##### 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 December 31, 2005
 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
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 o
 o þ




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##### 



POLYMEDICA CORPORATION
TABLE OF CONTENTS
 PagePART IItem 1.
    
    Financial Statements (unaudited):Consolidated Balance Sheets as of December 31 and March 31, 2005
    
    
    3Consolidated Statements of Income for the three and nine months ended December 31, 2005 and 2004
    
    
    5Consolidated Statements of Cash Flows for the nine months ended December 31, 2005 and 2004
    
    
    7Notes to Consolidated Financial Statements
    
    
    9Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    40Item 4.
    
    Controls and Procedures
    
    
    41PART IIItem 1.
    
    Legal Proceedings
    
    
    42Item 2(c).
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    42Item 6.
    
    Exhibits
    
    
    43Signatures
    
    
    
    
    44Exhibit Index
    
    
    
    
    45Ex-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)
 Dec. 31,
    
    
    March 31,2005
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,071
    
    
    $
    72,246Marketable securities
    
    
    
    
    
    
    6,804Accounts receivable (net of allowances of $29,445 and $25,827 as of
December 31 and March 31, 2005, respectively)
    
    
    92,685
    
    
    
    62,054Inventories
    
    
    40,019
    
    
    
    25,730Deferred income taxes
    
    
    14,477
    
    
    
    14,477Income tax receivable
    
    
    
    
    
    
    1,085Prepaid expenses and other current assets
    
    
    10,162
    
    
    
    7,327Current assets of discontinued operations
    
    
    1,399
    
    
    
    6,651Total current assets
    
    
    164,813
    
    
    
    196,374Property, plant and equipment, net
    
    
    62,387
    
    
    
    59,984Goodwill
    
    
    69,367
    
    
    
    10,498Intangible assets, net
    
    
    29,305
    
    
    
    14,954Direct-response advertising, net
    
    
    87,431
    
    
    
    78,499Other assets
    
    
    7,148
    
    
    
    438Long-term assets of discontinued operations
    
    
    
    
    
    
    8,316Total assets
    
    $
    420,451
    
    
    $
    369,063
  3




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##### Table of Contents



POLYMEDICA CORPORATION
Consolidated Balance Sheets
(Unaudited)  (In thousands, except share and per share amounts)
 Dec. 31
    
    
    March 31,2005
    
    
    2005LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    30,685
    
    
    $
    13,545Accrued expenses
    
    
    30,788
    
    
    
    15,574Current portion, capital lease obligations and note payable
    
    
    2,736
    
    
    
    559Current liabilities of discontinued operations
    
    
    632
    
    
    
    3,588Total current liabilities
    
    
    64,841
    
    
    
    33,266Capital lease and other obligations
    
    
    1,241
    
    
    
    3,113Credit facility
    
    
    167,500
    
    
    
    Deferred income taxes
    
    
    31,659
    
    
    
    31,659Total liabilities
    
    
    265,241
    
    
    
    68,038Shareholders equity:Preferred stock, $0.01 par value; 2,000,000 shares authorized, none
issued or outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value; 50,000,000 shares authorized,
23,150,129 and 27,923,712 shares issued and outstanding
as of December 31 and March 31, 2005, respectively
    
    
    231
    
    
    
    279Deferred compensation
    
    
    (5,081
    )
    
    
    (476
    )Additional paid-in capital
    
    
    140,092
    
    
    
    162,837Retained earnings
    
    
    19,968
    
    
    
    138,385Total shareholders equity
    
    
    155,210
    
    
    
    301,025Total liabilities and shareholders equity
    
    $
    420,451
    
    
    $
    369,063
  4




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##### Table of Contents



PolyMedica Corporation
 
 Consolidated Statements of Income
 (Unaudited)  (In thousands, except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedDec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues
    
    $
    131,931
    
    
    $
    95,864
    
    
    $
    350,886
    
    
    $
    279,516Cost of sales
    
    
    62,999
    
    
    
    42,305
    
    
    
    161,526
    
    
    
    122,693Gross margin
    
    
    68,932
    
    
    
    53,559
    
    
    
    189,360
    
    
    
    156,823Selling general and administrative expenses
    
    
    52,328
    
    
    
    39,254
    
    
    
    140,650
    
    
    
    117,872Settlement charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,987Income from continuing operations
    
    
    16,604
    
    
    
    14,305
    
    
    
    48,710
    
    
    
    8,964Other income and expense:Investment income
    
    
    232
    
    
    
    372
    
    
    
    931
    
    
    
    872Interest expense
    
    
    (1,696
    )
    
    
    (23
    )
    
    
    (2,970
    )
    
    
    (54
    )Other income and expense
    
    
    (1,464
    )
    
    
    349
    
    
    
    (2,039
    )
    
    
    818Income from continuing operations before income taxes
    
    
    15,140
    
    
    
    14,654
    
    
    
