##### Table of Contents



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 September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No. 0-19842
 PolyMedica Corporation
  Massachusetts
    
    04-3033368(State or Other Jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)701 Edgewater Drive, Suite 360, Wakefield, Massachusetts
    
    01880(Address of Principal Executive Offices)
    
    (Zip Code)
 (781) 486-8111
 þ o
  þ o o
 o þ




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##### 



POLYMEDICA CORPORATION
TABLE OF CONTENTS
  
 PagePART IItem 1. Financial Statements (unaudited):Consolidated Balance Sheets as of September 30 and March 31, 2006
    
    
    3Consolidated
Statements of Income for the three and six months ended
September 30, 2006 and 2005
    
    
    5Consolidated Statements of Cash Flows for the six months ended
September 30, 2006 and 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    33PART IIItem 1. Legal Proceedings
    
    
    34Item 1A. Risk Factors
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 4. Submission of Matters to a Vote of Security Holders
    
    
    41Item 6. Exhibits
    
    
    41Signatures
    
    
    42Exhibit Index
    
    
    43Ex-10.3 Confirmation of Convertible Note Hedge with Deutsche Bank AG LondonEx-10.4 Confirmation of Convertible Note Hedge with Bank of America, N.A.Ex-10.5 Confirmation of Warrants for PolyMedica Corporation Common Stock with Deutsche Bank AG LondonEx-10.6 Confirmation of Warrants for PolyMedica Corporation Common Stock with Bank of America, N.A.Ex-10.7 Amendment to the 2000 Stock Incentive PlanEx-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEO & CFO
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 PolyMedica Corporation
 
 Consolidated Balance Sheets
 (Unaudited)
 (In thousands, except share and per share amounts)
 September 30,
    
    
    March 31,2006
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,436
    
    
    $
    9,101Accounts receivable (net of allowances
of $29,353 and $28,169 as of September
30 and March 31, 2006, respectively)
    
    
    106,609
    
    
    
    104,013Inventories
    
    
    41,387
    
    
    
    34,467Deferred income taxes
    
    
    4,334
    
    
    
    4,334Income tax receivable
    
    
    
    
    
    
    6,662Prepaid expenses and other current assets
    
    
    13,125
    
    
    
    9,896Total current assets
    
    
    172,891
    
    
    
    168,473Property, plant and equipment, net
    
    
    64,577
    
    
    
    64,678Goodwill
    
    
    64,598
    
    
    
    64,488Intangible assets, net
    
    
    47,689
    
    
    
    27,228Direct-response advertising, net
    
    
    97,270
    
    
    
    91,653Notes receivable
    
    
    9,610
    
    
    
    9,548Other assets
    
    
    9,052
    
    
    
    3,249Total assets
    
    $
    465,687
    
    
    $
    429,317
  3




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##### Table of Contents



PolyMedica Corporation
Consolidated Balance Sheets
(Unaudited)  (In thousands, except share and per share amounts)
 September 30,
    
    
    March 31,2006
    
    
    2006LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    31,988
    
    
    $
    26,363Accrued expenses
    
    
    17,792
    
    
    
    20,652Current portion, capital lease obligations
    
    
    561
    
    
    
    596Total current liabilities
    
    
    50,341
    
    
    
    47,611Capital lease and other obligations
    
    
    1,170
    
    
    
    1,144Credit facility
    
    
    83,600
    
    
    
    190,000Convertible subordinated notes
    
    
    180,000
    
    
    
    Deferred income taxes
    
    
    12,130
    
    
    
    31,411Total liabilities
    
    
    327,241
    
    
    
    270,166Commitments and contingenciesShareholders equity:Preferred stock, $0.01 par value; 2,000,000
shares authorized, none issued or outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value; 50,000,000 shares
authorized; 22,533,232 and 23,050,924 shares
issued as of September 30 and March 31, 2006
    
    
    225
    
    
    
    230Additional paid-in capital
    
    
    140,022
    
    
    
    142,468Retained earnings
    
    
    (1,801
    )
    
    
    16,453Total shareholders equity
    
    
    138,446
    
    
    
    159,151Total liabilities and shareholders equity
    
    $
    465,687
    
    
    $
    429,317
  4




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##### Table of Contents



PolyMedica Corporation
 
 Consolidated Statements of Income
 (Unaudited)
 (In thousands, except per share amounts)
 Three Months Ended
    
    
    Six Months EndedSept. 30,
    
    
    
    
    
    
    Sept. 30,Sept. 30,
    
    
    2005
    
    
    Sept. 30,
    
    
    20052006
    
    
    As Restated
    
    
    2006
    
    
    As RestatedNet revenues
    
    $
    164,110
    
    
    $
    116,427
    
    
    $
    319,999
    
    
    $
    218,955Cost of sales
    
    
    88,152
    
    
    
    53,453
    
    
    
    171,708
    
    
    
    98,527Gross margin
    
    
    75,958
    
    
    
    62,974
    
    
    
    148,291
    
    
    
    120,428Selling, general and administrative expenses
    
    
    60,215
    
    
    
    46,285
    
    
    
    120,479
    
    
    
    88,322Income from continuing operations
    
    
    15,743
    
    
    
    16,689
    
    
    
    27,812
    
    
    
    32,106Other income and expense:Investment income
    
    
    46
    
    
    
    218
    
    
    
    386
    
    
    
    699Interest and other expense
    
    
    (3,260
    )
    
    
    (1,106
    )
    
