option is exercised in full, the following selling shareholders will sell the number of additional shares of common stock set forth in the following table and, after the sale, will beneficially own the number of shares of common stock that is set forth below opposite their respective names; in addition, all directors and executive officers as a group will beneficially own the number of shares of common stock that is set forth below: 28 30
SHARES OF COMMON STOCK TO BE BENEFICIALLY OWNED AFTER NUMBER OF SHARES EXERCISE OF OF COMMON STOCK BEING UNDERWRITERS' OFFERED UPON EXERCISE OVER-ALLOTMENT OPTION OF THE UNDERWRITERS' ----------------------- NAME OVER-ALLOTMENT OPTION NUMBER PERCENTAGE ---- ---------------------------- --------- ---------- Steven J. Lee 19,314 561,281 4.4% Arthur A. Siciliano 14,486 319,001 2.5 Eric G. Walters 7,726 190,366 1.5 David S. Bernstein 965 34,992 * All directors and executive officers as a group (9 persons) 38,000 1,305,303 10.0
(2) Based on a Schedule 13G filed by Safeco Corporation and affiliated entities on February 12, 1999 pursuant to the Securities Exchange Act of 1934, as amended. The reported shares are owned beneficially by registered investment companies for which a subsidiary of Safeco Corporation serves as advisor. Safeco Corporation and the subsidiary that serves as an advisor disclaim beneficial ownership of the shares reported. (3) Represents aggregate shares of common stock issuable to John Hancock Mutual Life Insurance Company upon the cashless exercise of currently exercisable stock purchase warrants at an exercise price of $5.18 per share based on the $27.125 per share closing sale price of our common stock on September 13, 1999. (4) Includes 418,978 Presently Exercisable Options held by Mr. Lee. (5) Includes 197,781 Presently Exercisable Options held by Dr. Siciliano. (6) Includes 148,234 Presently Exercisable Options held by Mr. Walters. (7) Includes 6,249 Presently Exercisable Options held by Mr. Trowbridge. (8) Includes 17,625 Presently Exercisable Options held by Mr. Soltys. (9) Includes 33,000 Presently Exercisable Options held by Dr. Bernstein and 4,620 shares held by Dr. Bernstein in an IRA account. (10) Includes 33,000 Presently Exercisable Options held by Ms. Hooper. (11) Includes 27,750 Presently Exercisable Options held by Dr. LoGerfo. (12) Includes 9,760 Presently Exercisable Options held by Mr. Hoffman. (13) Includes 892,377 Presently Exercisable Options beneficially owned prior to this offering, gives effect to the exercise of options for 210,320 shares and the sale of those shares in the offering and, therefore, includes 682,057 Presently Exercisable Options beneficially owned after the offering. 29 31 UNDERWRITING PolyMedica and the selling shareholders have entered into an underwriting agreement with the underwriters named below. CIBC World Markets Corp. and First Union Capital Markets Corp. are acting as representatives of the underwriters. The underwriting agreement provides for the purchase of a specific number of shares of common stock by each of the underwriters. The underwriters' obligations are several, which means that each underwriter is required to purchase a specified number of shares, but is not responsible for the commitment of any other underwriter to purchase shares. Subject to the terms and conditions of the underwriting agreement, each underwriter has severally agreed to purchase the number of shares of common stock set forth opposite its name below:
UNDERWRITERS NUMBER OF SHARES ------------ ---------------- CIBC World Markets Corp. ................................... First Union Capital Markets Corp. .......................... -------- Total............................................. ========
This is a firm commitment underwriting. This means that the underwriters have agreed to purchase all of the shares offered by this prospectus (other than those covered by the over-allotment option described below) if any are purchased. Under the underwriting agreement, if an underwriter defaults in its commitment to purchase shares, the commitments of non-defaulting underwriters may be increased or the underwriting agreement may be terminated, depending on the circumstances. The representatives have advised PolyMedica and the selling shareholders that the underwriters propose to offer the shares directly to the public at the public offering price that appears on the cover page of this prospectus. In addition, the representatives may offer some of the shares to certain securities dealers at such price less a concession of $ per share. The underwriters may also allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the shares are released for sale to the public, the representatives may change the offering price and other selling terms at various times. PolyMedica and some of the selling shareholders have granted the underwriters an over-allotment option. This option, which is exercisable for up to 30 days after the date of this prospectus, permits the underwriters to purchase a maximum of 435,000 additional shares from PolyMedica and the participating selling shareholders to cover over-allotments. If the underwriters exercise all or part of this option, they will purchase shares covered by the option at the public offering price that appears on the cover page of this prospectus, less the underwriting discount. If this option is exercised in full, the total price to public will be $ million, and the total proceeds to PolyMedica and the selling shareholders will be approximately $ million and $ million, respectively. The underwriters have severally agreed that, to the extent the over-allotment option is exercised, they will each purchase a number of additional shares proportionate to the underwriter's initial amount reflected in the foregoing table. The following table provides information regarding the amount of the discount to be given to the underwriters by PolyMedica and the selling shareholders.
TOTAL WITHOUT TOTAL WITH EXERCISE OF FULL EXERCISE OF PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION --------- --------------------- --------------------- PolyMedica.................................. $ $ $ Selling shareholders........................ -------- -------- -------- Total............................. $ $ $ ======== ======== ========
PolyMedica will pay all of the expenses of the offering, excluding the underwriting discount, which expenses we estimate to be approximately $500,000. 30 32 PolyMedica and the selling shareholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933. PolyMedica, its officers and directors and certain other shareholders have agreed to a 90-day "lock up" with respect to approximately 1,338,812 shares of common stock and certain other PolyMedica securities that they beneficially own, including securities that are exchangeable or exercisable for shares of common stock. This means that, subject to certain exceptions, for a period of 90 days following the date of this prospectus, PolyMedica and such persons may not offer, sell, pledge or otherwise dispose of the PolyMedica securities without the prior written consent of CIBC World Markets Corp. Rules of the Securities and Exchange Commission may limit the underwriters from bidding for or purchasing shares before the distribution of the shares is completed. However, the underwriters may engage in the following activities in accordance with the rules: - Stabilizing transactions -- The representatives may make bids or purchases for the purpose of pegging, fixing or maintaining the price of the shares, so long as stabilizing bids do not exceed a specified maximum. - Over-allotments and syndicate covering transactions -- The underwriters may create a short position in the shares by selling more shares than are set forth on the cover page of this prospectus. If a short position is created in connection with the offering, the representatives may engage in syndicate covering transactions by purchasing shares in the open market. The representatives may also elect to reduce any short position by exercising all or part of the over-allotment option. - Penalty bids -- If the representatives purchase shares in the open market in a stabilizing transaction or syndicate covering transaction, they may reclaim a selling concession from the underwriters and selling group members who sold those shares as part of this offering. - Passive market making -- Market makers in the shares who are underwriters or prospective underwriters may make bids for or purchases of shares, subject to certain limitations, until the time, if ever, at which a stabilizing bid is made. Stabilization and syndicate covering transactions may cause the price of the shares to be higher than it would be in the absence of such transactions. The imposition of a penalty bid might also have an effect on the price of the shares if it discourages resales of the shares. Neither PolyMedica nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of the shares. These transactions may occur on the Nasdaq National Market or otherwise. If these transactions are commenced, they may be discontinued without notice at any time. 31 33 LEGAL MATTERS The validity of the shares of common stock we are offering will be passed upon for us by Hale and Dorr LLP, Boston, Massachusetts. Certain legal matters in connection with this offering will be passed upon for the selling shareholders by Hale and Dorr LLP. Certain legal matters in connection with this offering will be passed upon for the underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. EXPERTS The consolidated financial statements as of March 31, 1998 and 1999 and for each of the three years in the period ended March 31, 1999 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We file reports, proxy statements and other documents with the Securities and Exchange Commission. You may read and copy any document we file at the SEC's public reference room at Judiciary Plaza Building, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. You should call 1-800-SEC-0330 for more information on the public reference room. Our SEC filings are also available to you on the SEC's Internet site at http://www.sec.gov. In addition, these materials may be read at the offices of The Nasdaq Stock Market, Inc., 1735 K Street, N.W., Washington, D.C. 20006. This prospectus is part of the registration statement and does not contain all of the information included in the registration statement. Whenever a reference is made in this prospectus to any contract or other document of PolyMedica, the reference may not be complete and you should refer to the exhibits that are a part of the registration statement for a copy of the contract or document. The SEC allows us to "incorporate by reference" into this prospectus information that we file with the SEC in other documents. This means that we can disclose important information to you by referring to other documents that contain that information. The information incorporated by reference is considered to be part of this prospectus, and information that we file with the SEC in the future and incorporate by reference will automatically update and may supersede the information contained in this prospectus. We incorporate by reference the documents listed below and any future filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, prior to the sale of all the shares covered by this prospectus. - - Our Annual Report on Form 10-K for the fiscal year ended March 31, 1999; - - Our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1999; - - All of our filings pursuant to the Exchange Act after the date of filing the initial registration statement and prior to effectiveness of the registration statement; and - - The description of our common stock contained in our Registration Statement on Form 8-A dated March 27, 1995. You may request a copy of these documents, which will be provided at no cost, by contacting: PolyMedica Corporation, 11 State Street, Woburn, Massachusetts 01801, Attention: Investor Relations; Telephone (781) 933-2020. 32 34 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants........................... F-2 Consolidated Balance Sheets as of March 31, 1998 and 1999... F-3 Consolidated Statements of Operations for the years ended March 31, 1997, 1998, and 1999............................ F-4 Consolidated Statements of Shareholders' Equity for the years ended March 31, 1997, 1998, and 1999................ F-5 Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1998, and 1999............................ F-6 Notes to Consolidated Financial Statements.................. F-7 Consolidated Balance Sheets at March 31, 1999 and June 30, 1999...................................................... F-23 Consolidated Statements of Operations for the three months ended June 30, 1998 and June 30, 1999..................... F-24 Consolidated Statements of Cash Flows for the three months ended June 30, 1998 and June 30, 1999..................... F-25 Notes to Consolidated Financial Statements.................. F-26
F-1 35 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of PolyMedica Corporation: In our opinion, the accompanying consolidated balance sheets, and the related statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the financial position of PolyMedica Corporation and its subsidiaries (the "Company") at March 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1999, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP -------------------------------------- PricewaterhouseCoopers LLP Boston, Massachusetts May 6, 1999 F-2 36 POLYMEDICA CORPORATION CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31, 1998 1999 -------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS Current assets: Cash and cash equivalents................................. $ 6,440 $ 10,191 Accounts receivable (net of allowances of $3,914 and $7,330 in 1998 and 1999 , respectively)................ 21,207 32,251 Inventories............................................... 4,857 6,909 Deferred tax asset........................................ 2,075 2,708 Prepaid expenses and other current assets................. 845 721 -------- -------- Total current assets................................... 35,424 52,780 Property, plant, and equipment, net......................... 6,285 6,856 Intangible assets, net...................................... 39,555 37,278 Direct response advertising, net............................ 10,899 15,678 Other assets, net........................................... 238 347 -------- -------- Total assets........................................... $ 92,401 $112,939 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable -- trade................................. $ 8,221 $ 12,527 Accrued expenses.......................................... 3,805 4,781 Long-term debt and notes payable.......................... 2,329 3,083 -------- -------- Total current liabilities.............................. 14,355 20,391 Long-term debt and notes payable, net....................... 20,577 21,583 Deferred income taxes....................................... 4,541 7,920 -------- -------- Total liabilities...................................... 39,473 49,894 -------- -------- Commitments (Note K) Shareholders' equity: Preferred stock, $.01 par value; 2,000,000 shares authorized, none issued or outstanding................. -- -- Common stock, $.01 par value; 20,000,000 shares authorized; 8,909,718 and 9,197,075 shares issued in 1998 and 1999, respectively............................ 89 92 Treasury stock, at cost (129,560 and 78,003 shares in 1998 and 1999, respectively)................................ (706) (458) Additional paid-in capital................................ 54,498 56,557 Retained earnings (deficit)............................... (164) 7,480 Notes receivable from officers............................ (789) (626) -------- -------- Total shareholders' equity............................. 52,928 63,045 -------- -------- Total liabilities and shareholders' equity............. $ 92,401 $112,939 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-3 37 POLYMEDICA CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31, ----------------------------------------- 1997 1998 1999 ---------- --------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net revenues............................................ $ 30,453 $73,825 $104,825 Cost of sales........................................... 13,603 35,575 49,605 -------- ------- -------- Gross margin............................................ 16,850 38,250 55,220 Selling, general and administrative expenses............ 12,985 28,826 42,185 -------- ------- -------- Income from operations.................................. 3,865 9,424 13,035 Other income and expense: Gain on sale of wound care business................... -- 4,126 1,597 Investment income..................................... 864 629 434 Interest expense...................................... (2,774) (2,688) (2,555) -------- ------- -------- (1,910) 2,067 (524) Income before income taxes.............................. 1,955 11,491 12,511 Income tax provision (benefit).......................... (367) 3,872 4,867 -------- ------- -------- Net income.............................................. $ 2,322 $ 7,619 $ 7,644 ======== ======= ======== Net income per weighted average share, basic............ $ .28 $ .88 $ .86 ======== ======= ======== Net income per weighted average share, diluted.......... $ .27 $ .79 $ .78 ======== ======= ======== Weighted average shares, basic.......................... 8,259 8,652 8,898 Weighted average shares, diluted........................ 8,618 9,691 9,786
The accompanying notes are an integral part of the consolidated financial statements. F-4 38 POLYMEDICA CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1997, 1998, AND 1999
COMMON STOCK TREASURY STOCK ------------------ ------------------- ADDITIONAL NUMBER OF NUMBER OF PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT --------- ------ --------- ------- ---------- ----------- (DOLLARS IN THOUSANDS) BALANCE AT MARCH 31, 1996....................... 8,112,635 $81 (159,905) $(1,036) $54,917 $(10,105) Exercise of stock options....................... 245,966 3 (11,880) (110) 924 Issuance of common stock........................ 224,400 2 1,115 Purchase of common stock........................ (8,900) (38) Officer notes receivable........................ Payment of officer note receivable.............. (9,832) (93) Issuance of treasury stock under the 1992 Employee Stock Purchase Plan.................. 17,958 162 (70) Distribution of CardioTech stock to PolyMedica shareholders.................................. (3,548) Currency translation adjustment................. Net income...................................... 2,322 --------- --- -------- ------- ------- -------- BALANCE AT MARCH 31, 1997....................... 8,583,001 86 (172,559) (1,115) 53,338 (7,783) Exercise of stock options and warrants.......... 326,717 3 11,471 125 1,325 Payment of officer notes receivable............. (3,282) (30) Issuance of treasury stock under the 1992 Employee Stock Purchase Plan.................. 34,810 314 (165) Currency translation adjustment................. Net income...................................... 7,619 --------- --- -------- ------- ------- -------- BALANCE AT MARCH 31, 1998....................... 8,909,718 89 (129,560) (706) 54,498 (164) Exercise of stock options and warrants.......... 287,357 3 34,608 134 987 Payments of officer notes receivable............ Tax benefit from stock options exercised........ 1,046 Issuance of treasury stock under the 1992 Employee Stock Purchase Plan.................. 16,949 114 26 Net income...................................... 7,644 --------- --- -------- ------- ------- -------- BALANCE AT MARCH 31, 1999....................... 9,197,075 $92 (78,003) $ (458) $56,557 $ 7,480 ========= === ======== ======= ======= ======== NOTES CURRENCY TOTAL RECEIVABLE TRANSLATION STOCKHOLDERS' FROM OFFICERS ADJUSTMENT EQUITY ------------- ----------- ------------- (DOLLARS IN THOUSANDS) BALANCE AT MARCH 31, 1996....................... $(415) $(162) $43,280 Exercise of stock options....................... 817 Issuance of common stock........................ 1,117 Purchase of common stock........................ (38) Officer notes receivable........................ (607) (607) Payment of officer note receivable.............. 93 Issuance of treasury stock under the 1992 Employee Stock Purchase Plan.................. 92 Distribution of CardioTech stock to PolyMedica shareholders.................................. (3,548) Currency translation adjustment................. (63) (63) Net income...................................... -- 2,322 ----- ----- ------- BALANCE AT MARCH 31, 1997....................... (929) (225) 43,372 Exercise of stock options and warrants.......... 1,453 Payment of officer notes receivable............. 140 110 Issuance of treasury stock under the 1992 Employee Stock Purchase Plan.................. 149 Currency translation adjustment................. 225 225 Net income...................................... 7,619 ----- ----- ------- BALANCE AT MARCH 31, 1998....................... (789) 0 52,928 Exercise of stock options and warrants.......... 1,124 Payments of officer notes receivable............ 163 163 Tax benefit from stock options exercised........ 1,046 Issuance of treasury stock under the 1992 Employee Stock Purchase Plan.................. 140 Net income...................................... -- 7,644 ----- ----- ------- BALANCE AT MARCH 31, 1999....................... $(626) $ 0 $63,045 ===== ===== =======
