##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
  o
 0-19842
 PolyMedica Corporation
  Massachusetts
    
    
    
    04-3033368(State or other jurisdiction of
incorporation or organization)
    
    
    
    (I.R.S. Employer
Identification No.)701 Edgewater Drive, Suite 360, Wakefield, Massachusetts
    
    
    
    01880(Address of principal executive offices)
    
    
    
    (Zip Code)Registrants telephone number, including area code
    
    
    
    (781)486-8111
 þ o
 o þ
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o




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##### Table of Contents



POLYMEDICA CORPORATION
TABLE OF CONTENTS
 PagePART IItem 1.
    
    Financial Statements (unaudited):Consolidated Balance Sheets as of June 30 and March 31, 2006
    
    
    3Consolidated Statements of Income for the three months ended
June 30, 2006 and 2005
    
    
    5Consolidated Statements of Cash Flows for the three months ended
June 30, 2006 and 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    19Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    25PART IIItem 1.
    
    Legal Proceedings
    
    
    26Item 1A.
    
    Risk Factors
    
    
    26Item 6.
    
    Exhibits
    
    
    31Signatures
    
    
    32Exhibit Index
    
    
    33Description of Executive Incentive Compensation PlanEX-31.1 CERTIFICATION BY CHIEF EXECUTIVE OFFICEREX-31.2 CERTIFICATION BY CHIEF FINANCIAL OFFICEREX-32.1 Section 906 Certification
 2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1.    Financial Statements
 
 PolyMedica Corporation
Consolidated Balance Sheets
(Unaudited)  (In thousands, except share and per share amounts)
 June 30,
    
    
    March 31,2006
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,588
    
    
    $
    9,101Accounts receivable (net of allowances of
$31,332 and $28,169 as of June 30 and March
31, 2006, respectively)
    
    
    99,803
    
    
    
    104,013Inventories
    
    
    33,435
    
    
    
    34,467Deferred income taxes
    
    
    4,334
    
    
    
    4,334Income tax receivable
    
    
    2,433
    
    
    
    6,662Prepaid expenses and other current assets
    
    
    11,226
    
    
    
    9,896Total current assets
    
    
    153,819
    
    
    
    168,473Property, plant and equipment, net
    
    
    62,592
    
    
    
    64,678Goodwill
    
    
    64,508
    
    
    
    64,488Intangible assets, net
    
    
    35,972
    
    
    
    27,228Direct-response advertising, net
    
    
    95,407
    
    
    
    91,653Notes receivable
    
    
    9,579
    
    
    
    9,548Other assets
    
    
    3,096
    
    
    
    3,249Total assets
    
    $
    424,973
    
    
    $
    429,317
  3




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##### Table of Contents



PolyMedica Corporation
Consolidated Balance Sheets
(Unaudited)  (In thousands, except share and per share amounts)
 June 30,
    
    
    March 31,2006
    
    
    2006LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    29,412
    
    
    $
    26,363Accrued expenses
    
    
    17,129
    
    
    
    20,652Current portion, capital lease obligations
    
    
    587
    
    
    
    596Total current liabilities
    
    
    47,128
    
    
    
    47,611Capital lease, note payable and other obligations
    
    
    974
    
    
    
    1,144Credit facility
    
    
    180,000
    
    
    
    190,000Deferred income taxes
    
    
    30,311
    
    
    
    31,411Total liabilities
    
    
    258,413
    
    
    
    270,166Commitments and contingenciesShareholders equity:Preferred stock, $0.01 par value; 2,000,000
shares authorized, none issued or outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value; 50,000,000 shares
authorized; 23,124,799 and 23,050,924 shares
issued as of June 30 and March 31, 2006
    
    
    231
    
    
    
    230Additional paid-in capital
    
    
    147,462
    
    
    
    142,468Retained earnings
    
    
    18,867
    
    
    
    16,453Total shareholders equity
    
    
    166,560
    
    
    
    159,151Total liabilities and shareholders equity
    
    $
    424,973
    
    
    $
    429,317
  4




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##### Table of Contents



PolyMedica Corporation
Consolidated Statements of Income
(Unaudited)  (In thousands, except per share amounts)
 Three Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005Net revenues
    
