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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  to
  PolyMedica Corporation
  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
 þ o
 þ o




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##### Table of Contents



POLYMEDICA CORPORATION
TABLE OF CONTENTS
 PagePART IItem 1.
    
    Financial Statements (unaudited):Consolidated Balance Sheets as of June 30 and March 31, 2005
    
    
    3Consolidated Statements of Income for the three months endedJune 30, 2005 and 2004
    
    
    5Consolidated Statements of Cash Flows for the three months endedJune 30, 2005 and 2004
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
30Item 4.
    
    Controls and Procedures
31PART IIItem 1.
    
    Legal Proceedings
32Item 6.
    
    Exhibits
33Signatures
    
    
    34Exhibit Index
    
    
    35EX-31.1 Section 302 Certification of CEOEX-31.2 Section 302 Certification of CFOEX-32.1 Section 906 Certification of CEO & CFO
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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 31,2005
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    90,341
    
    
    $
    72,246Marketable securities
    
    
    413
    
    
    
    6,804Accounts receivable (net of allowances of
$29,012 and $26,756 as of June 30 and March
31, 2005, respectively)
    
    
    64,938
    
    
    
    64,076Inventories
    
    
    32,979
    
    
    
    29,758Deferred income taxes
    
    
    14,904
    
    
    
    14,904Prepaid expenses and other current assets
    
    
    8,984
    
    
    
    7,501Total current assets
    
    
    212,559
    
    
    
    195,289Property, plant and equipment, net
    
    
    64,109
    
    
    
    65,004Goodwill
    
    
    11,434
    
    
    
    11,493Patient lists, net
    
    
    13,605
    
    
    
    14,954Direct-response advertising, net
    
    
    83,777
    
    
    
    78,499Other assets
    
    
    1,903
    
    
    
    503Total assets
    
    $
    387,387
    
    
    $
    365,742
  3




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PolyMedica Corporation
Consolidated Balance Sheets
(Unaudited)  (In thousands, except share and per share amounts)
 June 30,
    
    
    March 31,2005
    
    
    2005LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    19,842
    
    
    $
    13,849Accrued expenses
    
    
    22,871
    
    
    
    17,774Current portion, capital lease obligations
    
    
    565
    
    
    
    559Total current liabilities
    
    
    43,278
    
    
    
    32,182Capital lease, note payable and other obligations
    
    
    3,016
    
    
    
    3,112Deferred income taxes
    
    
    29,423
    
    
    
    29,423Total liabilities
    
    
    75,717
    
    
    
    64,717Commitments and contingenciesShareholders equity:Preferred stock, $0.01 par value; 2,000,000
shares authorized, none issued or outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value; 50,000,000 shares
authorized; 28,099,352 and 27,923,712 shares
issued as of June 30 and March 31, 2005
    
    
    281
    
    
    
    279Deferred compensation
    
    
    (5,074
    )
    
    
    (476
    )Additional paid-in capital
    
    
    170,112
    
    
    
    162,837Retained earnings
    
    
    146,351
    
    
    
    138,385Total shareholders equity
    
    
    311,670
    
    
    
    301,025Total liabilities and shareholders equity
    
    $
    387,387
    
    
    $
    365,742
  4




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PolyMedica Corporation
Consolidated Statements of Income
(Unaudited)  (In thousands, except per share amounts)
 Three Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004Net revenues
    
    $
    117,754
    
    
    $
    111,140Cost of sales
    
    
    51,011
    
    
    
    43,788Gross margin
    
    
    66,743
    
    
    
    67,352Selling, general and administrative expenses
    
    
    47,792
    
    
    
    45,618Income from operations
    
    
    18,951
    
    
    
    21,734Other income and expense:Investment income
    
    
    536
    
    
    
    216Interest and other expense
    
    
    (186
    )
    
    
    (19
    )350
    
    
    
    197Income before income taxes
    
    
    19,301
    
    
    
    21,931Income tax provision
    
    
    7,141
    
    
    
    8,158Net income
    
    $
    12,160
    
    
    $
    13,773Net income per weighted average share:Basic
    
    $
    0.43
    
    
    $
    0.51Diluted
    
    $
    0.43
    
    
    $
    0.50Cash dividend per share
    
    $
    0.15
    
    
    $
    0.15Weighted average shares, basic
    
    
    27,975
    
    
    
    26,871Weighted average shares, diluted
    
    
    28,443
    
    
    
