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UNITED STATES
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 1934For the quarterly period ended June 30, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the transition period from ___to ___
  Commission File No. 0-19842 PolyMedica Corporation(Exact
name of registrant as specified in its charter)
 Massachusetts
    
    04-3033368(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)11 State Street, Woburn, Massachusetts
    
    01801(Address
of principal executive offices)
    

(Zip
Code)
 Registrants telephone number, including area code
    
    (781)933-2020
 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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).    Yes x    No o As
of August 4, 2004, there were 27,278,547 shares of the registrants
Common Stock issued and outstanding.




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POLYMEDICA CORPORATION
TABLE OF CONTENTS  
 PagePART I -
    
    FINANCIAL
INFORMATIONItem 1 -
    
    Financial
Statements (unaudited)Consolidated Balance Sheets as of June 30 and March 31, 2004
    
    
    3Consolidated Statements of Income for the three months ended
June 30, 2004 and 2003
    
    
    5Consolidated Statements of Cash Flows for the three months ended
June 30, 2004 and 2003
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2 -
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    16Item 3 -
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4 -
    
    Controls and Procedures
    
    
    29PART II -
    
    OTHER INFORMATIONItem 1 -
    
    Legal Proceedings
    
    
    30Item 2 -
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 6 -
    
    Exhibits and Reports on Form 8-K
    
    
    31Signatures
    
    
    32Exhibit Index
    
    
    33EX-31.1 SECTION 302 CERTIFICATION OF C.E.O.EX-31.2 SECTION 302 CERTIFICATION OF C.F.O.EX-32.1 SECTION 906 CERTIFICATIONS OF CEO & CFO
 2




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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 31,2004
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    85,964
    
    
    $
    69,229Marketable securities
    
    
    7,271
    
    
    
    7,421Restricted cash
    
    
    512
    
    
    
    512Accounts
receivable (net of allowances of $29,522 and $29,700 as of
June 30 and March
31, 2004, respectively)
    
    
    51,994
    
    
    
    63,828Inventories
    
    
    24,353
    
    
    
    18,745Deferred income taxes
    
    
    18,331
    
    
    
    18,331Income tax receivable
    
    
    
    
    
    
    2,530Prepaid expenses and other current assets
    
    
    6,606
    
    
    
    4,438Total current assets
    
    
    195,031
    
    
    
    185,034Property, plant and equipment, net
    
    
    62,242
    
    
    
    61,659Goodwill
    
    
    5,946
    
    
    
    5,946Intangible assets, net
    
    
    560
    
    
    
    383Direct-response advertising, net
    
    
    66,468
    
    
    
    64,953Other assets
    
    
    1,271
    
    
    
    1,193Total assets
    
    $
    331,518
    
    
    $
    319,168
 The accompanying notes are an integral part of these unaudited consolidated financial statements. 3




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PolyMedica Corporation
Consolidated Balance Sheets
(Unaudited)(In thousands, except share and per share amounts) June 30,
    
    March 31,2004
    
    2004LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,060
    
    
    $
    11,874Accrued expenses
    
    
    24,733
    
    
    
    21,872Current portion, capital lease obligations
    
    
    280
    
    
    
    292Total current liabilities
    
    
    29,073
    
    
    
    34,038Capital lease and other obligations
    
    
    1,712
    
    
    
    1,691Deferred income taxes
    
    
    24,611
    
    
    
    24,611Total liabilities
    
    
    55,396
    
    
    
    60,340Commitments and contingenciesShareholders equity:Preferred stock, $0.01 par value; 2,000,000
shares authorized, noneissued or outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value; 50,000,000 shares
authorized;
27,180,678 and 26,674,520 shares
issued as of June 30 and
March 31, 2004
    
    
    272
    
    
    
    267Additional paid-in capital
    
    
    143,767
    
    
    
    136,236Retained earnings
    
    
    132,083
    
    
    
    122,325Total shareholders equity
    
    
    276,122
    
    
    
    258,828Total liabilities and shareholders equity
    
    $
    331,518
    
    
    $
    319,168
 The accompanying notes are an integral part of these unaudited consolidated financial statements. 4




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PolyMedica Corporation
Consolidated Statements of Income
(Unaudited)(In thousands, except per share amounts) Three Months EndedJune 30,
    
    June 30,2004
    
    2003Net revenues
    
    $
    111,140
    
    
    $
    98,937Cost of sales
    
    
    43,788
    
    
    
    35,769Gross margin
    
    
    67,352
    
    
    
    63,168Selling, general and administrative expenses
    
    
    45,618
    
    
    
    45,531Income from operations
    
    
    21,734
    
    
    
    17,637Other income and expense:Investment income
    
    
    216
    
    
    
    223Interest expense
    
    
    (19
    )
    
    
    (17
    )197
    
    
    
    206Income before income taxes
    
    
    21,931
    
    
    
    17,843Income tax provision
    
    
    8,158
    
    
    
    6,745Net income
    
    $
    13,773
    
    
    $
    11,098Net income per weighted average share:Basic
    
    $
    0.51
    
    
    $
    0.45Diluted
    
    $
    0.50
    
    
    $
    0.44Cash dividend per share
    
    $
    0.15
    
    
    $
    0.125Weighted average shares, basic
    
    
    26,871
    
    
    
    24,620Weighted average shares, diluted
    
    
    27,527
    
    
    
    25,344
 The accompanying notes are an integral part of these unaudited consolidated financial statements. 5




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PolyMedica Corporation
Consolidated Statements of Cash Flows
(Unaudited)(In thousands) Three Months EndedJune 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    13,773
    
    
    $
    11,098Adjustments to reconcile net income to net cash flows:Depreciation and amortization
    
    
    2,200
    
    
    
    1,889Amortization of direct-response advertising
    
    
    9,038
    
    
    
    10,364Direct-response advertising expenditures
    
    
    (10,553
    )
    
    
    (13,862
    )Provision for bad debts
    
    
    5,444
    
    
    
    5,653Provision for sales allowances/returns
    
    
    3,960
    
    
    
    5,219Loss on sale of equipment
    
    
    34
    
    
    
    43Stock-based compensation
    
    
    
    
    
    
    54Changes in assets and liabilities:Accounts receivable
    
    
    2,430
    
    
    
    (1,111
    )Income tax receivable
    
    
    2,530
    
    
    
    1,181Inventories
    
    
    (5,608
    )
    
    
    2,386Prepaid expenses and other assets
    
    
    (2,163
    )
    
    
    (3,126
    )Accounts payable
    
    
    (7,814
    )
    
    
    (8,253
    )Accrued expenses and other liabilities
    
    
    2,932
    
    
    
    (1,484
    )Net cash flows provided by operating activities
    
    
    16,203
    
    
    
    10,051Cash flows from investing activities:Purchase of marketable securities
    
    
    (2,629
    )
    
    
    (6,465
    )Proceeds from maturing marketable securities
    
    
    2,779
    
    
    
    900Purchase of property, plant and equipment
    
    
    (2,765
    )
    
    
    (3,272
    )Purchase of customer lists
    
    
    (231
    )
    
    
    Proceeds from sale of equipment
    
    
    3
    
    
    
    Net cash flows used for investing activities
    
    
    (2,843
    )
    
    
    (8,837
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    7,536
    
    
    
    1,315Contributions to deferred compensation plans
    
    
    (72
    )
    
    
    (157
    )Payment of dividends declared on common stock
    
    
    (4,015
    )
    
    
    (3,072
    )Payment of capital lease and note payable obligations
    
    
    (74
    )
    
    
    (825
    )Net cash flows provided by (used for) financing activities
    
    
    3,375
    
    
    
    (2,739
    )Net change in cash and cash equivalents
    
    
    16,735
    
    
    
    (1,525
    )Cash and cash equivalents at beginning of period
    
    
    69,229
    
    
    
    27,162Cash and cash equivalents at end of period
    
    $
    85,964
    
    
    $
    25,637Supplemental disclosure of cash flow information:Assets purchased under capital lease
    
    $
    
    
    
    $
    46Disposal of equipment
    
    
    300
    
    
    