    $
    155,889
    
    
    $
    102,528Cost of sales
    
    
    83,556
    
    
    
    45,074Gross margin
    
    
    72,333
    
    
    
    57,454Selling, general and administrative expenses
    
    
    60,264
    
    
    
    42,037Income from continuing operations
    
    
    12,069
    
    
    
    15,417Other income and expense:Investment income
    
    
    340
    
    
    
    481Interest and other expense
    
    
    (3,097
    )
    
    
    (168
    )(2,757
    )
    
    
    313Income from continuing operations before income taxes
    
    
    9,312
    
    
    
    15,730Income tax provision
    
    
    3,399
    
    
    
    5,781Income from continuing operations, net of income taxes
    
    
    5,913
    
    
    
    9,949Discontinued operations, net of income taxes
    
    
    
    
    
    
    2,211Net income
    
    $
    5,913
    
    
    $
    12,160Income from continuing operations per weighted average share, basic
    
    $
    0.26
    
    
    $
    0.36Income from discontinued operations per weighted average share, basic
    
    
    
    
    
    
    0.07Net income per weighted average share, basic
    
    $
    0.26
    
    
    $
    0.43Income from continuing operations per weighted average share, diluted
    
    $
    0.25
    
    
    $
    0.35Income from discontinued operations per weighted average share, diluted
    
    
    
    
    
    
    0.08Net income per weighted average share, diluted
    
    $
    0.25
    
    
    $
    0.43Cash dividend per share
    
    $
    0.15
    
    
    $
    0.15Weighted average shares, basic
    
    
    23,111
    
    
    
    27,975Weighted average shares, diluted
    
    
    23,538
    
    
    
    28,443
  5




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PolyMedica Corporation
Consolidated Statements of Cash Flows
(Unaudited)  (In thousands)
 Three Months EndedJune 30,2006
    
    
    2005Operating activities:Net income
    
    $
    5,913
    
    
    $
    12,160Income from discontinued operations
    
    
    
    
    
    
    (2,211
    )Adjustments to reconcile net income to net cash flows:Depreciation and amortization
    
    
    4,881
    
    
    
    3,229Amortization of direct-response advertising
    
    
    11,642
    
    
    
    9,931Direct-response advertising expenditures
    
    
    (15,396
    )
    
    
    (15,267
    )Provision for bad debts
    
    
    5,397
    
    
    
    4,572Provision for sales allowances/returns
    
    
    3,390
    
    
    
    3,746Stock-based compensation expense
    
    
    3,014
    
    
    
    171Deferred income taxes
    
    
    (1,100
    )
    
    
    (Gain)/loss on sale of equipment
    
    
    16
    
    
    
    (178
    )Loss on impairment of direct-response advertising
    
    
    
    
    
    
    58Imputed interest on note payable
    
    
    
    
    
    
    46Changes in assets and liabilities excluding effects of acquisitions and
dispositions:Accounts receivable
    
    
    (4,723
    )
    
    
    (10,465
    )Income tax receivable
    
    
    4,229
    
    
    
    1,085Inventories
    
    
    1,032
    
    
    
    (3,218
    )Prepaid expenses and other assets
    
    
    (1,257
    )
    
    
    (761
    )Accounts payable
    
    
    3,049
    
    
    
    5,665Accrued expenses and other liabilities
    
    
    (3,522
    )
    
    
    3,127Net cash flows provided by continuing operations
    
    
    16,565
    
    
    
    11,690Net cash flows provided by discontinued operations
    
    
    204
    
    
    
    5,259Net cash flows provided by operating activities
    
    
    16,769
    
    
    
    16,949Investing activities:Purchase of marketable securities
    
    
    
    
    
    
    (2,297
    )Proceeds from maturing marketable securities
    
    
    
    
    
    
    8,688Purchase of property, plant and equipment
    
    
    (444
    )
    
    
    (1,714
    )Purchase of patient lists
    
    
    (11,169
    )
    
    
    Proceeds from sale of equipment
    
    
    
    
    