    
    (6,357
    )
    
    
    (1,274
    )(3,214
    )
    
    
    (888
    )
    
    
    (5,971
    )
    
    
    (575
    )Income from continuing operations before income taxes
    
    
    12,529
    
    
    
    15,801
    
    
    
    21,841
    
    
    
    31,531Income tax provision
    
    
    4,573
    
    
    
    5,735
    
    
    
    7,972
    
    
    
    11,516Income from continuing operations, net of income taxes
    
    
    7,956
    
    
    
    10,066
    
    
    
    13,869
    
    
    
    20,015Discontinued operations, net of income taxes
    
    
    
    
    
    
    21,429
    
    
    
    
    
    
    
    23,640Net income
    
    $
    7,956
    
    
    $
    31,495
    
    
    $
    13,869
    
    
    $
    43,655Income from continuing operations per weighted
average share, basic
    
    $
    0.35
    
    
    $
    0.41
    
    
    $
    0.60
    
    
    $
    0.76Income from discontinued operations per weighted
average share, basic
    
    
    
    
    
    
    0.88
    
    
    
    
    
    
    
    0.90Net income per weighted average share, basic
    
    $
    0.35
    
    
    $
    1.29
    
    
    $
    0.60
    
    
    $
    1.66Income from continuing operations per weighted
average share, diluted
    
    $
    0.34
    
    
    $
    0.40
    
    
    $
    0.59
    
    
    $
    0.75Income from discontinued operations per weighted
average share, diluted
    
    
    
    
    
    
    0.86
    
    
    
    
    
    
    
    0.88Net income per weighted average share, diluted
    
    $
    0.34
    
    
    $
    1.26
    
    
    $
    0.59
    
    
    $
    1.63Cash dividend per share
    
    $
    0.15
    
    
    $
    0.15
    
    
    $
    0.30
    
    
    $
    0.30Weighted average shares, basic
    
    
    23,027
    
    
    
    24,473
    
    
    
    23,069
    
    
    
    26,224Weighted average shares, diluted
    
    
    23,568
    
    
    
    25,053
    
    
    
    23,553
    
    
    
    26,748
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PolyMedica Corporation
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 (In thousands)
 Six Months EndedSeptember 30,20052006
    
    
    As RestatedOperating activities:Net income
    
    $
    13,869
    
    
    $
    43,655Income from discontinued operations
    
    
    
    
    
    
    (23,640
    )Adjustments to reconcile net income to net cash flows:Depreciation and amortization
    
    
    11,213
    
    
    
    6,657Amortization of direct-response advertising
    
    
    23,695
    
    
    
    20,418Direct-response advertising expenditures
    
    
    (29,312
    )
    
    
    (29,612
    )Provision for bad debts
    
    
    11,329
    
    
    
    9,525Provision for sales allowances/returns
    
    
    6,890
    
    
    
    7,946Stock-based compensation expense
    
    
    5,953
    
    
    
    579Tax benefit from exercise of stock options
    
    
    893
    
    
    
    Deferred income taxes
    
    
    (2,173
    )
    
    
    (Gain)/loss on sale of equipment
    
    
    29
    
    
    
    (151
    )Loss on impairment of direct-response advertising
    
    
    
    
    
    
    382Imputed interest on note payable
    
    
    
    
    
    
    74Changes in assets and liabilities excluding effects of acquisitions
and dispositions:Accounts receivable
    
    
    (20,815
    )
    
    
    (24,165
    )Income tax receivable
    
    
    6,662
    
    
    
    1,085Inventories
    
    
    (6,920
    )
    
    
    (7,582
    )Prepaid expenses and other assets
    
    
    (3,101
    )
    
    
    (2,848
    )Accounts payable
    
    
    5,625
    
    
    
    19,443Accrued expenses and other liabilities
    
    
    (2,860
    )
    
    
    (1,620
    )Net cash flows provided by continuing operations
    
    
    20,977
    
    
    
    20,146Net cash flows provided by discontinued operations
    
    
    
    
    
    
    9,468Net cash flows provided by operating activities
    
    
    20,977
    
    
    
    29,614Investing activities:Purchase of marketable securities
    
    
    
    
    
    
    (2,288
    )Proceeds from maturing marketable securities
    
    
    
    
    
    
    9,092Proceeds from sale of businesses
    
    
    
    
    
    
    42,269Purchase of business
    
    
    
    
    
    
    (55,335
    )Issuance of note receivable
    
    
    
    
    
    
    (5,000
    )Purchase of property, plant and equipment
    
    
    (5,004
    )
    
    
    (4,082
    )Purchase of intangible assets
    
    
    (26,598
    )
    
    
    (5,210
    )Proceeds from sale of equipment
    
    
    
    
    
    
    545Net cash flows used for continuing operations
    
    
    (31,602
    )
    
    
    (20,009
    )Net cash flows used for discontinued operations
    
    
    
    
    
    
    (101
    )Net cash flows used for investing activities
    
    
    (31,602
    )
    
    
    (20,110
    )Financing activities:Proceeds from issuance of common and restricted stock
    
    
    3,868
    
    
    
    4,069Proceeds from issuance of convertible subordinated notes
    
    
    180,000
    
    
    
    Proceeds from issuance of warrants
    
    
    20,736
    
    
    
    Purchase of convertible note hedge, net of fees
    
    
    (47,004
    )
    
    
    Net cash from line of credit
    
    
    (106,400
    )
    