    27,527
  5




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PolyMedica Corporation
Consolidated Statements of Cash Flows
(Unaudited)  (In thousands)
 Three Months EndedJune 30,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    12,160
    
    
    $
    13,773Adjustments to reconcile net income to net cash flows:Depreciation and amortization
    
    
    3,678
    
    
    
    2,200Amortization of direct-response advertising
    
    
    9,931
    
    
    
    9,038Direct-response advertising expenditures
    
    
    (15,267
    )
    
    
    (10,553
    )Provision for bad debts
    
    
    5,170
    
    
    
    5,444Provision for sales allowances/returns
    
    
    4,336
    
    
    
    3,960(Gain)/loss on sale of equipment
    
    
    (175
    )
    
    
    34Stock-based compensation
    
    
    171
    
    
    
    Loss on impairment of direct-response advertising
    
    
    58
    
    
    
    Imputed interest on note payable
    
    
    46
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (10,368
    )
    
    
    2,430Income tax receivable
    
    
    
    
    
    
    2,530Inventories
    
    
    (3,221
    )
    
    
    (5,608
    )Prepaid expenses and other assets
    
    
    (660
    )
    
    
    (2,163
    )Accounts payable
    
    
    5,993
    
    
    
    (7,814
    )Accrued expenses and other liabilities
    
    
    5,097
    
    
    
    2,932Net cash flows provided by operating activities
    
    
    16,949
    
    
    
    16,203Cash flows from investing activities:Purchase of marketable securities
    
    
    (2,297
    )
    
    
    (2,629
    )Proceeds from maturing marketable securities
    
    
    8,688
    
    
    
    2,779Purchase of property, plant and equipment
    
    
    (1,804
    )
    
    
    (2,765
    )Purchase of patient lists
    
    
    
    
    
    
    (231
    )Proceeds from sale of equipment
    
    
    545
    
    
    
    3Net cash flows provided by (used for) investing activities
    
    
    5,132
    
    
    
    (2,843
    )Cash flows from financing activities:Proceeds
from issuance of common and restricted stock
    
    
    2,508
    
    
    
    7,536Contributions to deferred compensation plans
    
    
    
    
    
    
    (72
    )Payment of costs for stock repurchase
    
    
    (1,009
    )
    
    
    Payment of dividends declared on common stock
    
    
    (4,194
    )
    
    
    (4,015
    )Payment of debt issuance costs
    
    
    (1,155
    )
    
    
    Payment of capital lease and note payable obligations
    
    
    (136
    )
    
    
    (74
    )Net cash flows provided by (used for) financing activities
    
    
    (3,986
    )
    
    
    3,375Net change in cash and cash equivalents
    
    
    18,095
    
    
    
    16,735Cash and cash equivalents at beginning of period
    
    
    72,246
    
    
    
    69,229Cash and cash equivalents at end of period
    
    $
    90,341
    
    
    $
    85,964Supplemental disclosure of cash flow information:Assets purchased under capital lease
    
    $
    
    
    
    $
    Disposal of equipment
    
    
    477
    
    
    
    300
  6




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PolyMedica Corporation
Notes to Consolidated Financial Statements
 1.   Basis of Presentation
 Company
   Accounting
   Revenue Recognition and Accounts Receivable
   7




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PolyMedica Corporation
Notes to Consolidated Financial Statements
       Accounting for Stock-Based Compensation
  8




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PolyMedica Corporation
Notes to Consolidated Financial Statements
 Three Months Ended June 30,(in thousands, except per share data)
    
    2005
    
    
    2004Net income
    
    $
    12,160
    
    
    $
    13,773Add back: Stock compensation costs, net of tax, on
options and restricted stock granted below fair
market value
    
    
    108
    
    
    
    --Less: Stock compensation costs, net of tax, had all
employee options and restricted stock been
recorded at fair value
    
    
    (1,601
    )
    
    
    (887
    )Adjusted net income
    
    $
    10,667
    
    
    $
    12,886Net income per weighted average share, basic, as
reported
    
    $
    0.43
    
    
    $
    0.51Net income per weighted average share, diluted, as
reported
    
    $
    0.43
    
    
    $
    0.50Adjusted net income per weighted average share,
basic
    
    $
    0.38
    
    
    $
    0.48Adjusted net income per weighted average share,
diluted
    
    $
    0.38
    
    
    $
    0.47
  2005
    
    
    2004Dividend yield
    
    
    1.73
    %
    
    
    1.93
    %Expected volatility
    
    
    46.62
    %
    
    
    88.20
    %Risk-free interest rate
    
    
    3.78
    %
    
    
    3.86
    %Expected life
    
    
    3.75
    
    
    
