SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
____________ Quarterly Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarterly period ended _________________________________________ or
X Transition report pursuant to Section 13 or 15(d)
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of the Securities Exchange Act of 1934
For the transition period from September 1, 1994 to December
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31, 1994
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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
----------------
Former fiscal year ended August 31, 1994
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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 February 1, 1995, 10,237,589 shares of common stock, par value $0.01 per
share, were outstanding.
MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets as of, December 31, 1994 August 31, 1994
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ASSETS
Current assets:
Cash and cash equivalents $157,591 $788,663
Accounts receivable 4,032,487 4,191,352
Inventories 10,739,786 9,394,463
Prepaid expenses and other current assets 1,494,811 1,110,433
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Total current assets 16,424,675 15,484,911
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Property, plant and equipment 12,466,151 11,799,300
Less accumulated depreciation and amortization 3,021,975 2,798,042
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Net property, plant and equipment 9,444,176 9,001,258
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Note receivable -Anika Research, Inc. 1,000,000 1,000,000
Cost in excess of net assets of businesses acquired 35,887,747 36,375,478
Intangible and other assets 16,274,010 16,633,667
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Total Assets $79,030,608 $78,495,314
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,679,607 $1,529,960
Accrued expenses 3,370,893 4,317,910
Note payable - Life Medical Sciences, Inc. 1,000,000 2,000,000
Current installments of long term debt 2,000,000 2,000,000
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Total current liabilities 9,050,500 9,847,870
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Deferred income taxes 626,809 626,809
Long-term debt, excluding current installments 11,000,000 9,500,000
Convertible subordinated debt 4,103,204 4,103,204
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Total liabilities 24,780,513 24,077,883
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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 11,213,536 and 11,150,236
shares, respectively 112,135 111,502
Additional paid-in capital 37,493,085 37,307,139
Retained earnings 25,220,017 25,573,932
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62,825,237 62,992,573
Treasury stock, 1,024,702 shares, at cost (8,575,142) (8,575,142)
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Total stockholders' equity 54,250,095 54,417,431
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Total Liabilities and Stockholders' Equity $79,030,608 $78,495,314
====================================================================================================================
See accompanying notes to consolidated financial statements.
2
MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Four months ended
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Dec. 31, 1994 Dec. 31, 1993
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Net sales:
Domestic $7,919,874 $7,529,134
International 1,585,968 949,068
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Total net sales 9,505,842 8,478,202
Cost of sales 3,037,859 2,596,034
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Gross profit 6,467,983 5,882,168
Operating expenses:
Research and development 656,244 265,373
Selling, general and administrative 5,070,761 3,477,053
Depreciation and amortization 861,399 813,841
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Total operating expenses 6,588,404 4,556,267
Income (loss) from operations before interest and income taxes (120,421) 1,325,901
Interest expense, net 412,431 315,248
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Income (loss) from operations before income taxes (532,852) 1,010,653
Income tax expense (benefit) (178,937) 252,663
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Net income (loss) ($353,915) $757,990
Income (loss) per share, primary and fully diluted: ($0.03) $0.07
Weighted average number of shares outstanding:
Primary and fully diluted 10,189,000 10,349,000
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See accompanying notes to consolidated financial statements.
3
MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Four months ended
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Dec. 31, 1994 Dec. 31, 1993
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Cash flows from operating activities:
Net income (loss) ($353,915) $757,990
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,103,839 1,123,217
Changes in operating assets and liabilities:
Accounts receivable 158,865 1,250,290
Inventories (1,345,323) (1,049,119)
Prepaid expenses and other current assets (384,378) (468,307)
Other assets (32,518) 16,467
Accounts payable and accrued expenses 202,630 (905,025)
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Net cash provided by (used for) operating activities (650,800) 725,513
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Cash flows from investing activities:
Additions to property, plant and equipment (666,851) (1,076,987)
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Net cash used for investing activities (666,851) (1,076,987)
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Cash flows from financing activities:
Net borrowing under revolving line of credit 2,000,000 --
Principal payments on bank debt (500,000) --
Principal payment on note payable - Life Medical Sciences, Inc. (1,000,000) --
Proceeds from exercise of stock options 186,579 --
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Net cash provided by financing activities 686,579 --
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Increase (decrease) in cash and cash equivalents (631,072) (351,474)
Cash and cash equivalents at beginning of period 788,663 346,099
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Cash and cash equivalents at end of period $157,591 ($5,375)
====================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $317,898 $427,740
Income taxes 399,184 368,254
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See accompanying notes to consolidated financial statements.