    
    135,000Repurchase of common stock
    
    
    (29,624
    )
    
    
    (150,000
    )Payment of costs for stock repurchase
    
    
    
    
    
    
    (1,233
    )
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Six Months EndedSeptember 30,20052006
    
    
    As RestatedPayment of dividends declared on common stock
    
    
    (6,999
    )
    
    
    (7,833
    )Payment of debt issuance costs
    
    
    (5,812
    )
    
    
    (1,155
    )Excess tax benefit from exercise of stock options
    
    
    495
    
    
    
    Payment of capital lease obligations
    
    
    (300
    )
    
    
    (276
    )Net cash flows provided by (used for) financing activities
    
    
    8,960
    
    
    
    (21,428
    )Net change in cash and cash equivalents
    
    
    (1,665
    )
    
    
    (11,924
    )Cash and cash equivalents at beginning of period
    
    
    9,101
    
    
    
    72,246Cash and cash equivalents at end of period
    
    $
    7,436
    
    
    $
    60,322Supplemental disclosure of cash flow information:Disposal of equipment
    
    $
    429
    
    
    $
    1,844
  7




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PolyMedica Corporation
 
 Notes to Consolidated Financial Statements
 1. Basis of Presentation
 Company
   Accounting
    8




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PolyMedica Corporation
Notes to Consolidated Financial Statements
  Three Months Ended
    
    Six Months EndedSept. 30, 2005
    
    Sept. 30, 2005As Reported
    
    As Restated
    
    As Reported
    
    As RestatedGain on disposal of discontinued operations,
net of income taxes
    
    $
    22,243
    
    
    $
    19,803
    
    
    $
    22,243
    
    
    $
    19,803Income taxes on gain on disposal of
discontinued operations
    
    $
    15,379
    
    
    $
    13,689
    
    
    $
    15,379
    
    
    $
    13,689Income from discontinued operations, net of
income taxes
    
    $
    23,869
    
    
    $
    21,429
    
    
    $
    26,080
    
    
    $
    23,640Net Income
    
    $
    33,935
    
    
    $
    31,495
    
    
    $
    46,095
    
    
    $
    43,655Gain on disposal of discontinued operations
per weighted average share, basic
    
    $
    0.91
    
    
    $
    0.81
    
    
    $
    0.85
    
    
    $
    0.75Net income per weighted average share, basic
    
    $
    1.39
    
    
    $
    1.29
    
    
    $
    1.76
    
    
    $
    1.66Gain on disposal of discontinued operations
per weighted average share, diluted
    
    $
    0.89
    
    
    $
    0.79
    
    
    $
    0.83
    
    
    $
    0.74Net income per weighted average share, diluted
    
    $
    1.36
    
    
    $
    1.26
    
    
    $
    1.72
    
    
    $
    1.63
 2. Accounts receivable and revenue
     9




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PolyMedica Corporation
Notes to Consolidated Financial Statements
  3. Inventories
  10




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PolyMedica Corporation
Notes to Consolidated Financial Statements
 4. Direct-Response Advertising
  Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Capitalized direct-response advertising
additions
    
    $
    13,916
    
    
    $
    14,345
    
    
    $
    29,312
    
    
    $
    29,612Direct-response advertising amortization
    
    
    (12,053
    )
    
    
    (10,487
    )
    
    
    (23,695
    )
    
    
    (20,418
    )Impairment of direct-response advertising
    
    
    
    
    
    
    (324
    )
    
    
    
    
    
    
    (382
    )Increase in direct-response advertising
asset, net
    
    
    1,863
    
    
    
    3,534
    
    
    
    5,617
    
    
    
    8,812Beginning direct-response advertising asset,
net
    
    
    95,407
    
    
    
    83,777
    
    
    
    91,653
    
    
    
    78,499Ending direct-response advertising asset, net
    
    $
    97,270
    
    
    $
    87,311
    
    
    $
    97,270
    
    
    $
    87,311
 5. Goodwill and Other Intangible Assets
  September 30,
    
    
    March 31,(in thousands)
    
    2006
    
    
    2006Goodwill:Diabetes
    
    $
    64,598
    
    
    $
    64,488Intangible assets:Diabetes patient lists
    
    $
    56,817
    
    
    $
    30,436Diabetes managed care and other contracts
    
    
    8,558
    
    
    
    8,341Accumulated amortization
    
    
    (17,686
    )
    
    
    (11,549
    )Total consolidated intangible assets, net
    
    $
    47,689
    
    
    $
    27,228
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PolyMedica Corporation
Notes to Consolidated Financial Statements
  September 30, 2006
    
    
    March 31, 2006Average
    
    
    Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetLife in
    
    
    Carrying
    
    
    Accumulated
    
    
    Book
    
    
    Carrying
    
    
    Accumulated
    
    
    Book(in thousands)
    
    Years
    
    
    Amount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValuePatient lists
    
    
    4
    
    
    $
    56,817
    
    
    $
    (16,292
    )
    
    $
    40,525
    
    
    $
    30,436
    
    
    
    (10,847
    )
    
    $
    19,589Other contracts
    
    
    2-9
    
    
    
    8,133
    
    
    
    (1,244
    )
    
    
    6,889
    
    
    
    8,133
    
    
    
    (649
    )
    
    
    7,484Covenants not to
compete
    
    
    < 1
    
    
    
    425
    
    
    
    (150
    )
    
    
    275
    
    
    