    
    545Net cash flows (used for) provided by continuing operations
    
    
    (11,613
    )
    
    
    5,222Net cash flows used for discontinued operations
    
    
    
    
    
    
    (90
    )Net cash flows (used for) provided by investing activities
    
    
    (11,613
    )
    
    
    5,132Financing activities:Proceeds from issuance of common and restricted stock
    
    
    1,981
    
    
    
    2,508Payment of credit facility obligation
    
    
    (10,000
    )
    
    
    Payment of costs for stock repurchase
    
    
    
    
    
    
    (1,009
    )Payment of dividends declared on common stock
    
    
    (3,499
    )
    
    
    (4,194
    )Payment of debt issuance costs
    
    
    
    
    
    
    (1,155
    )Payment of capital lease obligations
    
    
    (151
    )
    
    
    (136
    )Net cash flows used for financing activities
    
    
    (11,669
    )
    
    
    (3,986
    )
 6




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Three Months EndedJune 30,2006
    
    
    2005Net change in cash and cash equivalents
    
    
    (6,513
    )
    
    
    18,095Cash and cash equivalents at beginning of period
    
    
    9,101
    
    
    
    72,246Cash and cash equivalents at end of period
    
    $
    2,588
    
    
    $
    90,341Supplemental disclosure of cash flow information:Disposal of equipment
    
    $
    336
    
    
    $
    427
  7




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PolyMedica Corporation
Notes to Consolidated Financial Statements
 1.
    
    Basis of Presentation
 Company
   Accounting
   2.
    
    Accounts receivable and revenue
   8




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PolyMedica Corporation
Notes to Consolidated Financial Statements
    3.
    
    Inventories
  4.
    
    Direct-Response Advertising
  Three Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005Capitalized direct-response advertising additions
    
    $
    15,396
    
    
    $
    15,267Direct-response advertising amortization
    
    
    (11,642
    )
    
    
    (9,931
    )Impairment of direct-response advertising
    
    
    
    
    
    
    (58
    )Increase in direct-response advertising asset, net
    
    
    3,754
    
    
    
    5,278Beginning direct-response advertising asset, net
    
    
    91,653
    
    
    
    78,499Ending direct-response advertising asset, net
    
    $
    95,407
    
    
    $
    83,777
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PolyMedica Corporation
Notes to Consolidated Financial Statements
 5.
    
    Goodwill and Other Intangible Assets
  June 30,
    
    
    March 31,(in thousands)
    
    2006
    
    
    2006Goodwill:Diabetes
    
    $
    64,508
    
    
    $
    64,488Intangible assets:Diabetes patient lists
    
    $
    41,605
    
    
    $
    30,436Diabetes managed care and other contracts
    
    
    8,341
    
    
    
    8,341Accumulated amortization
    
    
    (13,974
    )
    
    
    (11,549
    )Total consolidated intangible assets, net
    
    $
    35,972
    
    
    $
    27,228
  (in thousands)
    
    June 30, 2006
    
    
    March 31, 2006Average
    
    
    Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetLife in
    
    
    Carrying
    
    
    Accumulated
    
    
    Book
    
    
    Carrying
    
    
    Accumulated
    
    
    BookYears
    
    
    Amount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValuePatient lists
    
    
    4
    
    
    $
    41,605
    
    
    $
    (12,944
    )
    
    $
    28,661
    
    
    $
    30,436
    
    
    
    (10,847
    )
    
    $
    19,589Other contracts
    
    
    2-9
    
    
    
    8,133
    
    
    
    (947
    )
    
    
    7,186
    
    
    
    8,133
    
    
    
    (649
    )
    
    
    7,484Covenants not to
compete
    
    
    < 1
    
    
    
    208
    
    
    
    (83
    )
    
    
    125
    
    
    
    208
    
    
    
    (53
    )
    
    
    155Total
    
    
    
    
    
    $
    49,946
    
    
    $
    (13,974
    )
    
    $
    35,972
    
    
    $
    38,777
    
    
    $
    (11,549
    )
    
    $
    27,228
  Remainder of fiscal year 2007
    $
    8,711Fiscal year 2008
    
    10,430Fiscal year 2009
    
    8,713Fiscal year 2010
    
    4,9162011 and thereafter
    3,202Total
    $
    35,972
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PolyMedica Corporation
Notes to Consolidated Financial Statements
 6.
    