The accompanying notes are an integral part of the consolidated financial statements. F-5 39 POLYMEDICA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31, -------------------------------- 1997 1998 1999 -------- -------- -------- (IN THOUSANDS) Cash flows from continuing operating activities: Net income................................................ $ 2,322 $ 7,619 $ 7,644 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization........................... 3,045 3,243 3,290 Amortization of direct-response advertising............. 120 2,423 5,383 Direct-response advertising............................. (1,740) (11,702) (10,162) Deferred income taxes................................... (1,138) 3,604 2,746 Tax benefit from stock options exercised................ -- -- 1,046 (Gain) loss on disposal of fixed assets................. 4 (60) -- Provision for bad debts................................. 237 3,138 7,119 Provision for sales allowances.......................... 1,369 4,846 3,702 Provision for inventory obsolescence.................... 71 12 10 Gain on sale of wound care business..................... -- (4,126) (1,597) Changes in assets and liabilities: Accounts receivable................................... (3,650) (22,988) (21,866) Inventories........................................... (1,051) (1,390) (2,062) Prepaid expenses and other assets..................... (389) 141 3 Accounts payable -- trade............................. 589 5,240 4,306 Accrued expenses...................................... 459 125 977 -------- -------- -------- Total adjustments..................................... (2,074) (17,494) (7,105) -------- -------- -------- Net cash flows from continuing operations.......... 248 (9,875) 539 Net cash flows used for discontinued operations.... (389) -- -- -------- -------- -------- Net cash flows from operating activities........... (141) (9,875) 539 -------- -------- -------- Cash flows from investing activities: Proceeds from sale of wound care business................. -- 8,428 1,597 Spinoff of CardioTech International, Inc.................. (3,830) -- -- Acquisition, net of cash acquired......................... (7,375) -- -- Purchase of property, plant, and equipment................ (913) (2,303) (1,474) Proceeds from sale of equipment........................... -- 100 -- -------- -------- -------- Net cash flows from investing activities........... (12,118) 6,225 123 -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock.................... 905 1,606 1,262 Purchase of common stock.................................. (38) -- -- Proceeds from long-term debt.............................. -- -- 4,000 Repayment (issuance) of officer notes receivable.......... (607) 110 163 Repayment of senior debt and notes payable................ (312) (2,658) (2,329) -------- -------- -------- Net cash flows from financing activities........... (52) (942) 3,096 -------- -------- -------- Net increase (decrease) in cash and cash equivalents...................................... (12,311) (4,592) 3,758 -------- -------- -------- Effect of exchange rate changes on cash..................... 37 4 (7) Cash and cash equivalents at beginning of period............ 23,302 11,028 6,440 -------- -------- -------- Cash and cash equivalents at end of period.................. $ 11,028 $ 6,440 $ 10,191 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest.................. $ 2,769 $ 2,728 $ 2,554 Income taxes paid......................................... 10 25 1,086
The accompanying notes are an integral part of the consolidated financial statements. F-6 40 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. NATURE OF BUSINESS: PolyMedica Corporation (the "Company") was incorporated as Emerging Sciences, Inc. in Massachusetts on November 16, 1988, and commenced commercial operations in October 1989. In July 1990, the Company changed its name to PolyMedica Industries, Inc. In June 1996, the Company distributed to its shareholders all of its shares of CardioTech International, Inc. ("CardioTech") in a transaction that qualified as a tax free spinoff. In August 1996, the Company purchased Liberty Medical Supply, Inc., a diabetes supply company. In July 1997, the Company sold certain assets of its U.S. and U.K. professional wound care operations. In September 1997, the Company changed its name to PolyMedica Corporation. The Company and its subsidiaries operate from manufacturing, distribution, and laboratory facilities located in Massachusetts, Florida, and Colorado. The Company generates sales from Diabetic Supplies; Consumer Healthcare, which includes OTC medical devices and urinary discomfort products; and Professional Products, which include prescription urologicals. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly- and majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. EARNINGS PER COMMON SHARE In its fiscal quarter ended December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share," which modifies the calculation of earnings per share ("EPS"). The Standard replaced the previous presentation of primary and fully diluted EPS to basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS includes the dilution of common stock equivalents, and is computed similarly to fully diluted EPS pursuant to APB Opinion 15. All prior periods presented have been restated to reflect this adoption. See Note L. UNCERTAINTIES The Company is subject to risks common to companies in the healthcare industry, including but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, receipt of third party healthcare reimbursement, and compliance with FDA government regulations. F-7 41 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CASH AND CASH EQUIVALENTS The Company considers all highly liquid short-term investments purchased with an initial maturity of three months or less to be cash equivalents. The Company places its cash and cash equivalents with high credit quality financial institutions. INVESTMENTS In 1999 and 1998, the Company invested primarily in commercial paper with initial maturities of 90 days or less and classifies all investments as held-to-maturity. All investments held as of March 31, 1999 and 1998 have been classified as cash equivalents and are carried at amortized cost which approximates market value. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out method) or market. RESEARCH AND DEVELOPMENT Research and development costs are charged to expense as incurred. INTANGIBLE ASSETS The Company capitalizes and includes in intangible assets the costs of acquiring patents on its products, a customer list, a covenant-not-to-compete, and goodwill, which is the cost in excess of the fair value of the net assets of acquired companies and product lines. All amortization is computed on the straight-line basis over the shorter of the economic life of the asset or the term of the underlying agreement. A customer list, a covenant-not-to-compete, and goodwill are amortized over seven, ten, and seven to thirty years, respectively. LONG-LIVED ASSETS Management's policy is to evaluate the recoverability of its long-lived assets when the facts and circumstances suggest that these assets may be impaired. The test of such recoverability is a comparison of the book value of the asset to expected cumulative (undiscounted) operating cash flows resulting from the underlying asset over its remaining life. If the book value of the long-lived asset exceeds undiscounted cumulative operating cash flows, the write-down is computed as the excess of the asset over the present value of the operating cash flow discounted at the Company's weighted average cost of capital over the remaining amortization period. MARKETING AND PROMOTIONAL COSTS Advertising, promotional, and other marketing costs are charged to earnings in the period in which they are incurred. Promotional and sample costs whose benefit is expected to assist future sales are expensed as the related materials are used. F-8 42 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DIRECT-RESPONSE ADVERTISING In accordance with Statement of Position 93-7, direct-response advertising and related costs for all periods presented are capitalized and amortized to selling, general and administrative expenses on an accelerated basis during the first two years of a four-year period. The amortization rate is such that 55% of such costs are expensed after two years from the date they are incurred, and the remaining 45% is expensed on a straight line basis over the next two years. Revenues generated from new customers as a result of direct-response advertising have historically resulted in a revenue stream lasting seven years. Management has selected a more conservative four-year amortization period, in consideration of the "Factors Affecting Future Operating Results" in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report. Management assesses the realizability of the amounts of direct-response advertising costs reported as assets at each balance sheet date by comparing the carrying amounts of such assets to the probable remaining future net benefits expected to result directly from such advertising. The Company incurred and capitalized direct-response advertising of $1.74 million, $11.70 million and $10.16 million in 1997, 1998 and 1999, respectively. As of March 31, 1998 and 1999, accumulated amortization was $2.54 million and $7.92 million, which resulted in a net capitalized direct-response advertising asset of $10.90 million and $15.68 million, respectively. A total of $120,000, $2.42 million and $5.38 million in direct-response advertising was amortized and charged to selling, general and administrative expenses in 1997, 1998 and 1999, respectively. OTHER ASSETS Other assets consist principally of senior debt issuance costs and deposits for equipment yet to be placed in service. Senior debt issuance costs are being amortized over ten years. FOREIGN CURRENCY TRANSLATION In accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation", assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars using current exchange rates at the balance sheet date, and revenues and expenses are translated at average exchange rates prevailing during the period. The resulting translation adjustments are recorded in a separate component of Shareholders' Equity. As result of the inactivity of foreign subsidiaries caused by the sale of the U.S. and U.K. wound care business in July 1997, all foreign currency translation adjustments were expensed. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the various assets which range from five to twelve years. Amortization of leasehold improvements is computed using the straight-line method based on estimated useful lives or terms of the lease, whichever is shorter. Upon retirement or disposal of fixed assets, the costs and accumulated depreciation are removed from the accounts, and any gain or loss is reflected in income. Expenditures for repairs and maintenance are charged to expense as incurred. Construction in progress is not depreciated until placed in service. F-9 43 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES The Company recognizes deferred tax assets and liabilities based on temporary differences between the financial statements and tax basis of assets and liabilities using enacted tax rates expected to be in effect when they are realized. REVENUE RECOGNITION The Company recognizes revenue upon shipment. Included as reductions to gross accounts receivable are a sales allowance for returned goods and an allowance for bad debts. ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. This statement requires the classification of items of comprehensive income by their nature in a financial statement and the accumulated balance of other comprehensive income separately from retained earnings, additional paid-in capital and the equity section of the balance sheet. The Company adopted SFAS No. 130 for its fiscal year ended March 31, 1999. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which supercedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise" and changes the way public companies report information about operating segments. SFAS No. 131, which is based on the management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report entity-wide disclosures about products and services, major customers and the material countries in which the entity holds assets and reports revenue. The Company adopted SFAS No. 131 for its fiscal year ended March 31, 1999. RECLASSIFICATIONS Certain amounts in the prior financial statements have been reclassified to conform with the current year presentation. C. SALE OF WOUND CARE BUSINESS: In July 1997, the Company sold certain assets of its U.S. and U.K. wound care operations. Under the terms of the sale, the purchaser, Innovative Technologies Group Plc ("IT"), paid the Company $9 million in cash and issued to the Company an unsecured promissory note in the face amount of $4 million. In July 1998, the Company received $1.6 million as final settlement of this note. The net book value of assets sold and pretax gain as a result of this transaction were $4.9 million and $5.7 million, respectively. Gains on the sale for the years ended March 31, 1998 and 1999 were as follows: F-10 44 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 1999 ------ ------ Gain on sale of wound care business........................ $4,126 $1,597 Provision for income taxes related to gain................. 1,390 621 ------ ------ Gain on sale, net of income taxes.......................... $2,736 $ 976 ====== ====== Net income per common share, diluted, related to gain...... $ .29 $ .10 ====== ====== Net income per common share, diluted....................... $ .79 $ .78 ====== ======
D. PURCHASE OF LIBERTY MEDICAL SUPPLY, INC.: On August 30, 1996, the Company acquired all of the outstanding stock of Liberty Medical Supply, Inc. in a transaction accounted for under the purchase method of accounting. Accordingly, the net assets and operations of Liberty Medical have been included in the Company's financial statements since the date of acquisition. The acquisition, as amended on March 26, 1997, was for an aggregate purchase price of $10.26 million (including $490,000 of related expenses), which was comprised of (i) $7.35 million in cash, (ii) two-year 7% subordinated promissory notes in the aggregate amount of $1.30 million and (iii) 224,400 shares of the Company's common stock. The purchase price was allocated to net assets acquired based on their fair value at the date of acquisition, and the excess of the purchase price over the fair value of the assets acquired was recorded as attributable to a customer list ($1.82 million, to be amortized over seven years) and goodwill ($6.82 million, to be amortized over twenty years). If the acquisition had taken place at the beginning of the year ending March 31, 1997, giving effect to adjustments for amortization of intangible assets, interest income and interest expense for twelve months, the Company's pro forma (unaudited) revenues, net income and net income per share for the twelve months ended March 31, 1997 would have been $35.63 million, $2.50 million and $.29, respectively. E. DISCONTINUED OPERATIONS: On March 1, 1996, the Company announced its strategic decision to distribute to its shareholders all of its shares of CardioTech under a plan which was approved by the Company's board of directors. In May 1996, the Company's board of directors declared a stock dividend for the purpose of making a distribution to the Company's shareholders of all of the outstanding shares it owned in CardioTech. The Company believes that the distribution of CardioTech Common Stock in the Distribution qualified as a "tax-free" spinoff under Section 355 of the Internal Revenue Code of 1986, as amended. CardioTech develops, manufactures and markets its polymer technologies with particular emphasis on the development of implantable synthetic grafts for a broad variety of applications, including vascular access grafts, peripheral grafts and coronary artery bypass grafts. F. ACCOUNTS RECEIVABLE: As of March 31, 1999, Liberty Medical's gross unbilled receivables included in accounts receivable were $15.35 million as compared with $10.82 million as of March 31, 1998. The increase is primarily a result of the overall growth of Liberty Medical's sales in the fiscal year ended March 31, 1999. The Company recorded sales returns and bad debt write-offs of $5.13 million and $7.41 million in the fiscal years ended March 31, 1998 and 1999, respectively. F-11 45 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) G. INVENTORIES: Inventories consist of the following:
MARCH 31, MARCH 31, 1998 1999 --------- --------- (IN THOUSANDS) Raw materials.......................................... $1,058 $ 739 Work in process........................................ 296 594 Finished goods......................................... 3,503 5,576 ------ ------ $4,857 $6,909 ====== ======
H. PROPERTY, PLANT, AND EQUIPMENT: Property, plant, and equipment consist of the following:
MARCH 31, MARCH 31, 1998 1999 --------- --------- (IN THOUSANDS) Manufacturing equipment................................ $1,841 $1,937 Laboratory equipment................................... 188 222 Land................................................... 663 663 Building............................................... 2,345 2,364 Leasehold improvements................................. 343 343 Furniture, fixtures, and office equipment.............. 2,638 3,485 Construction in progress............................... -- 403 ------ ------ 8,018 9,417 Less accumulated depreciation and amortization......... (1,733) (2,561) ------ ------ $6,285 $6,856 ====== ======
Depreciation and amortization expense from continuing operations for property, plant, and equipment for the years ended March 31, 1997, 1998, and 1999, was approximately $899,000, $838,000, and $903,000, respectively. In May 1999, the Company purchased a 66,000 square foot building in Port St. Lucie, Florida to support the Company's growth. F-12 46 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) I. INTANGIBLE ASSETS: Intangible assets consist of the following:
MARCH 31, MARCH 31, 1998 1999 --------- --------- (IN THOUSANDS) Goodwill............................................... $42,816 $42,816 Covenant-not-to-Compete................................ 6,800 6,800 Customer list.......................................... 1,816 1,816 ------- ------- 51,432 51,432 Less accumulated amortization.......................... (11,877) (14,154) ------- ------- $39,555 $37,278 ======= =======