    5.0
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PolyMedica Corporation
Notes to Consolidated Financial Statements
 2.  Inventories
  (in thousands)
    
    June 30,
    
    
    March 31,2005
    
    
    2005Raw materials
    
    $
    1,338
    
    
    $
    1,317Work in process
    
    
    779
    
    
    
    634Finished goods
    
    
    30,862
    
    
    
    27,807$
    32,979
    
    
    $
    29,758
  3.   Direct-Response Advertising
    10




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PolyMedica Corporation
Notes to Consolidated Financial Statements
  Three Months Ended(in thousands)
    
    June 30,
    
    
    June 30,2005
    
    
    2004Capitalized direct-response advertising additions
    
    $
    15,267
    
    
    $
    10,553Direct-response advertising amortization
    
    
    (9,931
    )
    
    
    (9,038
    )Impairment of direct-response advertising
    
    
    (58
    )
    
    
    Increase in direct-response advertising asset, net
    
    
    5,278
    
    
    
    1,515Beginning direct-response advertising asset, net
    
    
    78,499
    
    
    
    64,953Ending direct-response advertising asset, net
    
    $
    83,777
    
    
    $
    66,468
 4.  Accrued Expenses
  June 30,
    
    
    March 31,(In thousands)
    
    2005
    
    
    2005Compensation and benefits
    
    $
    6,418
    
    
    $
    8,172Income tax payable
    
    
    6,354
    
    
    
    1,579Inventory receipts
    
    
    2,372
    
    
    
    255Other
    
    
    7,727
    
    
    
    7,768$
    22,871
    
    
    $
    17,774
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PolyMedica Corporation
Notes to Consolidated Financial Statements
 5.   Commitments and Contingencies
 Contingencies
 Class Action Lawsuit
     Commitments
  6.   Note Payable and Credit Facility
 Note payable
  12




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PolyMedica Corporation
Notes to Consolidated Financial Statements
  Credit facility
  7.   Segment Information
  Liberty Diabetes
 Liberty Respiratory
 Pharmaceuticals
   13




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PolyMedica Corporation
Notes to Consolidated Financial Statements
 Three Months Ended June 30,(in thousands)
    
    2005
    
    
    2004Net Revenues:Liberty Diabetes
    
    $
    83,170
    
    
    $
    78,450Liberty Respiratory
    
    
    10,759
    
    
    
    15,782Pharmaceuticals
    
    
    23,825
    
    
    
    16,908Total
    
    $
    117,754
    
    
    $
    111,140Depreciation and Amortization Expense:Liberty Diabetes
    
    $
    13,066
    
    
    $
    9,287Liberty Respiratory
    
    
    341
    
    
    
    1,786Pharmaceuticals
    
    
    202
    
    
    
    165Total
    
    $
    13,609
    
    
    $
    11,238Income before Income Taxes:Liberty Diabetes
    
    $
    13,832
    
    
    $
    14,740Liberty Respiratory
    
    
    2,506
    
    
    
    5,926Pharmaceuticals
    
    
    2,963
    
    
    
    1,265Total
    
    $
    19,301
    
    
    $
    21,931
 June 30,
    
    
    March 31,2005
    
    
    2005Segment assets:Liberty Diabetes
    
    $
    239,091
    
    
    $
    225,799Liberty Respiratory
    
    
    15,126
    
    
    
    16,680Pharmaceuticals
    
    
    20,070
    
    
    
    27,799Corporate Headquarters
    
    
    113,100
    
    
    
    95,464Total
    
    $
    387,387
    
    
    $
    365,742
 8.   Shareholders Equity
   2006
    
    $
    1,0412007
    
    
    1,3122008
    
    
    1,3162009
    
    
    1,2222010
    
    
    183Total
    
    $
    5,074
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PolyMedica Corporation
Notes to Consolidated Financial Statements
 9.   Calculations of Earnings Per Share
  (In thousands, except per share data)
    
    Three Months EndedJune 30, 2005
    
    
    June 30, 2004Net income
    
    $
    12,160
    
    
    $
    13,773BASIC:Weighted average common stock outstanding, net of treasury stock,
end of period
    
    
    27,975
    
    
    
    26,871Net income per weighted average share, basic
    
    $
    0.43
    
    
    $
    0.51DILUTED:Weighted average common stock outstanding, net of treasury stock,
end of period
    
    
    27,975
    
    
    