    Accrued Expenses
  June 30,
    
    
    March 31,(In thousands)
    
    2006
    
    
    2006Compensation and benefits
    
    $
    7,260
    
    
    $
    8,270Inventory receipts
    
    
    1,572
    
    
    
    2,791Other
    
    
    8,297
    
    
    
    9,591$
    17,129
    
    
    $
    20,652
    7.
    
    Commitments and Contingencies
 Contingencies
 Class Action Lawsuit
    11




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PolyMedica Corporation
Notes to Consolidated Financial Statements
    Commitments
  8.
    
    Note Payable and Credit Facility
 Note payable
  Credit facility
  9. Segment Information
  12




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PolyMedica Corporation
Notes to Consolidated Financial Statements
  Diabetes
 Pharmacy
   Three Months Ended June 30,(in thousands)
    
    2006
    
    
    2005Net revenues:Diabetes
    
    $
    113,783
    
    
    $
    83,170Pharmacy
    
    
    42,106
    
    
    
    19,358Total
    
    $
    155,889
    
    
    $
    102,528Gross margin:Diabetes
    
    $
    63,605
    
    
    $
    50,973Pharmacy
    
    
    8,728
    
    
    
    6,481Total
    
    $
    72,333
    
    
    $
    57,454Reconciliation of segment gross margin to income
from continuing operations before income taxes:Diabetes gross margin
    
    $
    63,605
    
    
    $
    50,973Pharmacy gross margin
    
    
    8,728
    
    
    
    6,481Selling, general and administrative expenses
    
    
    (60,264
    )
    
    
    (42,037
    )Other income and expense
    
    
    (2,757
    )
    
    
    313Income from continuing operations before income taxes
    
    $
    9,312
    
    
    $
    15,730
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PolyMedica Corporation
Notes to Consolidated Financial Statements
 June 30,
    
    
    March 31,2006
    
    
    2006Segment assets:Diabetes
    
    $
    359,947
    
    
    $
    365,546Pharmacy
    
    
    27,479
    
    
    
    18,279Corporate Headquarters and Liberty Healthcare
Group, Inc.
    
    
    37,547
    
    
    
    45,492Total
    
    $
    424,973
    
    
    $
    429,317
 10. Shareholders Equity
  Net income
    
    $
    5,913Proceeds from the exercise of stock options
    
    
    1,981Stock-based compensation
    
    
    3,014Dividends paid
    
    
    (3,499
    )$
    7,409
  11.
    
    Stock-Based Compensation
   No. 123(R).
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PolyMedica Corporation
Notes to Consolidated Financial Statements
   Stock
Options
  Three months ended,June 30,
    
    
    June 30,2006
    
    
    2005Dividend yield
    
    
    1.46
    %
    
    
    1.73
    %Expected volatility
    
    
    35.18
    %
    
    
    46.62
    %Risk-free interest rate
    
    
    4.89
    %
    
    
    3.78
    %Expected life.
    
    
    3.75
    
    
    
    3.75
  Three months endedJune 30,
    
    
    June 30,2006
    
    
    2005Weighted average fair value of options granted
    
    $
    12.29
    
    
    $
    12.17Weighted average fair value of Employee Stock
Purchase Plan rights granted below fair value
    
    $
    10.15
    
    
    $
    6.43
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PolyMedica Corporation
Notes to Consolidated Financial Statements
  WeightedWeighted
    
    
    Aggregate
    
    
    AverageRemainingOption
    
    
    Average
    
    
    Intrinsic Value
    
    
    ContractualShares
    
    
    Option Price
    
    

(in thousands)
    
    
    Term in YearsOutstanding as of March 31, 2006
    
    
    3,188,358
    
    
    $
    29.36
    
    
    
    
    
    
    
    8.17Granted
    
    
    30,000
    
    
    
    41.19Exercised
    
    
    (58,202
    )
    