Amortization expense from continuing operations associated with intangible assets for the years ended March 31, 1997, 1998, and 1999, was $2,117,000, $2,279,000, and $2,277,000, respectively. J. LONG-TERM DEBT AND NOTES PAYABLE: SENIOR DEBT In connection with the purchase of the WEBCON product line, in January 1993, the Company and its wholly-owned subsidiary, PolyMedica Pharmaceuticals (U.S.A.), Inc. ("PMP USA") sold to the John Hancock Mutual Life Insurance Company ("Hancock"), $25 million 10.65% Guaranteed Senior Secured Notes due January 31, 2003, and a warrant for the purchase of up to 500,000 shares of common stock of the Company at $13.50 each (the "Hancock Notes"). The effective interest rate of the Hancock Notes was 10.97%. Interest is payable semi-annually. At that time, the warrant was valued at $725,000 and was recorded as a discount to the Hancock Notes, to be amortized to expense over the life of the Hancock Notes. The warrant was exercisable beginning in January 1994. The Company recorded $89,000 of amortization expense each for the years ended March 31, 1998 and 1999. As of March 31, 1998 and 1999 the balance due to Hancock was $23.0 million and $21.0 million, respectively. As of March 31, 1998 and 1999, there was $423,000 and $334,000, respectively, of unamortized discount, netted against senior debt. In January 1996, the Company and Hancock signed an amendment to the Hancock Notes. Under the terms of the amendment, scheduled semi-annual repayments of principal commence at $1.00 million each in fiscal 1998, increase to $2.08 million each beginning in January 2000 and are completed with a $7.50 million payment at January 31, 2003. Pursuant to the amendment, the exercise price for the Hancock warrant, exercisable for 536,993 shares of common stock of the Company, was reduced from $8.38 to $7.00 per share and the interest rate of the Hancock Notes was increased from 10.65% to 10.9%. In addition, the Company obtained less restrictive dividend terms and revised financial covenants. This amendment resulted in a revaluation of the warrant to $623,000, which compared with a $513,000 unamortized value on January 1, 1996. The difference of $110,000 was recorded to additional paid-in capital. As a result of a private placement of the Company's Common Stock in March 1996 and the acquisition of Liberty Medical in August 1996, the exercise price of the Hancock warrant was adjusted to $5.18 per share of common stock for a total of 543,464 shares exercisable under the warrant. F-13 47 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Under the terms of the Hancock Notes, Hancock has a security interest in all of the assets of PMP USA and its subsidiary PolyMedica Pharmaceuticals (Puerto Rico), Inc. ("PMP PR"). The Hancock Notes are collateralized by all of the assets of PMP USA and PMP PR, which amounted to approximately $40.9 million as of March 31, 1999. Interest expense recorded for the Hancock Notes was $2,725,000, $2,634,000, and $2,416,000 in the years ended March 31, 1997, 1998, and 1999, respectively. REVOLVING CREDIT FACILITY In March 1999, the Company increased its existing revolving credit facility from $7.5 million to $10 million. As of March 31, 1999, the Company had an outstanding balance of $4 million. Under the terms of this facility, the Company is required to repay all principal balances on March 31, 2001. The facility is collateralized by certain assets of the Company. Under this facility, the Company is required to maintain certain financial covenants. The interest rate is tied to the Company's funded debt to EBITDA ratio and was 7.75% as of March 31, 1999. K. COMMITMENTS: The Company leases its facilities and certain equipment under operating leases expiring through 2004. The annual future minimum lease and rental commitments as of March 31, 1999, under all the Company's leases are:
(IN THOUSANDS) 2000......................................... $ 945 2001......................................... 705 2002......................................... 523 2003......................................... 364 2004......................................... 168 ------ Total minimum lease payments............ $2,705 ======
Rental expense under these leases amounted to approximately $368,000, $418,000, and $500,000, for the years ended March 31, 1997, 1998, and 1999, respectively. F-14 48 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) L. EARNINGS PER SHARE: Calculation of per share earnings is as follows:
FISCAL YEAR ENDED MARCH 31, ------------------------------------ 1997 1998 1999 -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE DATA) Net income........................................... $2,322 $7,619 $7,644 BASIC: Weighted average common stock outstanding, net of treasury stock, end of period...................... 8,259 8,652 8,898 Net income per common share, basic................... $ 0.28 $ 0.88 $ 0.86 ====== ====== ====== DILUTED: Weighted average common stock outstanding, net of treasury stock, end of period...................... 8,259 8,652 8,898 Weighted average common stock equivalents............ 359 1,039 888 Weighted average common stock outstanding, net of treasury stock, end of period...................... 8,618 9,691 9,786 Net income per common share, diluted................. $ 0.27 $ 0.79 $ 0.78 ====== ====== ======
M. COMPREHENSIVE INCOME: The Company's total comprehensive income was as follows:
1997 1998 1999 ------ ------ ------ (IN THOUSANDS) Net income............................................... $2,322 $7,619 $7,644 Other comprehensive expense, net of tax: Currency translation adjustment.......................... (63) 225 -- ------ ------ ------ Total comprehensive income............................... $2,259 $7,844 $7,644 ====== ====== ======
N. SHAREHOLDERS' EQUITY: Each holder of outstanding common stock has a preferred stock purchase right (a "Right") for each share of common stock. Each Right entitles the holder to purchase from the Company one one-hundredth of a share of Series A junior participating preferred stock at a cash exercise price to be determined by the board of directors. Initially, the Rights will be attached to all common stock certificates and will not be exercisable. The Rights will become exercisable upon the earlier of certain events, including an acquisition by a person or group of 15% or more of the outstanding common stock (an "Acquiring Person"), or the commencement of a tender offer or exchange offer that would result in an Acquiring Person beneficially owning 15% or more of the outstanding common stock. The Company will generally be entitled to redeem the Rights at $.01 per share at any time until the tenth day following public announcement that a 15% stock position has been acquired. The Rights will expire on January 23, 2002, unless earlier redeemed or exchanged. Between June 1992 and May 1994, the Company's board of directors authorized the future purchase of up to an aggregate of 1,750,000 shares of the Company's common stock on the open market, with any shares F-15 49 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) to be held in treasury. As of March 31, 1999, cumulative purchases of common stock totalled 239,193 for an aggregate of $1.69 million. The purpose of this purchase program is, in part, to provide shares of common stock for issuance pursuant to the 1992 Employee Stock Purchase Plan and upon the exercise of the warrant issued to Hancock. O. INCOME TAXES: Income (loss) before income taxes was generated as follows in the years ended March 31:
1997 1998 1999 ------ ------- ------- (IN THOUSANDS) United States.......................................... $1,994 $10,291 $12,463 Foreign................................................ (39) 1,200 48 ------ ------- ------- $1,955 $11,491 $12,511 ====== ======= =======
The provision (benefit) for income taxes consists of the following for the years ended March 31:
1997 1998 1999 ----- ------ ------ (IN THOUSANDS) FEDERAL -- current.............................................. $(275) $ 216 $1,381 -- deferred............................................. -- 2,495 2,749 ----- ------ ------ -- total................................................ (275) 2,711 4,130 STATE -- current.............................................. 65 52 740 -- deferred............................................. (157) 1,109 (3) ----- ------ ------ -- total................................................ (92) 1,161 737 ----- ------ ------ Total Federal and State................................... $(367) $3,872 $4,867 ===== ====== ======
A reconciliation between the Company's effective tax rate for operations and the U.S. statutory rate is as follows:
1997 1998 1999 ----- ---- ---- U.S. statutory rate......................................... 34.0% 34.0% 34.0% Change in valuation allowance............................... (60.5%) (5.5%) -- State income taxes, net of U.S. Federal Income Tax effect................................... 6.5% 6.6% 4.7% Other....................................................... 1.2% (1.9%) .2% ----- ---- ---- Effective tax rate.......................................... (18.8%) 33.2% 38.9% ===== ==== ====
The Company determined that it is more likely than not that deferred tax assets remaining on March 31, 1999 will be realized. Realization of the net deferred tax assets is dependent on generating sufficient taxable income prior to the expiration of loss carryforwards. Although realization is not assured, management believes that it is more likely than not that such net deferred tax assets will be realized. The following is a summary of F-16 50 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the significant components of the Company's deferred tax assets and liabilities as of March 31, 1998 and 1999:
1998 1999 ------- ------- (IN THOUSANDS) Deferred tax assets (liabilities) -- current: Reserves............................................... $ 2,075 $ 2,708 ======= ======= Deferred tax assets (liabilities) -- long term: Federal and state net operating loss carryforwards..... $ 1,558 $ 79 Foreign net operating loss carryforwards............... -- -- Other assets........................................... -- -- Intangible assets...................................... (1,291) (1,579) Property, plant and equipment.......................... (419) (520) Direct-response advertising............................ (4,389) (5,900) ------- ------- Net deferred tax liability -- long term................ $(4,541) $(7,920) ======= =======
As of March 31, 1998, accrued expenses included $1.04 million of accrued taxes. As of March 31, 1999, the Company has utilized all net operating loss carryforward amounts for federal income tax purposes. P. MAJOR CUSTOMERS: For the fiscal years ended March 31, 1997, 1998 and 1999, no customer represented more than 10% of the Company's consolidated net revenues. As of March 31, 1998 and 1999, the amounts due from Health Care Financing Administration of the United States government related to Liberty Medical revenues was $4.64 million and $8.77 million, respectively. Q. STOCK OPTIONS: Effective September 1998, the Company's shareholders approved the 1998 Stock Incentive Plan (the "1998 Plan"), which replaced the 1990 Stock Option Plan (the "1990 Plan") and the 1992 Directors Stock Option Plan (the "1992 Plan") (collectively, the "Plans"). The 1998 Plan provides for the grant to certain individuals of stock options to purchase up to 315,000 shares of the Company's common stock. Generally, when shares acquired pursuant to the exercise of incentive stock options are sold within one year of exercise or within two years from the date of grant, the Company derives a tax deduction measured by the amount that the fair market value exceeds the option price at the date the options are exercised. When non-qualified stock options are exercised, the Company derives a tax deduction measured by the amount that the fair market value exceeds the option price at the date the options are exercised. The tax benefit from these deductions are recognized as additional paid-in capital. F-17 51 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Option activity under the Plans is as follows:
OPTION OPTION SHARES PRICES ---------- -------------- Outstanding, March 31, 1996............................. 1,674,559 $ .95 - $13.33 Granted............................................... 1,983,212 .71 - 6.38 Exercised............................................. (245,966) 2.06 - 7.86 Cancelled............................................. (1,435,197) .95 - 13.33 ---------- Outstanding, March 31, 1997............................. 1,976,608 $ .71 - $ 6.38 ---------- Granted............................................... 271,360 4.87 - 13.75 Exercised............................................. (326,717) .71 - 5.38 Cancelled............................................. (46,736) 4.31 - 5.38 ---------- Outstanding, March 31, 1998............................. 1,874,515 $ .71 - $13.75 ---------- Granted............................................... 267,250 7.56 - 11.44 Exercised............................................. (287,357) 0.71 - 7.75 Cancelled............................................. (97,645) 4.31 - 13.75 ---------- Outstanding, March 31, 1999............................. 1,756,763 $2.14 - $13.75 ==========
At March 31, 1999, 1,482,659 shares were exercisable and 274,104 will vest principally over three years under the Plans. There were 73,000 shares remaining that are authorized for future option grants under the 1998 Plan. The weighted average exercise price of shares exercisable as of March 31, 1999 was $5.33. In October 1996, the board of directors approved the cancellation of prior grants of 1,172,355 options whose exercise prices ranged from $.95 to $13.33 per common share. A total of 1,172,355 new options were granted whose exercise prices ranged from $.71 to $5.38 per common share. SUPPLEMENTAL DISCLOSURES FOR STOCK-BASED COMPENSATION The Company applies APB Opinion No. 25 and related Interpretations in accounting for the Plans. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") issued in 1995, defined a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. The Company elected to continue to apply the accounting provisions of APB Opinion No. 25 for stock options. The required disclosures under SFAS 123 as if the Company had applied the new method of accounting are made below. Summarized information about stock options outstanding as of March 31, 1999, is as follows:
NUMBER OF RANGE OF NUMBER OF WEIGHTED AVG. OPTIONS WEIGHTED-AVG. EXERCISE OPTIONS REMAINING WEIGHTED AVG. OUTSTANDING- EXERCISE-PRICE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISABLE - -------------- ----------- ---------------- -------------- ------------ -------------- $ 2.14 - 2.14.. 39,663 7.51 $ 2.15 39,663 $ 2.14 $ 3.30 - 4.64.. 897,980 7.63 $ 4.01 860,202 $ 4.00 $ 5.38 - 7.75.. 551,252 8.28 $ 6.22 426,738 $ 5.81 $ 8.63 - 11.88.. 229,119 8.76 $11.14 117,307 $11.69 $13.50 - 13.75.. 38,749 8.50 $13.51 38,749 $13.51
F-18 52 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The fair value of each option granted during 1998 and 1999 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
1998 1999 ----- ----- Dividend yield.............................................. none none Expected volatility......................................... 55.0% 55.0% Risk-free interest rate..................................... 6.18% 4.89% Expected life............................................... 4 4 Weighted average fair value of options granted at fair value during: 1998............................................................. $5.80 1999............................................................. $3.79 Employee Stock Purchase Plan weighted-average fair value of options: 1998............................................................. $2.06 1999............................................................. $2.82
Had compensation cost for the Company's 1998 and 1999 stock option grants been determined consistent with SFAS 123, the Company's net income and net income per share would approximate the pro forma amounts below:
NET INCOME PER FULLY NET INCOME DILUTED SHARE ---------- ------------- As reported: 1998.............................................. $7,619,000 $.79 1999.............................................. $7,644,000 $.78 Pro forma: 1998.............................................. $7,003,000 $.72 1999.............................................. $7,035,000 $.72
The effect of applying SFAS 123 in this pro forma disclosure is not indicative of future amounts. SFAS 123 does not apply to awards made prior to 1995. Additional awards in future years are anticipated. R. 401(k) PLAN: The PolyMedica Corporation 401(k) Plan and Trust (the "401(k) Plan") is a voluntary savings plan for all eligible employees which is intended to qualify under Section 401(k) of the Internal Revenue Code. Each eligible employee may elect to contribute to the 401(k) Plan, through payroll deductions, up to 15% of his or her salary, subject to statutory limitations. The Company may make matching contributions on behalf of participating employees of half of the dollar amount of each participating employee's contribution, up to a maximum of 3% of an employee's total cash compensation, subject to certain limitations. For the years ended March 31, 1997, 1998, and 1999, the Company paid and accrued matching contributions of $69,000, $108,000, and $190,000, respectively, for the 401(k) Plan participants. F-19 53 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) S. SEGMENT INFORMATION: The Company adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131") during the year ended March 31, 1999. SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments. It also establishes standards for related disclosures about products, services and geographic areas. The Company's reportable segments are strategic business units or divisions that offer different products or services. These units have separate financial information that is evaluated by senior management. The Company has three reportable segments: Diabetes Supplies -- Liberty Medical Supply, Inc. is a direct -to-consumer provider of diabetes testing supplies to seniors who have Medicare coverage. Consumer Healthcare -- PolyMedica Healthcare, Inc. offers the AZO line of products which includes OTC ("over-the-counter") female urinary tract discomfort products and home medical diagnostic kits; and is a manufacturer and distributor of private-label and branded digital thermometers. Professional Products -- PolyMedica Pharmaceuticals (U.S.A.), Inc. develops, manufactures and distributes prescription urology products. All Other consists of operations associated with the Company's corporate headquarters. Assets and depreciation and amortization expense are not allocated to the operating segments for management evaluation purposes. However, when evaluating Income before Income Taxes, management allocates all profit and loss activities related to the Company's corporate headquarters to the operating segments, except for gains related to the sale of the Company's wound care business. As a result, the segment information may not be indicative of the financial position of results of operations that would have been achieved had these segments operated as unaffiliated entities. The Company does not organize its units geographically, as its products and services are sold throughout the United States only. The following segment information has been prepared in accordance with the internal accounting policies of the Company, as described above. There are no intersegment sales for the periods presented. Information concerning the operations in these reportable segments is as follows:
FISCAL YEAR ENDED MARCH 31, ------------------------------ 1997 1998 1999 ------- ------- -------- (IN THOUSANDS) REVENUES: Diabetes Supplies.................................... $ 8,652 $48,708 $ 80,597 Consumer Healthcare.................................. 10,296 11,149 14,275 Professional Products................................ 11,505 13,968 9,953 All Other............................................ -- -- -- ------- ------- -------- Total........................................... $30,453 $73,825 $104,825 ======= ======= ======== DEPRECIATION AND AMORTIZATION EXPENSE: Diabetes Supplies.................................... 506 3,331 6,507 Consumer Healthcare.................................. 51 62 65 Professional Products................................ 2,561 2,218 2,048 All Other............................................ 47 55 53 ------- ------- -------- Total........................................... $ 3,165 $ 5,666 $ 8,673 ======= ======= ========
F-20 54 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED MARCH 31, ------------------------------ 1997 1998 1999 ------- ------- -------- (IN THOUSANDS) INCOME BEFORE INCOME TAXES: Diabetes Supplies.................................... 716 1,140 5,300 Consumer Healthcare.................................. 2,120 1,253 2,868 Professional Products................................ (881) 4,972 2,746 All Other(1)......................................... 0 4,126 1,597 ------- ------- -------- Total........................................... $ 1,955 $11,491 $ 12,511 ======= ======= ======== SEGMENT ASSETS: Diabetes Supplies.................................... 15,417 40,795 62,922 Consumer Healthcare.................................. 4,229 5,217 6,263 Professional Products................................ 48,429 43,540 39,337 All Other............................................ 7,158 2,849 4,417 ------- ------- -------- Total........................................... $75,233 $92,401 $112,939 ======= ======= ========
- --------------------------- (1) Represents pretax gains related to the sale of the Company's wound care business. T. INTERIM INFORMATION (UNAUDITED): The following consolidated interim financial information is unaudited. Such information reflects all adjustments, consisting solely of normal recurring adjustments, which are in the opinion of management necessary for a fair presentation.
YEAR ENDED MARCH 31, 1999 ---------------------------------------- QTR. 1 QTR. 2* QTR. 3 QTR. 4 ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenues...................................... $20,661 $24,823 $28,791 $30,550 Gross margin........................................ 10,740 12,945 14,826 16,709 Net income.......................................... 1,293 2,484 1,746 2,121 Net income per weighted average share, basic........ $ 0.15 $ 0.28 $ 0.20 $ 0.23 Net income per weighted average share, diluted...... $ 0.13 $ 0.26 $ 0.18 $ 0.22
- --------------------------- * includes after tax gain of $976,000 or $0.10 per diluted share related to the sale of the Company's wound care business.