    312
 The accompanying notes are an integral part of these unaudited consolidated financial statements. 6




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PolyMedica Corporation
Notes to Consolidated Financial Statements 1.    Basis of Presentation Company PolyMedica Corporation was organized in 1988 and has been in the medical
product and pharmaceutical business for over 15 years. Today, through our
primary segment, Liberty Diabetes, we are a leading provider of
direct-to-consumer diabetes testing supplies, primarily to Medicare-eligible
seniors, and provide a simple and reliable way for our customers to obtain
their supplies and medications. Through our Liberty Respiratory segment, we
provide direct-to-consumer respiratory medications, primarily to
Medicare-eligible seniors, and through our Pharmaceuticals segment, we sell
prescription medications directly to existing Liberty Diabetes and Liberty
Respiratory customers and their spouses and we also manufacture and sell
prescription and over-the-counter urology products to distributors and
retailers. Accounting The accompanying interim consolidated financial statements are unaudited
and have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information.
These consolidated financial statements include the accounts of PolyMedica and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain information and
footnote disclosures normally included in our annual consolidated financial
statements have been condensed or omitted. The interim consolidated financial
statements, in the opinion of management, reflect all adjustments (consisting
only of normal recurring accruals) necessary to fairly present the results as
of and for the periods ended June 30, 2004 and 2003. Certain prior year
amounts have been reclassified to conform with the 2004 presentation. The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for any future period or
the entire fiscal year. Accordingly, these interim consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements for the fiscal year ended March 31, 2004 which are
contained in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission (SEC) on June 14, 2004. Consequently, the interim
consolidated financial statements do not include all disclosures normally
required by accounting principles generally accepted in the United States of
America for annual audited financial statements. Revenue Recognition and Accounts Receivable We recognize revenue related to product sales to customers who have placed
orders upon shipment of such orders, provided that risk of loss has passed to
the customer and we have received and verified any written documentation
required to bill Medicare, other third-party payers, and customers. We record
revenue at the amounts expected to be collected from Medicare, other
third-party payers, and directly from customers. As a result, our contractual
allowances are immaterial. Revenue recognition is delayed for product
shipments for which we have not yet received the required written forms until
the period in which those documents are collected and verified. Revenue related to Medicare reimbursement is calculated based on
government-determined reimbursement prices for Medicare-covered items. The
reimbursements that Medicare pays us are subject to review by appropriate
government regulators. Medicare reimburses at 80% of the government-determined
prices for reimbursable supplies, and we bill the remaining balance to either
third-party payers or directly to customers. Approximately $72.59 million and $67.95 million of net revenues for the
three months ended June 30, 2004 and 2003, respectively, were reimbursable by
Medicare for products provided to Medicare beneficiaries. Accounts receivable allowances consist of an allowance for doubtful
accounts, an allowance for product returns, and other sales allowances. As of
June 30 and March 31, 2004, accounts receivable allowances were $29.52 million
and $29.70 million, respectively, or 36.2% and 31.8% of gross accounts
receivable, respectively. The valuation of accounts receivable is based upon the credit-worthiness
of customers and third-party payers as well as our historical collection
experience. Allowances for doubtful accounts are recorded as a selling, general
and 7




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PolyMedica Corporation
Notes to Consolidated Financial Statements administrative expense for estimated amounts expected to be uncollectible
from third-party payers and customers. We base our estimates on our historical
collection and write-off experience, current trends, credit policy, and on our
analysis of accounts receivable by aging category. Our accounts receivable are generally due from Medicare, private insurance
companies, Medicaid and our customers. The collection process is time
consuming, complex and typically involves the submission of claims to multiple
payers whose payment of claims may be contingent upon the payment of another
payer. As a result, our collection efforts may be active up to 18 months from
the initial billing date. In accordance with applicable regulatory
requirements, we make reasonable and appropriate efforts to collect our
accounts receivable, including deductible and copayment amounts, in a
consistent manner for all payer classes. During the three months ended June 30,
2004 and 2003, we provided for allowances for doubtful accounts at a rate of
approximately 4.9% and 5.7% of net revenues, respectively. Sales allowances are recorded for estimated product returns as well as
estimated claim denials, as a reduction of revenue. We analyze sales allowances
using historical data adjusted for significant changes in volume, customer
demographics, and business conditions. The reserve for sales allowances and the
rate at which we provide for such allowances are periodically adjusted to
reflect actual returns and claim denials. During the three months ended June
30, 2004 and 2003, we provided for sales allowances at a rate of approximately
3.4% and 5.0% of gross revenues, respectively. Accounting for Stock-Based Compensation PolyMedica accounts for its stock-based compensation plan under the
recognition and measurement principles of APB 25, Accounting for Stock Issued
to Employees and related Interpretations. We have adopted the disclosure-only
provisions of Statement of Financial Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation Transition and Disclosure, an
amendment of SFAS No. 123. Therefore, no stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had
an exercise price equal to or greater than the market value of the underlying
common stock on the date of grant. The following table illustrates the effect
on net income and earnings per share if we had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation. Three Months Ended(in thousands, except per share data)
    
    June 30,2004
    
    June 30,2003Net income
    
    $
    13,773
    
    
    $
    11,098Add back: Stock compensation costs,
net of tax, on
options granted below
fair market value
    
    
    
    
    
    
    64Less: Stock compensation costs, net
of tax, had all
employee options
been recorded at fair value
    
    
    (887
    )
    
    
    (1,462
    )Adjusted net income
    
    $
    12,886
    
    
    $
    9,700Net income per weighted average
share, basic, as reported
    
    $
    0.51
    
    
    $
    0.45Net income per weighted average
share, diluted, as reported
    
    $
    0.50
    
    
    $
    0.44Adjusted net income per weighted
average share, basic
    
    $
    0.48
    
    
    $
    0.39Adjusted net income per weighted
average share, diluted
    
    $
    0.47
    
    
    $
    0.39
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PolyMedica Corporation
Notes to Consolidated Financial Statements The fair value of each option granted during the three months ended June
30, 2004 and 2003 is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions: 2004
    
    2003Dividend yield
    
    
    1.93
    %
    
    
    2.35
    %Expected volatility
    
    
    88.20
    %
    
    
    89.20
    %Risk-free interest rate
    
    
    3.86
    %
    
    
    2.45
    %Expected life
    
    
    5.0
    
    
    
    5.0
 Weighted-average
fair value of options granted at or above fair value during the three months ended June 30, 2004
    $19.472003
    $13.13
 Weighted-average fair value of Employee Stock Purchase Plan rights
granted below fair value during the three months ended June 30, 2004
    $9.672003
    $4.61
 2.    Inventories Inventories consist of the following: June 30,
    
    March 31,(in thousands)
    
    2004
    
    2004Raw materials
    
    $
    1,737
    
    
    $
    1,682Work in process
    
    
    824
    
    
    
    526Finished goods
    
    
    21,792
    
    
    
    16,537$
    24,353
    
    
    $
    18,745
 Due to the medical nature of the products we provide, customers sometimes
request supplies before we have received the required written documents, if
applicable, to bill Medicare, other third-party payers and customers. Because
we do not recognize revenue until we have received and verified such documents,
included in inventories as of June 30 and March 31, 2004, is $2.27 million and
$2.45 million, respectively, of inventory shipped to customers for which we
have received an order but have not yet received and verified the required
written documents, if applicable, to bill Medicare, other third-party payers
and customers, and to recognize revenue. 9




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PolyMedica Corporation
Notes to Consolidated Financial Statements 3.    Goodwill and Other Intangible Assets We have three reporting units with goodwill: Liberty Medical Supply, Inc.
(Liberty), included in the Liberty Diabetes reporting segment, and PolyMedica
Pharmaceuticals (U.S.A.), Inc. and PolyMedica Healthcare, Inc., both included
in the Pharmaceuticals reporting segment. The carrying amounts of goodwill and
intangible assets, excluding direct-response advertising, as of June 30 and
March 31, 2004, by reportable segment, were as follows: June 30,
    
    March 31,(in thousands)
    
    2004
    
    2004Liberty Diabetes:Goodwill
    
    $
    4,951
    
    
    $
    4,951Customer lists
    
    $
    2,504
    
    
    $
    2,273Accumulated amortization
    
    
    (1,944
    )
    
    
    (1,890
    )$
    560
    
    
    $
    383Pharmaceuticals:Goodwill
    
    $
    995
    
    
    $
    995Total consolidated goodwill
    
    $
    5,946
    
    
    $
    5,946
 Amortization expense for intangible assets was approximately $54,000 and
$65,000 for the three months ended June 30, 2004 and 2003, respectively. As of
June 30, 2004, amortization expense on existing intangibles for the remainder
of fiscal 2005 and the next four fiscal years is as follows (table in
thousands): 2005
    
    $
    1492006
    
    
    1502007
    
    
    1492008
    
    
    1092009
    
    
    3Total
    
    $
    560
 4.    Direct-Response Advertising In accordance with Statement of Position 93-7 (SOP 93-7),
direct-response advertising and associated costs for our diabetes supplies and
related products, included in the Liberty Diabetes segment, for the periods
presented are capitalized and amortized to selling, general and administrative
expenses over a four-year period. The amortization rate is such that 55% of
such costs are expensed after two years from the date they are incurred, and
the remaining 45% is expensed on a straight-line basis over the next two years.
Management assesses the realizability of the amounts of direct-response
advertising costs reported as assets at each balance sheet date by comparing
the carrying amounts of such assets to the probable remaining future net cash
flows expected to result directly from such advertising. Advertising that does
not meet the capitalization requirements of SOP 93-7 is expensed in the current
period. Any change in existing accounting rules or a business change that impacts
expected net cash flows or that shortens the period over which such net cash
flows are estimated to be realized, currently four years for our diabetes
products and two years for our respiratory supplies, could result in
accelerated charges against our earnings. In addition, new or different
marketing initiatives that may not qualify for direct-response advertising
could result in accelerated charges against our earnings. The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the Medicare Modernization Act), signed into law on December 8, 2003,
reduces reimbursement rates for inhalation drugs, which we provide through our
Liberty Respiratory segment. Beginning January 1, 2004, reimbursement for
these drugs was reduced from 95% of the average wholesale price (AWP) to 80%
of the AWP. Beginning January 1, 2005, the law currently in effect would
reduce reimbursement for inhalation drugs to 106% of the average price of sales
by manufacturers (ASP), a new benchmark that will be determined by sales data
submitted by the drug manufacturers. On July 28, the Centers for 10