    208
    
    
    
    (53
    )
    
    
    155Total
    
    
    
    
    
    $
    65,375
    
    
    $
    (17,686
    )
    
    $
    47,689
    
    
    $
    38,777
    
    
    $
    (11,549
    )
    
    $
    27,228
  Remainder of fiscal year 2007
    
    $
    8,193Fiscal year 2008
    
    
    14,479Fiscal year 2009
    
    
    12,172Fiscal year 2010
    
    
    8,3422011 and thereafter
    
    
    4,503Total
    
    $
    47,689
 6. Accrued Expenses
  September 30,
    
    
    March 31,(In thousands)
    
    2006
    
    
    2006Compensation and benefits
    
    $
    4,640
    
    
    $
    8,270Inventory receipts
    
    
    2,746
    
    
    
    2,791Other
    
    
    10,406
    
    
    
    9,591$
    17,792
    
    
    $
    20,652
   7. Credit Facility and Convertible Subordinated Notes
 Credit facility
  12




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PolyMedica Corporation
Notes to Consolidated Financial Statements
  Convertible subordinated notes
     13




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PolyMedica Corporation
Notes to Consolidated Financial Statements
   8. Commitments and Contingencies
 Contingencies
 Class Action Lawsuit
     14




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##### Table of Contents



PolyMedica Corporation
Notes to Consolidated Financial Statements
     Proposed Tax Deduction Disallowance
  Commitments
  9. Segment Information
  Diabetes
 Pharmacy
 15




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PolyMedica Corporation
Notes to Consolidated Financial Statements
   Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net revenues:Diabetes
    
    $
    116,697
    
    
    $
    95,346
    
    
    $
    230,480
    
    
    $
    178,516Pharmacy
    
    
    47,413
    
    
    
    21,081
    
    
    
    89,519
    
    
    
    40,439Total
    
    $
    164,110
    
    
    $
    116,427
    
    
    $
    319,999
    
    
    $
    218,955Gross margin:Diabetes
    
    $
    66,869
    
    
    $
    55,644
    
    
    $
    130,474
    
    
    $
    106,617Pharmacy
    
    
    9,089
    
    
    
    7,330
    
    
    
    17,817
    
    
    
    13,811Total
    
    $
    75,958
    
    
    $
    62,974
    
    
    $
    148,291
    
    
    $
    120,428Reconciliation
of segment
gross margin
to
income from
continuing
operations
before
income taxes:Diabetes
gross margin
    
    $
    66,869
    
    
    $
    55,644
    
    
    $
    130,474
    
    
    $
    106,617Pharmacy
gross margin
    
    
    9,089
    
    
    
    7,330
    
    
    
    17,817
    
    
    
    13,811Selling,
general and
administrative
expenses
    
    
    (60,215
    )
    
    
    (46,285
    )
    
    
    (120,479
    )
    
    
    (88,322
    )Other income
and expense
    
    
    (3,214
    )
    
    
    (888
    )
    
    
    (5,971
    )
    
    
    (575
    )Income from
continuing
operations
before
income taxes
    
    $
    12,529
    
    
    $
    15,801
    
    
    $
    21,841
    
    
    $
    31,531
 September 30,
    
    
    March 31,2006
    
    
    2006Segment assets:Diabetes
    
    $
    380,755
    
    
    $
    365,546Pharmacy
    
    
    35,923
    
    
    
    18,279Corporate Headquarters and Liberty Healthcare
Group, Inc.
    
    
    49,009
    
    
    
    45,492Total
    
    $
    465,687
    
    
    $
    429,317
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##### Table of Contents



PolyMedica Corporation
Notes to Consolidated Financial Statements
 10. Shareholders Equity
  Balance at March 31, 2006
    
    $
    159,151Six months ended September 30, 2006:Net income
    
    
    13,869Proceeds from the exercise of stock options
    
    
    3,868Stock-based compensation
    
    
    5,953Dividends paid
    
    
    (6,999
    )Tax benefit from exercise of stock options
    
    
    1,388Three months ended September 30, 2006:Tax benefit of derivatives
    
    
    17,108Proceeds from sale of warrants
    
    
    20,736Purchase of note hedge, net of fees
    
    
    (47,004
    )Repurchase of common stock
    
    
    (29,624
    )Balance at September 30, 2006
    
    $
    138,446
  11. Stock-Based Compensation
    17




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##### Table of Contents



PolyMedica Corporation
Notes to Consolidated Financial Statements
   Stock Options
  Three months ended
    
    Six months endedSept. 30,
    
    Sept. 30,
    
    Sept. 30,
    
    Sept. 30,2006
    
    2005
    
    2006
    
    2005Dividend yield
    
    
    1.65
    %
    
    
    1.67
    %
    
    
    1.48
    %
    
    
    1.70
    %Expected
volatility
    
    
    32.88
    %
    
    
    38.67
    %
    
    
    34.03
    %
    
    
    42.65
    %Risk-free interest rate
    
    
    5.08
    %
    
    
    3.91
    %
    
    
    4.92
    %
    
    
    3.83
    %Expected
life
    
    
    3.75
    
    
    
    3.75
    
    
    
    3.75
    
    
    
    3.75
 Three months ended
    
    Six months endedSept. 30,
    
    Sept. 30,
    
    Sept. 30,
    
    Sept. 30,2006
    
    2005
    
    2006
    
    2005Weighted average fair value of options granted
    
    $
    10.21
    
    
    $
    10.87
    
    
    $
    11.99
    
    
    $
    11.65Weighted average fair value of Employee Stock Purchase
Plan rights granted below fair value
    
