SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report pursuant to Section 13 or 15(d) of
------------ the Securities Exchange Act of 1934
For Quarterly period ended June 30, 1995 or
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Transition report pursuant to Section 13 or 15(d) of
------------
the Securities Exchange Act of 1934
Commission File Number 1-9899
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MedChem Products, Inc.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-2471310
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(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
232 West Cummings Park, Woburn, MA. 01801
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 932-5900
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On August 1, 1995, 10,306,096 shares of common stock, par value $0.01 per share,
were outstanding.
1
PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets as of, June 30, 1995 December 31, 1994
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ASSETS
Current assets:
Cash and cash equivalents $1,335,019 $157,591
Cash escrow agreement 2,000,000 --
Accounts receivable 4,429,211 4,032,487
Inventories 9,347,004 10,739,786
Note receivable -Anika Research, Inc. 1,000,000 --
Prepaid expenses and other current assets 1,809,338 1,494,811
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Total current assets 19,920,572 16,424,675
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Property, plant and equipment 13,578,144 12,466,151
Less accumulated depreciation and amortization 3,405,526 3,021,975
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Net property, plant and equipment 10,172,618 9,444,176
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Note receivable -Anika Research, Inc. -- 1,000,000
Cost in excess of net assets of businesses acquired 35,256,151 35,887,747
Intangible and other assets 15,681,448 16,274,010
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Total Assets $81,030,789 $79,030,608
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,386,953 $2,679,607
Accrued expenses 2,969,416 3,370,893
Note payable - Life Medical Sciences, Inc. -- 1,000,000
Current installments of long term debt 2,000,000 2,000,000
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Total current liabilities 6,356,369 9,050,500
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Deferred income taxes 577,229 626,809
Long-term debt, excluding current installments 13,350,000 11,000,000
Convertible subordinated debt 4,103,204 4,103,204
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Total liabilities 24,386,802 24,780,513
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Stockholders' equity:
Preferred stock, $.01 par value: authorized 1,000,000
shares; no shares issued and outstanding -- --
Common stock, $.01 par value: authorized
20,000,000 shares; issued 11,304,548 and 11,213,536
shares, respectively 113,045 112,135
Additional paid-in capital 37,905,803 37,493,085
Retained earnings 27,200,281 25,220,017
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65,219,129 62,825,237
Treasury stock, 1,024,702 shares, at cost (8,575,142) (8,575,142)
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Total stockholders' equity 56,643,987 54,250,095
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Total Liabilities and Stockholders' Equity $81,030,789 $79,030,608
==============================================================================================================
See accompanying notes to consolidated financial statements.
2
MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three months ended Six months ended
June 30, June 30,
1995 1994 1995 1994
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Net sales $9,822,717 $6,926,324 $19,243,987 $14,859,834
Cost of sales 3,162,777 2,118,964 6,181,815 4,657,687
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Gross profit 6,659,940 4,807,360 13,062,172 10,202,147
Operating expenses:
Research and development 511,681 302,937 1,114,433 481,118
Selling, general and administrative 3,355,940 2,426,770 6,966,176 5,284,253
Depreciation and amortization 669,108 608,147 1,315,895 1,218,802
Other (reorganization costs) -- 510,000 -- 510,000
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Total operating expenses 4,536,729 3,847,854 9,396,504 7,494,173
Income from operations before interest and income taxes 2,123,211 959,506 3,665,668 2,707,974
Interest expense, net 395,402 241,404 773,913 489,107
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Income from operations before income taxes 1,727,809 718,102 2,891,755 2,218,867
Income tax expense 552,898 199,793 911,491 617,422
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Net income $1,174,911 $518,309 $1,980,264 $1,601,445
Income per share, primary and fully diluted: $0.11 $0.05 $0.19 $0.16
Weighted average number of shares outstanding:
Primary 10,699,000 10,305,000 10,523,000 10,305,000
Fully diluted 10,932,000 10,305,000 10,641,000 10,305,000
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See accompanying notes to consolidated financial statements.
