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 March 31, 1995 or ----------------------------------- _________ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 1-9899 -------------------------- MedChem Products, Inc. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-2471310 - ------------------------------------------------------------------------------- (state or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 232 West Cummings Park, Woburn, MA. 01801 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 932-5900 ---------------------------- - ------------------------------------------------------------------------------- (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 ----- ----- 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 May 1, 1995, 10,242,089 shares of common stock, par value $0.01 per share, were outstanding. PART 1: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES Consolidated Balance Sheets as of, March 31, 1995 December 31, 1994 - ----------------------------------------------------------------------------------------------------- (Audited) ASSETS Current assets: Cash and cash equivalents $163,400 $157,591 Accounts receivable 4,359,465 4,032,487 Inventories 10,274,334 10,739,786 Prepaid expenses and other current assets 1,519,255 1,494,811 - ----------------------------------------------------------------------------------------------------- Total current assets 16,316,454 16,424,675 - ----------------------------------------------------------------------------------------------------- Property, plant and equipment 13,030,797 12,466,151 Less accumulated depreciation and amortization 3,197,845 3,021,975 - ----------------------------------------------------------------------------------------------------- Net property, plant and equipment 9,832,952 9,444,176 - ----------------------------------------------------------------------------------------------------- Note receivable - Anika Research, Inc. 1,000,000 1,000,000 Cost in excess of net assets of businesses acquired 35,521,949 35,887,747 Intangible and other assets 15,975,579 16,274,010 - ----------------------------------------------------------------------------------------------------- Total Assets $78,646,934 $79,030,608 ===================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $1,903,613 $2,679,607 Accrued expenses 2,814,049 3,370,893 Note payable - Life Medical Sciences, Inc. 0 1,000,000 Current installments of long term debt 2,000,000 2,000,000 - ----------------------------------------------------------------------------------------------------- Total current liabilities 6,717,662 9,050,500 - ----------------------------------------------------------------------------------------------------- Deferred income taxes 616,944 626,809 Long-term debt, excluding current installments 12,000,000 11,000,000 Convertible subordinated debt 4,103,204 4,103,204 - ----------------------------------------------------------------------------------------------------- Total liabilities 23,437,810 24,780,513 - ----------------------------------------------------------------------------------------------------- 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 11,262,291 and 11,213,536 shares, respectively 112,623 112,135 Additional paid-in capital 37,646,273 37,493,085 Retained earnings 26,025,370 25,220,017 - ----------------------------------------------------------------------------------------------------- 63,784,266 62,825,237 Treasury stock, 1,024,702 shares, at cost (8,575,142) (8,575,142) - ----------------------------------------------------------------------------------------------------- Total stockholders' equity 55,209,124 54,250,095 - ----------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $78,646,934 $79,030,608 ===================================================================================================== See accompanying notes to consolidated financial statements. 2 MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES Consolidated Statements of Operations Three months ended ------------------ March 31, 1995 March 31, 1994 - -------------------------------------------------------------------------------------------------- Net sales $9,421,270 $7,933,510 Cost of sales 3,019,038 2,538,723 - -------------------------------------------------------------------------------------------------- Gross profit 6,402,232 5,394,787 Operating expenses: Research and development 602,752 178,181 Selling, general and administrative 3,610,236 2,857,483 Depreciation and amortization 646,787 610,655 - -------------------------------------------------------------------------------------------------- Total operating expenses 4,859,775 3,646,319 Income from operations before interest and income taxes 1,542,457 1,748,468 Interest expense, net 378,511 247,703 - -------------------------------------------------------------------------------------------------- Income from operations before income taxes 1,163,946 1,500,765 Income tax expense 358,593 417,629 - -------------------------------------------------------------------------------------------------- Net income $805,353 $1,083,136 Income per share, primary and fully diluted: $0.08 $0.10 Weighted average number of shares outstanding: Primary and fully diluted 10,350,000 10,330,000 - -------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 3 MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Three months ended ------------------ March 31, 1995 March 31, 1994 - ----------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $805,353 $1,083,136 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 835,717 847,212 Deferred income taxes (9,865) (1,329,760) Changes in operating