YEAR ENDED MARCH 31, 1998 ---------------------------------------- QTR. 1 QTR. 2* QTR. 3 QTR. 4 ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenues.............................. $13,958 $17,643 $20,668 $21,556 Gross margin................................ 7,230 9,664 10,448 10,908 Net income.................................. 831 3,915 1,383 1,490 Net income per weighted average share, basic..................................... $ 0.10 $ 0.45 $ 0.16 $ 0.17 Net income per weighted average share, diluted................................... $ 0.09 $ 0.39 $ 0.14 $ 0.15
- --------------------------- * includes after tax gain of $2.74 million or $0.29 per diluted share related to the sale of the Company's wound care business F-21 55 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U. RELATED PARTY TRANSACTIONS: In December 1994 and January 1997, certain executive officers of the Company purchased in the aggregate 100,000 and 100,000 shares, respectively, of the Company's common stock on the open market. The purchases, valued at $415,000 and $607,000, respectively, were funded by a note issued by the Company to each officer. The terms of the notes provide for each executive to repay the Company with Company shares within five years from the date of the note at a market value equal to the original principal of the note. The principal balance due is shown as notes receivable from officers in Shareholders' Equity on the Consolidated Balance Sheet. As of March 31, 1999 the balance of notes receivable was $626,000. V. SUBSEQUENT EVENT: To support Liberty Medical's growth, in May 1999 the Company purchased a 66,000 square foot building in Port St. Lucie, Florida for $2.0 million, financed by a $1.4 million mortgage. Under the terms of this mortgage, the Company is required to repay all principal balances by May 2006 using a 15-year amortization period. The mortgage is collateralized by the land, building, future improvements and permanent fixtures. Under this mortgage, the Company is required to maintain certain financial covenants. The interest rate is 8.07%. F-22 56 POLYMEDICA CORPORATION CONSOLIDATED BALANCE SHEETS
MARCH 31, JUNE 30, 1999 1999 --------- ----------- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS Current assets: Cash and cash equivalents................................. $ 10,191 $ 10,423 Accounts receivable (net of allowances of $7,330 and $7,852 as of March 31, and June 30 1999, respectively).......................................... 32,251 31,609 Inventories............................................... 6,909 7,375 Deferred tax asset........................................ 2,708 2,708 Prepaid expenses and other current assets................. 721 1,400 -------- -------- Total current assets................................... 52,780 53,515 Property, plant, and equipment, net......................... 6,856 9,125 Intangible assets, net...................................... 37,278 36,708 Direct response advertising, net............................ 15,678 17,023 Other assets, net........................................... 347 236 -------- -------- Total assets........................................... $112,939 $116,607 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable -- trade................................. $ 12,527 $ 9,895 Accrued expenses.......................................... 4,781 7,766 Current portion of long-term debt and notes payable, net.................................................... 3,083 3,087 -------- -------- Total current liabilities.............................. 20,391 20,748 Long-term debt and notes payable, net....................... 21,583 22,018 Deferred income taxes....................................... 7,920 7,920 -------- -------- Total liabilities...................................... 49,894 50,686 -------- -------- Commitments Shareholders' equity: Preferred stock $.01 par value; 2,000,000 shares authorized, none issued or outstanding................. -- -- Common stock $.01 par value; 20,000,000 shares authorized; 9,197,075 and 9,319,913 issued as of March 31 and June 30, 1999, respectively................................. 92 93 Treasury stock, at cost, (78,003 and 90,971 shares as of March 31 and June 30, 1999, respectively).............. (458) (646) Additional paid-in capital................................ 56,557 57,099 Retained earnings......................................... 7,480 9,934 Notes receivable from officers............................ (626) (559) -------- -------- Total shareholders' equity............................. 63,045 65,921 -------- -------- Total liabilities and shareholders' equity............. $112,939 $116,607 ======== ========
The accompanying notes are an integral part of these unaudited consolidated financial statements. F-23 57 POLYMEDICA CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, ---------------------- 1998 1999 --------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net revenues................................................ $20,661 $31,580 Cost of sales............................................... 9,921 13,715 ------- ------- Gross margin................................................ 10,740 17,865 Selling, general and administrative expenses................ 8,062 13,361 ------- ------- Income from operations...................................... 2,678 4,504 Other income and expense: Investment income......................................... 114 89 Interest expense.......................................... (637) (603) ------- ------- (523) (514) ------- ------- Income before income taxes.................................. 2,155 3,990 Income tax provision........................................ 862 1,536 ------- ------- Net income.................................................. $ 1,293 $ 2,454 ======= ======= Net income per weighted average share, basic................ $ .15 $ .27 ======= ======= Net income per weighted average share, diluted.............. $ .13 $ .25 ======= ======= Weighted average shares, basic.............................. 8,789 9,152 Weighted average shares, diluted............................ 9,771 9,890
The accompanying notes are an integral part of these unaudited consolidated financial statements. F-24 58 POLYMEDICA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, ------------------ 1998 1999 ------- ------- (UNAUDITED) (IN THOUSANDS) Cash flows from operating activities: Net income................................................ $ 1,293 $ 2,454 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization.......................... 800 851 Amortization of direct-response advertising............ 1,156 1,687 Direct-response advertising............................ (3,058) (3,032) Deferred income taxes.................................. 862 -- Provision for inventory obsolescence................... -- 125 Provision for bad debts................................ 1,445 2,127 Provision for sales allowances......................... 959 1,793 Changes in assets and liabilities: Accounts receivable.................................. 1,611 (3,278) Inventories.......................................... (858) (590) Prepaid expenses and other assets.................... (815) (396) Accounts payable -- trade............................ (527) (2,809) Accrued expenses..................................... 842 2,985 ------- ------- Total adjustments................................. 2,417 (537) ------- ------- Net cash flows from operating activities.......... 3,710 1,917 ------- ------- Cash flows from investing activities: Purchase of property, plant, and equipment................ (482) (2,524) ------- ------- Net cash flows from investing activities.......... (482) (2,524) ------- ------- Cash flows from financing activities: Proceeds from issuance of common stock.................... 91 355 Repayment of long-term debt............................... -- (1,000) Proceeds from issuance of long-term debt.................. -- 1,417 Repayment of notes receivable from officers............... -- 67 ------- ------- Net cash flows from financing activities.......... 91 839 ------- ------- Net increase in cash and cash equivalents......... 3,319 232 ------- ------- Effect of exchange rate changes on cash..................... -- -- Cash and cash equivalents at beginning of period............ 6,440 10,191 ------- ------- Cash and cash equivalents at end of period.................. $ 9,759 $10,423 ======= =======
The accompanying notes are an integral part of these unaudited consolidated financial statements. F-25 59 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. The unaudited consolidated financial statements included herein have been prepared by PolyMedica Corporation ("PolyMedica" or the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and include, in the opinion of management, all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation of interim period results. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes, however, that its disclosures are adequate to make the information presented not misleading. The results for the interim periods presented are not necessarily indicative of results to be expected for the full fiscal year. It is suggested that these interim consolidated financial statements be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended March 31, 1999. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. 2. Inventories consist of the following:
MARCH 31, JUNE 30, 1999 1999 --------- -------- (IN THOUSANDS) Raw materials............................................ $ 739 $ 731 Work in process.......................................... 594 574 Finished goods........................................... 5,576 6,070 ------ ------ $6,909 $7,375 ====== ======
3. In accordance with Statement of Position 93-7, direct-response advertising and related costs for all periods presented are capitalized and amortized to selling, general and administrative expense on an accelerated basis during the first two years of a four-year period. The amortization rate is such that 55% of such costs are expensed after two years from the date they are incurred, and the remaining 45% is expensed on a straight line basis over the next two years. Revenues generated from new customers as a result of direct-response advertising have historically resulted in a revenue stream lasting seven years. Management has selected a more conservative four-year amortization period, in consideration of the "Factors Affecting Future Operating Results" in item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-Q. Management assesses the realizability of the amounts of direct-response advertising costs reported as assets at each balance sheet date by comparing the carrying amounts of such assets to the probable remaining future net benefits expected to result directly from such advertising. The Company capitalized direct-response advertising of $3.06 million and $3.03 million in the three months ended June 30, 1998 and 1999, respectively. A total of $1.16 million and $1.69 million in direct-response advertising was amortized and charged to selling, general and administrative expense for the three months ending June 30, 1998 and 1999, respectively. As of March 31 and June 30, 1999, accumulated amortization was $7.92 million and $9.61 million, which resulted in a net capitalized direct-response advertising asset of $15.68 million and $17.02 million, respectively. F-26 60 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) 4. As of June 30, 1999, gross unbilled receivables related to the diabetes supplies segment included in accounts receivable were $16.60 million as compared with $15.35 million as of March 31, 1999. 5. Calculations of earnings per share are as follows:
THREE MONTHS ENDED JUNE 30, ---------------------- 1998 1999 --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income.................................................. $1,293 $2,454 BASIC: Weighted average common stock outstanding, net of treasury stock, end of period...................................... 8,789 9,152 Net income per common share, basic.......................... $ 0.15 $ 0.27 ====== ====== DILUTED: Weighted average common stock outstanding, net of treasury stock, end of period...................................... 8,789 9,152 Weighted average common stock equivalents................... 982 738 ------ ------ Weighted average common stock outstanding, net of treasury stock, end of period...................................... 9,771 9,890 Net income per common share, diluted........................ $ 0.13 $ 0.25 ====== ======
6. Company's total net income and comprehensive income was $1.29 million and $2.45 million for the three months ended June 30, 1998 and 1999, respectively. There were no adjustments during the either period presented. 7. The Company adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131") during the year ended March 31, 1999. SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments. It also establishes standards for related disclosures about products, services and geographic areas. The Company's reportable segments are strategic business units or divisions that offer different products or services. These units have separate financial information that is evaluated by senior management. The Company has three reportable segments: Diabetes Supplies -- Liberty Medical Supply, Inc. is a direct-to-consumer provider of diabetes testing supplies to seniors who have Medicare coverage. Consumer Healthcare -- PolyMedica Healthcare, Inc. offers the AZO line of products which includes OTC ("over-the-counter") female urinary tract discomfort products and home medical diagnostic kits; and is a manufacturer and distributor of private-label and branded digital thermometers. Professional Products -- PolyMedica Pharmaceuticals (U.S.A.), Inc. develops, manufactures and distributes prescription urology products. All Other consists of operations associated with the Company's corporate headquarters. Assets and depreciation and amortization expense are not allocated to the operating segments for management evaluation purposes. However, when evaluating Income before Income Taxes, management allocates all profit and loss activities related to the Company's corporate headquarters to the operating segments. As a F-27 61 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) result, the segment information may not be indicative of the financial position or results of operations that would have been achieved had these segments operated as unaffiliated entities. The Company does not organize its units geographically, as its products and services are sold throughout the United States only. The following segment information has been prepared in accordance with the internal accounting policies of the Company, as described above. There are no intersegment sales for the periods presented. Information concerning the operations in these reportable segments is as follows:
FOR THE THREE MONTHS ENDED -------------------- JUNE 30, JUNE 30, 1998 1999 -------- -------- (IN THOUSANDS) REVENUES: Diabetes Supplies........................................... $15,681 $26,365 Consumer Healthcare......................................... 2,598 2,929 Professional Products....................................... 2,382 2,286 ------- ------- Total....................................................... $20,661 $31,580 ======= ======= DEPRECIATION AND AMORTIZATION: Diabetes Supplies........................................... 1,420 1,994 Consumer Healthcare......................................... 16 14 Professional Products....................................... 508 515 All Other................................................... 12 15 ------- ------- Total....................................................... $ 1,956 $ 2,538 ======= ======= INCOME BEFORE INCOME TAXES: Diabetes Supplies........................................... 1,246 2,857 Consumer Healthcare......................................... 509 567 Professional Products....................................... 400 566 ------- ------- Total....................................................... $ 2,155 $ 3,990 ======= =======
MARCH 31, JUNE 30, 1999 1999 --------- -------- SEGMENT ASSETS: Diabetes Supplies........................................... 62,922 66,177 Consumer Healthcare......................................... 6,263 5,892 Professional Products....................................... 39,337 39,018 All Other................................................... 4,417 5,520 -------- -------- Total....................................................... $112,939 $116,607 ======== ========
8. The Company will adopt Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities" in the fiscal year beginning April 1, 2000. On July 7, 1999, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 137("SFAS 137"), "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133." SFAS 137 delayed the implementation of SFAS 133 by one year. SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Under the new statement, the accounting for changes in the fair value of a derivative (that is, gains or losses) depends on the intended use of the derivative, the F-28 62 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) resulting designation. The Company believes that adoption of the statement will not have a material effect on the financial statements. 9. Long-Term Debt SENIOR DEBT In connection with the purchase of the WEBCON product line, in January 1993, the Company and its wholly-owned subsidiary, PolyMedica Pharmaceuticals (U.S.A.), Inc. ("PMP USA") sold to the John Hancock Mutual Life Insurance Company ("Hancock"), $25 million of Guaranteed Senior Secured Notes due January 31, 2003 (the "Hancock Notes"). As of June 30, 1999 the balance due to Hancock was $21.0 million. The Company is required and was in compliance with certain financial covenants. The effective interest rate of the Hancock Notes is 10.90%. REVOLVING CREDIT FACILITY In March 1999, the Company increased its existing revolving credit facility from $7.5 million to $10 million. Under the terms of this facility, the Company is required to repay all principal balances on March 31, 2001. As of June 30, 1999, the Company had an outstanding balance of $3 million. Under the terms of the credit facility, the Company is required to and was in compliance with certain financial covenants. The interest rate is tied to the Company's funded debt to EBITDA ratio and was 7.75% as of June 30, 1999. BUILDING MORTGAGE To support Liberty Medical's growth, in May 1999 the Company purchased a 66,000 square foot building in Port St. Lucie, Florida for $2.0 million, financed by a $1.4 million mortgage. Under the terms of this mortgage, the Company is required to repay all principal balances by May 2006 using a 15-year amortization period. The mortgage is collateralized by the land, building, future improvements and permanent fixtures. Under this mortgage, the Company is required to and was in compliance with certain financial covenants. The interest rate is 8.07%. 10. Certain amounts in the prior period financial statements have been reclassified to conform with the current year presentation. F-29 63 - -------------------------------------------------------------------------------- [POLYMEDICA LOGO] POLYMEDICA CORPORATION 2,900,000 SHARES COMMON STOCK --------------------------- PROSPECTUS --------------------------- , 1999 CIBC WORLD MARKETS FIRST UNION CAPITAL MARKETS CORP. - -------------------------------------------------------------------------------- YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES. 64 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses to be incurred in connection with the sale and distribution of the securities being registered hereby, all of which will be borne by PolyMedica (except for underwriting discounts and commissions and fees and expenses of legal counsel for the selling shareholders, which will be borne by the selling shareholders). All amounts shown are estimates except the Securities and Exchange Commission registration fee, the NASDAQ National Market listing fee and the NASD filing fee. Registration Fee -- Securities and Exchange Commission...... $ 25,091 NASDAQ National Market listing fee.......................... 17,500 NASD filing fee............................................. 9,526 Blue Sky Fees............................................... 5,000 Legal fees and expenses of PolyMedica....................... 250,000 Accounting fees and expenses................................ 75,000 Printing.................................................... 100,000 Miscellaneous expenses...................................... 17,883 -------- Total Expenses.................................... $500,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 13(b)(1) of Chapter 156B of the Massachusetts General Laws allows a corporation to eliminate or limit the personal liability of a director of a corporation to the corporation or its shareholders for monetary damages for a breach of fiduciary duty as a director notwithstanding any provision of law imposing such liability, except where the director breached his duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of an improper distribution or loan to an insider or obtained an improper personal benefit. PolyMedica has included such a provision in its restated articles of organization. Section 67 of Chapter 156B of the Massachusetts General Laws ("Section 67") provides that a corporation may indemnify its directors and officers to the extent specified in or authorized by: (i) the articles of organization, (ii) a by-law adopted by the shareholders, or (iii) a vote adopted by the holders of a majority of the shares of stock entitled to vote on the election of directors. In all instances, the extent to which a corporation provides indemnification to its directors and officers under Section 67 is optional. The Restated Articles of Organization of PolyMedica contain provisions to the effect that each director, officer and employee of PolyMedica shall be indemnified by PolyMedica against expenses, judgments and fines incurred in connection with any legal proceedings to which he may be made a party or with which he may become involved or threatened by reason of having been an officer, director or employee of PolyMedica or of any other organization at the request of PolyMedica. The provisions include indemnification with respect to matters covered by a settlement. Any such indemnification shall be made unless it is determined by a majority vote of a quorum of the Board of Directors, a majority vote of a quorum of disinterested stockholders, independent legal counsel or a court, that indemnification is improper in the circumstances because the person seeking indemnification has not met the applicable standards of conduct. It must be determined that the director, officer or employee acted in good faith with the reasonable belief that his action was in the best interests of PolyMedica, and, with respect to any criminal action or proceeding, that he had no reasonable cause to believe his conduct was unlawful. II-1 65 PolyMedica has purchased directors' and officers' liability insurance which would indemnify its directors and officers against damages arising out of certain kinds of claims which might be made against them based on their negligent acts or omissions while acting in their capacity as such. The Underwriting Agreement provides that the underwriters are obligated, under certain circumstances, to indemnify directors, officers and controlling persons of the Company against certain liabilities, including liabilities under the Securities Act of 1933, as amended. Reference is made to the form of Underwriting Agreement filed as Exhibit 1.1 hereto. ITEM 16. EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1 Underwriting Agreement 5.1* Opinion of Hale and Dorr LLP 21.1* Subsidiaries of the Registrant 23.1 Consent of PricewaterhouseCoopers LLP 23.2* Consent of Hale and Dorr LLP (Included in Exhibit 5.1 filed herewith) 24.1* Power of Attorney (See page II-3 of this Registration Statement)
- ------------------------ * Previously filed. ITEM 17. UNDERTAKINGS. Item 512(b) of Regulation S-K. The Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. Item 512(h) of Regulation S-K. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the indemnification provisions described herein, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. Item 512(i) of Regulation S-K. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 66 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF WOBURN, COMMONWEALTH OF MASSACHUSETTS, ON SEPTEMBER 14, 1999. POLYMEDICA CORPORATION By: /s/ ERIC G. WALTERS ------------------------------------ Eric G. Walters Chief Financial Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON SEPTEMBER 14, 1999.