3
MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six months ended June 30,
1995 1994
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Cash flows from operating activities:
Net income $1,980,264 $1,601,445
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,703,525 1,701,100
Deferred income taxes (49,580) (1,374,760)
Changes in operating assets and liabilities:
Accounts receivable (396,724) 395,817
Inventories 1,392,782 (1,672,947)
Prepaid expenses and other current assets (314,527) 445,325
Other assets (95,815) (26,840)
Accounts payable and accrued expenses (1,694,131) 731,120
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Net cash provided by operating activities 2,525,794 1,800,260
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Cash flows from investing activities:
Additions to property, plant and equipment (1,111,994) (1,087,869)
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Net cash used for investing activities (1,111,994) (1,087,869)
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Cash flows from financing activities:
Cash in escrow agreement (2,000,000) --
Net borrowing (payments) under revolving line of credit 3,350,000 (600,000)
Principal payments on bank debt (1,000,000) --
Principal payment on note payable - Life Medical Sciences, Inc. (1,000,000) --
Proceeds from exercise of stock options 413,628 11,571
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Net cash used by financing activities (236,372) (588,429)
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Increase in cash and cash equivalents 1,177,428 123,962
Cash and cash equivalents at beginning of period 157,591 (5,375)
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Cash and cash equivalents at end of period $1,335,019 $118,587
========================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $675,534 $469,278
Income taxes 578,412 1,607,221
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See accompanying notes to consolidated financial statements.
4
PART I: FINANCIAL INFORMATION
MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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June 30,1995
(1) Nature of Business
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MedChem Products, Inc. and subsidiaries ("the Company") develop,
manufacture and market specialty medical products for use in surgical and
non-surgical procedures. The Company's two business groups are the
Surgical Specialties Group and the Drug Delivery Group. The Surgical
Specialties Group is comprised of the Company's Avitene(R) family of
topical hemostasis products used to control bleeding in surgical procedures
and the Sure-Closure product line, acquired in July 1994, used to close
skin-deficit wounds. The Drug Delivery Group is comprised of intravenous
("I.V")catheter products and disposable medical devices sold to the
neonatal, pediatric and adult markets by the Company's wholly owned
subsidiary, Gesco International, Inc. ("Gesco").
(2) Basis of Presentation
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The accompanying consolidated financial statements have been prepared by
the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of the Company, these
consolidated financial statements contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the
consolidated financial position of the Company as of June 30, 1995 and the
consolidated results of operations for the three months and six months
ended June 30, 1995 and 1994 and consolidated cash flows for the six months
ended June 30, 1995 and 1994. The results of operations for the six months
ended June 30, 1995 are not necessarily indicative of results to be
expected for the full year.
The accompanying consolidated financial statements and the related notes
should be read in conjunction with the Company's annual financial
statements filed with the Annual Report (Form 10-K) for the fiscal year
ended August 31, 1994, and the Company's financial statements filed with
the Transition Report (Form 10-Q) for the four months ended December 31,
1994.
The Company changed its fiscal year end from August 31, to December 31, and
accordingly, has restated its prior period results to correspond to the new
calendar period.
5
Certain reclassifications were made to the 1994 consolidated financial
statements to conform to the current year presentation.
(3) Long-Term Debt
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Long term debt consists of the following:
June 30, December 31,
1995 1994
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$9,000,000 bank revolving line
of credit at the bank's prime
rate plus one quarter percent or
cost of funds plus two and a quarter
percent (8.27% at June 30, 1995),
secured by tangible and
intangible property, payable
by June, 1997. $ 7,350,000 $ 4,000,000
Term loan payable to a bank,
interest at the bank's prime
rate plus one-half of one
percent or LIBOR plus two percent
(8.27% at June 30, 1995)
payable in quarterly installments
of $500,000, with a final installment
of $4,500,000 on May 1, 1997,
secured by tangible and intangible
property. 8,000,000 9,000,000
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Total long-term debt 15,350,000 13,000,000
Less: current installments 2,000,000 2,000,000
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Long-term debt
less current installments $13,350,000 $11,000,000
=========== ===========
At June 30, 1995, the Company obtained a waiver of a covenant pertaining to
the ratio of indebtedness to net cash flow, and also reached an agreement
with the bank to amend that covenant. It is probable that the Company will
be in compliance with this amended covenant at the next measurement date.
(4) Escrow Agreement
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On April 13, 1995, the Company paid $2,000,000 to an escrow account,
pursuant to the terms and conditions of the Distribution Agreement, dated
March 31, 1995, between the Company and Coletica, a Lyon, France based
manufacturer of medical devices.
6
Under terms of the distribution agreement the Company received an exclusive
right to distribute Coletica's Hemostagene(R) collagen hemostatic sponge in
the United States for five years. The agreement also contains provisions
for the extension of the term beyond five years upon the achievement of
certain sales volume goals.
(5) Merger Agreement
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On May 24, 1995, the Company announced that the Board of Directors had
approved a definitive agreement for a stock-for-stock merger of the Company
("Merger") into C.R. Bard, Inc. ("Bard"). Under the terms of the agreement
each MedChem share will be valued at $9.25, subject to adjustment under
certain circumstances and will be exchanged for Bard shares. The
transaction is expected to be a tax free reorganization and to be accounted
for as a pooling of interests. Under certain circumstances, if a
transaction does not occur, Bard has an option to purchase the Company's
Gesco subsidiary ("Option").