    
    
    
    
    
    
    
    
    $
    10.15
    
    
    $
    6.43
 18




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##### Table of Contents



PolyMedica Corporation
Notes to Consolidated Financial Statements
  WeightedAverageWeighted
    
    Aggregate
    
    RemainingOption
    
    Average
    
    Intrinsic Value
    
    ContractualShares
    
    Option Price
    
    (in thousands)
    
    Term in YearsOutstanding as of March 31, 2006
    
    
    3,188,358
    
    
    $
    29.36
    
    
    
    
    
    
    
    8.17Granted
    
    
    30,000
    
    
    
    41.19Exercised
    
    
    (58,202
    )
    
    
    27.17Cancelled
    
    
    (6,876
    )
    
    
    34.86Outstanding as of June 30, 2006
    
    
    3,153,280
    
    
    $
    29.50
    
    
    $
    20,370
    
    
    
    7.94Granted
    
    
    5,000
    
    
    
    36.26Exercised
    
    
    (87,278
    )
    
    
    21.61Cancelled
    
    
    (32,566
    )
    
    
    33.64Outstanding as of September 30, 2006
    
    
    3,038,436
    
    
    $
    29.70
    
    
    $
    39,847
    
    
    
    7.62Vested and exercisable as of
September 30, 2006
    
    
    1,728,230
    
    
    $
    26.61
    
    
    $
    28,004
    
    
    
    6.96
   Restricted Stock Awards
 19




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##### Table of Contents



PolyMedica Corporation
Notes to Consolidated Financial Statements
  Weighted AverageGrant DateShares
    
    Par value
    
    Fair ValueNon-vested as of March 31, 2006
    
    
    206,313
    
    
    $
    0.01
    
    
    $
    34.51Granted
    
    
    690
    
    
    $
    0.01
    
    
    $
    36.21Vested
    
    
    (938
    )
    
    $
    0.01
    
    
    $
    32.26Cancelled
    
    
    
    
    
    
    
    
    
    
    Non-vested as of June 30, 2006
    
    
    206,065
    
    
    $
    0.01
    
    
    $
    34.53Granted
    
    
    133,000
    
    
    $
    0.01
    
    
    $
    30.14Vested
    
    
    (26,155
    )
    
    $
    0.01
    
    
    $
    35.57Cancelled
    
    
    
    
    
    
    
    
    
    
    Non-vested as of September 30, 2006
    
    
    312,910
    
    
    $
    0.01
    
    
    $
    32.57
     Three Months
    
    
    Six MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,(in thousands, except per share data)
    
    2005
    
    
    2005Income from continuing operations, net of income taxes
    
    $
    10,066
    
    
    $
    20,015Add back: Stock compensation costs, net of tax, on options
and restricted stock granted below fair market value
    
    
    259
    
    
    
    367Less: Stock compensation costs, net of tax, had all
employee options and restricted stock been recorded at
fair value
    
    
    (2,321
    )
    
    
    (3,926
    )Adjusted net income
    
    $
    8,004
    
    
    $
    16,456Net income per weighted average share, basic, as reported
    
    $
    0.41
    
    
    $
    0.76Net income per weighted average share, diluted, as reported
    
    $
    0.40
    
    
    $
    0.75Adjusted net income per weighted average share, basic
    
    $
    0.33
    
    
    $
    0.63Adjusted net income per weighted average share, diluted
    
    $
    0.32
    
    
    $
    0.62
 20




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PolyMedica Corporation
Notes to Consolidated Financial Statements
  12. Calculations of Earnings Per Share
  Three Months Ended
    
    
    Six Months EndedSept. 30,
    
    
    Sept. 30,
    
    
    Sept. 30,
    
    
    Sept. 30,(In thousands, except per share data)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Income from continuing operations, net of income taxes
    
    $
    7,956
    
    
    $
    10,066
    
    
    $
    13,869
    
    
    $
    20,015BASIC:Weighted average common stock issued and outstanding,
end of period
    
    
    23,027
    
    
    
    24,473
    
    
    
    23,069
    
    
    
    26,224Income from continuing operations, net of income
taxes, per weighted average share, basic
    
    $
    0.35
    
    
    $
    0.41
    
    
    $
    0.60
    
    
    $
    0.76DILUTED:Weighted average common stock issued and outstanding,
end of period
    
    
    23,027
    
    
    
    24,473
    
    
    
    23,069
    
    
    
    26,224Weighted average dilutive common stock equivalents
    
    
    541
    
    
    
    580
    
    
    
    484
    
    
    
    524Weighted average common stock and dilutive common
stock equivalents outstanding
    
    
    23,568
    
    
    
    25,053
    
    
    
    23,553
    
    
    
    26,748Income from continuing operations, net of income
taxes, per weighted average share, diluted
    
    $
    0.34
    
    
    $
    0.40
    
    
    $
    0.59
    
    
    $
    0.75
 Potentially Dilutive Stock Options
   21




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PolyMedica Corporation
Notes to Consolidated Financial Statements
  13. Comprehensive Income
  14. New Accounting Pronouncements
  15. Subsequent Events
  22