    
    27.17Cancelled
    
    
    (6,876
    )
    
    
    34.86Outstanding as of June 30, 2006
    
    
    3,153,280
    
    
    $
    29.50
    
    
    $
    20,370
    
    
    
    7.94Vested and exercisable as of
June 30, 2006
    
    
    1,623,503
    
    
    $
    25.67
    
    
    $
    16,706
    
    
    
    7.23
   Restricted
Stock Awards
  Weighted AverageGrant DateShares
    
    
    Par value
    
    
    Fair ValueNon-vested as of March 31, 2006
    
    
    206,313
    
    
    $
    0.01
    
    
    $
    34.51Granted
    
    
    690
    
    
    $
    0.01
    
    
    $
    36.21Vested
    
    
    (938
    )
    
    $
    0.01
    
    
    $
    32.26Cancelled
    
    
    
    
    
    
    
    
    
    
    Non-vested as of June 30, 2006
    
    
    206,065
    
    
    $
    0.01
    
    
    $
    34.53
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PolyMedica Corporation
Notes to Consolidated Financial Statements
     Three Months Ended(in thousands, except per share data)
    
    June 30, 2005Net income
    
    $
    12,160Add back: Stock compensation costs, net of tax, on
options and restricted stock granted below fair market
value
    
    
    108Less: Stock compensation costs, net of tax, had all
employee options and restricted stock been recorded at
fair value
    
    
    (1,601
    )Adjusted net income
    
    $
    10,667Net income per weighted average share, basic, as
reported
    
    $
    0.43Net income per weighted average share, diluted, as
reported
    
    $
    0.43Adjusted net income per weighted average share, basic
    
    $
    0.38Adjusted net income per weighted average share, diluted
    
    $
    0.38
 12.
    
    Calculations of Earnings Per Share
  (In thousands, except per share data)
    
    Three Months EndedJune 30, 2006
    
    
    June 30, 2005Income from continuing operations, net of income taxes
    
    $
    5,913
    
    
    $
    9,949BASIC:Weighted average common stock issued and outstanding,
end of period
    
    
    23,111
    
    
    
    27,975Income from continuing operations, net of income
taxes, per weighted average share, basic
    
    $
    0.26
    
    
    $
    0.36DILUTED:Weighted average common stock issued and outstanding,
end of period
    
    
    23,111
    
    
    
    27,975Weighted average dilutive common stock equivalents
    
    
    427
    
    
    
    468
 Weighted average common stock and dilutive common
stock equivalents outstanding
    
    
    23,538
    
    
    
    28,443Income from continuing operations, net of income
taxes, per weighted average share, diluted
    
    $
    0.25
    
    
    $
    0.35
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##### Table of Contents



PolyMedica Corporation
Notes to Consolidated Financial Statements
 Potentially Dilutive Stock Options
  13.
    
    Comprehensive Income
  14.
    
    New Accounting Pronouncements
  15.
    
    Subsequent Events
  18




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Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Future Operating Results
   Overview
  Diabetes
  -
    
    providing mail order delivery of supplies directly to our patients homes;-
    
    billing Medicare, other government agencies and/or private insurance companies
directly for those diabetes related supplies that are reimbursable;-
    
    providing medical call and contact center services and 24-hour telephone support to patients;-
    
    providing technology solutions focused on electronic patient relationship management;-
    
    using sophisticated software and advanced order fulfillment systems to
efficiently provide diabetes related products.
   19




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Pharmacy
    20




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##### Table of Contents



Critical Accounting Policies
   Stock-based compensation
  Seasonality
   Other
   21




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Results of Operations
 Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
 Net Revenues
  Three Months Ended June 30,(in thousands)
    
    2006
    
    
    2005Net
    
    
    % Net
    
    
    Net
    
    
    % NetRevenues
    
    
    Revenues
    
    
    Revenues
    
    
    Revenues
    
    
    $ Change
    
    
    % ChangeNet revenues:Diabetes
    
    $
    113,783
    
    
    
    73.0
    %
    
    $
    83,170
    
    
    