SIGNATURE TITLE --------- ----- * Chief Executive Officer and Chairman of the - --------------------------------------------------- Board of Directors (Principal Executive STEVEN J. LEE Officer) /s/ ERIC G. WALTERS Chief Financial Officer - --------------------------------------------------- (Principal Financial Officer and Principal ERIC G. WALTERS Accounting Officer) * Director - --------------------------------------------------- DANIEL S. BERNSTEIN * Director - --------------------------------------------------- PETER K. HOFFMAN * Director - --------------------------------------------------- MARCIA J. HOOPER * Director - --------------------------------------------------- FRANK W. LOGERFO * Director - --------------------------------------------------- THOMAS S. SOLTYS *By /s/ ERIC G. WALTERS ---------------------------------------------- ERIC G. WALTERS Attorney-in-Fact
II-3 67 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1 Underwriting Agreement 5.1* Opinion of Hale and Dorr LLP 21.1* Subsidiaries of the Registrant 23.1 Consent of PricewaterhouseCoopers LLP 23.2* Consent of Hale and Dorr LLP (Included in Exhibit 5.1 filed herewith) 24.1* Power of Attorney (See page II-3 of this Registration Statement)
- ------------------------ * Previously filed. EX-1.1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 2,900,000 Shares POLYMEDICA CORPORATION Common Stock UNDERWRITING AGREEMENT , 1999 CIBC World Markets Corp. First Union Capital Markets Corp. c/o CIBC World Markets Corp. One World Financial Center New York, New York 10281 On behalf of the Several Underwriters named on Schedule I attached hereto. Ladies and Gentlemen: PolyMedica Corporation, a Delaware corporation (the "Company") and the stockholders of the Company named in Schedule II to this Agreement (the "Selling Stockholders"), propose, subject to the terms and conditions contained herein, to sell to you and the other underwriters named on Schedule I to this Agreement (the "Underwriters"), for whom you are acting as Representatives (the "Representatives"), an aggregate of 2,900,000 shares of the Company's Common Stock, $0.01 par value (the "Common Stock"), of which 2,250,000 are to be issued and sold by the Company, _______ are to be sold by the Selling Stockholders listed under the heading "Institutional Selling Stockholders" on Schedule II to this Agreement (the "Institutional Selling Stockholders") and _______ are to be sold by the Selling Stockholders listed under the heading "Non-Institutional Selling Stockholders" on Schedule II to this Agreement (the "Non-Institutional Selling Stockholders"); provided, however, that to the extent that any of the Sellers Stockholders do not for any reason sell any of the foregoing shares, the Company shall issue and sell in lieu thereof an equivalent number of its authorized but unissued shares (all of the foregoing shares being hereafter collectively referred to as the "Firm Shares"). The respective amounts of the Firm Shares to be purchased by each of the several Underwriters are set forth opposite their names on Schedule I hereto. In addition, the Company and the Non-Institutional Selling Stockholders propose to grant to the Underwriters an option to purchase up to an additional 435,000 shares (the "Option Shares") of Common Stock from them for the purpose of covering over-allotments in connection with the sale of the Firm Shares. Of the 435,000 Option Shares, _______ are to be issued and sold by the Company and ______ are to be sold by the Non-Institutional Selling Stockholders. The Firm Shares and the Option Shares are together called the "Shares." 2 1. Sale and Purchase of the Shares. On the basis of the representations, warranties and agreements contained in, and subject to the terms and conditions of, this Agreement: (a) The Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at a price of $_____ per share (the "Initial Price"), the number of Firm Shares set forth opposite the name of such Underwriter under the column "Number of Firm Shares to be Purchased from the Company" on Schedule I to this Agreement, subject to adjustment in accordance with Section 11 hereof. Each of the Selling Stockholders agrees, severally and not jointly, to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Selling Stockholders, at the Initial Price, the number of Firm Shares set forth opposite the name of such Underwriter under the column "Number of Firm Shares to be Purchased from the Selling Stockholders" on Schedule I to this Agreement, subject to adjustment in accordance with Section 11 hereof. (b) The Company and each of the Non-Institutional Selling Stockholders, as and to the extent indicated in Schedule II hereto, grants to the several Underwriters an option to purchase, severally and not jointly, all or any part of the Option Shares at the Initial Price. The number of Option Shares to be purchased by each Underwriter shall be the same percentage (adjusted by the Representatives to eliminate fractions) of the total number of Option Shares to be purchased by the Underwriters as such Underwriter is purchasing of the Firm Shares. The Option Shares to be sold shall be allocated among the Company and the Non-Institutional Selling Stockholders in proportion to the maximum number of Option Shares to be sold by the Company and each Non-Institutional Selling Stockholder as set forth in Schedule II hereto. Such option may be exercised only to cover over-allotments in the sales of the Firm Shares by the Underwriters and may be exercised in whole or in part at any time on or before 12:00 noon, New York City time, on the business day before the Firm Shares Closing Date (as defined below), and from time to time thereafter within 30 days after the date of this Agreement, in each case upon written, facsimile or telegraphic notice, or verbal or telephonic notice confirmed by written, facsimile or telegraphic notice, by the Representatives to the Company no later than 12:00 noon, New York City time, on the business day before the Firm Shares Closing Date or at least two business days before the Option Shares Closing Date (as defined below), as the case may be, setting forth the number of Option Shares to be purchased and the time and date (if other than the Firm Shares Closing Date) of such purchase. 2. Delivery and Payment. Delivery by the Company and the Selling Stockholders of the Firm Shares to the Representatives for the respective accounts of the Underwriters, and payment of the purchase price by certified or official bank check or checks payable in New York Clearing House (same day) funds drawn to the order of the Company for the shares purchased from the Company and to the Selling Stockholders for the shares purchased from the Selling Stockholders, against delivery of the respective certificates therefor to the Representatives, shall take place at the offices of CIBC World Markets Corp., One World Financial -2- 3 Center, New York, New York 10281, at 10:00 a.m., New York City time, on the third business day following the date of this Agreement, or at such time on such other date, not later than 10 business days after the date of this Agreement, as shall be agreed upon by the Company and the Representatives (such time and date of delivery and payment are called the "Firm Shares Closing Date"). In the event the option with respect to the Option Shares is exercised in whole or in part on one or more occasions, delivery by the Company and the Non-Institutional Selling Stockholders of the Option Shares to the Representatives for the respective accounts of the Underwriters and payment of the purchase price thereof in immediately available funds by wire transfer or by certified or official bank check or checks payable in New York Clearing House (same day) funds to the Company for the shares purchased from the Company and to the Non-Institutional Selling Stockholders for the shares purchased from the Non-Institutional Selling Stockholders, against delivery of the respective certificates therefor to the Representatives, shall take place at the offices of CIBC World Markets Corp. specified above at the time and on the date (which may be the same date as, but in no event shall be earlier than, the Firm Shares Closing Date) specified in the notice referred to in Section 1(b) (such time and date of delivery and payment are called the "Option Shares Closing Date"). The Firm Shares Closing Date and the Option Shares Closing Date are called, individually, a "Closing Date" and, together, the "Closing Dates." Certificates evidencing the Shares shall be registered in such names and shall be in such denominations as the Representatives shall request at least two full business days before the Firm Shares Closing Date or, in the case of Option Shares, on the day of notice of exercise of the option as described in Section l(b) and shall be made available to the Representatives for checking and packaging, at such place as is designated by the Representatives, on the full business day before the Firm Shares Closing Date (or the Option Shares Closing Date in the case of the Option Shares). 3. Registration Statement and Prospectus; Public Offering. The Company has prepared and filed in conformity with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the published rules and regulations thereunder (the "Rules") adopted by the Securities and Exchange Commission (the "Commission") a Registration Statement (as hereinafter defined) on Form S-3 (No. 333-86575), including a preliminary prospectus relating to the Shares, and such amendments thereof as may have been required to the date of this Agreement. Copies of such Registration Statement (including all amendments thereof) and of the related Preliminary Prospectus (as hereinafter defined) have heretofore been delivered by the Company to you. The term "Preliminary Prospectus" means any preliminary prospectus (as described in Rule 430 of the Rules) included at any time as a part of the Registration Statement or filed with the Commission by the Company with the consent of the Representatives pursuant to Rule 424(a) of the Rules. The term "Registration Statement" as used in this Agreement means the initial registration statement (including all exhibits, financial schedules and information deemed to be a part of the Registration Statement through incorporation by reference or otherwise), as amended at the time and on the date it becomes effective (the "Effective Date") including the information (if any) deemed to be part thereof at the time of effectiveness pursuant to Rule 430A of the Rules, and as thereafter amended by post-effective amendments. If the Company has filed an abbreviated registration statement to register additional Shares pursuant to Rule 462(b) under the Rules (the "462(b) Registration Statement") then any reference herein to the Registration Statement shall also be -3- 4 deemed to include such 462(b) Registration Statement. The term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement at the time of effectiveness or, if Rule 430A of the Rules is relied on, the term Prospectus shall also include the final prospectus filed with the Commission pursuant to Rule 424(b) of the Rules. The Company and the Selling Stockholders understand that the Underwriters propose to make a public offering of the Shares, as set forth in and pursuant to the Prospectus, as soon after the Effective Date and the date of this Agreement as the Representatives deem advisable. The Company and the Selling Stockholders hereby confirm that the Underwriters and dealers have been authorized to distribute or cause to be distributed each Preliminary Prospectus and are authorized to distribute the Prospectus (as from time to time amended or supplemented if the Company furnishes amendments or supplements thereto to the Underwriters). 4. Representations and Warranties of the Company. The Company represents and warrants to each Underwriter and to each Institutional Selling Stockholder as follows: (a) On the Effective Date, the Registration Statement complied, and on the date of the Prospectus, the date any post-effective amendment to the Registration Statement becomes effective, the date any supplement or amendment to the Prospectus is filed with the Commission and each Closing Date, the Registration Statement and the Prospectus (and any amendment thereof or supplement thereto) will comply, in all material respects, with the applicable provisions of the Securities Act and the Rules and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder. The Registration Statement did not, as of the Effective Date, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and on the Effective Date and the other dates referred to above neither the Registration Statement nor the Prospectus, nor any amendment thereof or supplement thereto, will contain any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. When any related preliminary prospectus was first filed with the Commission (whether filed as part of the Registration Statement or any amendment thereto or pursuant to Rule 424(a) of the Rules) and when any amendment thereof or supplement thereto was first filed with the Commission, such preliminary prospectus as amended or supplemented complied in all material respects with the applicable provisions of the Securities Act and the Rules and did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. Notwithstanding the foregoing, none of the representations and warranties in this paragraph 4(a) shall apply to statements in, or omissions from, the Registration Statement or the Prospectus made in reliance upon, and in conformity with, information herein or otherwise furnished in writing by the Representatives on behalf of the several Underwriters for use in the Registration Statement or the Prospectus. With respect to the preceding sentence, the Company acknowledges that the only information furnished in writing by the Representatives on behalf of the several Underwriters for use in the Registration -4- 5 Statement or the Prospectus is the paragraph with respect to stabilization on the inside front cover page of the Prospectus and the statements contained under the caption "Underwriting" in the Prospectus. (b) The Registration Statement is effective under the Securities Act and no stop order preventing or suspending the effectiveness of the Registration Statement or suspending or preventing the use of the Prospectus has been issued and no proceedings for that purpose have been instituted or are threatened under the Securities Act. Any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules has been or will be made in the manner and within the time period required by such Rule 424(b). (c) The documents incorporated by reference in the Registration Statement and the Prospectus, at the time they were filed with the Commission, complied in all material respects with the requirements of the Exchange Act and, when read together and with the other information in the Registration Statement and the Prospectus, do not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except to the extent that any statements in such documents have been superseded by statements specifically set forth in the Registration Statement and the Prospectus. (d) The financial statements of the Company (including all notes and schedules thereto) included or incorporated by reference in the Registration Statement and Prospectus present fairly the financial position, the results of operations, the statements of cash flows and the statements of stockholders' equity and the other information purported to be shown therein of the Company at the respective dates and for the respective periods to which they apply; and such financial statements and related schedules and notes have been prepared in conformity with generally accepted accounting principles, consistently applied throughout the periods involved, and all adjustments necessary for a fair presentation of the results for such periods have been made. The summary and selected financial data included in the Prospectus present fairly the information shown therein as at the respective dates and for the respective periods specified and the summary and selected financial data have been presented on a basis consistent with the consolidated financial statements so set forth in the Prospectus and other financial information. (e) PricewaterhouseCoopers LLP, whose reports are filed with the Commission as a part of the Registration Statement, are and, during the periods covered by their reports, were independent public accountants as required by the Securities Act and the Rules. (f) Exhibit 21.1 to the Registration Statement contains a true, correct and complete list of all of the subsidiaries of the Company controlled directly or indirectly by the Company (collectively, "Subsidiaries"). The Company and each of its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of -5- 6 its jurisdiction of its incorporation. The Company and each of its Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted by it or location of the assets or properties owned, leased or licensed by it requires such qualification, except for such jurisdictions where the failure to so qualify would not have a material adverse effect on the assets or properties, business, results of operations or financial condition of the Company (a "Material Adverse Effect"). The Company and each of its Subsidiaries have all requisite corporate power and authority, and all necessary authorizations, approvals, consents, orders, licenses, certificates and permits of and from all governmental or regulatory bodies or any other person or entity (collectively, the "Permits"), to own, lease and license its assets and properties and conduct its business, all of which are valid and in full force and effect, as described in the Registration Statement and the Prospectus, except where the lack of such Permits, individually or in the aggregate, would not have a Material Adverse Effect. The Company and each of its Subsidiaries have fulfilled and performed in all material respects all of their material obligations with respect to such Permits and no event has occurred that allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the Company or such Subsidiaries thereunder. Except as may be required under the Securities Act and state and foreign Blue Sky laws, no other Permits are required to enter into, deliver and perform this Agreement and to issue and sell the Shares. (g) The Company and each of its Subsidiaries owns or possesses adequate and enforceable rights to use all trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, licenses, know-how and other similar rights and proprietary knowledge (collectively, "Intangibles") described in the Prospectus as being owned by it necessary for the conduct of its business. Neither the Company nor any of its Subsidiaries has received any notice of, or is not aware of, any infringement of or conflict with asserted rights of others with respect to any Intangibles. (h) The Company and each of its Subsidiaries has good and marketable title in fee simple to all items of real property and good and marketable title to all personal property described in the Prospectus as being owned by it. Any real property and buildings described in the Prospectus as being held under lease by the Company and each of its Subsidiaries is held by it under valid, existing and enforceable leases, free and clear of all liens, encumbrances, claims, security interests and defects, except such as are described, or incorporated by reference, in the Registration Statement and the Prospectus or would not have a Material Adverse Effect. (i) There are no litigation or governmental proceedings to which the Company or its Subsidiaries are subject or which are pending or, to the knowledge of the Company, threatened, against the Company or any of its Subsidiaries, which, individually or in the aggregate, might have a Material Adverse Effect, affect the consummation of this Agreement or which are required to be disclosed in the Registration Statement and the Prospectus that are not so disclosed. -6- 7 (j) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, except as described therein, (a) there has not been any material adverse change with regard to the assets or properties, business, results of operations or financial condition of the Company; (b) neither the Company nor its Subsidiaries has sustained any loss or interference with its assets, businesses or properties (whether owned or leased) from fire, explosion, earthquake, flood or other calamity, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree which would have a Material Adverse Effect; and (c) since the date of the latest balance sheet included in the Registration Statement and the Prospectus, except as reflected therein, neither the Company nor its Subsidiaries has (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money, except such liabilities or obligations incurred in the ordinary course of business, (ii) entered into any transaction not in the ordinary course of business or (iii) declared or paid any dividend or made any distribution on any shares of its stock or redeemed, purchased or otherwise acquired or agreed to redeem, purchase or otherwise acquire any shares of its stock. (k) There is no document, contract or other agreement of a character required to be described in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed as required by the Securities Act or Rules. Each description of a contract, document or other agreement in the Registration Statement and the Prospectus accurately reflects in all respects the terms of the underlying document, contract or agreement. Each agreement described in the Registration Statement and Prospectus or listed in the Exhibits to the Registration Statement or incorporated by reference is in full force and effect and is valid and enforceable by and against the Company or any of its the Subsidiaries, as the case may be, in accordance with its terms. Neither the Company nor any Subsidiary, if any Subsidiary is a party, nor to the Company's knowledge, any other party is in default in the observance or performance of any term or obligation to be performed by it under any such agreement, and no event has occurred which with notice or lapse of time or both would constitute such a default, in any such case which default or event, individually or in the aggregate, would have a Material Adverse Effect. No default exists, and no event has occurred which with notice or lapse of time or both would constitute a default, in the due performance and observance of any term, covenant or condition, by the Company or any of its Subsidiaries, if any of its Subsidiaries is a party thereto, of any other agreement or instrument to which the Company or any of such Subsidiaries is a party or by which the Company, any of its Subsidiaries or their properties or businesses may be bound or affected which default or event, individually or in the aggregate, would have a Material Adverse Effect. (l) Neither the Company nor any of its Subsidiaries is in violation of any term or provision of its charter or by-laws or of any franchise, license, permit, judgment, decree, order, statute, rule or regulation, where the consequences of such violation, individually or in the aggregate, would have a Material Adverse Effect. -7- 8 (m) Neither the execution, delivery and performance of this Agreement by the Company nor the consummation of any of the transactions contemplated hereby (including, without limitation, the issuance and sale by the Company of the Shares) will give rise to a right to terminate or accelerate the due date of any payment due under, or conflict with or result in the breach of any term or provision of, or constitute a default (or an event which with notice or lapse of time or both would constitute a default) under, or require any consent or waiver under, or result in the execution or imposition of any lien, charge or encumbrance upon any properties or assets of the Company or any of its Subsidiaries pursuant to the terms of, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which either the Company or any of its Subsidiaries or any of their properties or businesses is bound, or any franchise, license, permit, judgment, decree, order, statute, rule or regulation applicable to the Company or any of its Subsidiaries or violate any provision of the charter or by-laws of the Company or any of its Subsidiaries, except for such consents or waivers which have already been obtained and are in full force and effect and except where such event would not have a Material Adverse Effect. (n) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus. The certificates evidencing the Shares are in due and proper legal form and have been duly authorized for issuance by the Company. All of the issued and outstanding shares of Common Stock have been duly and validly issued and are fully paid and nonassessable. There are no statutory preemptive or other similar rights to subscribe for or to purchase or acquire any shares of Common Stock of the Company or its Subsidiaries or any such rights pursuant to its Certificate of Incorporation or by-laws or any agreement or instrument to or by which the Company or any of its Subsidiaries is a party or bound. The Shares, when issued and sold pursuant to this Agreement, will be duly and validly issued, fully paid and nonassessable and none of them will be issued in violation of any preemptive or other similar right. Except as disclosed in the Registration Statement and the Prospectus, there is no outstanding option, warrant or other right calling for the issuance of, and there is no commitment, plan or arrangement to issue, any share of stock of the Company or its Subsidiaries or any security convertible into, or exercisable or exchangeable for, such stock. The Common Stock and the Shares conform in all material respects to all statements in relation thereto contained in the Registration Statement and the Prospectus. All outstanding shares of capital stock of each Subsidiary have been duly authorized and validly issued, and are fully paid and nonassessable and are owned directly by the Company or by another wholly-owned subsidiary of the Company free and clear of any security interests, liens, encumbrances, equities or claims, other than those described in the Prospectus, except that the Company owns 89% of the outstanding capital stock of Liberty Home Pharmacy Corp. and 89% of the outstanding capital stock of Liberty Direct Services Corp. (o) Except for the Institutional Selling Stockholders and certain stockholders of the Company having rights under warrants originally issued to Jeffries & Co. in 1995, no holder of any security of the Company has the right to have any security owned by such holder included in the Registration Statement or to demand registration of any security owned by such holder during the period ending 90 days after the date of this -8- 9 Agreement (the "Lock-Up Period"). Each stockholder of the Company (other than the Institutional Selling Stockholders) known to the Company who, as of the expiration date of the