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PolyMedica Corporation
Notes to Consolidated Financial Statements Medicare and
Medicaid Services (CMS) published a proposed rule to implement the ASP
payment methodology for inhalation drugs (CMS-1429-P). Under this proposed
rule, CMS estimates that payment for albuterol and ipratropium, the most common
inhalation drugs, will decrease by approximately 89% beginning January 1, 2005.
The proposed rule states that CMS expects to pay a dispensing fee to suppliers
for dispensing inhalation drugs, in addition to the $5.00 dispensing fee
presently in effect. It is not known at this time whether an additional
dispensing fee for inhalation drugs, if established by CMS, will be adequate to
enable our Liberty Respiratory segment to remain profitable. This will depend
on the amount of the fee and our ability to reduce the expenses of providing
inhalation drugs. It is also possible that there will be favorable
Congressional or regulatory action (other than a dispensing fee) on payment for
inhalation drugs, but such action should not be considered likely. If providers
of respiratory inhalation drugs are ultimately reimbursed at 106% of ASP,
without a significant dispensing or other fee, we believe that most companies,
including us, will exit this business, because it will not be possible to
operate without significant losses. See Managements Discussion and Analysis
of Financial Condition and Results of Operations  Future Operating Results 
Liberty Respiratory. Due to the reduction in reimbursement rates for inhalation drugs
contemplated by the Medicare Modernization Act, we expect that our Liberty
Respiratory segment will eventually generate less revenue and earnings than it has historically. As a result, we suspended all Liberty
Respiratory direct-response advertising in December 2003 and recorded a $14.44
million impairment charge of Liberty Respiratorys direct-response advertising
asset to adjust the assets carrying value down to its net realizable value.
Net realizable value is determined by comparing the carrying amounts of
direct-response advertising costs capitalized as assets at each balance sheet
date to the probable remaining future net cash flows expected to result
directly from such advertising. If the carrying amount of the assets exceeds
the probable remaining future net cash flows expected to result directly from
such assets, an impairment loss is recognized in an amount equal to that
excess. We perform net realizable value tests of our direct-response
advertising asset at each reporting period and whenever events or changes in
circumstance suggest that the carrying value may not be recoverable and record
any impairment as a cost of continuing operations. In accordance with SOP 93-7, we recorded the following activity related to
our direct-response advertising asset for the periods presented: Three Months EndedJune 30,
    
    June 30,(in thousands)
    
    2004
    
    2003Capitalized direct-response advertising additions
    
    $
    10,553
    
    
    $
    13,862Direct-response advertising amortization
    
    
    (9,038
    )
    
    
    (10,364
    )Increase in direct-response advertising asset, net
    
    
    1,515
    
    
    
    3,498Beginning direct-response advertising asset, net
    
    
    64,953
    
    
    
    64,061Ending direct-response advertising asset, net
    
    $
    66,468
    
    
    $
    67,559
 5.    Accrued Expenses Accrued expenses consist of the following: June 30,
    
    March 31,(In thousands)
    
    2004
    
    2004Compensation and benefits
    
    $
    6,666
    
    
    $
    9,514Amounts reserved for overpayments by Medicare and others
    
    
    7,756
    
    
    
    7,962Income tax payable
    
    
    5,421
    
    
    
    Other
    
    
    4,890
    
    
    
    4,396$
    24,733
    
    
    $
    21,872
 As part of the internal review that we conducted in parallel with the
Department of Justice (DOJ) investigation described in greater detail under
Contingencies  U.S. Attorneys Office in Note 6 below, we identified a
category of 11




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PolyMedica Corporation
Notes to Consolidated Financial Statements Medicare claims where the documentation we received for the claim
supported a portion, but not the full quantity, of the products shipped and
billed. We engaged an outside consulting firm to perform a statistical
analysis of all Medicare claims filed by PolyMedica over a six-year period in
order to develop an estimate of overpayments by Medicare related to this
category of claims. In the third quarter of fiscal 2004, we received the
preliminary results of that analysis, which indicated an aggregate overpayment
of approximately $5.71 million, of which $2.57 million had
been previously accrued
and $3.14 million was recorded as a reduction of net revenues and an increase
to the accrual in the fiscal year ended March 31, 2004. In June 2004, we
received the final results of the statistical analysis, which did not change
managements estimate of the required reserve for the specific documentation
deficiencies discussed above. As of June 30, 2004, $2.05 million of the amounts reserved for
overpayments to Medicare and others relates to the change in interpretation of
the reimbursement formula for albuterol and ipratropium combinations, discussed
in more detail in Note E to our consolidated financial statements in our Annual
Report on Form 10-K for the fiscal year ended March 31, 2004, filed with the
SEC on June 14, 2004, and $5.71 million is the amount reserved related to
documentation deficiencies as discussed above. We reduced the accrual related
to the reimbursement formula for albuterol and ipratropium by $206,000 in the
quarter ended June 30, 2004, consistent with the expiration of Medicares right
to contest certain claims for the albuterol and ipratropium combinations.
Medicare carriers in general must deny claims within four years from the
billing date. The governments Medicare regulations are complex and sometimes subjective
and therefore may require managements interpretation. Accruals for
overpayments by Medicare and others also occur in the normal course of business
when, based on our assessment of the facts and circumstances, we believe that
the amounts due are probable and estimable. 6.    Commitments and Contingencies Contingencies U.S. Attorneys Office The U.S. Attorneys Office for the Southern District of Florida, with the
assistance of the Federal Bureau of Investigation (FBI) and Department of
Health and Human Services Office of Inspector General (OIG), is
investigating allegations of healthcare fraud, improper revenue recognition and
obstruction of justice by Liberty and Liberty Home Pharmacy. Both civil and
criminal investigations are being conducted. We are cooperating with the
investigations. We cannot accurately predict the outcome of these proceedings
at this time, and have therefore not recorded any charges relating to their
outcome. As part of the internal review described in Note 5 above, we identified
certain other claims that largely occurred during 1999 and 2000 where
PolyMedicas documentation was consistent with the full quantity shipped and
billed, but was not strictly in accordance with Medicare rules. We are
contending the adequacy of our documentation for these claims to the government
investigators. We believe that our documentation for these claims is adequate.
Accordingly, we have not recorded any reserves for this category of claims, as
to which the analysis indicates that the amount potentially at issue is
approximately $12 million, and anticipate that the issue will be addressed in
the context of the overall resolution of the investigation. While the
governments investigation could identify other issues, we are not aware of any
information that would result in payments to the government by PolyMedica,
which in the aggregate would substantially impair our ability to carry out our
current business plan. Class Action Lawsuit On November 27, 2000, Richard Bowe SEP-IRA filed a purported class action
lawsuit in the United States District Court for the District of Massachusetts
against PolyMedica and Steven J. Lee, PolyMedicas former Chief Executive
Officer and Chairman of the Board, on behalf of himself and purchasers of
common stock. The lawsuit seeks an unspecified amount of damages, attorneys
fees and costs and claims violations of Sections 10(b), 10b-5, and 20(a) of the
Securities Exchange Act of 1934 (the Exchange Act), alleging various
statements were misleading with respect to our revenue and earnings based on an
alleged scheme to produce fictitious sales. Several virtually
identical lawsuits
were subsequently filed in the United States District Court for the District of
Massachusetts against PolyMedica. On July 30, 12