    46,671
    
    
    
    9,782Income tax provision
    
    
    5,526
    
    
    
    5,412
    
    
    
    17,042
    
    
    
    3,106Income from continuing operations, net of income taxes
    
    
    9,614
    
    
    
    9,242
    
    
    
    29,629
    
    
    
    6,676Discontinued operations:Income from discontinued operations, net of income
taxes
    
    
    264
    
    
    
    4,855
    
    
    
    26,344
    
    
    
    14,047Net income
    
    $
    9,878
    
    
    $
    14,097
    
    
    $
    55,973
    
    
    $
    20,723
  5




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PolyMedica Corporation
Consolidated Statements of Income
(Unaudited)  (In thousands, except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedDec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Income from continuing operations per weighted average share, basic
    
    $
    0.40
    
    
    $
    0.33
    
    
    $
    1.16
    
    
    $
    0.24Income from discontinued operations per weighted average share, basic
    
    
    0.01
    
    
    
    0.18
    
    
    
    1.04
    
    
    
    0.52Net income per weighted average share, basic
    
    
    0.41
    
    
    
    0.51
    
    
    
    2.20
    
    
    
    0.76Income from continuing operations per weighted average share, diluted
    
    
    0.40
    
    
    
    0.33
    
    
    
    1.14
    
    
    
    0.24Income from discontinued operations per weighted average share, diluted
    
    
    0.01
    
    
    
    0.17
    
    
    
    1.02
    
    
    
    0.50Net income per weighted average share, diluted
    
    $
    0.41
    
    
    $
    0.50
    
    
    $
    2.16
    
    
    $
    0.74Cash dividend per share
    
    $
    0.15
    
    
    $
    0.15
    
    
    $
    0.45
    
    
    $
    0.45Weighted average shares, basic
    
    
    23,787
    
    
    
    27,501
    
    
    
    25,412
    
    
    
    27,216Weighted average shares, diluted
    
    
    24,270
    
    
    
    28,162
    
    
    
    25,922
    
    
    
    27,841
  6




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PolyMedica Corporation
 
 Consolidated Statements of Cash Flows
 (Unaudited)  (In thousands)
 Nine Months EndedDecember 31,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    55,973
    
    
    $
    20,723Income from discontinued operations
    
    
    (26,344
    )
    
    
    (14,047
    )Adjustments to reconcile income from continuing operations to net
cash flows:Depreciation and amortization
    
    
    11,010
    
    
    
    6,334Amortization of direct-response advertising
    
    
    31,246
    
    
    
    24,393Direct-response advertising expenditures
    
    
    (40,560
    )
    
    
    (34,835
    )Provision for bad debts
    
    
    14,477
    
    
    
    13,704Provision for sales allowances/returns
    
    
    12,113
    
    
    
    10,909Other
    
    
    357
    
    
    
    843Stock-based compensation
    
    
    1,144
    
    
    
    Changes in assets and liabilities excluding effects of
acquisitions and dispositions:Accounts receivable
    
    
    (52,308
    )
    
    
    (34,624
    )Income tax receivable
    
    
    1,085
    
    
    
    (289
    )Inventories
    
    
    (10,308
    )
    
    
    (11,225
    )Prepaid expenses and other assets
    
    
    (2,037
    )
    
    
    (1,662
    )Accounts payable
    
    
    10,388
    
    
    
    (2,456
    )Accrued expenses and other liabilities
    
    
    (3,296
    )
    
    
    2,072Net cash flows provided by continuing operations
    
    
    2,940
    
    
    
    (20,160
    )Net cash flows provided by discontinued operations
    
    
    9,295
    
    
    
    22,781Net cash flows provided by operating activities
    
    
    12,235
    
    
    
    2,621Cash flows from investing activities:Purchase of marketable securities
    
    
    (2,288
    )
    
    
    (10,535
    )Proceeds from maturing marketable securities
    
    
    9,092
    
    
    
    10,958Proceeds from sale of businesses
    
    
    42,098
    
    
    
    Purchase of businesses
    
    
    (75,373
    )
    
    
    Issuance of note receivable
    
    
    (5,000
    )
    
    
    Purchase of property, plant and equipment
    
    
    (7,943
    )
    
    
    (6,181
    )Purchase of patient lists and other contracts
    
    
    (7,051
    )
    
    
    (8,722
    )Proceeds from sale of equipment
    
    
    545
    
    
    
    Net cash flows used for continuing operations
    
    
    (45,920
    )
    
    
    (14,480
    )Net cash flows used for discontinued operations
    
    
    (101
    )
    
    
    (173
    )Net cash flows used for investing activities
    
    
    (46,021
    )
    
    
    (14,653
    )
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PolyMedica Corporation
Consolidated Statements of Cash Flows
(Unaudited)  (In thousands)
 Nine Months EndedDecember 31,2005
    