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Future Operating Results
   Overview
  Diabetes
  -
    
    providing mail order delivery of supplies directly to our patients homes;-
    
    billing Medicare, other government agencies and/or private insurance companies
directly for those diabetes related supplies that are reimbursable;-
    
    providing medical call and contact center services and 24-hour telephone
support to patients;-
    
    using sophisticated software and advanced order fulfillment systems to
efficiently provide diabetes related products.
   23




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Pharmacy
    24




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Critical Accounting Policies
   Stock-based compensation
  Seasonality
   25




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Other
   26




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Results of Operations
 Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
 Net Revenues
  Three Months Ended September 30,2006
    
    
    2005Net
    
    
    % Net
    
    
    Net
    
    
    % Net(in thousands)
    
    Revenues
    
    
    Revenues
    
    
    Revenues
    
    
    Revenues
    
    
    $ Change
    
    
    % ChangeNet revenues:Diabetes
    
    $
    116,697
    
    
    
    71.1
    %
    
    $
    95,346
    
    
    
    81.9
    %
    
    $
    21,351
    
    
    
    22.4
    %Pharmacy
    
    
    47,413
    
    
    
    28.9
    
    
    
    21,081
    
    
    
    18.1
    
    
    
    26,332
    
    
    
    124.9Total net revenues
    
    $
    164,110
    
    
    
    100.0
    %
    
    $
    116,427
    
    
    
    100.0
    %
    
    $
    47,683
    
    
    
    41.0
    %
  Three Months Ended September 30,2005Net
    
    
    % Net(in thousands)
    
    Revenues
    
    
    RevenuesNet revenues:Diabetes
    
    $
    104,954
    
    
    
    83.3
    %Pharmacy
    
    
    21,081
    
    
    
    16.7Total net revenues
    
    $
    126,035
    
    
    
    100.0
    %
    Gross Margin
  27




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##### Table of Contents



Three Months Ended September 30,2006
    
    
    2005Gross
    
    
    Gross
    
    
    Gross
    
    
    Gross(in thousands)
    
    Margin
    
    
    Margin %
    
    
    Margin
    
    
    Margin %
    
    
    $ Change
    
    
    % ChangeGross margin:Diabetes
    
    $
    66,869
    
    
    
    57.3
    %
    
    $
    55,644
    
    
    
    58.4
    %
    
    $
    11,225
    
    
    
    20.2
    %Pharmacy
    
    
    9,089
    
    
    
    19.2
    
    
    
    7,330
    
    
    
    34.8
    
    
    
    1,759
    
    
    
    24.0Total gross margin
    
    $
    75,958
    
    
    
    46.3
    %
    
    $
    62,974
    
    
    
    54.1
    %
    
    $
    12,984
    
    
    
    20.6
    %
  Three Months Ended September 30,2005Gross
    
    
    Gross(in thousands)
    
    Margin
    
    
    Margin %Gross margin:Diabetes
    
    $
    58,313
    
    
    
    55.6
    %Pharmacy
    
    
    7,330
    
    
    
    34.8Total gross margin
    
    $
    65,643
    
    
    
    52.1
    %
   28




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##### Table of Contents



Selling, General and Administrative Expenses
  Sept. 30,
    
    
    Sept. 30,2006
    
    
    2005Employee compensation and benefits
    
    $
    22,550
    
    
    $
    19,886Direct-response advertising amortization
    
    
    12,053
    
    
    
    10,487Depreciation expense
    
    
    2,562
    
    
    
    1,912Amortization of intangible assets
    
    
    3,712
    
    
    
    1,515Provision for doubtful accounts
    
    
    5,801
    
    
    
    4,953Stock-based compensation
    
    
    2,939
    
    
    
    408Other
    
    
    10,598
    
    
    
    7,124Selling, general and administrative expenses
    
    $
    60,215
    
    
    $
    46,285Selling, general and administrative expenses as a percentage of net revenues
    
    
    36.7
    %
    
    
    39.8
    %
   Other Income and Expense
  Three Months Ended September 30,(in thousands)
    
    2006
    
    2005
    
    $ Change
    
    % ChangeInvestment income
    
    $
    46
    
    
    $
    218
    
    
    $
    (172
    )
    
    
    (78.9
    )%Interest and other expense
    
    $
    (3,260
    )
    
    $
    (1,106
    )
    
    $
    (2,154
    )
    
    
    194.8
    %
  29




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##### Table of Contents



Income Taxes
  Three Months Ended September 30,(in thousands)
    
    2006
    
    2005Income tax provision
    
    $
    4,573
    
    
    $
    5,735Effective tax rate
    
    
    36.5
    %
    
    
    36.3
    %
 ,
 Six Months Ended September 30, 2006 Compared to Six Months Ended September 30, 2005
 Net Revenues
  Six Months Ended September 30,2006
    
    
    2005Net
    
    
    % Net
    
    
    Net
    
    
    % Net(in thousands)
    
    Revenues
    
    
    Revenues
    
    
    Revenues
    
    
    Revenues
    
    
    % ChangeDiabetes
    
    $
    230,480
    
    
    
    72.0
    %
    
    $
    178,516
    
    
    
    81.5
    %
    
    
    29.1
    %Pharmacy
    
    
    89,519
    
    
    
    28.0
    
    
    
    40,439
    
    
    
    18.5
    
    
    
    121.4Total net revenues
    
    $
    319,999
    
    
    
    100.0
    %
    
    $
    218,955
    
    
    
    100.0
    %
    
    
    46.2
    %
  Six Months Ended September 30,2005Net
    
    
    % Net(in thousands)
    