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PolyMedica Corporation
Notes to Consolidated Financial Statements 2001, the Court granted the
plaintiffs motion to consolidate the complaints under the caption In re:
PolyMedica Corp. Securities Litigation, Civ. Action No. 00-12426-REK. Plaintiffs filed a consolidated amended complaint on October 9, 2001. The
consolidated amended complaint extended the class period to October 26, 1998
through August 21, 2001, and named as defendants PolyMedica, Liberty, and
certain former officers of PolyMedica. Defendants moved to dismiss the
consolidated amended complaint on December 10, 2001. Plaintiffs filed their
opposition to this motion on February 11, 2002, and defendants filed a reply
memorandum on March 11, 2002. The Court denied the motion without a hearing on
May 10, 2002. On June 20, 2002, defendants filed answers to the consolidated
amended complaint. On January 28, 2004, plaintiffs filed a motion for class certification to
which defendants filed an opposition on February 27, 2004. Plaintiffs filed a
reply memorandum on April 12, 2004 followed by additional sur-reply briefing by
the parties. The Court heard oral argument on the motion on June 2, 2004, and
has taken the matter under advisement. The case is currently in discovery. We believe that we have meritorious defenses to the claims made in the
consolidated amended complaint and intend to contest the claims vigorously. We
are unable to express an opinion as to the likely outcome of this litigation. 7.    Segment Information Our reportable segments are strategic business units or divisions that
offer different products. These units have separate financial information that
is evaluated by senior management. The segments are as follows: Liberty Diabetes Through our Liberty Diabetes segment, we provide
diabetes testing supplies and related products to customers suffering from
diabetes and related chronic diseases. We offer a wide array of diabetes
supplies from a broad range of manufacturers. Liberty Respiratory Through our Liberty Respiratory segment, we provide
prescription respiratory medications and supplies to customers suffering from
chronic obstructive pulmonary disease (COPD) and other breathing disorders. Pharmaceuticals Through our Pharmaceuticals segment, we provide
prescription medications directly to existing Liberty Diabetes and Liberty
Respiratory customers and sell to distributors prescription urology and
suppository products, over-the-counter female urinary discomfort products, and
home medical diagnostic kits. Selling, general and administrative expenses attributable to PolyMedicas
corporate headquarters are allocated to the operating segments according to the
segments relative percentage of total net revenues. Selling, general and
administrative expenses incurred by Liberty Healthcare Group, Inc., part of the
Liberty Diabetes segment, that were incurred on behalf of all of our businesses
located in Florida for shared services are allocated to the operating
segments primarily in accordance with the segments relative percentage of
total employees and square footage in addition to managements estimates.
Effective for the quarter ended June 30, 2004, we changed the
way we segment cash, cash equivalents and marketable securities, in
order to reflect how management currently views these assets. Segment assets belonging to PolyMedicas corporate headquarters, which included
$93.24 million and $76.65 million of cash, cash equivalents and marketable
securities as of June 30 and March 31, 2004, respectively, are not allocated as
they are considered separately for management evaluation purposes. As a result
of these allocations and the start-up nature of some of the businesses included
in our Liberty Diabetes and Pharmaceuticals segments, the segment information may not be indicative
of the financial position or results of operations that would have been
achieved had these segments operated as unaffiliated entities. The
depreciation and amortization amounts below include amortization of
direct-response advertising. We do not organize our units geographically, as
our products are sold throughout the United States only. There are no
intersegment sales for the periods presented. Information concerning the
operations in these reportable segments is as follows: 13




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PolyMedica Corporation
Notes to Consolidated Financial Statements Three Months EndedJune 30,
    
    June 30,(in thousands)
    
    2004
    
    2003Net Revenues:Liberty Diabetes
    
    $
    78,450
    
    
    $
    67,529Liberty Respiratory
    
    
    15,782
    
    
    
    19,867Pharmaceuticals
    
    
    16,908
    
    
    
    11,541Total
    
    $
    111,140
    
    
    $
    98,937Depreciation and Amortization Expense:Liberty Diabetes
    
    $
    9,287
    
    
    $
    7,229Liberty Respiratory
    
    
    1,786
    
    
    
    4,850Pharmaceuticals
    
    
    165
    
    
    
    174Total
    
    $
    11,238
    
    
    $
    12,253Income before Income Taxes:Liberty Diabetes
    
    $
    14,740
    
    
    $
    11,332Liberty Respiratory
    
    
    5,926
    
    
    
    5,261Pharmaceuticals
    
    
    1,265
    
    
    
    1,250Total
    
    $
    21,931
    
    
    $
    17,843
 June 30,
    
    March 31,2004
    
    2004Segment assets:Liberty Diabetes
    
    $
    178,693
    
    
    $
    178,030Liberty Respiratory
    
    
    18,716
    
    
    
    21,667Pharmaceuticals
    
    
    19,538
    
    
    
    18,838Corporate Headquarters
    
    
    114,571
    
    
    
    100,633Total
    
    $
    331,518
    
    
    $
    319,168
 8.
   Shareholders Equity  Cash Dividends On May 17, 2004, we paid a $0.15 per share cash dividend on 26,768,918
common shares outstanding for a total payment of $4.02 million to our common
shareholders of record as of the close of business on May 5, 2004. 14




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PolyMedica Corporation
Notes to Consolidated Financial Statements 9.    Calculations of Earnings Per Share Calculations of earnings per share are as follows: Three Months Ended(In thousands, except per share
data)
    
    June 30,
2004
    
    June 30,
2003Net income
    
    $
    13,773
    
    
    $
    11,098BASIC:Weighted average common stock outstanding, net of
treasury stock, end of period
    
    
    26,871
    
    
    
    24,620Net income per weighted average share, basic
    
    $
    0.51
    
    
    $
    0.45DILUTED:Weighted average common stock outstanding, net of
treasury stock, end of period
    
    
    26,871
    
    
    
    24,620Weighted average dilutive common stock equivalents
    
    
    656
    
    
    
    724Weighted average common stock and dilutive common
stock equivalents outstanding, net of treasury
stock
    
    
    27,527
    
    
    
    25,344Net income per weighted average share, diluted
    
    $
    0.50
    
    
    $
    0.44
 Potentially Dilutive Stock Options Options to purchase shares of common stock with exercise prices in excess
of the average market price of the common shares are not included in the
computation of diluted earnings per share. There were 165,000 and 1,415,742
options not included in the diluted earnings per share computation as of June
30, 2004 and 2003, respectively. 10.    Comprehensive Income Our total comprehensive income is equal to our net income for the three
months ended June 30, 2004 and 2003. Unrealized gains (losses) on investments
were not material for any periods presented. 11.    Subsequent Events On July 13, 2004, we announced that our Board declared a $0.15 per share
cash dividend to PolyMedica common shareholders of record as of the close of
business on August 5, 2004, payable on August 16, 2004. On July 27, 2004, PolyMedica purchased certain diabetes business assets of
a direct-to-consumer provider of diabetes testing supplies, including inventory
and a customer list but excluding working capital, for $5.50 million, subject
to a post-closing price adjustment based upon the number of customers we
successfully convert. The customer list is comprised of over 15,000 active
customers, substantially all of whom are Medicare-eligible diabetics. 15




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Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations Future Operating Results Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, are made throughout this Quarterly Report on Form
10-Q. For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words believes, anticipates, plans,
expects, seeks, estimates, and similar expressions are intended to
identify forward-looking statements. There are a number of important factors
that could cause our results to differ materially from those indicated by such
forward-looking statements, including those detailed under the caption
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Future Operating Results. In addition, any forward-looking statements represent our view only as of
the day this Quarterly Report on Form 10-Q was first filed with the SEC and
should not be relied upon as representing our view as of any subsequent date.
While we may elect to update forward-looking statements at some point in the
future, we specifically disclaim any obligation to do so, even if our views
change. Overview PolyMedica Corporation was organized in 1988 and has been in the medical
product and pharmaceutical business for over 15 years. Today, through our
primary segment, Liberty Diabetes, we are a leading provider of
direct-to-consumer diabetes testing supplies, primarily to Medicare-eligible
seniors, and provide a simple and reliable way for our customers to obtain
their supplies and medications. Through our Liberty Respiratory segment, we
provide direct-to-consumer respiratory medications, primarily to
Medicare-eligible seniors, and through our Pharmaceuticals segment, we sell
prescription medications directly to our existing Liberty Diabetes and Liberty
Respiratory customers and their spouses and we also manufacture and sell
prescription and over-the-counter urology products to distributors and
retailers. Liberty Diabetes Through our Liberty Diabetes segment we provide diabetes testing supplies
and related products including insulin, syringes, and other ancillary products
to our customers suffering from diabetes. As of June 30, 2004, we had
approximately 639,000 active diabetes customers, compared to approximately
563,000 active customers as of June 30, 2003. Approximately 98.0% of our
Liberty Diabetes customers are covered by Medicare. We meet the needs of our
diabetes customers by:  
    
    providing mail order delivery of supplies directly to our
customers homes;
    
    billing Medicare and/or private insurance companies directly
for those diabetes related supplies that are reimbursable;
    
    providing 24-hour telephone support to customers; and
    
    using sophisticated software and advanced order fulfillment
systems to provide diabetes related products . The Medicare Modernization Act, signed into law on December 8, 2003, has
frozen for the 2004 calendar year the reimbursement rates for diabetes testing
supplies at the rates that were in effect for the 2003 calendar year.
Commencing January 1, 2005, reimbursement rates for diabetes test strips and
lancets will be reduced by the percentage difference between the median amounts
paid by the Federal Employees Health Benefit Program in the 2002 calendar year
and the amount reimbursed by the Medicare program in the 2002 calendar year.
The maximum downward adjustment for test strips and lancets for calendar year
2005 appears to be 4.1% for diabetes test strips and 5.36% for lancets, but the
actual percentage decrease in payment amounts for any particular provider will
depend on the geographic distribution of its customers. No further adjustments
for test strip and lancets are expected for calendar year 2006. Based on a
preliminary interpretation of the Medicare Modernization Act, we
currently expect
an overall reduction in reimbursement rates for test strips and lancets of
approximately 3.0% in calendar year 2005. A bill has been introduced in the House of Representatives, H.R. 4491, to
repeal the reduction in Medicare 16