    26,871Weighted average dilutive common stock equivalents
    
    
    468
    
    
    
    656Weighted average common stock and dilutive common stock
equivalents outstanding, net of treasury stock
    
    
    28,443
    
    
    
    27,527Net income per weighted average share, diluted
    
    $
    0.43
    
    
    $
    0.50
 Potentially Dilutive Stock Options
  10.  Comprehensive Income
  11.  Subsequent Events
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PolyMedica Corporation
Notes to Consolidated Financial Statements
   16




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Future Operating Results
   Overview
  Liberty Diabetes
  
    
    providing mail order delivery of supplies directly to our patients homes;
    
    billing Medicare and/or private insurance companies directly for those diabetes
related supplies that are reimbursable;
    
    providing 24-hour telephone support to patients; and
    
    using sophisticated software and advanced order fulfillment systems to provide
diabetes related products.
   17




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Liberty Respiratory
     Pharmaceuticals
  18




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Critical Accounting Policies
  Other
    19




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Results of Operations
 Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004
 Net Revenues
  Three Months Ended June 30,(in thousands)
    
    2005
    
    
    2004Net
    
    
    
    
    
    
    NetRevenues
    
    
    % Net Revenues
    
    
    Revenues
    
    
    % Net Revenues
    
    
    % ChangeLiberty Diabetes
    
    $
    83,170
    
    
    
    70.6
    %
    
    $
    78,450
    
    
    
    70.6
    %
    
    
    6.0
    %Liberty Respiratory
    
    
    10,759
    
    
    
    9.2
    
    
    
    15,782
    
    
    
    14.2
    
    
    
    (31.8
    )Pharmaceuticals
    
    
    23,825
    
    
    
    20.2
    
    
    
    16,908
    
    
    
    15.2
    
    
    
    40.9Total net
revenues
    
    $
    117,754
    
    
    
    100.0
    %
    
    $
    111,140
    
    
    
    100.0
    %
    
    
    6.0
    %
      20




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Gross Margin
  Three Months Ended June 30,(in thousands)
    
    2005
    
    
    2004Gross
    
    
    Gross
    
    
    Gross
    
    
    GrossMargin
    
    
    Margin %
    
    
    Margin
    
    
    Margin %
    
    
    % ChangeGross margin:Liberty Diabetes
    
    $
    50,973
    
    
    
    61.3
    %
    
    $
    47,664
    
    
    
    60.8
    %
    
    
    6.9
    %Liberty
Respiratory
    
    
    6,246
    
    
    
    58.1
    
    
    
    12,666
    
    
    
    80.3
    
    
    
    (50.7
    )Pharmaceuticals
    
    
    9,524
    
    
    
    40.0
    
    
    
    7,022
    
    
    
    41.5
    
    
    
    35.6Total gross
margin
    
    $
    66,743
    
    
    
    56.7
    %
    
    $
    67,352
    
    
    
    60.6
    %
    
    
    (0.9
    )%
   Selling, General and Administrative Expenses
 Three Months Ended June 30,% Net
    
    
    
    
    
    
    % Net(in thousands)
    
    2005
    
    
    Revenues
    
    
    2004
    
    
    RevenuesReported selling, general and
administrative expenses
    
    $
    47,792
    
    
    
    40.6
    %
    
    $
    45,618
    
    
    
    41.0
    %Primary components of selling, general
and administrative expenses:Direct-response advertising amortization
    
    $
    9,931
    
    
    
    8.4
    %
    
    $
    9,038
    
    
    
    8.1
    %Provision for doubtful accounts
    
    $
    5,170
    
    
    
    4.4
    %
    
    $
    5,444
    
    
    
    4.9
    %Employee compensation
    
    $
    16,455
    
    
    
    14.0
    %
    
    $
    15,629
    
    
    
    14.1
    %
  21




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Investment Income
  Three Months Ended June 30,(in thousands)
    
    2005
    
    
    2004
    
    
    $ Change
    
    
    % ChangeAverage cash, cash
equivalents,
restricted cash,
marketable
securities and
deferred
compensation plan
balances
    
    $
    80,129
    
    
    $
    90,490
    
    
    $
    (10,361
    )
    
    
    (11.4
    )%Investment income
    
    $
    536
    
    
    $
    216
    
    
    $
    320
    
    
    
    148.4
    %
  Income Taxes
  Three Months Ended June 30,(in thousands)
    