4
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (CONTINUED)
MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(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
---------------------
The accompanying consolidated financial statements for the four month
transition period ended December 31, 1994 and the comparable period for
1993 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
December 31, 1994, and the consolidated results of the Company's operations
and their cash flows for the four month transition period ended December
31, 1994 and 1993.
The accompanying consolidated financial statements and related notes should
be read in conjunction with the Company's annual financial statements filed
with the Annual Report on Form 10-K. The four months ended December 31,
1994 comprise the four month ("transition period") resulting from a recent
change in the Company's year end from August 31, to December 31. On January
1, 1995 the Company started a new calendar year and will begin reporting on
a calendar quarter and year basis.
Certain reclassifications were made to the 1993 period consolidated
financial statements to conform to the
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transition period 1994 presentation.
(3) Inventories
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Inventories consist of the following:
December 31, August 31,
1994 1994
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Raw materials $1,737,472 $2,325,484
Work in process 2,768,512 2,898,490
Finished goods 6,233,802 4,170,489
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Total inventories $10,739,786 $9,394,463
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(4) Long-Term Debt
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Long term debt consists of the following:
December 31, August 31,
1994 1994
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$7,000,000 bank revolving line
of credit at the bank's prime
rate or cost of funds rate
plus two percent (8.50% at
December 31, 1994), secured
by tangible and intangible
property, payable by June, 1996. $4,000,000 $2,000,000
Term loan payable to a bank,
interest at the bank's prime
rate plus one-half of one
percent or LIBOR plus two percent
(8.50% at December 31, 1994),
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. 9,000,000 9,500,000
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Total long-term debt 13,000,000 11,500,000
Less: current installments 2,000,000 2,000,000
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Long-term debt
less current installments $11,000,000 $ 9,500,000
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6
The Company has obtained a waiver, through November 30, 1995, of a covenant
pertaining to the ratio of indebtedness to net cash flow and a waiver,
through December 31, 1994, of a covenant pertaining to profitability.
(5) Contingencies
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The Company's 1992 tax return is currently under review by the Internal
Revenue Service and the Commonwealth of Massachusetts is also scheduled to
audit the Company's state tax returns for that year.
The Company is currently involved in three pending product liability claims
related to its Drug Delivery 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. However, the Company
feels that its product liability insurance is adequate to cover any
liability that may arise from these claims.
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PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Overview
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The Company's net loss for the four month period ended December 31, 1994
was $353,915, or $0.03 per share, versus net income of $757,990, or $0.07
per share, for the comparable period last year. Operating cash flow, before
interest and income taxes for the transition period decreased to $983,418
from $2,449,118 for the comparable period last year.
As previously reported, Avitene sales have been depressed for several
quarters due in large part to overstocked inventories at some of the
Company's wholesale distributors. During the transition period, the
estimated overstocked position at distributors decreased by approximately
$1,800,000. The Company believes that this overstock was substantially
eliminated by December 31, 1994, and that Avitene sales in 1995 will begin
to approach a level approximately commensurate with hospital demand.
The four months ended December 31, 1994 comprise the four month
("transition period") resulting from a recent change in the Company's year
end from August 31, to December 31.
Results of Operations
---------------------
Total net sales for the transition period ended December 31, 1994 increased
12% to $9,505,842 from $8,478,202 in the comparable period last year.
Domestic sales from the Company's Surgical Specialties Group, consisting of
Avitene and Sure-Closure products, declined $350,038, or 9%. This decline
was primarily attributable to the decline in Avitene sales of $1,264,238
due to the overstocked position at the Company's Avitene distributors as
discussed above, which was mostly offset by sales of the recently acquired
Sure-Closure product line. Domestic sales of Drug Delivery products from
the Company's Gesco subsidiary increased 22% to $4,177,727 in the
transition period from $3,436,949 in the prior year. International sales of
Avitene to the Company's Japanese distributor amounted to $562,593, of the
total $636,900 increase in international sales compared to the same period
last year.