    81.1
    %
    
    $
    30,613
    
    
    
    36.8
    %Pharmacy
    
    
    42,106
    
    
    
    27.0
    
    
    
    19,358
    
    
    
    18.9
    
    
    
    22,748
    
    
    
    117.5Total net revenues
    
    $
    155,889
    
    
    
    100.0
    %
    
    $
    102,528
    
    
    
    100.0
    %
    
    $
    53,361
    
    
    
    52.0
    %
   Gross Margin
  Three Months Ended June 30,(in thousands)
    
    2006
    
    
    2005Gross
    
    
    Gross
    
    
    Gross
    
    
    GrossMargin
    
    
    Margin %
    
    
    Margin
    
    
    Margin %
    
    
    $ Change
    
    
    % ChangeGross margin:Diabetes
    
    $
    63,605
    
    
    
    55.9
    %
    
    $
    50,973
    
    
    
    61.3
    %
    
    $
    12,632
    
    
    
    24.8
    %Pharmacy
    
    
    8,728
    
    
    
    20.7
    
    
    
    6,481
    
    
    
    33.5
    
    
    
    2,247
    
    
    
    34.7Total gross margin
    
    $
    72,333
    
    
    
    46.4
    %
    
    $
    57,454
    
    
    
    56.0
    %
    
    $
    14,879
    
    
    
    25.9
    %
  22




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Selling, General and Administrative Expenses
  June 30,
    
    
    June 30,2006
    
    
    2005Employee compensation
    
    $
    19,963
    
    
    $
    14,744Direct-response advertising amortization
    
    
    11,642
    
    
    
    9,931Depreciation expense
    
    
    2,456
    
    
    
    1,880Amortization of intangible assets
    
    
    2,425
    
    
    
    1,349Provision for doubtful accounts
    
    
    5,397
    
    
    
    4,572Stock-based compensation
    
    
    3,014
    
    
    
    171Other
    
    
    15,367
    
    
    
    9,390Selling, general and administrative expenses
    
    $
    60,264
    
    
    $
    42,037Selling, general and administrative expenses as a percentage of net revenues
    
    
    38.7
    %
    
    
    41.0
    %
  Other Income and Expense
  Three Months Ended June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeInvestment income
    
    $
    340
    
    
    $
    481
    
    
    $
    (141
    )
    
    
    (29.3
    )%Interest expense
    
    $
    3,097
    
    
    $
    168
    
    
    $
    2,929
    
    
    
    1,743.5
    %
  Income Taxes
  Three Months Ended June 30,(in thousands)
    
    2006
    
    
    2005Income tax provision
    
    $
    3,399
    
    
    $
    5,781Effective tax rate
    
    
    36.5
    %
    
    
    36.8
    %
 23




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Liquidity and Capital Resources
  Three Months Ended June 30,(in thousands)
    
    2006
    
    
    2005Net cash provided by operating activities
    
    $
    16,769
    
    
    $
    16,949Net cash provided by (used for)
investing activities
    
    
    (11,613
    )
    
    
    5,132Net cash used for financing activities
    
    
    (11,669
    )
    
    
    (3,986
    )Net change in cash and cash equivalents
    
    $
    (6,513
    )
    
    $
    18,095
       24




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##### Table of Contents



New Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
 (1)
    
    Disclosure controls and procedures
  25




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##### Table of Contents



(2)
    
    Changes in internal controls
  
 PART II  OTHER INFORMATION
 
 Item 1.    Legal Proceedings
  
 Item 1A.  Risk Factors
  We could experience significantly reduced revenues and profits if payers change, delay or deny reimbursement
   The impact of Medicare Part D on the Pharmacy segment is unclear
   26




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##### Table of Contents



Competitive bidding for durable medical equipment suppliers could negatively affect our Diabetes
segment
  We are subject to a corporate integrity agreement
  We are currently involved in litigation and could experience reduced net income if this litigation
is not resolved in our favor
 ,
 We could experience significantly reduced profits from our Diabetes segment if new technologies
that reduce or eliminate the need for consumable testing supplies are developed for glucose
monitoring
  Failure to maintain effective internal control over financial reporting could result in a loss of
investor confidence in our financial reports and have a materially adverse effect on our stock
price
  27




