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.
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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
----- -----
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
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Total current assets 16,316,454 16,424,675
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Property, plant and equipment 13,030,797 12,466,151
Less accumulated depreciation and amortization 3,197,845 3,021,975
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Net property, plant and equipment 9,832,952 9,444,176
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Note receivable - Anika Research, Inc. 1,000,000 1,000,000
Cost in excess of net assets of businesses acquired 35,521,949 35,887,747
Intangible and other assets 15,975,579 16,274,010
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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
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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
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Total liabilities 23,437,810 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 11,262,291 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
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63,784,266 62,825,237
Treasury stock, 1,024,702 shares, at cost (8,575,142) (8,575,142)
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Total stockholders' equity 55,209,124 54,250,095
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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
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Net sales $9,421,270 $7,933,510
Cost of sales 3,019,038 2,538,723
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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
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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
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Income from operations before income taxes 1,163,946 1,500,765
Income tax expense 358,593 417,629
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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
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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
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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
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Net cash provided by operating activities 416,779 423,765
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Cash flows from investing activities:
Additions to property, plant and equipment (564,646) (518,390)
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Net cash used for investing activities (564,646) (518,390)
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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 --
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Net cash provided by financing activities 153,676 100,000
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Increase in cash and cash equivalents 5,809 5,375
Cash and cash equivalents at beginning of period 157,591 (5,375)
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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
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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
------------------------------------------
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