    Revenues
    
    
    RevenuesDiabetes
    
    $
    205,378
    
    
    
    83.6
    %Pharmacy
    
    
    40,439
    
    
    
    16.4Total net revenues
    
    $
    245,817
    
    
    
    100.0
    %
   30




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Gross Margin
  Six Months Ended September 30,2006
    
    
    2005Gross
    
    
    Gross
    
    
    Gross
    
    
    Gross(in thousands)
    
    Margin
    
    
    Margin %
    
    
    Margin
    
    
    Margin %
    
    
    % ChangeGross margin:Diabetes
    
    $
    130,474
    
    
    
    56.6
    %
    
    $
    106,617
    
    
    
    59.7
    %
    
    
    22.4
    %Pharmacy
    
    
    17,817
    
    
    
    19.9
    
    
    
    13,811
    
    
    
    34.2
    
    
    
    29.0Total gross margin
    
    $
    148,291
    
    
    
    46.3
    %
    
    $
    120,428
    
    
    
    55.0
    %
    
    
    23.1
    %
   Six Months Ended September 30,2005Gross
    
    
    Gross(in thousands)
    
    Margin
    
    
    Margin %Gross margin:Diabetes
    
    $
    114,154
    
    
    
    55.6
    %Pharmacy
    
    
    13,811
    
    
    
    34.2Total gross margin
    
    $
    127,965
    
    
    
    52.1
    %
  31




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Selling, General and Administrative Expenses
 Sept. 30,
    
    
    Sept. 30,2006
    
    
    2005Employee compensation and benefits
    
    $
    46,909
    
    
    $
    37,551Direct-response advertising amortization
    
    
    23,695
    
    
    
    20,418Depreciation expense
    
    
    5,076
    
    
    
    3,792Amortization of intangible assets
    
    
    6,137
    
    
    
    2,865Provision for doubtful accounts
    
    
    11,329
    
    
    
    9,525Stock-based compensation
    
    
    5,953
    
    
    
    579Other
    
    
    21,380
    
    
    
    13,592Selling, general and administrative expenses
    
    $
    120,479
    
    
    $
    88,322Selling, general and administrative expenses as a percentage of net revenues
    
    
    37.7
    %
    
    
    40.3
    %
   Other income and expense
  Six Months Ended September 30,(in thousands)
    
    2006
    
    2005
    
    $ Change
    
    % ChangeInvestment income
    
    $
    386
    
    
    $
    699
    
    
    $
    (313
    )
    
    
    (44.8
    )%Interest expense
    
    $
    (6,357
    )
    
    $
    (1,274
    )
    
    $
    (5,083
    )
    
    
    (399.0
    )%
  Income Taxes
  Six Months Ended September 30,(in thousands)
    
    2006
    
    2005Income tax provision (benefit)
    
    $
    7,972
    
    
    $
    11,516Effective tax rate
    
    
    36.5
    %
    
    
    36.5
    %
  32




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##### Table of Contents



,
 Liquidity and Capital Resources
  Six Months Ended September 30,(in thousands)
    
    2006
    
    
    2005Net cash provided by operating activities
    
    $
    20,977
    
    
    $
    29,614Net cash used for investing activities
    
    
    (31,602
    )
    
    
    (20,110
    )Net cash provided by (used for)
financing activities
    
    
    8,960
    
    
    
    (21,428
    )Net change in cash and cash equivalents
    
    $
    (1,665
    )
    
    $
    (11,924
    )
      33




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##### Table of Contents



34




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##### Table of Contents



New Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
 Disclosure controls and procedures
  Changes in internal controls
  
 PART II  OTHER INFORMATION
 
 Item 1.  Legal Proceedings
    35




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##### Table of Contents



Item 1A.  Risk Factors
  We could experience significantly reduced revenues and profits if payers change, delay or deny
reimbursement
   The impact of Medicare Part D on the Pharmacy segment is unclear
   36




---



##### Table of Contents



Competitive bidding for durable medical equipment suppliers could negatively affect our Diabetes
segment
  We are subject to a corporate integrity agreement
  We are currently involved in litigation and could experience reduced net income if this litigation
is not resolved in our favor
 ,
 We could experience significantly reduced profits from our Diabetes segment if new technologies
that reduce or eliminate the need for consumable testing supplies are developed for glucose
monitoring
  Failure to maintain effective internal control over financial reporting could result in a loss of
investor confidence in our financial reports and have a materially adverse effect on our stock
price
  37




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##### Table of Contents



The market price of our common stock may experience substantial fluctuations for reasons over which
we have little control
  -
    
    fluctuations in our quarterly results;-
    
    announcements concerning us, our competitors, or manufacturers with whom we have
relationships or the healthcare market;-
    
    overall volatility of the stock market;-
    
    changes in government regulations;-
    
    changes in the financial estimates we provide to the market or estimates by analysts; and-
    
    loss of key executives.
  We plan to continue our expansion; if we do not manage our growth successfully, our growth and
profitability may slow or stop
  Our debt may adversely affect our cash flow and may restrict our investment opportunities or limit
our activities.
   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
  38




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##### Table of Contents



The profitability of our segments will decrease if we do not receive recurring orders from patients
  We could experience a charge to earnings as a result of an impairment of our goodwill,
direct-response advertising or other intangible assets
   We could be liable for harm caused by products that we sell and may incur significant expenses in
connection with the defense of any product liability claims
  We could lose patients and revenues to new or existing competitors
  Loss of use of data storage facilities could significantly reduce revenues and profits from our
businesses
  If we or our suppliers do not comply with applicable government regulations, we may be prohibited
from selling our
products or may incur fines and other expenses
  39