assets and liabilities: Accounts receivable (326,978) (885,546) Inventories 465,452 (218,130) Prepaid expenses and other current assets (24,444) 348,189 Other assets 4,382 (10,945) Accounts payable and accrued expenses (1,332,838) 589,609 - ----------------------------------------------------------------------------------------------------- Net cash provided by operating activities 416,779 423,765 - ----------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property, plant and equipment (564,646) (518,390) - ----------------------------------------------------------------------------------------------------- Net cash used for investing activities (564,646) (518,390) - ----------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net borrowing under revolving line of credit 1,500,000 100,000 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 153,676 -- - ----------------------------------------------------------------------------------------------------- Net cash provided by financing activities 153,676 100,000 - ----------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 5,809 5,375 Cash and cash equivalents at beginning of period 157,591 (5,375) - ----------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $163,400 -- ===================================================================================================== Supplemental disclosure of cash flow information: Cash paid for: Interest $282,639 $118,431 Income taxes 190,000 1,361,276 - ----------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 4 PART I: FINANCIAL INFORMATION MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ MARCH 31, 1995 (1) Nature of Business ------------------ 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 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 March 31, 1995 and the consolidated results of operations and cash flows for the three months ended March 31, 1995 and 1994. The results of operations for the period ended March 31, 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 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 first quarter results to correspond to the new calendar period. Certain reclassifications were made to the 1994 period 5 consolidated financial statements to conform to the current year presentation. (3) Long-Term Debt -------------- Long term debt consists of the following: March 31, December 31, 1995 1994 ----------- ------------ (Audited) $7,000,000 bank revolving line of credit at the bank's prime rate or cost of funds rate plus two percent (8.15% at March 31, 1995), secured by tangible and intangible property, payable by June, 1996. $ 5,500,000 $ 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 (8.15% at March 31, 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. 8,500,000 9,000,000 ----------- ----------- Total long-term debt 14,000,000 13,000,000 Less: current installments 2,000,000 2,000,000 ----------- ----------- Long-term debt less current installments $12,000,000 $11,000,000 =========== =========== The Company has obtained a waiver, through March 31, 1995, of a covenant pertaining to the ratio of indebtedness to net cash flow. (4) Subsequent Event ---------------- On April 13, 1995, the bank increased the Company's revolving line of credit to $9,000,000 from $7,000,000 at March 31, 1995, specifically, to finance the signing fee of $2,000,000 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 (referenced in Item 5 of Part II). 6 (5) Contingencies ------------- The Company's 1992 tax return is currently under review by the Internal Revenue Service. 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. 7 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 $805,353, or $0.08 per share, for the first quarter ended March 31, 1995, versus consolidated net income of $1,083,136, or $0.10 per share, for the quarter ended March 31, 1994. Operating cash flow (EBITDA) was $2,378,174 for the three month period ended March 31, 1995 as compared to $2,595,680 for the comparable period in the prior 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. The results of operations of the Sure-Closure product line since the date of acquisition have been included with those of the Company. Results of Operations --------------------- Total net sales for the three month period ended March 31, 1995 increased 19% to $9,421,270 from $7,933,510 in the comparable period last year. During the first quarter of 1995, domestic sales increased 9% to $7,382,808 from $6,763,276 in the previous year's quarter. The increase in domestic sales were primarily due to the sales generated by the recently acquired Sure-Closure product line and increased Drug Delivery product sales from the Company's Gesco subsidiary, offset by a decrease in domestic Avitene sales. International sales for the period ended March 31, 1995 increased 74% to $2,038,462 from $1,170,234 in the comparable quarter, primarily due to increased sales to the Company's Avitene partner in Japan. In the first quarter of 1994, international sales to Japan were depressed due to the overstocking position at the Company's Avitene partner in Japan which was 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, was 68% for the three month period ended March 31, 1995 and 1994. Research and development expense (which includes regulatory and clinical trial expenses) increased $424,571 to $602,752 for 8 the three month period ended March 31, 1995 from $178,181 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 by the Company's Drug Delivery Group products. The Company expects an increase in spending for the full 1995 year as compared to 1994 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. Selling, general and administrative expenses increased $752,753 