    2005
    
    
    2004Income tax provision
    
    $
    7,141
    
    
    $
    8,158Effective tax rate
    
    
    37.0
    %
    
    
    37.2
    %
  Liquidity and Capital Resources
  Three Months Ended June 30,(in thousands)
    
    2005
    
    
    2004Net cash provided by operating
activities
    
    $
    16,949
    
    
    $
    16,203Net cash provided by (used for)
investing activities
    
    
    5,132
    
    
    
    (2,843
    )Net cash provided by (used for)
financing activities
    
    
    (3,986
    )
    
    
    3,375Net change in cash and cash equivalents
    
    $
    18,095
    
    
    $
    16,735
  22




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New Accounting Pronouncements
      24




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Factors Affecting Future Operating Results
  We could experience significantly reduced revenues and profits if Medicare or other government
programs change, delay or deny reimbursement
     We are currently involved in litigation and could experience reduced net income if this litigation
is not resolved in our favor
  Failure to maintain effective internal control over financial reporting could result in a loss of
investor confidence in our financial reports and have a material adverse effect on our stock price
  25




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The market price of our common stock may experience substantial fluctuations for reasons over which
we have little control.
  
    
    fluctuations in our quarterly results;
    
    announcements concerning us, our competitors, the drug manufacturers with whom we
have relationships or the healthcare market;
    
    overall volatility of the stock market;
    
    changes in government regulations;
    
    changes in the financial estimates we provide to the market or estimates by analysts; and
    
    loss of key executives.
  We plan to continue our expansion; if we do not manage our growth successfully, our growth and
profitability may slow or stop
  Geopolitical events may reduce our ability to obtain favorable advertising rates for our
direct-response advertising efforts, which may increase our expenses and/or lead to a reduction in
revenues
  The profitability of our Liberty Diabetes and Liberty Respiratory segments will decrease if we do
not receive recurring orders from patients
  26




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We could experience significantly reduced profits from our Liberty Diabetes segment if new
technologies that reduce or eliminate the need for consumable testing supplies are developed for
glucose monitoring
  We could experience a charge to earnings as a result of an impairment of our goodwill or other
intangible assets
   We could be liable for harm caused by products that we sell and may incur significant expenses in
connection with the defense of any product liability claims
  We could lose patients and revenues to new or existing competitors
  Loss of use of manufacturing or data storage facilities could significantly reduce revenues and
profits from our businesses
  If we or our suppliers do not comply with applicable government regulations, we may be prohibited
from selling our products and/or may incur fines and other expenses
  27




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We depend on key employees and the loss of a key employee could adversely affect our business.
  We could have difficulty selling our pharmaceuticals products if we cannot maintain and expand our
sales to distributors
  Our quarterly revenues or operating results could vary, which may cause the market price of our
securities to decline
  
    
    changes in reimbursement guidelines and amounts;
    
    changes in regulations affecting the healthcare industry;
    
    changes in suppliers;
    
    the timing of patient orders;
    
    the timing and cost of our advertising campaigns;
    
    the timing of the introduction or acceptance of new products offered by us or our competitors; and
    
    changes in the mix of our products; product costs are significantly influenced by the product
brand chosen by the patients of our mail-order diabetes supply business. We provide a wide range
of product brand choices to our patients, purchased at varying costs from suppliers. Our ability
to sustain current gross margin levels is dependent both on our ability to continue securing
favorable pricing from suppliers and on the brand choices of our patients.
 A reduction in working capital or a change in our business could prevent us from paying dividends
to shareholders
  We may make acquisitions that will strain our financial and operational resources
  
    
    diversion of the attention of senior management from important business matters;
    
    amortization of substantial intangible assets;
    
    difficulty in retaining key personnel of an acquired business;
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
    
    lack of adequate internal control over financial reporting;
    
    failure to assimilate operations of an acquired business;
    
    possible operating losses and expenses of an acquired business;
    
    exposure to legal claims for activities of an acquired business prior to acquisition; and
    
    incurrence of debt and related interest expense.
  We may issue preferred stock with rights senior to our common stock
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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Item 4. Controls and Procedures
 (1)
Disclosure controls and procedures
  (2) Changes in internal controls
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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
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Item 6. Exhibits
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PolyMedica Corporation(registrant)/s/ Patrick T. RyanPatrick T. RyanPresident, Chief Executive Officer and Director(Principal Executive Officer)/s/ Keith W. JonesKeith W. JonesChief Financial Officer(Principal Financial and Accounting Officer)Dated: August 9, 2005
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Exhibit Index
 ExhibitNumber
    
    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.
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