The Company has elected to defer its costs and expenses of the Merger until
the transaction closes or it is terminated. As of June 30, 1995 the
Company has deferred $405,265 of costs associated with the Merger.
(6) Contingencies
-------------
On August 1, 1995, Edward J. Borto, who may be a stockholder of the
Company, filed a putative class action naming as defendants, the Company,
members of the Company's Board of Directors ("Board") and Bard. The
plaintiff alleges, among other things, that the Company and the members of
the Company's Board breached their fiduciary duties to the Company's
stockholders by agreeing to be acquired by Bard for grossly unfair and
inadequate consideration and in a manner which is coercive and
fundamentally unfair to the Company's stockholders. The complaint seeks
declaratory relief, preliminary and permanent injunction of the Merger and
the Option, unspecified compensatory damages and costs and disbursements.
The Company believes that the claims asserted are without merit and plans
to defend against them vigorously. However, the amount of exposure, the
outcome, or its effect on the consummation of the Merger, cannot be
predicted at this time.
7
In December, 1994, the Internal Revenue Service (the "Service") selected
MedChem (P.R.) Inc.'s 1992 tax return and its qualifications under
Section 936 for review. As a result of the review, the Service has
initiated a request for technical advice from the National Office with
respect to MedChem (P.R.), Inc.'s active conduct of a trade or business in
Puerto Rico. The active conduct of a trade or business in Puerto Rico is a
requirement of Section 936. Additionally, the Massachusetts Department of
Revenue has selected for audit the Company's 1992 and 1993 state tax
returns. At this time, the ultimate outcome of this review and audit cannot
be predicted.
The Company is currently involved in four pending product liability claims
related to its Drug Delivery Group business. At this time the Company
cannot estimate the exposure on its financial statements, if any, if the
Company were unsuccessful in its defense of these claims.
8
PART I: FINANCIAL INFORMATION
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Overview
------------------
The Company reported consolidated net income of $1,174,911, or $0.11 per
share, for the second quarter ended June 30, 1995, versus consolidated net
income of $518,309 or $0.05 per share, for the quarter ended June 30, 1994.
For the first six months of 1995, net income was $1,980,264 or $0.19 per
share versus $1,601,445 or $0.16 per share in the comparable period last
year.
On July 29, 1994, the Company purchased substantially all of the assets and
assumed certain liabilities of the Sure-Closure product line from Life
Medical Sciences, Inc ("L.M.S."). The results of operations of the Sure-
Closure product line since the date of acquisition have been included with
those of the Company.
On May 24, 1995, the Company announced that the Board of Directors had
approved a definitive agreement for a stock-for-stock merger of the Company
("Merger") into C.R. Bard, Inc. ("Bard"). Under the terms of the agreement
each MedChem share will be valued at $9.25, subject to adjustment under
certain circumstances and will be exchanged for Bard shares. The
transaction is expected to be a tax free reorganization and to be accounted
for as a pooling of interests. Under certain circumstances, if a
transaction does not occur, Bard has an option to purchase the Company's
Gesco subsidiary ("Option").
Results of Operations
---------------------
Net sales for the three month period ended June 30, 1995 increased 42% to
$9,822,717 from $6,926,324 in the comparable period last year. During the
second quarter of 1995, domestic sales increased 22% to $6,950,099 from
$5,690,066 in the previous year's quarter. This increase was primarily due
to sales generated by the recently acquired Sure-Closure product line.
International sales for the three month period ended June 30, 1995
increased 132% to $2,872,619 from $1,236,258 in the comparable quarter in
1994, primarily due to increased sales to the Company's Avitene partner in
Japan.
Net sales for the first six months of 1995 increased by $4,384,153 or 30%
to $19,243,987 from $14,859,834 in the corresponding period in the prior
year. During the first half of 1995, domestic sales increased 15% to
$14,332,907 from $12,453,342 in the comparable period in the prior year.
This increase was primarily due to sales generated by the recently acquired
Sure-Closure product line and increased sales from the Company's Gesco
subsidiary. International sales for the first six months of 1995 increased
by $2,504,589 or 104% to
9
$4,911,081 from $2,406,492 in the first six months of 1994, primarily due
to increased sales to the Company's Avitene partner in Japan. In the first
half of 1994, international sales were depressed due to the overstocking
position at the Company's Avitene partner in Japan which were previously
disclosed and rectified in calendar 1994. The Company anticipates an
overall increase in total international sales in calendar 1995 as compared
to 1994 primarily due to increased sales volume and more favorable exchange
rates.