to $3,610,236 for the three month period ended March 31, 1995 from $2,857,483 in the prior year. The increase is attributable to the expansion 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 increase in selling, general and administrative expenses as a percentage of net sales for the remaining quarters in 1995 as compared to 1994. Depreciation and amortization expense for the first quarter ended March 31, 1995 totaled $646,787 compared to $610,655 in the comparable period in the prior year. The Company recorded net interest expense of $378,511 for the three month period ended March 31, 1995 versus $247,703 for the same period in 1994. The Company's effective tax rate for the three month period ended March 31, 1995 was 31% versus 28% in the comparable period last year. The increase was due to the recently enacted changes in Section 936 regulations 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 manufacturing to the U.S., and accordingly loses its tax exemption under Section 936 regulations. Liquidity and Capital Resources ------------------------------- The Company generated operating cash flow (EBITDA), of $2,378,174 in the first quarter of 1995 versus $2,595,680 in the comparable period last year. At March 31, 1995, the Company had a revolving line of credit agreement whereby the bank will lend the Company up to $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 March 31, 1995 there was $5,500,000 outstanding under this line and $8,500,000 outstanding under the term loan. 9 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. On April 13, 1995, the bank increased the Company's revolving line of credit to $9,000,000 from $7,000,000 at March 31, 1995, specifically, to finance the signing fee of $2,000,000 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 (referenced in Item 5 of Part II). 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. ("LMS"), 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. On January 27, 1995, the Company paid the final installment of $1,000,000 to LMS. 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. 10 PART II: OTHER INFORMATION ----------------- ITEM 1: THROUGH ITEM 3: NOT APPLICABLE ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On February 14, 1995 the Company held its Annual Meeting of Stockholders at which time the Stockholders voted on the following proposals; expansion of the Board to seven members (Proposal I), the election of one Class I director and two Class II directors to its Board of Directors (Proposal II), the Company's 1994 Stock Option Plan (Proposal III), and the appointment of KPMG Peat Marwick LLP as the Company's independent auditors (Proposal IV). As of the record date of December 22, 1994 there were 10,188,834 shares of common stock of the Company issued and outstanding and entitled to be voted. Quorum was 9,359,711 shares of common stock or 91.862 percent of the eligible voting shares tabulated. The following proposals were approved at the Company's Annual Meeting of Stockholders: Broker For Against Abstain Nonvotes --- ------- ------- -------- 1. Proposal I (To 9,011,128 225,145 123,438 --- increase the size of the Board of Directors.) 2. Proposal II (The election of Directors.) Mr. Amin J. Khoury 9,136,004 224,050 --- --- Dr. Henry M. Morgan 9,148,654 211,400 --- --- Dr. Thomas W. Davison 9,140,636 219,075 --- --- 3. Proposal III 6,083,613 1,151,475 130,122 1,992,364 (The approval of the Company's 1994 Stock Option Plan.) 4. Proposal IV (The 9,221,273 36,392 102,046 --- selection of KPMG Peat Marwick LLP as the Company's independent auditors for the current fiscal year.) 11 ITEM 5: OTHER INFORMATION On March 31, 1995, the Company signed a five-year exclusive distribution agreement with Coletica ("Coletica"), a Lyon, France-based manufacturer of medical devices, to distribute Coletica's Hemostagene(R) collagen hemostatic sponge in the United States. The Company plans to market the product, which provides hemostatic control for moderate bleeding in surgery and wound treatment, under the trade name Avifoam(TM). In addition, the agreement called for a signing fee of $2,000,000 by MedChem, and contains provisions for the extension of the term of the agreement beyond five years upon the achievement of certain sales volume goals. The Company also received a right of first refusal for the distribution of Avifoam(TM)in selected additional countries. Refer to Item 6., Exhibit No. 10.3(*). ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit No. Description ----------- ----------- 10.1 1994 Stock Option Plan. 10.2 Employment Agreement between the Company and James F. Marten dated January 1, 1995. 10.3 (*) Distribution Agreement between the Company and Coletica dated March 31, 1995. 10.4 Amendment to the Employment Agreement between the Company and Edward J. Quilty dated March 1, 1995. 10.5 Employment Agreement between the Company and John J. McDonough dated February 13, 1995. 10.6 Employment Agreement between the Company and Bradford R. Gay dated February 13, 1995. 10.7 Employment Agreement between the Company and Charles L. Putnam dated February 13, 1995. 10.8 Employment Agreement between the Company and Timothy J. Patrick dated February 13, 1995. 11 Computation of earnings per share 27 Financial Data Schedule (*) The Company has requested confidential treatment of certain portions of this agreement. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 1995. 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: May 15, 1995 BY:/s/ Edward J. Quilty ----------------------------- Edward J. Quilty President Chief Executive Officer DATE: May 15, 1995 BY:/s/ John J. McDonough ---------------------------- John J. McDonough Vice President Chief Financial Officer 13