Lock-Up Period, will own beneficially 25,000 shares or more of Common Stock and each director and executive officer of the Company, has delivered to the Representatives his enforceable written lock-up agreement in the form attached to this Agreement ("Lock-Up Agreement"). (p) All necessary corporate action has been duly and validly taken by the Company to authorize the execution, delivery and performance of this Agreement and the issuance and sale of the Shares by the Company. This Agreement has been duly and validly authorized, executed and delivered by the Company and constitutes and will constitute the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles. (q) Neither the Company nor any of its Subsidiaries is involved in any labor dispute nor, to the knowledge of the Company, is any such dispute threatened, which dispute would have a Material Adverse Effect. The Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers or contractors which would have a Material Adverse Effect. The Company is not aware of any threatened or pending litigation between the Company or its Subsidiaries and any of its executive officers which, if adversely determined, could have a Material Adverse Effect and has no reason to believe that such officers will not remain in the employment of the Company. (r) No transaction has occurred between or among the Company and any of its officers or directors or five percent shareholders or any affiliate or affiliates of any such officer or director or five percent shareholders that is required to be described in and is not described in the Registration Statement and the Prospectus. (s) The Company has not taken, nor will it take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of any of the Shares. (t) Each of the Company and its Subsidiaries has filed all Federal, state, local and foreign tax returns which are required to be filed through the date hereof, or has received extensions thereof, and has paid all taxes shown on such returns and all assessments received by it to the extent that the same are material and have become due. There are no tax audits or investigations pending, which if adversely determined would have a Material Adverse Effect; nor are there any material proposed additional tax assessments against the Company and any of its Subsidiaries. -9- 10 (u) The Shares have been duly authorized for quotation on the National Association of Securities Dealers Automated Quotation ("Nasdaq") National Market System, subject to official Notice of Issuance. A registration statement has been filed on Form 8-A pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which registration statement complies in all material respects with the Exchange Act. (v) The Company has complied with all of the requirements and filed the required forms as specified in Florida Statutes Section 517.075. (w) The books, records and accounts of the Company and its Subsidiaries accurately and fairly reflect, in reasonable detail, the transactions in, and dispositions of, the assets of, and the results of operations of, the Company and its Subsidiaries. The Company and each of its Subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (x) Each of the Company and its Subsidiaries is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are customary in the businesses in which they are engaged or propose to engage after giving effect to the transactions described in the Prospectus; all policies of insurance and fidelity or surety bonds insuring the Company or any of its Subsidiaries or the Company's or its Subsidiaries' respective businesses, assets, employees, officers and directors against such losses and risks are in full force and effect; the Company and each of its Subsidiaries are in compliance with the terms of such policies and instruments in all material respects; and neither the Company nor any Subsidiary of the Company has any reason to believe that it will not be able to renew its existing insurance coverage against such losses and risks as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. Neither the Company nor any Subsidiary has been denied any insurance coverage against such losses and risks which it has sought or for which it has applied. (y) Each approval, consent, order, authorization, designation, declaration or filing of, by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated required to be obtained or performed by the Company (except such additional steps as may be required by the National Association of Securities Dealers, Inc. (the "NASD") or may be necessary to qualify the Shares for public offering by the Underwriters under the state securities or Blue Sky laws) has been obtained or made and is in full force and effect. -10- 11 (z) There are no affiliations with the NASD among the Company's officers, directors or, to the best of the knowledge of the Company, any five percent or greater stockholder of the Company, except as set forth in the Registration Statement or otherwise disclosed in writing to the Representatives. (aa) (i) Each of the Company and its Subsidiaries is in compliance in all material respects with all rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Law") which are applicable to its business; (ii) neither the Company nor its Subsidiaries has received any notice from any governmental authority or third party of an asserted claim under Environmental Laws; (iii) each of the Company and its Subsidiaries has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its business and is in compliance with all terms and conditions of any such permit, license or approval; (iv) to the Company's knowledge, no facts currently exist that will require the Company or its Subsidiaries to make future material capital expenditures to comply with Environmental Laws; and (v) no property which is or has been owned, leased or occupied by the Company or its Subsidiaries has been designated as a Superfund site pursuant to the Comprehensive Environmental Response, Compensation of Liability Act of 1980, as amended (42 U.S.C. Section 9601, et. seq.) ("CERCLA") or otherwise designated as a contaminated site under applicable state or local law. Neither the Company nor any of its Subsidiaries has been named as a "potentially responsible party" under CERCLA. (bb) In the ordinary course of its business, the Company periodically reviews the effect of Environmental Laws on the business, operations and properties of the Company and its subsidiaries, in the course of which the Company identifies and evaluates associated costs and liabilities (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws, or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties). On the basis of such review, the Company has reasonably concluded that such associated costs and liabilities would not, singly or in the aggregate, have a Material Adverse Effect. (cc) The Company is not and, after giving effect to the offering and sale of the Shares and the application of proceeds thereof as described in the Prospectus, will not be an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"). (dd) The Company, its Subsidiaries or any other person associated with or acting on behalf of the Company or its Subsidiaries including, without limitation, any director, officer, agent or employee of the Company or its Subsidiaries has not, directly or indirectly, while acting on behalf of the Company or its Subsidiaries (i) used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity; (ii) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or -11- 12 campaigns from corporate funds; (iii) violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any other unlawful payment. (ee) The Company has reviewed its operations and that of its Subsidiaries to evaluate the extent to which the business or operations of the Company or any of its subsidiaries will be affected by the Year 2000 Problem (that is, any significant risk that computer hardware or software applications used by the Company and its subsidiaries will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively as in the case of dates or time periods occurring prior to January 1, 2000); as a result of such review, (i) the Company has no reason to believe, and does not believe, that (A) there are any issues related to the Company's preparedness to address the Year 2000 Problem that are of a character required to be described or referred to in the Registration Statement or Prospectus which have not been accurately described in the Registration Statement or Prospectus and (B) the Year 2000 Problem will have a Material Adverse Effect, or result in any material loss or interference with the business or operations of the Company and its subsidiaries, taken as a whole; and (ii) the Company reasonably believes, after due inquiry, that the suppliers, vendors, customers or other material third parties used or served by the Company and such subsidiaries are addressing or will address the Year 2000 Problem in a timely manner, except to the extent that a failure to address the Year 2000 by a supplier, vendor, customer or material third party would not have a Material Adverse Effect. 5. Representations and Warranties of the Non-Institutional Selling Stockholders. Each of the Non-Institutional Selling Stockholders, severally and not jointly, hereby represents and warrants to each Underwriter as follows: (a) Such Non-Institutional Selling Stockholder has caused certificates for the number of Shares to be sold by such Non-Institutional Selling Stockholder hereunder to be delivered to PolyMedica Corporation (the "Custodian"), endorsed in blank or with blank stock powers duly executed, with a signature appropriately guaranteed, such certificates to be held in custody by the Custodian for delivery, pursuant to the provisions of this Agreement and an agreement dated ____________, 1999 among the Custodian and such Non-Institutional Selling Stockholder (the "Custody Agreement"). (b) Such Non-Institutional Selling Stockholder has granted an irrevocable power of attorney (the "Power of Attorney") to the person named therein, on behalf of such Non-Institutional Selling Stockholder, to execute and deliver this Agreement and any other document necessary or desirable in connection with the transactions contemplated hereby and to deliver the shares to be sold by such Non-Institutional Selling Stockholder pursuant hereto. (c) This Agreement, the Custody Agreement, the Power of Attorney and the Lock-Up Agreement have each been duly authorized, executed and delivered by or on behalf of such Non-Institutional Selling Stockholder and, assuming due authorization, execution and delivery by the other parties hereto, constitutes the valid and legally binding agreement of such Non-Institutional Selling Stockholder, enforceable against -12- 13 such Non-Institutional Selling Stockholder in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other similar laws now or hereafter in effect relating to creditors' rights generally, and subject to general principles of equity. (d) The execution and delivery by such Non-Institutional Selling Stockholder of this Agreement and the performance by such Non-Institutional Selling Stockholder of its obligations under this Agreement (i) will not contravene any provision of applicable law, statute, regulation or filing or any agreement or other instrument binding upon such Non-Institutional Selling Stockholder or any judgment, order or decree of any governmental body, agency or court having jurisdiction over such Non-Institutional Selling Stockholder, (ii) does not require any consent, approval, authorization or order of or registration or filing with any court or governmental agency or body having jurisdiction over it, except such as may be required by the Blue Sky laws of the various states in connection with the offer and sale of the Shares which have been or will be effected in accordance with this Agreement, (iii) does not and will not violate any statute, law, regulation or filing or judgment, injunction, order or decree applicable to such Non-Institutional Selling Stockholder or (iv) will not result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of such Non-Institutional Selling Stockholder pursuant to the terms of any agreement or instrument to which such Non-Institutional Selling Stockholder is a party or by which such Non-Institutional Selling Stockholder may be bound or to which any of the property or assets of such Non-Institutional Selling Stockholder is subject. (e) Such Non-Institutional Selling Stockholder has, and on the Firm Shares Closing Date will have, valid and unencumbered title to the Shares to be sold by such Non-Institutional Selling Stockholder free and clear of any lien, claim, security interest or other encumbrance, including, without limitation, any restriction on transfer, except as otherwise described in the Registration Statement and Prospectus. (f) Such Non-Institutional Selling Stockholder has, and on the Firm Shares Closing Date will have, full legal right, power and authorization, and any approval required by law, to sell, assign, transfer and deliver the Shares to be sold by such Non-Institutional Selling Stockholder in the manner provided by this Agreement. (g) Upon delivery of and payment for the Shares to be sold by such Non-Institutional Selling Stockholder pursuant to this Agreement, the several Underwriters will receive valid and unencumbered title to such Shares free and clear of any lien, claim, security interest or other encumbrance, provided, such Underwriters are without notice of any "adverse claim" (as such term is defined in Section 8-102(a)(1) of the New York Uniform Commercial Code (the "NYUCC")) and are otherwise bona fide purchasers for purposes of the NYUCC. (h) All information relating to such Non-Institutional Selling Stockholder furnished in writing by such Non-Institutional Selling Stockholder expressly for use in the Registration Statement and Prospectus is, and on each Closing Date will be, true, correct, and complete, and does not, and on each Closing Date will not, contain any -13- 14 untrue statement of a material fact or omit to state any material fact necessary to make such information not misleading. (i) Such Non-Institutional Selling Stockholder has reviewed the Registration Statement and Prospectus and, although such Non-Institutional Selling Stockholder has not independently verified the accuracy or completeness of all the information contained therein, nothing has come to the attention of such Non-Institutional Selling Stockholder that would lead such Non-Institutional Selling Stockholder to believe that (i) on the Effective Date, the Registration Statement contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein in order to make the statements made therein not misleading and (ii) on the Effective Date the Prospectus contained and, on each Closing Date contains, no untrue statement of a material fact or omitted or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (j) The sale of Shares by such Non-Institutional Selling Stockholder pursuant to this Agreement is not prompted by such Non-Institutional Selling Stockholder's knowledge of any material information concerning the Company or its Subsidiaries which is not set forth in the Prospectus. (k) Such Non-Institutional Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. (l) Such Non-Institutional Selling Stockholder has no actual knowledge that any representation or warranty of the Company set forth in Section 4 above is untrue or inaccurate in any material respect. (m) The representations and warranties of such Non-Institutional Selling Stockholder in the Custody Agreement are and on each Closing Date will be, true and correct. 6. Representations and Warranties of the Institutional Selling Stockholders. Each of the Institutional Selling Stockholders, severally and not jointly, hereby represents and warrants to each Underwriter as follows: (a) Such Institutional Selling Stockholder has caused certificates for the number of Shares to be sold by such Institutional Selling Stockholder hereunder to be delivered to PolyMedica Corporation (the "Custodian"), endorsed in blank or with blank stock powers duly executed, with a signature appropriately guaranteed, such certificates to be held in custody by the Custodian for delivery, pursuant to the provisions of this Agreement and an agreement dated ____________, 1999 among the Custodian and such Institutional Selling Stockholder (the "Custody Agreement"). -14- 15 (b) Such Institutional Selling Stockholder has granted an irrevocable power of attorney (the "Power of Attorney") to the person named therein, on behalf of such Institutional Selling Stockholder, to execute and deliver this Agreement and any other document necessary or desirable in connection with the transactions contemplated hereby and to deliver the shares to be sold by such Institutional Selling Stockholder pursuant hereto. (c) This Agreement, the Custody Agreement and the Power of Attorney have each been duly authorized, executed and delivered by or on behalf of such Institutional Selling Stockholder and, assuming due authorization, execution and delivery by the other parties hereto, constitutes the valid and legally binding agreement of such Institutional Selling Stockholder, enforceable against such Institutional Selling Stockholder in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other similar laws now or hereafter in effect relating to creditors' rights generally, including, without limitation, the rights and priorities of creditors provided in Chapter 175, Sections 180A through 180L of the Mass. Gen. Laws in any rehabilitation or liquidation proceeding begun in the Commonwealth of Massachusetts against an insolvent Massachusetts insurer, and subject to general principles of equity. (d) The execution and delivery by such Institutional Selling Stockholder of this Agreement and the performance by such Institutional Selling Stockholder of its obligations under this Agreement (i) will not contravene any provision of applicable law, statute, regulation or filing or any agreement or other instrument binding upon such Institutional Selling Stockholder or any judgment, order or decree of any governmental body, agency or court having jurisdiction over such Institutional Selling Stockholder, (ii) does not require any consent, approval, authorization or order of or registration or filing with any court or governmental agency or body having jurisdiction over it, except such as may be required by the Blue Sky laws of the various states in connection with the offer and sale of the Shares which have been or will be effected in accordance with this Agreement, (iii) does not and will not violate any statute, law, regulation or filing or judgment, injunction, order or decree applicable to such Institutional Selling Stockholder or (iv) will not result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of such Institutional Selling Stockholder pursuant to the terms of any agreement or instrument to which such Institutional Selling Stockholder is a party or by which such Institutional Selling Stockholder may be bound or to which any of the property or assets of such Institutional Selling Stockholder is subject. (e) Such Institutional Selling Stockholder has, and on the Firm Shares Closing Date will have, valid and marketable title to the Shares to be sold by such Institutional Selling Stockholder free and clear of any lien, claim, security interest or other encumbrance, including, without limitation, any restriction on transfer, except as otherwise described in the Registration Statement and Prospectus. (f) Such Institutional Selling Stockholder has, and on the Firm Shares Closing Date will have, full legal right, power and authorization, and any approval required by -15- 16 law, to sell, assign, transfer and deliver the Shares to be sold by such Institutional Selling Stockholder in the manner provided by this Agreement. (g) Upon delivery of and payment for the Shares to be sold by such Institutional Selling Stockholder pursuant to this Agreement, the several Underwriters will receive valid and marketable title to such Shares free and clear of any lien, claim, security interest or other encumbrance, provided such Underwriters are without notice of any "adverse claim" (as such term is defined in the NYUCC) and are otherwise bona fide purchasers for purposes of the NYUCC. (h) All information relating to such Institutional Selling Stockholder furnished in writing by such Institutional Selling Stockholder expressly for use in the Registration Statement and Prospectus is, and on each Closing Date will be, true, correct, and complete, and does not, and on each Closing Date will not, contain any untrue statement of a material fact or omit to state any material fact necessary to make such information not misleading. (i) Such Institutional Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. (j) The representations and warranties of such Institutional Selling Stockholder in the Custody Agreement are and on each Closing Date will be, true and correct. 7. Conditions of the Underwriters' Obligations. The obligations of the Underwriters under this Agreement are several and not joint. The respective obligations of the Underwriters to purchase the Shares are subject to each of the following terms and conditions: (a) Notification that the Registration Statement has become effective shall have been received by the Representatives and the Prospectus shall have been timely filed with the Commission in accordance with Section 8(a) of this Agreement. (b) No order preventing or suspending the use of any preliminary prospectus or the Prospectus shall have been or shall be in effect and no order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings for such purpose shall be pending before or threatened by the Commission, and any requests for additional information on the part of the Commission (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of the Commission and the Representatives. (c) The representations and warranties of the Company and the Selling Stockholder contained in this Agreement and in the certificates delivered pursuant to Section 7(d) shall be true and correct when made and on and as of each Closing Date as if made on such date. The Company and the Selling Stockholder shall have performed all -16- 17 covenants and agreements and satisfied all the conditions contained in this Agreement required to be performed or satisfied by them at or before such Closing Date. (d) The Representatives shall have received on each Closing Date a certificate, addressed to the Representatives and dated such Closing Date, of the chief executive or chief operating officer and the chief financial officer or chief accounting officer of the Company to the effect that (i) the signers of such certificate have carefully examined the Registration Statement, the Prospectus and this Agreement and that the representations and warranties of the Company in this Agreement are true and correct on and as of such Closing Date with the same effect as if made on such Closing Date and the Company has performed all covenants and agreements and satisfied all conditions contained in this Agreement required to be performed or satisfied by it at or prior to such Closing Date, and (ii) no stop order suspending the effectiveness of the Registration Statement has been issued and to the best of their knowledge, no proceedings for that purpose have been instituted or are pending under the Securities Act. (e) The Representatives shall have received on each Closing Date a certificate, addressed to the Representatives and dated such Closing Date, from each of the Non-Institutional Selling Stockholders, to the effect that such Non-Institutional Selling Stockholder has carefully examined the Registration Statement, the Prospectus and this Agreement and that the representations and warranties of such Non-Institutional Selling Stockholder in this Agreement are true and correct on and as of such Closing Date with the same effect as if made on such Closing Date and such Non-Institutional Selling Stockholder has performed all covenants and agreements and satisfied all conditions contained in this Agreement required to be performed or satisfied by him at or prior to such Closing Date. (f) The Representatives shall have received on the Firm Shares Closing Date a certificate, addressed to the Representatives and dated such Closing Date, from each of Institutional Selling Stockholders, to the effect that such Institutional Selling Stockholder has carefully examined the information concerning such Institutional Selling Stockholder contained in the Registration Statement, the Prospectus and this Agreement and that the representations and warranties of such Institutional Selling Stockholder in this Agreement are true and correct on and as of such Closing Date with the same effect as if made on such Closing Date and such Institutional Selling Stockholder has performed all covenants and agreements and satisfied all conditions contained in this Agreement required to be performed or satisfied by it at or prior to such Closing Date. (g) The Representatives shall have received, at the time this Agreement is executed and on each Closing Date a signed letter from PricewaterhouseCoopers LLP addressed to the Representatives and dated, respectively, the date of this Agreement and each such Closing Date, in form and substance reasonably satisfactory to the Representatives, confirming that they are independent accountants within the meaning of the Securities Act and the Rules, that the response to Item 10 of the Registration Statement is correct insofar as it relates to them and stating in effect that: -17- 18 (i) in their opinion the audited financial statements included or incorporated by reference in the Registration Statement and the Prospectus and reported on by them comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the Rules; (ii) on the basis of a reading of the amounts included in the Registration Statement and the Prospectus under the headings "Summary Consolidated Financial Data" and "Selected Consolidated Financial Data," carrying out certain procedures (but not an examination in accordance with generally accepted auditing standards) which would not necessarily reveal matters of significance with respect to the comments set forth in such letter, a reading of the minutes of the meetings of the stockholders and directors of the Company, and inquiries of certain officials of the Company who have responsibility for financial and accounting matters of the Company as to transactions and events subsequent to the date of the latest audited financial statements, except as disclosed in the Registration Statement and the Prospectus, nothing came to their attention which caused them to believe that: (A) the amounts in "Summary Consolidated Financial Information," and "Selected Consolidated Financial Data" included in the Registration Statement and the Prospectus do not agree with the corresponding amounts in the audited and unaudited financial statements from which such amounts were derived; or (B) with respect to the Company, there were, at a specified date not more than five business days prior to the date of the letter, any increases in the current liabilities and long-term liabilities of the Company or any decreases in net income or in working capital or the stockholders' equity in the Company, as compared with the amounts shown on the Company's unaudited balance sheet as of June 30, 1999 and on the Company's unaudited statement of operations for the three months ended June 30, 1999 included in the Registration Statement; (iii) they have performed certain other procedures as may be permitted under Generally Acceptable Auditing Standards as a result of which they determined that certain information of an accounting, financial or statistical nature (which is limited to accounting, financial or statistical information derived from the general accounting records of the Company) set forth in the Registration Statement and the Prospectus and reasonably specified by the Representatives agrees with the accounting records of the Company; and (iv) based upon the procedures set forth in clauses (ii) and (iii) above and a reading of the amounts included in the Registration Statement under the headings "Summary Consolidated Financial Data" and "Selected Consolidated Financial Data" included in the Registration Statement and Prospectus and a reading of the financial statements from which certain of such data were derived, -18- 19 nothing has come to their attention that gives them reason to believe that the "Summary Consolidated Financial Data" and "Selected Consolidated Financial Data" included in the Registration Statement and Prospectus do not comply as to the form in all material respects with the applicable accounting requirements of the Securities Act and the Rules or that the information set forth therein is not fairly stated in relation to the financial statements included in the Registration Statement or Prospectus from which certain of such data were derived are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement and Prospectus. References to the Registration Statement and the Prospectus in this paragraph (g) are to such documents as amended and supplemented at the date of the letter. (h) The Representatives shall have received on each Closing Date from Hale and Dorr LLP, counsel for the Company, an opinion, addressed to the Representatives and dated such Closing Date and stating that the Institutional Selling Stockholders may rely on such opinion, and stating in effect that: (i) Each of the Company and its Subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of its incorporation. Each of the Company and its Subsidiaries is duly qualified and in good standing as a foreign corporation in each jurisdiction listed in a schedule to the opinion. (ii) Each of the Company and its Subsidiaries has all requisite corporate power and authority to own, lease and license its assets and properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus and, with respect to the Company, to enter into, deliver and perform this Agreement and to issue and sell the Shares other than those required under the state and foreign Blue Sky laws. (iii) The Company has authorized and issued capital stock as set forth in the Registration Statement and the Prospectus under the caption "Capitalization"; the certificates evidencing the Shares are in due and proper legal form and have been duly authorized for issuance by the Company; all of the outstanding shares of Common Stock of the Company have been duly and validly authorized and issued and are fully paid and nonassessable and none of them was issued in violation of any preemptive or other similar right. The Shares when issued and sold pursuant to this Agreement will be duly and validly issued, outstanding, fully paid and nonassessable and none of them will have been issued in violation of any preemptive or other similar right. To such counsel's knowledge, except as disclosed in the Registration Statement and the Prospectus, there are no preemptive or other rights to subscribe for or to purchase or any restriction upon the voting or transfer of any securities of the Company -19- 20 pursuant to the Company's Certificate of Incorporation or by-laws. To such counsel's knowledge based upon a review by such counsel of the minute books of the Company and the documents filed by the Company with the Securities and Exchange Commission, except as disclosed in the Registration Statement and the Prospectus, there is no outstanding option, warrant or other right calling for the issuance of, and no commitment, plan or arrangement to issue, any share of stock of the Company or any security convertible into, exercisable for, or exchangeable for stock of the Company. The Common Stock and the Shares conform in all material respects to the descriptions thereof contained in the Registration Statement and the Prospectus. The issued and outstanding shares of capital stock of each of the Company's Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and are owned by the Company or by another wholly owned subsidiary of the Company as set forth in a schedule to the opinion and none of the documents filed as exhibits to the Registration Statement or incorporated by reference into the Registration Statement (including documents filed as exhibits to document so incorporated by reference into the Registration Statement creates any security interest, lien, encumbrance, equity or claim, other than as described in the Registration Statement and the Prospectus. (iv) All necessary corporate action has been duly and validly taken by the Company to authorize the execution, delivery and performance of this Agreement and the issuance and sale of the Shares. This Agreement has been duly and validly authorized, executed and delivered by the Company. (v) Neither the execution, delivery and performance of this Agreement by the Company nor the consummation of any of the transactions contemplated hereby (including, without limitation, the issuance and sale by the Company of the Shares) will give rise to a right to terminate or accelerate the due date of any payment due under, or conflict with or result in the breach of any term or provision of, or constitute a default (or any event which with notice or lapse of time, or both, would constitute a default) under, or require consent or waiver under, or result in the execution or imposition of any lien, charge, claim, security interest or encumbrance upon any properties or assets of the Company or any of its Subsidiaries pursuant to the terms of any agreement or instrument that is filed as an exhibit to the Registration Statement or to the terms of any of the documents incorporated by reference into the Registration Statement, or violate any provision of the charter or by-laws of the Company or any of its Subsidiaries. -20- 21 (vi) No consent, approval, authorization or order of any court or governmental agency or regulatory body is required for the execution, delivery or performance of this Agreement by the Company or the consummation of the transactions contemplated hereby or thereby, except such as have been obtained under the Securities Act and such as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the several Underwriters. (vii) To such counsel's knowledge, there is no litigation or governmental or other proceeding or investigation, before any court or before or by any public body or board pending or threatened against, or involving the assets, properties or businesses of, the Company which would have a Material Adverse Effect. (viii) The statements (A) incorporated by reference into the Prospectus under the caption "Description of Capital Stock" and (B) in the Registration Statement in Item 15, in each case insofar as such statements constitute summaries of documents referred to therein or matters of law, fairly present the information required with respect to such documents and matters of law and fairly summarize in all material respects the matters required to be disclosed therein. To such counsel's knowledge, there are no contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described therein or filed as required. (ix) The Registration Statement, all preliminary prospectuses and the Prospectus and each amendment or supplement thereto (except for the financial statements and schedules and other financial and statistical data included therein, as to which such counsel expresses no opinion) comply as to form in all material respects with the requirements of the Securities Act and the Rules. (x) The Registration Statement has become effective under the Securities Act, and no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Securities Act. (xi) The Shares have been authorized for quotation on the Nasdaq National Market. (xii) The Company is not, and after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. -21- 22 To the extent deemed advisable by such counsel, they may rely as to matters of fact on certificates of responsible officers of the Company and public officials and on the opinions of other counsel satisfactory to the Representatives as to matters which are governed by laws other than the laws of the Commonwealth of Massachusetts, the General Corporation Law of the State of Delaware and the Federal laws of the United States; provided that such counsel shall state that, in their opinion, the Underwriters and they are justified in relying on such other opinions. Copies of such certificates and other opinions shall be furnished to the Representatives and counsel for the Underwriters. In addition, such counsel shall state that such counsel has participated in conferences with officers and other representatives of the Company, representatives of the Representatives and representatives of the independent certified public accountants of the Company, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus (except as specified in the foregoing opinion), on the basis of the foregoing, no facts have come to the attention of such counsel which lead such counsel to believe that the Registration Statement at the time it became effective (except with respect to the financial statements and notes and schedules thereto and other financial data, as to which such counsel need express no belief and after giving effect to any changes incorporated pursuant to Section 430A under the Securities Act) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus as amended or supplemented (except with respect to the financial statements, notes and schedules thereto and other financial data, as to which such counsel need make no statement) on the date thereof contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (i) The Representatives shall have received on the Firm Shares Closing Date from Choate, Hall & Stewart, counsel for the Institutional Selling Stockholders, an opinion, addressed to the Representatives and dated such Closing Date, and stating in effect that: (i) This Agreement, the Custody Agreement, the Power of Attorney and the Lock-Up Agreement each constitute the valid and binding obligation of each Institutional Selling Stockholder. The Custody Agreement, the Power of Attorney and the Lock-Up Agreement are enforceable against such Institutional Selling Stockholder in accordance with their respective terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other similar laws now or hereafter in effect relating to creditors' rights generally, including without limitation, the rights and priorities of creditors provided in Chapter 175, Sections 180A through 180L of the Mass. Gen. Laws in any rehabilitation or liquidation proceeding begun in the Commonwealth of Massachusetts against an insolvent Massachusetts insurer, and subject to general principles of equity. (ii) All of the rights of each Institutional Selling Stockholder in the Shares to be sold by such Institutional Selling Stockholder pursuant to this Agreement, -22- 23 have been transferred to the Underwriters who have severally purchased such Shares pursuant to this Agreement, free and clear of adverse claims, assuming for purposes of this opinion that the Underwriters purchased the same in good faith without notice of any adverse claims. To the extent deemed advisable by such counsel, they may rely as to matters of fact on certificates of the Institutional Selling Stockholders and on the opinions of other counsel satisfactory to the Representatives as to matters which are governed by laws other than the laws of the Commonwealth of Massachusetts, the General Corporation Law of the State of Delaware or the Federal laws of the United States; provided that such counsel shall state that, in their opinion, the Underwriters and they are justified in relying on such other opinions. Copies of such certificates and other opinions shall be furnished to the Representatives and counsel for the Underwriters. (j) The Representatives shall have received on the Firm Shares Closing Date from internal legal counsel of John Hancock Mutual Life Insurance Company, counsel for the Institutional Selling Stockholders, an opinion, addressed to the Representatives and dated such Closing Date, and stating in effect that: (i) This Agreement has been duly and validly executed and delivered by or on behalf of the Institutional Selling Stockholders. (ii) Each Institutional Selling Stockholder has full legal right and authority to enter into this Agreement and to sell, transfer and deliver in the manner provided in this Agreement, the Shares to be sold by such Institutional Selling Stockholder hereunder. (iii) The transfer and sale by each Institutional Selling Stockholder of the Shares to be sold by such Institutional Selling Stockholder as contemplated by this Agreement will not conflict with, result in a breach of, or constitute a default under any agreement or instrument known to such counsel to which such Institutional Selling Stockholder is a party or by which such Institutional Selling Stockholder or any of its properties may be bound, or any franchise, license, permit, judgment, decree, order, statute, rule or regulation. (iv) No consent, approval, authorization, license, certificate, permit or order of any court, governmental or regulatory agency, authority or body or financial institution is required in connection with the performance of this Agreement by the Institutional Selling Stockholders or the consummation of the transactions contemplated hereby, including the delivery and sale of the Shares to be delivered and sold by the Institutional Selling Stockholders, except such as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Shares by the several Underwriters. To the extent deemed advisable by such counsel, they may rely as to matters of fact on certificates of the Institutional Selling Stockholders and on the opinions of other counsel satisfactory to the Representatives as to matters which are governed by laws other than the laws of the -23- 24 Commonwealth of Massachusetts, the General Corporation Law of the State of Delaware or the Federal laws of the United States; provided that such counsel shall state that, in their opinion, the Underwriters and they are justified in relying on such other opinions. Copies of such certificates and other opinions shall be furnished to the Representatives and counsel for the Underwriters. (k) The Representatives shall have received on the each Closing Date from Hale and Dorr LLP, counsel for the Non-Institutional Selling Stockholders, an opinion, addressed to the Representatives and dated such Closing Date, and stating in effect that: (i) This Agreement has been duly and validly executed and delivered by or on behalf of the Non-Institutional Selling Stockholders. (ii) This Agreement, the Custody Agreement, the Power of Attorney and the Lock-Up Agreement each constitute the valid and binding obligation of each Non-Institutional Selling Stockholder. The Custody Agreement, the Power of Attorney and the Lock-up Agreement are enforceable against such Non-Institutional Selling Stockholder in accordance with their respective terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other similar laws now or hereafter in effect relating to creditors' rights generally, and subject to general principles of equity; and each Non-Institutional Selling Stockholder has full legal right and authority to enter into this Agreement and to sell, transfer and deliver in the manner provided in this Agreement, the Shares to be sold by such Non-Institutional Selling Stockholder hereunder. (iii) The transfer and sale by each Non-Institutional Selling Stockholder of the Shares to be sold by such Non-Institutional Selling Stockholder as contemplated by this Agreement will not conflict with, result in a breach of, or constitute a default under any agreement or instrument known to such counsel to which such Non-Institutional Selling Stockholder is a party or by which such Non-Institutional Selling Stockholder or any of its properties may be bound, or any franchise, license, permit, judgment, decree, order, statute, rule or regulation. (iv) All of the rights of each Non-Institutional Selling Stockholder in the Shares to be sold by such the Non-Institutional Selling Stockholder pursuant to this Agreement, have been transferred to the Underwriters who have severally purchased such Shares pursuant to this Agreement, free and clear of adverse claims, assuming for purposes of this opinion that the Underwriters purchased the same in good faith without notice of any adverse claims. (v) No consent, approval, authorization, license, certificate, permit or order of any court, governmental or regulatory agency, authority or body or financial institution is required in connection with the performance of this Agreement by the Non-Institutional Selling Stockholders or the consummation of the transactions contemplated hereby, including the delivery and sale of the Shares to be delivered and sold by the Non-Institutional Selling Stockholders, except such as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Shares by the several Underwriters. -24- 25 To the extent deemed advisable by such counsel, they may rely as to matters of fact on certificates of the Non-Institutional Selling Stockholders and on the opinions of other counsel satisfactory to the Representatives as to matters which are governed by laws other than the laws of the Commonwealth of Massachusetts, the General Corporation Law of the State of Delaware or the Federal laws of the United States; provided that such counsel shall state that, in their opinion, the Underwriters and they are justified in relying on such other opinions. Copies of such certificates and other opinions shall be furnished to the Representatives and counsel for the Underwriters. In addition, such counsel shall state that such counsel has participated in conferences with officers and other representatives of the Company, representatives of the Representatives and representatives of the independent public accountants of the Company, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed. While such counsel has not undertaken to independently verify and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus (except as specified in the foregoing opinion), on the basis of the foregoing, no facts have come to the attention of such counsel which lead such counsel to believe that the Registration Statement at the time it became effective (except with respect to the financial statements, notes and schedules thereto and other financial data, as to which such counsel need express no belief and after giving effect to any changes incorporated pursuant to Section 430A under the Securities Act) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus as amended or supplemented (except with respect to the financial statements, notes and schedules thereto and other financial data, as to which such counsel need make no statement) on the date thereof and the date of such opinion contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (l) All proceedings taken in connection with the sale of the Firm Shares and the Option Shares as herein contemplated shall be reasonably satisfactory in form and substance to the Representatives, and their counsel and the Underwriters shall have received on each Closing Date from Testa Hurwitz & Thibeault LLP a favorable opinion, addressed to the Representatives, with respect to the Shares, the Registration Statement and the Prospectus, and such other related matters, as the Representatives may reasonably request, and the Company shall have furnished to Testa Hurwitz & Thibeault LLP such documents as they may reasonably request for the purpose of enabling them to pass upon such matters. (m) If the Shares have been qualified for sale in Florida, the Representatives shall have received on each Closing Date certificates, addressed to the Representatives, and dated such Closing Date, of an executive officer of the Company, to the effect that the signer of such certificate has reviewed and understands the provisions of Section 517.075 of the Florida Statutes, and represents that the Company has complied, and at all times will comply, with all provisions of Section 517.075 and further, that as of such Closing Date, neither the Company nor any of its affiliates does business with the government of Cuba or with any person or affiliate located in Cuba. -25- 26 (n) The Representatives shall have received copies of the Lock-up Agreements executed by each entity or person described in Sections 4(o), 5(c) and 6(c). (o) The Company and the Selling Stockholders shall have furnished or caused to be furnished to the Representatives such further certificates or documents as the Representatives shall have reasonably requested. 8. Covenants of the Company. (a) The Company covenants and agrees as follows: (i) The Company will use its best efforts to cause the Registration Statement, if not effective at the time of execution of this Agreement, and any amendments thereto, to become effective as promptly as possible. The Company shall prepare the Prospectus in a form approved by the Representatives and file such Prospectus pursuant to Rule 424(b) under the Securities Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Securities Act. (ii) The Company shall promptly advise the Representatives in writing (A) when any amendment to the Registration Statement shall have become effective, (B) of any request by the Commission for any amendment of the Registration Statement or the Prospectus or for any additional information, (C) of the prevention or suspension of the use of any preliminary prospectus or the Prospectus or of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or threatening of any proceeding for that purpose and (D) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. The Company shall not file any amendment of the Registration Statement or supplement to the Prospectus unless the Company has furnished the Representatives a copy for its review prior to filing and shall not file any such proposed amendment or supplement to which the Representatives reasonably object. The Company shall use its best efforts to prevent the issuance of any such stop order and, if issued, to obtain as soon as possible the withdrawal thereof. (iii) If, at any time when a prospectus relating to the Shares is required to be delivered under the Securities Act and the Rules, any event occurs as a result of which the Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or if it shall be necessary to amend or supplement the Prospectus to comply with the Securities Act or the Rules, the Company promptly shall prepare and file with the Commission, subject to the second sentence of -26- 27 paragraph (ii) of this Section 7(a), an amendment or supplement which shall correct such statement or omission or an amendment which shall effect such compliance. (iv) The Company shall make generally available to its security holders and to the Representatives as soon as practicable, but not later than 45 days after the end of the 12-month period beginning at the end of the fiscal quarter of the Company during which the Effective Date occurs (or 90 days if such 12-month period coincides with the Company's fiscal year), an earnings statement (which need not be audited) of the Company, covering such 12-month period, which shall satisfy the provisions of Section 11(a) of the Securities Act or Rule 158 of the Rules. (v) The Company shall furnish to the Representatives and counsel for the Underwriters, without charge, signed copies of the Registration Statement (including all exhibits thereto and amendments thereof) and to each other Underwriter a copy of the Registration Statement (without exhibits thereto) and all amendments thereof and, so long as delivery of a prospectus by an Underwriter or dealer may be required by the Securities Act or the Rules, as many copies of any preliminary prospectus and the Prospectus and any amendments thereof and supplements thereto as the Representatives may reasonably request. (vi) The Company shall cooperate with the Representatives and their counsel in endeavoring to qualify the Shares for offer and sale in connection with the offering under the laws of such jurisdictions as the Representatives may designate and shall maintain such qualifications in effect so long as required for the distribution of the Shares; provided, however, that the Company shall not be required in connection therewith, as a condition thereof, to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction or subject itself to taxation as doing business in any jurisdiction. (vii) Without the prior written consent of CIBC World Markets Corp., for a period of 90 days after the date of this Agreement, the Company and each of its individual directors and executive officers shall not issue, sell or register with the Commission (other than on Form S-8 or on any successor form), or otherwise dispose of, directly or indirectly, any equity securities of the Company (or any securities convertible into, exercisable for or exchangeable for equity securities of the Company), except for the issuance of the Shares pursuant to the Registration Statement, the grant of options and issuance of shares pursuant to the Company's existing stock option plan or bonus plan and the issuance of shares pursuant to options granted pursuant to the Company's existing stock option plan, in each case as described, or incorporated by reference, in the Registration Statement and the Prospectus. In the event that during this period, (i) any shares are issued pursuant to the Company's existing stock option plan or bonus plan that are exercisable during -27- 28 such 90 day period or (ii) any registration is effected on Form S-8 or on any successor form relating to shares that are exercisable during such 90 period, the Company shall obtain the written agreement of such grantee or purchaser or holder of such registered securities that, for a period of 90 days after the date of this Agreement, such person will not, without the prior written consent of CIBC World Markets Corp., offer for sale, sell, distribute, grant any option for the sale of, or