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##### Table of Contents



We depend on key employees and the loss of a key employee could adversely affect our business
  Our quarterly revenues or operating results could vary, which may cause the market price of our
securities to decline
  
    
    changes in reimbursement guidelines and amounts;
    
    changes in regulations affecting the healthcare industry;
    
    changes in suppliers;
    
    the timing of patient orders;
    
    the timing and cost of our advertising campaigns;
    
    the timing of the introduction or acceptance of new products offered by us or our competitors; and
    
    changes in the mix of our products; product costs are significantly influenced by the product
brand chosen by the patients of our diabetes segment. We provide a wide range of product brand
choices to our patients, purchased at varying costs from suppliers. Our ability to sustain
current gross margin levels is dependent both on our ability to continue securing favorable
pricing from suppliers and on the brand choices of our patients.
 A reduction in working capital or a change in our business could prevent us from paying dividends
to shareholders
  We may make acquisitions that will strain our financial and operational resources
  
    
    diversion of the attention of senior management from important business matters;
    
    amortization of substantial intangible assets;
    
    difficulty in retaining key personnel of an acquired business;
    
    lack of adequate internal control over financial reporting;
    
    failure to assimilate operations of an acquired business;
    
    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.
 40




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##### Table of Contents



A fundamental change and the provisions in the Notes related to the occurrence of a fundamental
change may adversely affect us
    The convertible note hedge and warrant transactions may affect the value of our common stock
   Adverse results in tax audits could result in significant cash expenditures or exposure to
unforeseen liabilities
  We may issue preferred stock with rights senior to our common stock
  Conversion of the Notes will dilute the ownership interest of existing stockholders, including
holders who have previously converted their Notes
  41




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##### Table of Contents



Item 2. Unregisted Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities
  Total
    
    Average
    
    
    
    
    
    Maximum Number ofNumber of
    
    Price
    
    Total Number of Shares
    
    Shares that may yetShares
    
    Paid per
    
    Purchased as Part of Publicly
    
    be Purchased under(in thousands)
    
    Purchased
    
    Share
    
    Announced Plans or Programs (1)
    
    the Plans or ProgramsJuly
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    705,100August
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    705,100September
    
    
    705,000
    
    
    $
    42.02
    
    
    
    705,000
    
    
    
    100Total
    
    
    705,000
    
    
    $
    42.02
    
    
    
    705,000
 
 (1)
    
    In October 2005, our Board of Directors amended our share repurchase program to authorize the
purchase of 2,000,000 shares of our common stock. The program expires when the total number of
authorized shares has been repurchased. 
 Item 4. Submission of Matters to a Vote of Security Holders
   Nominees for Election as Directors:
    
    FOR
    
    WITHHELDWalter R. Maupay, Jr.
    
    
    21,403,851
    
    
    
    77,548Patrick T. Ryan
    
    
    21,105,083
    
    
    
    379,316William Van Faasen
    
    
    21,396,465
    
    
    
    84,934
  FOR
    
    AGAINST
    
    ABSTAIN20,781,033
    
    689,214
    
    11,152
 42




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Item 6. Exhibits
  43




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##### Table of Contents



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)  44




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##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    Description4.1
    -
    Indenture, between PolyMedica Corporation and LaSalle Bank National
Association, as trustee, dated as of September 19, 2006 (including form of
Convertible Subordinated Note) (1)4.2
    -
    Form of Convertible Subordinated Note (1)4.3
    -
    Registration Rights Agreement, among PolyMedica Corporation and the other
parties named therein, dated as of September 19, 2006. (1)10.1
    -
    Purchase Agreement, among PolyMedica Corporation and the Initial Purchasers
named therein dated as of September 13, 2006. (1)10.2
    -
    Consent and Amendment No. 4, by and among PolyMedica Corporation, Bank of
America, N.A. and the several lenders parties thereto, effective as of September
12, 2006. (2)10.3
    -
    Confirmation of Convertible Note
Hedge with Deutsche Bank AG London related to Convertible
Subordinated Notes issued September 19, 2006.10.4
    -
    Confirmation of Convertible Note
Hedge with Bank of America, N.A. related to Convertible
Subordinated Notes issued September 19, 2006.10.5
    -
    Confirmation of Warrants for
PolyMedica Corporation Common Stock with Deutsche Bank AG London
related to the Convertible Subordinated Notes issued September 19, 2006. 10.6
    -
    Confirmation of Warrants for
PolyMedica Corporation Common Stock with Bank of America, N.A.
related to the Convertible Subordinated Notes issued September 19, 2006. 10.7
    -
    2000 Stock
Incentive Plan, as amended.31.1
    -
    Certification by Chief Executive Officer pursuant to Rule 13a14(a)/15d-14(a)
of the Securities Exchange Act of 1934, as amended.31.2
    -
    Certification by Chief Financial Officer pursuant to Rule 13a14(a)/15d-14(a)
of the Securities Exchange Act of 1934, as amended.32.1
    -
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 (1)
    
    - Incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC on
September 19, 2006.(2)
    
    - Incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC on
September 12, 2006.
    
    Confidential treatment requested as to portions of the exhibit. Confidential portions omitted
and filed separately with the Securities and Exchange
Commission. 45