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##### Table of Contents



reimbursement for diabetes test strips and
lancets described above. We do not know whether this bill will be enacted. The Medicare Modernization Act also contains provisions that may have a
positive influence on our Liberty Diabetes segment. Beginning January 1, 2005,
Medicare coverage will be provided for an initial physical examination and for
regular diabetes screening tests. This coverage may increase the incidence of
diagnosis of diabetes and potentially expand the Medicare market for testing
supplies and other diabetes products. The Medicare Modernization Act also
provides up to $100.00 million over the next three years for chronic care
improvement programs to improve clinical quality while potentially reducing the
long-term cost of chronic diseases such as diabetes. Liberty Respiratory Through our Liberty Respiratory segment we sell prescription respiratory
medications and supplies to our customers suffering from COPD and other
breathing disorders. As of June 30, 2004, we had approximately 63,000 active
respiratory customers, compared to approximately 65,000 active customers as of
June 30, 2003. Like our Liberty Diabetes segment, through our Liberty
Respiratory segment we deliver respiratory medications and supplies to our
customers homes and bill Medicare and/or private insurance companies (if
applicable) directly for those prescription respiratory medications and
supplies that are reimbursable. The Medicare Modernization Act reduces reimbursement rates for inhalation
drugs, which we provide through our Liberty Respiratory segment. Beginning
January 1, 2004, reimbursement for these drugs was reduced from 95% of the
average wholesale price (AWP) to 80% of the AWP. Beginning January 1, 2005,
the law currently in effect would reduce reimbursement for inhalation drugs to
106% of the average price of sales by manufacturers (ASP), a new benchmark
that will be determined by sales data submitted by the drug manufacturers. On
July 28, CMS published a proposed rule to implement the ASP payment methodology
for inhalation drugs (CMS-1429-P). Under this proposed rule, CMS estimates that
payment for albuterol and ipratropium, the most common inhalation drugs, will
decrease by approximately 89% beginning January 1, 2005. The proposed rule
states that CMS expects to pay a dispensing fee, in addition to the $5.00
dispensing fee presently in effect, to suppliers for dispensing inhalation
drugs. The payment of a dispensing fee in addition to payment for inhalation
drugs at 106% of ASP is within the discretion of CMS. However, the proposed
rule states that the dispensing cycle will be changed to 90 days from the
present monthly cycle, so that the dispensing fee will be paid up to 4 times
per year instead of up to 12 times per year. The proposed rule does not specify
the dispensing fee, but instead solicits comments on the fee during the 60-day
comment period provided in the proposed rule. We plan to submit comments on the
dispensing fee and to work to persuade CMS to provide for an adequate
dispensing fee. We do not anticipate that a dispensing fee that may be
established by CMS will be sufficient to result in typical payments for
respiratory therapy drugs dispensed to a customer over the course of a year
beginning on January 1, 2005 that equal or approximate such payments for the
year beginning January 1, 2004. It is not known at this time whether an
additional dispensing fee for inhalation drugs, if established by CMS, will be
adequate to enable our Liberty Respiratory segment to remain profitable. This
will depend on the amount of the fee and our ability to reduce the expenses of
providing inhalation drugs. The Medicare Modernization Act also directs the General Accounting Office
to assess the adequacy of current reimbursement rates for inhalation drugs
under the Medicare program and report its findings to Congress no later than
December 8, 2004. Depending on the conclusions of this report, it is possible
that Congress will enact legislation that will change the ASP payment
methodology for inhalation drugs. In addition, the Secretary of Health and
Human Services has the authority to increase payment for inhalation drugs if
the Secretary determines that the ASP methodology is inherently unreasonable or
results in a health care emergency involving lack of beneficiary access to
inhalation drugs. However, the exercise of these authorities by the Secretary
would be unusual. The likelihood of favorable action by Congress after
receiving the report by the General Accounting Office or by the Secretary of
HHS under the inherent reasonableness or health care emergency authorities is
unknown at this time, but favorable action should not be viewed as probable. If
providers of respiratory inhalation drugs are ultimately reimbursed at 106% of
ASP, without a significant dispensing or other fee, we believe that most
companies, including us, will exit this business, because it will not be
possible to operate without significant losses. Due to the anticipated reimbursement reductions described above, we
suspended all direct-response advertising for our Liberty Respiratory segment
in December 2003 and our net revenues decreased 20.6% in the
three months ended June 30, 2004, as compared with the three
months ended June 30, 2003. For
further discussion of this matter, see Results of Operations  Net Revenues. 17




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Pharmaceuticals Through our Pharmaceuticals segment we provide prescription medications
directly to consumers and we manufacture and sell for further distribution
prescription urology and suppository products and over-the-counter female
urinary discomfort products. Within our Pharmaceuticals segment, our Liberty
Pharmacy business (Liberty Pharmacy), markets and sells prescription
medications primarily to our existing Liberty Diabetes and Liberty Respiratory
customers. Our line of prescription urology products, which includes urinary
analgesics, antispasmodics, local anesthetics and analgesic suppositories, are
sold to large drug distributors in the United States while our female urinary
discomfort products and home medical diagnostic kits are sold under our AZO
brand name to a network of large drug store chains, major supermarkets, mass
merchandisers and drug distributors in the United States. The Medicare Modernization Act establishes a voluntary prescription drug
benefit under the Medicare program. Beginning in calendar year 2006, coverage
will be available through both prescription drug plans and Medicare Advantage
prescription plans. This new benefit will include coverage for insulin and
syringes, as well as other prescription drugs. Liberty Pharmacy was one of only 27 applicants to be approved as an issuer
of a national Medicare-approved card. This Medicare-approved prescription drug
discount card program went into effect in June 2004. This benefit may be
voluntarily elected by certain Medicare beneficiaries who do not have an
existing outpatient prescription drug benefit. Sponsors of these cards will
offer Medicare beneficiaries access to outpatient prescription drugs at
discounted prices. Liberty Pharmacy began distributing its own Medicare
approved drug discount card to customers and their spouses in May 2004. Critical Accounting Policies There have been no material changes in our critical accounting policies
from those set forth in our Annual Report on Form 10-K for the fiscal year
ended March 31, 2004, filed with the SEC on June 14, 2004. Recent Developments Federal Employee Program Reimbursement Changes In December 2003, the service benefit administrator of the Federal
Employee Program (FEP) notified Liberty Pharmacy and other durable medical
equipment suppliers that as of February 1, 2004 certain supplies and
medications would only be reimbursable through FEPs pharmacy benefit
administrator. The service benefit administrator subsequently notified us that
this reimbursement change would be effective as of January 1, 2005. Processing
these supplies and medications as a pharmacy benefit will result in increased
costs to some of our FEP customers as well as lower reimbursement rates to us.
We are continuing to evaluate the impact of this change, but anticipate a
decrease to that portion of Liberty Pharmacys net revenues that is derived
from the FEP program. The FEP program currently comprises a substantial
portion of Liberty Pharmacys net revenues. Inhalation Drug Payment On July 28, 2004, CMS published a proposed rule to implement the ASP
payment methodology for inhalation drugs (CMS-1429-P). Under this proposed
rule, CMS estimates that payment for albuterol and ipratropium, the most common
inhalation drugs, will decrease by approximately 89% beginning January 1, 2005.
The proposed rule states that CMS expects to pay a dispensing fee to suppliers
for dispensing inhalation drugs. It is not known at this time whether a
dispensing fee for inhalation drugs, if established by CMS, will be adequate to
enable our Liberty Respiratory segment to remain profitable. See Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Future Operating Results  Liberty Respiratory. Other Advertising rates may fluctuate during the year, which may affect our
acquisition of new customers. We may purchase less advertising when rates are
higher, which generally occurs in November and December. As a result, our
acquisition of new customers during this period is generally reduced and our
net revenues may fluctuate accordingly. 18




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We operate from manufacturing and distribution facilities located in
Massachusetts and Florida, respectively. Virtually all of our product sales
are denominated in U.S. dollars. Period-to-period comparisons of changes in net revenues are not
necessarily indicative of results to be expected for any future period. 19




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Results of Operations Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003 Net Revenues The following table presents segment net revenues expressed as a
percentage of net revenues for the three months ended June 30, 2004 and 2003. Three Months Ended June 30,(in thousands)
    
    2004
    
    2003NetRevenues
    
    % NetRevenues
    
    NetRevenues
    
    % NetRevenues
    
    % ChangeLiberty Diabetes
    
    $
    78,450
    
    
    
    70.6
    %
    
    $
    67,529
    
    
    
    68.2
    %
    
    
    16.2
    %Liberty Respiratory
    
    
    15,782
    
    
    
    14.2
    
    
    
    19,867
    
    
    
    20.1
    
    
    
    (20.6
    )Pharmaceuticals
    
    
    16,908
    
    
    
    15.2
    
    
    