8
Gross profit, as a percentage of net sales, for the four months ended
December 31, 1994, decreased to 68% from 69% in the comparable period last
fiscal year. The decrease was primarily attributable to the increase in
Gesco and international Avitene(R) sales as a proportion of total sales for
the current period as these sales have lower gross margins than domestic
Avitene(R) sales.
Research and development expense (includes regulatory and clinical trial
expenses) increased $390,871 to $656,244 for the transition period ended
December 31, 1994 from $265,373 in the prior year due mainly to the
research and development being conducted in connection with the Sure-
Closure product line. The Company expects an increase in research and
development expenses due to the addition of the Sure-Closure product line
and increased product development related to its Drug Delivery product line
in calendar 1995 in comparison to the twelve month period ended August 31,
1994.
Selling, general and administrative expenses increased $1,593,708 to
$5,070,761 for the four month period ended December 31, 1994 from
$3,477,053 in the prior year. The increase is attributable to the expansion
and training of the national Surgical Specialty sales force and marketing
expenses resulting from the addition of the Sure-Closure product line. The
Company expects no significant increases in selling, general and
administrative expenses as a percent of sales for the full 1995 calendar
year in comparison to the twelve month period ended August 31, 1994.
Depreciation and amortization expense for the transition period totaled
$861,399 compared to $813,841 in the comparable period in the prior year.
The Company's effective tax rate for the transition period was 34% versus
25% in the comparable period last fiscal year. The increase in the
effective tax rate was due to a decrease in operating income from the
Avitene(R) product line which receives a favorable tax benefit as a result
of the section 936 election available on Avitene(R) sales as compared to
the same period last year.
Liquidity and Capital Resources
-------------------------------
The Company generated operating cash flow before interest and income taxes,
of $983,418 in the transition period versus $2,449,118 in the comparable
period last year.
The Company currently has a revolving line of credit agreement whereby the
bank will lend the Company up to
9
$7,000,000 at the bank's prime rate or cost of funds rate plus two percent
and a $10,000,000 term loan. At December 31, 1994 there was $4,000,000
outstanding under this line and $9,000,000 outstanding under the term loan.
The line of credit expires in June 1996 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
note payable to Life Medical Sciences, Inc, in the principal amount of
$2,000,000. The first installment of $1,000,000 on the non-interest bearing
note was paid on October 27, 1994, with the remaining installment paid on
January 27, 1995.
During the transition period ended December 31, 1994, the Company continued
to build the level of Avitene(R) finished goods, for approximately
$1,300,000 in anticipation of the termination of the finished goods
manufacturing contract with Alcon Laboratories, which terminated on
December 31, 1994. The Company has funded approximately $4,050,000 of this
planned inventory build-up from operating cash flow since the first quarter
of fiscal 1994. The Company believes it has sufficient Avitene(R) finished
goods inventory levels based on the anticipated demand until the fourth
quarter of calendar 1995, by which time the Company's new Avitene(R)
finished goods manufacturing facility is expected to be in full operation.
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.
Management continues to evaluate potential acquisitions and other
opportunities to expand and diversify the Company's product lines, although
there are no present agreements to enter into any such transactions. In the
event that the Company enters into any such transactions in the future,
additional financing may be required.
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PART II: OTHER INFORMATION
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ITEM 1: THROUGH ITEM 4: NOT APPLICABLE
ITEM 5: OTHER INFORMATION
On December 1, 1994, the Company and the MedTech Group, Inc.
("MedTech"), entered into a Strategic Alliance Agreement engaging
MedTech as its exclusive, worldwide manufacturer of the disposable
skin stretching devices and other molded plastic medical devices
relating to its Sure-Closure product line. This agreement supersedes
all prior oral or written agreements, commitments or understanding
with respect to the matters provided herein. Refer to Item 6: Exhibit
No. 12.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Description
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11 Computation of earnings per
share
12 Strategic Alliance Agreement
between the Company and The
MedTech Group, Inc.
(b) Reports on Form 8-K
-------------------
The Company filed a Current Report on Form 8-K with the Commission on
October 20, 1994 that reported the change in fiscal year from the year
ending August 31 to the year ending December 31.
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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: February 14, 1995 BY:/s/Edward J. Quilty
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Edward J. Quilty
President
Chief Executive Officer
DATE: February 14, 1995 BY:/s/John J. McDonough
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John J. McDonough
Vice President
Chief Financial Officer
12