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##### Table of Contents



The market price of our common stock may experience substantial fluctuations for reasons over which
we have little control
  -
    
    fluctuations in our quarterly results;-
    
    announcements concerning us, our competitors, or manufacturers with whom we have
relationships or the healthcare market;-
    
    overall volatility of the stock market;-
    
    changes in government regulations;-
    
    changes in the financial estimates we provide to the market or estimates by analysts; and-
    
    loss of key executives.
  We plan to continue our expansion; if we do not manage our growth successfully, our growth and
profitability may slow or stop
  Our debt may adversely affect our cash flow and may restrict our investment opportunities or limit
our activities.
   28




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Geopolitical events may reduce our ability to obtain favorable advertising rates for our
direct-response advertising efforts, which may increase our expenses and/or lead to a reduction in
revenues
  The profitability of our segments will decrease if we do not receive recurring orders from patients
  We could experience a charge to earnings as a result of an impairment of our goodwill,
direct-response advertising or other intangible assets
   We could be liable for harm caused by products that we sell and may incur significant expenses in
connection with the defense of any product liability claims
  We could lose patients and revenues to new or existing competitors
  Loss of use of data storage facilities could significantly reduce revenues and profits from our
businesses
  29




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##### Table of Contents



If we or our suppliers do not comply with applicable government regulations, we may be prohibited
from selling our products and/or may incur fines and other expenses
  We depend on key employees and the loss of a key employee could adversely affect our business.
  Our quarterly revenues or operating results could vary, which may cause the market price of our
securities to decline
  -
    
    changes in reimbursement guidelines and amounts;-
    
    changes in regulations affecting the healthcare industry;-
    
    changes in suppliers;-
    
    the timing of patient orders;-
    
    the timing and cost of our advertising campaigns;-
    
    the timing of the introduction or acceptance of new products offered by us or our competitors; and-
    
    changes in the mix of our products; product costs are significantly influenced by the product
brand chosen by the patients of our diabetes segment. We provide a wide range of product brand
choices to our patients, purchased at varying costs from suppliers. Our ability to sustain
current gross margin levels is dependent both on our ability to continue securing favorable
pricing from suppliers and on the brand choices of our patients.
 A reduction in working capital or a change in our business could prevent us from paying dividends
to shareholders
  We may make acquisitions that will strain our financial and operational resources
  -
    
    diversion of the attention of senior management from important business matters;-
    
    amortization of substantial intangible assets;-
    
    difficulty in retaining key personnel of an acquired business;-
    
    lack of adequate internal control over financial reporting;-
    
    failure to assimilate operations of an acquired business;
 30




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##### Table of Contents



-
    
    possible operating losses and expenses of an acquired business;-
    
    exposure to legal claims for activities of an acquired business prior to acquisition; and-
    
    incurrence of debt and related interest expense.
  We may issue preferred stock with rights senior to our common stock
  Adverse results in tax audits could result in significant cash expenditures or exposure to
unforeseen liabilities
  
 Item 6. Exhibits
  31




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##### Table of Contents



PolyMedica Corporation(registrant)/s/ Patrick T. RyanPatrick T. Ryan
President, Chief Executive Officer and Director
(Principal Executive Officer)/s/ Keith W. JonesKeith W. JonesChief Financial Officer
(Principal Financial and Accounting Officer)  32




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##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    
    
    Description10.1
    
    -
    
    Form of Director Indemnification Agreement. (1)10.2
    
    -
    
    Amendment No. 1 to Employment Agreement dated October 14, 2005 between
Patrick T. Ryan and the Registrant dated July 25, 2006. (2)10.4
    
    -
    
    Description of Executive Incentive Compensation Program.31.1
    
    -
    
    Certification by Chief Executive Officer pursuant to Rule
13a14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.31.2
    
    -
    
    Certification by Chief Financial Officer pursuant to Rule
13a14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.32.1
    
    -
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.(1)
    
    -
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed July 10, 2006.(2)
    
    -
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed July 31, 2006.