    11,541
    
    
    
    11.7
    
    
    
    46.5Total net revenues
    
    $
    111,140
    
    
    
    100.0
    %
    
    $
    98,937
    
    
    
    100.0
    %
    
    
    12.3
    %
 The increase in Liberty Diabetes net revenues of 16.2% was due primarily
to the 13.5% growth in our customer base, which grew to 639,000 active
customers as of June 30, 2004, from approximately 563,000 as of June 30, 2003,
and the balance represents an increase in the volume of shipments made to
existing customers. The average net revenue generated per shipment remained
fairly consistent. The growth in our customer base was primarily the result
of our national television advertising. The decrease in Liberty Respiratory net revenues of 20.6% was due
primarily to the reduction in reimbursement rates for inhalation drugs from 95%
of AWP to 80% of AWP effective January 1, 2004 through enactment of the
Medicare Modernization Act. Due to the anticipated decline in revenues and
earnings, we suspended all direct-response advertising for our Liberty
Respiratory segment in December 2003, which resulted in a decline in our
customer base of approximately 3.1% to 63,000 active customers as of June 30,
2004 from 65,000 active customers as of June 30, 2003. The new Medicare
legislation is discussed in further detail in Managements Discussion and
Analysis of Financial Condition and Results of Operations  Future Operating
Results  Liberty Respiratory. The increase in Pharmaceuticals net revenue was due primarily to the 57.4%
growth in Liberty Pharmacys direct-to-consumer sales of prescription
medications which represented 77.5% of total Pharmaceuticals segment net
revenues in the three months ended June 30, 2004, as compared with 72.1% in the
three months ended June 30, 2003. The current customer base for these products
consists primarily of our existing Liberty Diabetes and Liberty Respiratory
customers and their spouses. We expect this business to help position us for
the prescription drug benefit under the Medicare Modernization Act beginning in
calendar year 2006. Gross Margin The following table presents segment gross margins and gross margin
percentages for the three months ended June 30, 2004 and 2003. Three Months Ended June 30,(in thousands)
    
    2004
    
    2003GrossMargin
    
    GrossMargin %
    
    GrossMargin
    
    GrossMargin %Gross margin:Liberty Diabetes
    
    $
    47,664
    
    
    
    60.8
    %
    
    $
    41,696
    
    
    
    61.7
    %Liberty Respiratory
    
    
    12,666
    
    
    
    80.3
    
    
    
    16,300
    
    
    
    82.0Pharmaceuticals
    
    
    7,022
    
    
    
    41.5
    
    
    
    5,172
    
    
    
    44.8Total gross margin
    
    $
    67,352
    
    
    
    60.6
    %
    
    $
    63,168
    
    
    
    63.8
    %
 20




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Gross margin in the three months ended June 30, 2004, as compared with the
three months ended June 30, 2003, decreased primarily as a result of the 15%
cut in Medicare reimbursement for our Liberty Respiratory inhalation drugs and
a 57.4% increase in Liberty Pharmacy sales, included in our Pharmaceuticals
segment, for which we have historically reported gross margins in the 30%
range. A $500,000 increase in inventory reserves for shoes and inserts provided
through our Liberty Diabetes segment, for diabetics deemed at risk for
developing lower extremity complications, also contributed to the decline in
overall gross margin. Due to the low profitability of these products, we
intend to discontinue offering them to our customers in the second quarter of
fiscal 2005. We expect that our gross margin for the foreseeable future will be lower
than it has been historically primarily as a result of the 15% Medicare
reimbursement cuts for inhalation drugs currently in effect and further
Medicare reimbursement reductions proposed by the Medicare Modernization Act,
scheduled to take place January 1, 2005. Selling, General and Administrative Expenses Three Months Ended June 30,% Net
    
    
    
    
    
    % Net(in thousands)
    
    2004
    
    Revenues
    
    2003
    
    RevenuesReported selling, general and administrative expenses
    
    $
    45,618
    
    
    
    41.0
    %
    
    $
    45,531
    
    
    
    46.0
    %Select components of selling, general and
administrative expenses:Direct-response advertising amortization
    
    $
    9,038
    
    
    
    8.1
    %
    
    $
    10,364
    
    
    
    10.5
    %Provision for doubtful accounts
    
    $
    5,444
    
    
    
    4.9
    %
    
    $
    5,653
    
    
    
    5.7
    %Employee compensation
    
    $
    15,629
    
    
    
    14.1
    %
    
    $
    15,058
    
    
    
    15.2
    %
 A reduction in direct-response advertising amortization as a percentage of
net revenues, from 10.5% in the three months ended June 30, 2003 to 8.1% in the
three months ended June 30, 2004, was the primary reason for the decrease in
selling, general and administrative costs as a percentage of net revenues.
At 10.5% of net revenues, direct-response advertising amortization
for the three months ended June 30, 2004 would have been
$2.67 million more than reported. Realized economies of scale resulting from our growing business and
progress in our efforts to identify opportunities to streamline our business
were other key factors in the improvement, as evidenced by the decrease in
employee compensation as a percentage of net revenues, which dropped
approximately one net revenue percentage point, due primarily to improved
utilization of existing staff and fewer new hires. Had employee compensation
remained at 15.2% of net revenues as reported in the three months ended June
30, 2003, the expense in the three months ended June 30, 2004 would have been
approximately $1.26 million higher than reported. Reductions in our provision
for doubtful accounts, due primarily to improved cash collections, also
contributed to the improvement. Income Taxes The following table presents the income tax provision and effective tax
rates for the three months ended June 30, 2004 and 2003. Three Months Ended June 30,(in thousands)
    
    2004
    
    2003Income tax provision
    
    $
    8,158
    
    
    $
    6,745Effective tax rate
    
    
    37.2
    %
    
    
    37.8
    %
 The effective tax rates in the three months ended June 30, 2004 and 2003
were higher than the Federal U.S. statutory rates due primarily to state taxes
and other permanent differences. Our effective tax rate may vary from 21




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period to period based on changes in estimated taxable income or loss, changes to
federal or state tax laws, future expansion into areas with varying country,
state, or local income tax rates, and the deductibility of certain costs and
expenses by jurisdiction. Liquidity and Capital Resources The following table summarizes our sources and uses of cash during the
three months ended June 30, 2004 and 2003. Three Months Ended June 30,(in thousands)
    
    2004
    
    2003Net cash provided by operating activities
    
    $
    16,203
    
    
    $
    10,051Net cash used for investing activities
    
    
    (2,843
    )
    
    
    (8,837
    )Net cash provided by (used for)
financing activities
    
    
    3,375
    
    
    
    (2,739
    )Net change in cash and cash equivalents
    
    $
    16,735
    
    
    $
    (1,525
    )
 Our cash and cash equivalents balance increased $16.73 million from March
31, 2004, to $85.96 million as of June 30, 2004, due primarily to increased
sales and improved accounts receivable collections, increased proceeds from
common stock issuances related to the exercise of employee stock options, and
progress in our efforts to identify opportunities to streamline our business,
thereby reducing operating expenses. The growth of our business is funded primarily through cash flow from
operations. The increase in cash flow from operations was driven primarily by
increased sales and improved cash collections of accounts receivable as
evidenced by the decrease in our quarterly days sales outstanding calculation,
from 47 days in the first quarter of fiscal 2004 to 42 days in the first
quarter of fiscal 2005. This collection improvement, coupled with reductions
in our provisions for accounts receivable allowances as a percentage of net
revenues and $3.72 million less in income tax payments in the fiscal 2005 first
quarter, as compared with the fiscal 2004 first quarter, resulted in increased
cash flow provided by operations. The $5.99 million decrease in total cash used for investing activities in
the three months ended June 30, 2004, as compared with the three months ended
June 30, 2003, was primarily due to fewer purchases of marketable securities. The $6.11 million increase in total cash provided by financing activities
in the three months ended June 30, 2004, as compared with the three months
ended June 30, 2003, was due primarily to a $6.22 million increase in proceeds
raised from employee stock option exercises. This increase in cash flow from
financing activities was offset by an increase of $943,000 in cash dividend
payments to shareholders in the three months ended June 30, 2004, as compared
with the three months ended June 30, 2003. The current intention of our Board
is to pay a cash dividend to PolyMedica common shareholders on a quarterly
basis for the foreseeable future. We expect the quarterly cash dividend
payment to average approximately $4.10 million. Other financing activities
included less payments for capital lease and note payable obligations and a
decrease in amounts set aside for executive deferred compensation plans in the
three months ended June 30, 2004, as compared with the three months ended June
30, 2003. On July 27, 2004, PolyMedica purchased certain diabetes business assets of
a direct-to-consumer provider of diabetes testing supplies, including inventory
and a customer list but excluding working capital, for $5.50 million, subject
to a post-closing price adjustment based upon the number of customers we
successfully convert. The customer list is comprised of over 15,000 active
customers, substantially all of whom are Medicare-eligible diabetics. We
expect to ship to more than 10,000 new Medicare customers in the next 90 days
as a result of the purchase. To the extent that we can reduce our incremental
costs of attracting additional customers through acquisitions, we
will do so. Going forward, we expect acquisitions to become an
increasingly important means of growing our customer base. We believe that our cash, cash equivalents and marketable securities
balance as of June 30, 2004 of $93.24 million, and cash flows generated from
operations, will be sufficient to meet working capital, capital expenditure and
financing needs, including the payment of dividends to shareholders, for future
business operations for the 22