Gross profit, as a percentage of net sales, for the three and six months
ended June 30, 1995, each decreased to 68% from 69% in the comparable
periods last year.
Research and development expense (which includes regulatory and clinical
trial expenses) increased to $511,681 and $1,114,433 for the three and six
month periods ended June 30, 1995, respectively, from $302,937 and $481,118
in the prior year due mainly to the research and development being
conducted in connection with the Sure-Closure product line and increased
product development related to the Company's Drug Delivery Group products.
The Company expects an increase in research and development expenses for
the full 1995 year as compared to 1994 due to the addition of the Sure-
Closure product line and increased product development related to its Drug
Delivery Group product line.
Selling, general and administrative expenses increased by $929,170 to
$3,355,940 for the three month period ended June 30, 1995 from $2,426,770
in the prior year. For the first six months of 1995, selling, general and
administrative expenses increased by $1,681,923 to $6,966,176 from
$5,284,253 in the comparable period in the prior year. The increase is
attributable to higher Surgical Specialty sales force selling and marketing
expenses resulting from the addition of the Sure-Closure product line and
increased corporate administrative expenses. The Company expects no
significant increase in selling, general and administrative expenses as a
percentage of net sales for 1995 as compared to 1994.
Depreciation and amortization expense for the three and six months ended
June 30, 1995 totalled $669,108 and $1,315,895, respectively, compared to
$608,147 and $1,218,802 in the comparable periods in the prior year.
The Company recorded net interest expense for the three and six month
periods ended June 30, 1995 of $395,402 and $773,913 versus $199,793 and
$617,422 for the comparable periods in 1994. The increase in interest
expense for the first half of 1995 versus 1994 was due to higher interest
rates and increased debt borrowing.
The Company's effective tax rate for the three month and six months
ended June 30, 1995, each increased to 32% from 28% in the
10
comparable period last year. The increase was due to the recently enacted
changes to Section 936 which reduced the tax benefit to the Company. The
Company anticipates its effective tax rate will increase to the statutory
rate during the year as the Company completes the move of its Avitene
finished goods manufacturing to the United States, as previously disclosed,
and accordingly, loses its tax benefit under Section 936.
Liquidity and Capital Resources
-------------------------------
The Company generated net cash from operating activities of $2,525,794 in
the first half of 1995 versus $1,800,260 in the comparable period last
year.
At June 30, 1995, the Company had a revolving line of credit agreement
whereby the bank will lend the Company up to $9,000,000 at the bank's prime
rate plus a quarter percent or cost of funds rate plus two and one quarter
percent and a $10,000,000 term loan. At June 30, 1995 there was $7,350,000
outstanding under this line and $8,000,000 outstanding under the term loan.
The line of credit expires in June 1997 and the $10,000,000 term loan is
payable to the bank in quarterly installments of $500,000 through 1997,
with a final payment of $4,500,000 due on May 1, 1997.
The $4,103,204 of convertible subordinated debt issued to Gesco's principal
sellers is convertible at the option of the holders into common stock at
$11.73 per share. The note can be prepaid in whole, but not in part, at
par at the Company's option, and is payable in full on August 4, 1997.
In connection with the purchase of the Sure-Closure product line, the
Company issued a non-interest bearing note payable to L.M.S. in the
principal amount of $2,000,000. The first installment of $1,000,000 and
the last installment of $1,000,000 were paid on October 27, 1994 and
January 27, 1995 respectively.
The Company believes that cash flow generated from its operating
activities, as well as funds available under its bank line of credit, will
be sufficient to enable the Company to conduct its operations and repay its
indebtedness.
11
PART II: OTHER INFORMATION
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Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
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10.1 Raw Material Contract
Edible Bovine Corium
dated April 18, 1995
10.2 Sixth Amendment to Revolving Credit and Term
Financing dated April 14, 1995.
10.3 Amendment to Timothy Patrick's Employment Agreement.
11 Computation of earnings per
share.
27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
On June 7, 1995, the Company filed a current report on Form 8-K dated May
24, 1995 reporting the execution and delivery of an agreement and plan of
merger among C.R. Bard, Inc., CRB Acquisition Corp., and the Company.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDCHEM PRODUCTS, INC.
DATE: August 9, 1995 BY:/s/ Edward J. Quilty
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Edward J. Quilty
President
Chief Executive Officer
DATE: August 9, 1995 BY:/s/ John J. McDonough
----------------------------
John J. McDonough
Vice President
Chief Financial Officer
13