otherwise dispose of, directly or indirectly, or exercise any registration rights with respect to, any shares of Common Stock (or any securities convertible into, exercisable for, or exchangeable for any shares of Common Stock) owned by such person. (viii) On or before completion of this offering, the Company shall make all filings required under applicable securities laws and by the Nasdaq National Market (including any required registration under the Exchange Act). (ix) The Company shall file timely and accurate reports in accordance with the provisions of Florida Statutes Section 517.075, or any successor provision, and any regulation promulgated thereunder, if at any time after the Effective Date, the Company or any of its affiliates commences engaging in business with the government of Cuba or any person or affiliate located in Cuba. (x) The Company will apply the net proceeds from the offering of the Shares in the manner set forth under "Use of Proceeds" in the Prospectus. (b) The Company agrees to pay, or reimburse if paid by the Representatives and/or any Institutional Selling Stockholder, whether or not the transactions contemplated hereby are consummated or this Agreement is terminated, all costs and expenses incident to the public offering of the Shares and the performance of the obligations of the Company under this Agreement including those relating to: (i) the preparation, printing, filing and distribution of the Registration Statement including all exhibits thereto, each preliminary prospectus, the Prospectus, all amendments and supplements to the Registration Statement and the Prospectus, and the printing, filing and distribution of this Agreement; (ii) the preparation and delivery of certificates for the Shares to the Underwriters; (iii) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the various jurisdictions referred to in Section 7(a)(vi), including the reasonable fees and disbursements of counsel for the Underwriters and the Institutional Selling Stockholders in connection with such registration and qualification and the preparation, printing, distribution and shipment of preliminary and supplementary Blue Sky memoranda; (iv) the furnishing (including costs of shipping and mailing) to the Representatives and to the Underwriters and the Institutional Selling Stockholders of copies of each preliminary prospectus, the Prospectus and all amendments or supplements to the Prospectus, and of the several documents required by this Section to be so furnished, as may be reasonably requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold; (v) the filing fees of the NASD in connection with its review of the terms of the public offering and reasonable fees and disbursements of counsel for the Underwriters in connection with such review; (vi) inclusion of the Shares for quotation on the Nasdaq National Market; and (vii) all transfer taxes, if any, with -28- 29 respect to the sale and delivery of the Shares by the Company to the Underwriters. Subject to the provisions of Section 10, the Underwriters agree to pay, whether or not the transactions contemplated hereby are consummated or this Agreement is terminated, all costs and expenses incident to the performance of the obligations of the Underwriters under this Agreement not payable by the Company pursuant to the preceding sentence, including, without limitation, the fees and disbursements of counsel for the Underwriters. (c) The Company agrees to pay, or reimburse if paid by the Institutional Selling Stockholders, any transfer taxes incident to the transfer to the Underwriters of the Shares being sold by the Institutional Selling Stockholders. The Non-Institutional Selling Stockholders will pay any transfer taxes incident to the transfer to the Underwriters of the Shares being sold by the Non-Institutional Selling Stockholders. Nothing herein shall alter the continuing obligations of the Company to the Institutional Selling Stockholders arising under that certain Note and Warrant Agreement dated January 26, 1993 (as amended, modified and supplemented, the "Note and Warrant Agreement") and the other Operative Agreements (as defined in the Note and Warrant Agreement), including, without limitation, sections 22 and 23 of the Note and Warrant Agreement. 9. Indemnification. (a) The Company and the Selling Stockholders agree, jointly and severally, to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any and all losses, claims, damages and liabilities, joint or several (including any reasonable investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted), to which they, or any of them, may become subject under the Securities Act, the Exchange Act or other Federal or state law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based (i) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, the Registration Statement or the Prospectus or any amendment thereof or supplement thereto, or in any Blue Sky application or other information or other documents executed by the Company filed in any state or other jurisdiction to qualify any or all of the Shares under the securities laws thereof (any such application, document or information being hereinafter referred to as a "Blue Sky Application") or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) in whole or in part upon any breach of the representations and warranties set forth in Section 4 hereof, or (iii) in whole or in part upon any failure of the Company to perform any of its obligations hereunder or under law; provided, however, that (A) such indemnity shall not inure to the benefit of any Underwriter (or any person controlling such Underwriter) on account of any losses, claims, damages or liabilities arising from the sale of the Shares to any person by such Underwriter if such untrue statement or omission or alleged untrue statement or omission was made in such preliminary prospectus, the Registration Statement or the Prospectus, or such amendment or supplement thereto, or in any Blue Sky Application and (1) such Underwriter failed to send or give a copy of the Prospectus, as the same may then be supplemented or amended, to such person within the time required by the Act and the untrue statement or -29- 30 omission (or alleged untrue statement or omission) was contained in the Prospectus or (2) in reliance upon and in conformity with information furnished in writing to the Company by the Representatives on behalf of any Underwriter specifically for use therein, and (B) no Selling Stockholder shall be liable or have any obligation except if and only to the extent that such loss, claim, damage or liability arises out of or is based upon an untrue statement (or alleged untrue statement) or omission (or alleged omission) contained in (or omitted from) any such document in reliance upon and in conformity with information furnished in writing to the Company by such Selling Stockholder specifically for use therein. Notwithstanding the foregoing, the liability of each Selling Stockholder pursuant to the provisions of this Section 9(a) and Section 10 shall be limited to the lesser of (i) an amount equal to the aggregate net proceeds actually received by such Selling Stockholder from the sale of such Shares sold by the Selling Stockholder hereunder and (ii) that percentage of the total amount of such losses, claims, damages or liabilities indemnified against by the Selling Stockholder equal to the percentage obtained by dividing the total number of Shares sold by the Selling Stockholder hereunder by the total number of shares sold hereunder, including any Option Shares so sold. Notwithstanding anything to the contrary contained in this Section 9(a) or Section 10, each Underwriter agrees not to assert its rights to indemnity under this Section 9(a) or rights of Contribution under Section 10 against any Selling Stockholder until (i) such Underwriter has requested indemnification and reimbursement from the Company for such losses, claims, damages, liabilities or expenses and (ii) the Company does not within 90 days of such request (A) agree to so indemnify such Underwriter and (B) reimburse in full such Underwriter or controlling person for any such losses, claims, damages, liabilities or expenses incurred. This indemnity agreement will be in addition to any liability which the Company and the Selling Stockholders may otherwise have. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, the Selling Stockholders and each person, if any, who controls the Company or the Institutional Selling Stockholders within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, each director of the Company, and each officer of the Company who signs the Registration Statement, to the same extent as the foregoing indemnity from the Company and the Selling Stockholders to each Underwriter, but only insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which was made in any preliminary prospectus, the Registration Statement or the Prospectus, or any amendment thereof or supplement thereto, contained in the (i) concession and reallowance figures appearing under the caption "Underwriting" and (ii) the stabilization information contained under the caption "Underwriting" in the Prospectus; provided, however, that the obligation of each Underwriter to indemnify the Company or the Selling Stockholders (including any controlling person, director or officer thereof) shall be limited to the net proceeds received by the Company from such Underwriter. This indemnity agreement will be in addition to any liability that the Underwriters may otherwise have. (c) Any party that proposes to assert the right to be indemnified under this Section (or contribution under Section 10, as further provided in the last sentence to this Section 9(c)) will, promptly after receipt of notice of commencement of any action, suit -30- 31 or proceeding against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section, notify each such indemnifying party of the commencement of such action, suit or proceeding, enclosing a copy of all papers served. No indemnification provided for in Section 9(a) or 9(b) shall be available to any party who shall fail to give notice as provided in this Section 9(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice but the omission so to notify such indemnifying party of any such action, suit or proceeding shall not relieve it from any liability that it may have to any indemnified party for contribution or otherwise than under this Section. In case any such action, suit or proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and the approval by the indemnified party of such counsel, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses, except as provided below and except for the reasonable costs of investigation subsequently incurred by such indemnified party in connection with the defense thereof. The indemnified party shall have the right to employ its counsel in any such action, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of counsel by such indemnified party has been authorized in writing by the indemnifying parties, (ii) the indemnified party shall have been advised by counsel that there may be one or more legal defenses available to it which are different from or in addition to those available to the indemnifying party (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party) or (iii) the indemnifying parties shall not have employed counsel to assume the defense of such action within a reasonable time after notice of the commencement thereof, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying parties. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action, claim or proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, claim or proceeding and does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party. If an indemnifying party has agreed to assume the defense of any claim against an indemnified party, the indemnified party shall provide the indemnifying party with prior written notice of any proposed settlement and shall not complete any settlement without the prior written consent of the indemnifying party. An indemnifying party shall not be liable for any settlement of any action, suit, proceeding or claim effected without its written consent, which consent shall not be unreasonably withheld or delayed. Proceedings with respect to contribution obligations under section 10 shall be subject to the same conditions as provided in this Section 9(c). -31- 32 10. Contribution. In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Section 9(a) or 9(b) is due in accordance with its terms but for any reason is held to be unavailable to or insufficient to hold harmless an indemnified party under Section 9(a) or 9(b), then each indemnifying party shall contribute to the aggregate losses, claims, damages and liabilities (including any investigation, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting any contribution received by any person entitled hereunder to contribution from any person who may be liable for contribution) to which the indemnified party may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other from the offering of the Shares or, if such allocation is not permitted by applicable law or indemnification is not available as a result of the indemnifying party not having received notice as provided in Section 9 hereof, in such proportion as is appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Selling Stockholders and the Underwriters shall be deemed to be in the same proportion as (x) the total net proceeds from the offering (net of underwriting discounts but before deducting expenses) received by the Company or the Selling Stockholder, as set forth in the table on the cover page of the Prospectus, bear to (y) the underwriting discounts received by the Underwriters, as set forth in the table on the cover page of the Prospectus. The relative fault of the Company and the Selling Stockholders or the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact related to information supplied by the Company and the Selling Stockholders or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 10 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 10, (i) in no case shall any Underwriter (except as may be provided in the Agreement Among Underwriters) be liable or responsible for any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter hereunder; (ii) the Company shall be liable and responsible for any amount in excess of such underwriting discount; and (iii) in no case shall any Selling Stockholder be liable and responsible under Section 9 and this Section 10 for any amount in excess of the lesser of (x) the aggregate net proceeds of the sale of Shares received by such Selling Stockholder and (y) that percentage of the total amount of such losses, claims, damages or liabilities indemnified against by such Selling Stockholder equal to the percentage obtained by dividing the total number of Shares sold by such Selling Stockholder hereunder by the total number of Shares sold hereunder, including any Option Shares so sold; provided, however, that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) -32- 33 shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 10, each person, if any, who controls an Underwriter or an Institutional Selling Stockholder within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as such Underwriter or Institutional Selling Stockholder, and each person, if any, who controls the Company within the meaning of the Section 15 of the Securities Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to clauses (i) and (ii) in the immediately preceding sentence of this Section 10. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under this Section, notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties from whom contribution may be sought shall not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have hereunder or otherwise than under this Section. No party shall be liable for contribution with respect to any action, suit, proceeding or claim settled without its written consent. The Underwriter's obligations to contribute pursuant to this Section 10 are several in proportion to their respective underwriting commitments and not joint. The Selling Stockholders' obligations in this Agreement, including without limitation obligations under Section 9 and this Section 10 to indemnify and/or contribute, are several and not joint, and no Selling Stockholder shall be liable for any act or omission of any other Selling Stockholder. 11. Termination. This Agreement may be terminated with respect to the Shares to be purchased on a Closing Date by the Representatives by notifying the Company and the Selling Stockholders at any time: (a) in the absolute discretion of the Representatives at or before any Closing Date: (i) if on or prior to such date, any domestic or international event or act or occurrence has materially disrupted, or in the opinion of the Representatives will in the future materially disrupt, the securities markets; (ii) if there has occurred any new outbreak or material escalation of hostilities or other calamity or crisis the effect of which on the financial markets of the United States is such as to make it, in the judgment of the Representatives, inadvisable to proceed with the offering; (iii) if there shall be such a material adverse change in general financial, political or economic conditions or the effect of international conditions on the financial markets in the United States is such as to make it, in the judgment of the Representatives, inadvisable or impracticable to market the Shares; (iv) if trading in the Shares has been suspended by the Commission or trading generally on the New York Stock Exchange, Inc., on the American Stock Exchange, Inc. or the Nasdaq National Market has been suspended or limited, or minimum or maximum ranges for prices for securities shall have been fixed, or maximum ranges for prices for securities have been required, by said exchanges or by order of the Commission, the National Association of Securities Dealers, Inc., or any other governmental or regulatory authority; or (v) if a banking moratorium has been declared by any state or Federal -33- 34 authority; or (vi) if, in the judgment of the Representatives, there has occurred a Material Adverse Effect, or (b) at or before any Closing Date, that any of the conditions specified in Section 6 shall not have been fulfilled when and as required by this Agreement. If this Agreement is terminated pursuant to any of its provisions, neither the Company nor the Selling Stockholders shall be under any liability to any Underwriter, and no Underwriter shall be under any liability to the Company or any of the Selling Stockholders, except that (y) if this Agreement is terminated by the Representatives or the Underwriters because of any failure, refusal or inability on the part of the Company or the Selling Stockholders to comply with the terms or to fulfill any of the conditions of this Agreement, the Company will reimburse the Underwriters for all out-of-pocket expenses (including the reasonable fees and disbursements of their counsel) incurred by them in connection with the proposed purchase and sale of the Shares or in contemplation of performing their obligations hereunder and (z) no Underwriter who shall have failed or refused to purchase the Shares agreed to be purchased by it under this Agreement, without some reason sufficient hereunder to justify cancellation or termination of its obligations under this Agreement, shall be relieved of liability to the Company, the Selling Stockholders or to the other Underwriters for damages occasioned by its failure or refusal. 12. Substitution of Underwriters. If one or more of the Underwriters shall fail (other than for a reason sufficient to justify the cancellation or termination of this Agreement under Section 11) to purchase on any Closing Date the Shares agreed to be purchased on such Closing Date by such Underwriter or Underwriters, the Representatives may find one or more substitute underwriters to purchase such Shares or make such other arrangements as the Representatives may deem advisable or one or more of the remaining Underwriters may agree to purchase such Shares in such proportions as may be approved by the Representatives, in each case upon the terms set forth in this Agreement. If no such arrangements have been made by the close of business on the business day following such Closing Date, (a) if the number of Shares to be purchased by the defaulting Underwriters on such Closing Date shall not exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, then each of the nondefaulting Underwriters shall be obligated to purchase such Shares on the terms herein set forth in proportion to their respective obligations hereunder; provided, that in no event shall the maximum number of Shares that any Underwriter has agreed to purchase pursuant to Section 1 be increased pursuant to this Section 12 by more than one-ninth of such number of Shares without the written consent of such Underwriter, or (b) if the number of Shares to be purchased by the defaulting Underwriters on such Closing Date shall exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, then the Company shall be entitled to one additional business day within which it may, but is not obligated to, find one or more substitute underwriters reasonably satisfactory to the Representatives to purchase such Shares upon the terms set forth in this Agreement. -34- 35 In any such case, either the Representatives or the Company shall have the right to postpone the applicable Closing Date for a period of not more than five business days in order that necessary changes and arrangements (including any necessary amendments or supplements to the Registration Statement or Prospectus) may be effected by the Representatives and the Company. If the number of Shares to be purchased on such Closing Date by such defaulting Underwriter or Underwriters shall exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, and none of the nondefaulting Underwriters or the Company shall make arrangements pursuant to this Section within the period stated for the purchase of the Shares that the defaulting Underwriters agreed to purchase, this Agreement shall terminate with respect to the Shares to be purchased on such Closing Date without liability on the part of any nondefaulting Underwriter to the Company or the Selling Stockholders and without liability on the part of the Company, except in both cases as provided in Sections 8(b), 9, 10 and 11. The provisions of this Section shall not in any way affect the liability of any defaulting Underwriter to the Company or the nondefaulting Underwriters arising out of such default. A substitute underwriter hereunder shall become an Underwriter for all purposes of this Agreement. 13. Miscellaneous. The respective agreements, representations, warranties, indemnities and other statements of the Company or its officers, of the Selling Stockholders and of the Underwriters set forth in or made pursuant to this Agreement shall remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or the Selling Stockholders or any of the officers, directors or controlling persons referred to in Sections 9 and 10 hereof, and shall survive delivery of and payment for the Shares. The provisions of Sections 8(b), 9, 10 and 11 shall survive the termination or cancellation of this Agreement. This Agreement has been and is made for the benefit of the Underwriters, the Company and the Selling Stockholders and their respective successors and assigns, and, to the extent expressed herein, for the benefit of persons controlling any of the Underwriters, the Institutional Selling Stockholders, or the Company, and directors and officers of the Company, and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include any purchaser of Shares from any Underwriter merely because of such purchase. All notices and communications hereunder shall be in writing and mailed or delivered or by telephone or telegraph if subsequently confirmed in writing, (a) if to the Representatives, c/o CIBC World Markets Corp., One World Financial Center, New York, New York 10281 Attention: Peter J. Crowley, with a copy to Leslie E. Davis, Esq., Testa, Hurwitz & Thibeault, LLP, 125 High Street, Boston, Massachusetts 02110 and (b) if to the Company, to its agent for service as such agent's address appears on the cover page of the Registration Statement with a copy to John K.P. Stone, Esq., Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02108 (c) if to the Non-Institutional Selling Stockholders to each of them at the addresses set forth in their respective Custody Agreements with a copy to John K.P. Stone, Esq., Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02108 and (d) if to the Institutional Selling Stockholders, c/o John Hancock Mutual Life Insurance Company, Bond and Corporate Finance Department, 200 Clarendon Street, Boston, Massachusetts 02117 Attention: D. Dana Donovan, with a copy to W. Brewster Lee, Esq., Choate, Hall & Stewart, Exchange Place, 53 State Street, Boston, Massachusetts 02109. -35- 36 This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflict of laws. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. -36- 37 Please confirm that the foregoing correctly sets forth the agreement among us. Very truly yours, POLYMEDICA CORPORATION By: --------------------------------- Title: SELLING STOCKHOLDERS By: --------------------------------- Title: Attorney-In-Fact Confirmed: CIBC WORLD MARKETS CORP. FIRST UNION CAPITAL MARKETS CORP. Acting severally on behalf of itself and as representative of the several Underwriters named in Schedule I annexed hereto. By: CIBC WORLD MARKETS CORP. By: --------------------------------- Title: -37- 38 SCHEDULE I
Number of Firm Shares to Number of Firm Shares Be Purchased From the to Be Purchased From Name Company the Selling Stockholders - ---- ------------------------ ------------------------ CIBC World Markets Corp. First Union Capital Markets Corp. ------------------ ------------------ TOTAL ================== ==================
-38- 39 SCHEDULE II
Number of Number of Institutional Selling Stockholders Firm Shares Option Shares - ---------------------------------- ----------- ------------- John Hancock Mutual Life Insurance Company Non-Institutional Selling Stockholders Steven J. Lee Arthur A. Siciliano Eric G. Walters Daniel F. Bernstein ----------- -------------- TOTAL =========== ==============
-39- EX-23.1 3 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the inclusion and incorporation by reference in this Registration Statement on Form S-3 to register 2,900,000 shares of common stock of our report dated May 6, 1999 relating to the financial statements of PolyMedica Corporation, which appear in such Registration Statement and in the 1999 Annual Report on Form 10-K of PolyMedica Corporation. We also consent to the reference to us under the heading "Experts" in such Registration Statement. PricewaterhouseCoopers LLP Boston, Massachusetts September 10, 1999 -----END PRIVACY-ENHANCED MESSAGE-----