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foreseeable future. In the event that we undertake
to make acquisitions of complementary businesses, products or technologies, we
may require substantial additional funding beyond currently available working
capital and funds generated from operations. Other factors which could
negatively affect our liquidity include, among other things, a reduction in the
demand for our products, an unfavorable outcome of pending litigation and
investigations, or additional reductions in Medicare reimbursement for our
products. Sales of a significant portion of our Liberty Diabetes and Liberty
Respiratory segments depend on the continued availability of Medicare
reimbursement. Effective January 1, 2005, the Medicare Modernization Act
further reduces reimbursement rates for inhalation drugs, which we sell through
our Liberty Respiratory segment, and reduces reimbursement rates for diabetes
test strips and lancets by approximately 3%, which we sell through our Liberty
Diabetes segment. For a further discussion of these reimbursement rate
reductions, including their financial impact on our business, please see
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Future Operating Results  Liberty Diabetes and Liberty
Respiratory. FASB Exposure Drafts In March 2004, the FASB issued an exposure draft, Stock-Based Payment
(ED). If the ED is adopted by the FASB, we will be required to report
stock-based compensation expense at the grant date fair value of the related
stock-based awards. We currently account for our stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees and related Interpretations (APB 25) and have
adopted the disclosure-only provisions of SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure (SFAS No. 148), an
amendment of SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS
No. 123). The adoption of this ED by the FASB and subsequently PolyMedica
could have a material impact on our financial position and results of
operations. There have been no material changes in our contractual obligations and
off-balance sheet arrangements from those set forth in our Annual Report on
Form 10-K for the fiscal year ended March 31, 2004, filed with the SEC on June
14, 2004. Factors Affecting Future Operating Results Our future operating results remain difficult to predict. We continue to
face many risks and uncertainties which could affect our operating results,
including without limitation, those described below. We could experience significantly reduced revenues and profits if Medicare or
other government programs change, delay or deny reimbursement Sales of a significant portion of our Liberty Diabetes, Liberty
Respiratory and Pharmaceuticals segments depend on the continued availability
of reimbursement of our customers by government and private insurance plans.
Any reduction in Medicare or other government program or private plan
reimbursements currently available for our products would reduce our revenues.
Certain significant reductions under the Medicare Modernization Act are
discussed above. See Managements Discussion and Analysis of Financial
Condition and Results of Operations  Future Operating Results  Liberty
Diabetes and Liberty Respiratory. Other reductions are possible. Without a
corresponding reduction in the cost of such products, the result would be a
reduction in our overall profit margin. Similarly, any increase in the cost of
such products would reduce our overall profit margin unless there was a
corresponding increase in Medicare or other government program reimbursement.
Our profits could also be affected by the imposition of more stringent
regulatory requirements for Medicare or other government program reimbursement
or adjustments to previously reimbursed amounts. Litigation may materially adversely affect us PolyMedica and three former officers of PolyMedica are defendants in a
lawsuit alleging violations of certain sections and rules of the Securities
Exchange Act of 1934 (the Exchange Act), which was initiated in U.S. District
Court for the District of Massachusetts in November 2000. PolyMedica believes
it has meritorious defenses to the claims made against it in this action in
which it is a defendant and intends to contest the claims vigorously. We
cannot accurately predict the outcome of this proceeding at this time, and have
therefore not recorded any charges relating to this proceeding. An unfavorable
outcome could have a material effect on our financial position and results of
operations. Please see Item 3 of Part I, Legal Proceedings in our Annual
Report on Form 10-K for the fiscal year ended March 31, 23




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2004, filed with the
SEC on June 14, 2004, for a more complete description of this claim. We could experience significantly reduced revenues and profits as the result of
an unfavorable outcome to current governmental investigations The regulations that govern Medicare reimbursement are complex, and our
compliance with those regulations may be reviewed by federal agencies,
including the OIG, the DOJ, and the FDA. Our interpretation of Medicare
regulations may also differ from the interpretation of federal agencies. The
U.S. Attorneys Office for the Southern District of Florida, with the
assistance of the FBI and OIG, is investigating allegations of healthcare
fraud, improper revenue recognition and obstruction of justice by Liberty and
Liberty Home Pharmacy. We conducted our own internal review in parallel with
the investigations. Both civil and criminal investigations are being conducted.
We are cooperating with the investigations. We cannot accurately predict the
outcome of these investigations and proceedings at this time, and have
therefore not recorded any charges relating to these proceedings. If any of these investigations results in a determination that we have
failed to comply with the regulations governing Medicare reimbursement or
financial reporting or have otherwise committed healthcare fraud or securities
law violations, we could be subject to delays or loss of reimbursement,
substantial fines or penalties, and other sanctions. An adverse determination
could have a material effect on our financial position and results of
operations. At this time, we cannot accurately predict the outcome of these
proceedings, and have therefore not recorded any charges relating to these
proceedings. Accelerated amortization of our direct-response advertising costs could
adversely affect our operating results Any change in existing accounting rules or a business change that impacts
expected net cash flows or that shortens the period over which such net cash
flows are estimated to be realized, currently four years for our diabetes
products, could result in accelerated charges against our earnings. In
addition, new or different marketing initiatives that may not qualify for
direct-response advertising could result in accelerated charges against our
earnings. Our stock price could be volatile The trading price of our common stock has been volatile and is likely to
continue to be volatile. The stock market in general, and the market for
healthcare-related companies in particular, has experienced extreme volatility.
This volatility has often been unrelated to the operating performance of
particular companies. Investors may not be able to sell their common stock at
or above the price at which they purchased the stock. Prices for the common
stock will be determined in the marketplace and may be influenced by many
factors, including variations in our financial results, changes in earnings
estimates by industry research analysts, investors perceptions of us and
general economic, industry and market conditions. We plan to continue our rapid expansion; if we do not manage our growth
successfully, our growth and profitability may slow or stop We have expanded our operations rapidly and plan to continue to expand.
This expansion has created significant demand on our administrative,
operational and financial personnel and other resources. Additional expansion
in existing or new markets could strain these resources and increase our need
for capital. Our personnel, systems, procedures, controls and existing space
may not be adequate to support further expansion. The loss of senior management or other key personnel, or our inability to
attract and retain additional senior management or other key personnel, could
affect our ability to execute our business plan. If we are unable to retain our senior managers or other key personnel
necessary to operate our business, our ability to execute our business plan may
be impaired. Our success in the future may also depend on our ability to
attract and retain additional qualified senior management and other key
personnel. Geopolitical events may reduce our ability to obtain favorable advertising
rates for our direct-response advertising efforts, which may adversely affect
our operating results. The effectiveness of our direct-response advertising is subject to the
risks arising from geopolitical events. For 24




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example, around the clock news
coverage on the war in Iraq and the war on terrorism affected our ability to
obtain favorable rates for our product advertisements and thus affected our
ability to obtain new customers. Such geopolitical events may in the
foreseeable future have a negative impact on our results of operations. The profitability of our Liberty Diabetes and Liberty Respiratory segments will
decrease if we do not receive recurring orders from customers The profitability of our Liberty Diabetes and Liberty Respiratory segments
depends in large part on recurring and sustained reorders. Reorder rates are
inherently uncertain due to several factors, many of which are outside our
control, including changing customer preferences, competitive price pressures,
customer transition to extended care facilities, customer mortality and general
economic conditions. We generally incur losses and negative cash flow with
respect to the first order from a new customer, due primarily to the marketing
and regulatory compliance costs associated with initial customer qualification. We could experience significantly reduced profits from our Liberty Diabetes
segment if improved technologies that reduce or eliminate the need for
consumable testing supplies are developed for glucose monitoring The majority of our Liberty Diabetes net revenues are from consumable
testing supplies, used to draw and test small quantities of blood for the
purpose of measuring and monitoring glucose levels. Numerous research efforts
are underway to develop more convenient and less intrusive glucose measurement
techniques. The commercialization and widespread acceptance of new technologies
that eliminate or reduce the need for consumable testing supplies could
negatively affect our Liberty Diabetes segment. We could experience a charge to earnings as a result of an impairment of our
goodwill We are required to perform impairment tests under SFAS No. 142 annually
and whenever events or changes in circumstance suggest that the carrying value
of an asset may not be recoverable. The valuation of our goodwill is based upon
the results of these impairment tests. Changes in assumptions used and
forecasted results of operations of the reporting unit carrying goodwill, could
affect the quantification of an impairment value, should one exist. We could be liable for harm caused by products that we sell The sale of medical products entails the risk that users will make product
liability claims. A product liability claim could be expensive. While
management believes that our insurance provides adequate coverage, no assurance
can be made that adequate coverage will exist for these claims. We could lose customers and revenues to new or existing competitors Competition from other sellers of products offered through our Liberty
Diabetes, Liberty Respiratory and Pharmaceuticals segments, manufacturers of
healthcare products, pharmaceutical companies and other competitors is intense
and expected to increase. Many of our competitors and potential competitors are
large companies with well-known names and substantial resources. These
companies may develop products and services that are more effective or less
expensive than any that we are developing or selling. They may also promote and
market these products more successfully than we promote and market our
products. Loss of use of manufacturing or data storage facilities could significantly
reduce revenues and profits from our businesses We manufacture substantially all of our prescription urology and
suppository products and many of our AZO brand name products at our facility in
Woburn, Massachusetts. In addition, we process and store most of our customer
data in our facility in Port St. Lucie, Florida. If we cannot use any of these
facilities as a result of the FDA, Occupational Safety and Health
Administration or other regulatory action, fire, natural disaster or other
event, our revenues and profits would decrease significantly. We might also
incur significant expense in remedying the problem or securing alternative
manufacturing or data storage sources. 25




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If we or our suppliers do not comply with applicable government regulations, we
may be prohibited from selling our products The majority of the products that we sell are regulated by the FDA and
other regulatory agencies. If any of these agencies mandate a suspension of
production or sales of our products or mandate a recall, we may lose sales and
incur expenses until we are in compliance with the regulations or change to
another acceptable supplier. We could have difficulty selling our pharmaceuticals products if we cannot
maintain and expand our sales to distributors We rely on third party distributors to market and sell our
over-the-counter female urinary discomfort products and prescription urology
and suppository products. Future sales of these products depend in part on our
maintaining and expanding marketing and distribution relationships with
pharmaceutical, medical device, personal care and other distributors and on the
success of those distributors in marketing and selling our products. Our quarterly revenues or operating results could vary, which may cause the
market price of our securities to decline We have experienced fluctuations in our quarterly operating results and
anticipate that such fluctuations could continue. Results may vary
significantly depending on a number of factors, including:  
    
    changes in reimbursement guidelines and amounts;
    
    changes in regulations affecting the healthcare industry;
    
    the timing of customer 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 and costs of our products; product mix and
costs are significantly influenced by the product brand chosen by
the customers of our mail-order diabetes supply business. We provide
a wide range of product brand choices to our customers, 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
customers. A reduction in working capital or a change in our business could prevent us
from paying dividends to shareholders A significant decline in our cash balances or a change in our business
could cause us to reduce or eliminate the payment of dividends to shareholders. We may make acquisitions that will strain our financial and operational
resources We regularly review potential acquisitions of businesses products and
assets. Acquisitions involve a number of risks that might adversely affect our
financial and operational resources, including:  
    
    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;
    
    failure to assimilate operations of an acquired business;
    
    possible operating losses and expenses of an acquired business; 26




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##### Table of Contents




    
    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 the common stock Our articles of organization authorize the issuance of up to 2,000,000
shares of preferred stock without shareholder approval. The shares may have
dividend, voting, liquidation and other rights and preferences that are senior
to the rights of the common stock. The rights and preferences of any such class
or series of preferred stock would be established by our Board in its sole
discretion. 27




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Item 3.    Quantitative and Qualitative Disclosures About Market Risk We own certain money market funds, commercial bonds and mutual funds that
are sensitive to market risks as part of our investment portfolio. The
investment portfolio is used to preserve our capital until it is required to
fund operations, investing or financing activities. None of the market-risk
sensitive instruments held in our investment portfolio are held for trading
purposes. We do, however, hold some market-risk sensitive instruments in our
executive deferred compensation plans, for trading purposes. These investments
are accounted for under SFAS No. 115, Accounting for certain investments in
Debt and Equity Securities. The investments are recorded at fair value, and
changes in fair value are recorded as compensation expense and investment
income for the period. We do not own derivative financial instruments in our
investment portfolio. We do not believe that the exposure to market risks in
our investment portfolio is material. 28




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##### Table of Contents



Item 4.    Controls and Procedures (a)    Evaluation of disclosure controls and procedures. PolyMedicas management,
with the participation of PolyMedicas chief executive officer and chief
financial officer, evaluated the effectiveness of PolyMedicas disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of June 30, 2004. Based on this evaluation, PolyMedicas
chief executive officer and chief financial officer concluded that, as of June
30, 2004, PolyMedicas disclosure controls and procedures were (1) designed to
ensure that material information relating to PolyMedica, including its
consolidated subsidiaries, is made known to PolyMedicas chief executive
officer and chief financial officer by others within those entities,
particularly during the period in which this report was being prepared and (2)
effective, in that they provide reasonable assurance that information required
to be disclosed by PolyMedica in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms. (b)    Changes in internal controls. No change in PolyMedicas internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) occurred during the quarter ended June 30, 2004 that
has materially affected, or is reasonably likely to materially affect,
PolyMedicas internal control over financial reporting. 29




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##### Table of Contents



PART II  OTHER INFORMATION 
 Item 1.    Legal Proceedings Please refer to Item 3 of our Annual Report on Form 10-K for the fiscal
year ended March 31, 2004, filed with the SEC on June 14, 2004, for a complete
description of our legal proceedings. Any material developments regarding
these legal proceedings for the three months ended June 30, 2004 are set forth
below. U.S. Attorneys Office As part of the internal review that we conducted in parallel with the DOJ
investigation, we identified a category of Medicare claims where the
documentation we received for the claim supported a portion, but not the full
quantity, of the products shipped and billed. We engaged an outside consulting
firm to perform a statistical analysis of all Medicare claims filed by
PolyMedica over a six-year period in order to develop an estimate of
overpayments by Medicare related to this category of claims. In the third
quarter of fiscal 2004, we received the preliminary results of that analysis,
which indicated an aggregate overpayment of approximately $5.71 million, of
which $2.57 million had been previously accrued and $3.14 million was recorded as a
reduction of net revenues and an increase to the accrual in the fiscal year
ended March 31, 2004. In June 2004, we received the final results of the
statistical analysis, which did not change managements estimate of the
required reserve for the specific documentation deficiencies discussed above. The statistical analysis conducted by the outside consulting firm also
identified certain other claims that largely occurred during 1999 and 2000
where PolyMedicas documentation was consistent with the full quantity shipped
and billed, but was not strictly in accordance with Medicare rules. We are
contending the adequacy of our documentation for these claims to the government
investigators. We believe that our documentation for these claims is adequate.
Accordingly, we have not recorded any reserves for this category of claims, as
to which the analysis indicates that the amount potentially at issue is
approximately $12 million, and anticipate that the issue will be addressed in
the context of the overall resolution of the investigation. While the
governments investigation could identify other issues, we are not aware of any
information that would result in payments to the government by PolyMedica,
which in the aggregate would substantially impair our ability to carry out our
current business plan. Class Action Lawsuit Plaintiffs filed a consolidated amended complaint on October 9, 2001. The
consolidated amended complaint extended the class period to October 26, 1998
through August 21, 2001, and named as defendants PolyMedica, Liberty, and
certain former officers of PolyMedica. Defendants moved to dismiss the
consolidated amended complaint on December 10, 2001. Plaintiffs filed their
opposition to this motion on February 11, 2002, and defendants filed a reply
memorandum on March 11, 2002. The Court denied the motion without a hearing on
May 10, 2002. On June 20, 2002, defendants filed answers to the consolidated
amended complaint. On January 28, 2004, plaintiffs filed a motion for class certification to
which defendants filed an opposition on February 27, 2004. Plaintiffs filed a
reply memorandum on April 12, 2004 followed by additional sur-reply briefing by
the parties. The Court heard oral argument on the motion on June 2, 2004, and
has taken the matter under advisement. The case is currently in discovery. 
 Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds In June 2000, our Board authorized the repurchase of up to 1,000,000
shares of our common stock on the open market and authorized the repurchase of
an additional 1,000,000 shares in August 2001. As of June 30, 2004, we had
repurchased 1,371,000 shares under this program (2,742,000 shares when adjusted
for our two-for-one stock split effective September 29, 2003). No repurchases
were made during the quarter ended June 30, 2004. 30




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Item 6.    Exhibits and Reports on Form 8-K (a)    See Exhibit Index immediately following this report, which is
incorporated herein by reference. (b)    Reports on Form 8-K: On May 26, 2004, PolyMedica furnished a Current Report on Form 8-K under
Item 12 (Results of Operations and Financial Condition) containing a copy of
its earnings release for the fiscal year ended March 31, 2004. 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. PolyMedica Corporation
(registrant)/s/ Samuel L. Shanaman
Samuel L. Shanaman
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)/s/ Fred H. Croninger III
Fred H. Croninger III
Chief Financial Officer
(Principal Financial and Accounting Officer)Dated: August 5, 2004
 32




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Exhibit Index Exhibit
    
    
    

Description31.1
    
    
    
    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.


33