    
    2004Cash flows from financing activities:Proceeds from issuance of common and restricted stock
    
    
    5,902
    
    
    
    15,632Proceeds from line of credit
    
    
    167,500
    
    
    
    Contributions to deferred compensation plans
    
    
    (516
    )
    
    
    (141
    )Payment of costs for stock repurchase
    
    
    (1,233
    )
    
    
    Repurchase of common stock
    
    
    (190,977
    )
    
    
    Payment of dividends declared on common stock
    
    
    (11,490
    )
    
    
    (12,213
    )Payment of debt issuance costs
    
    
    (1,155
    )
    
    
    Payment of capital lease and note payable obligations
    
    
    (420
    )
    
    
    (301
    )Net cash flows provided by (used for) financing activities
    
    
    (32,389
    )
    
    
    2,977Net change in cash and cash equivalents
    
    
    (66,175
    )
    
    
    (9,055
    )Cash and cash equivalents at beginning of period
    
    
    72,246
    
    
    
    69,229Cash and cash equivalents at end of period
    
    $
    6,071
    
    
    $
    60,174Supplemental disclosure of cash flow information:Assets purchased under capital lease
    
    $
    
    
    
    $
    979Disposal of equipment
    
    
    1,954
    
    
    
    1,294
  8




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PolyMedica Corporation
 
 Notes to Consolidated Financial Statements
 1. Basis of Presentation
 Company
   Accounting
   9




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PolyMedica Corporation
Notes to Consolidated Financial Statements
 Revenue Recognition and Accounts Receivable
        10




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PolyMedica Corporation
Notes to Consolidated Financial Statements
  Accounting for Stock-Based Compensation
  Three months ended
    
    
    Nine months endedDec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,(in thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Income from continuing operations, net of income taxes
    
    $
    9,614
    
    
    $
    9,242
    
    
    $
    29,629
    
    
    $
    6,676Add back: Stock compensation costs, net of tax, on
restricted stock granted below fair market value
    
    
    360
    
    
    
    
    
    
    
    727
    
    
    
    Less: Stock compensation costs, net of tax, had all
employee options and restricted stock been recorded
at fair value
    
    
    (1,928
    )
    
    
    (1,332
    )
    
    
    (5,854
    )
    
    
    (4,000
    )Adjusted income from continuing operations, net of
income taxes
    
    $
    8,046
    
    
    $
    7,910
    
    
    $
    24,502
    
    
    $
    2,676Income from continuing operations, net of income
taxes, per weighted average share, basic, as reported
    
    $
    0.40
    
    
    $
    0.33
    
    
    $
    1.16
    
    
    $
    0.24Income from continuing operations, net of income
taxes, per weighted average share, diluted, as
reported
    
    $
    0.40
    
    
    $
    0.33
    
    
    $
    1.14
    
    
    $
    0.24Adjusted income from continuing operations, net of
income taxes, per weighted average share, basic
    
    $
    0.34
    
    
    $
    0.29
    
    
    $
    0.96
    
    
    $
    0.10Adjusted income from continuing operations, net of
income taxes, per weighted average share, diluted
    
    $
    0.33
    
    
    $
    0.28
    
    
    $
    0.95
    
    
    $
    0.10
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PolyMedica Corporation
Notes to Consolidated Financial Statements
  Three months ended
    
    Nine months endedDec. 31,
    
    Dec. 31,
    
    Dec. 31,
    
    Dec. 31,2005
    
    2004
    
    2005
    
    2004Dividend yield
    
    
    1.70
    %
    
    
    1.71
    %
    
    
    1.70
    %
    
    
    1.89
    %Expected
volatility
    
    
    36.11
    %
    
    
    47.85
    %
    
    
    40.47
    %
    
    
    71.78
    %Risk-free interest rate
    
    
    4.37
    %
    
    
    3.12
    %
    
    
    3.92
    %
    
    
    3.28
    %Expected
life
    
    
    3.75
    
    
    
    3.75
    
    
    
    3.75
    
    
    
    4.53
 Three months ended
    
    Nine months endedDec. 31,
    
    Dec. 31,
    
    Dec. 31,
    
    Dec. 31,2005
    
    2004
    
    2005
    
    2004Weighted average fair value of options granted
    
    $
    10.31
    
    
    $
    12.30
    
    
    $
    11.42
    
    
    $
    16.12Weighted average fair value of Employee Stock Purchase
Plan rights granted below fair value
    
    $
    6.49
    
    
    $
    5.63
    
    
    $
    6.46
    
    
    $
    13.09
 2. Business Acquisitions
   Cash and cash equivalents
    
    $
    723Accounts receivable, net
    
    
    4,924Prepaid expenses and other assets
    
    
    653Inventories
    
    
    3,980Property, plant and equipment, net
    
    
    898Intangible assets, net
    
    
    10,650Goodwill
    
    
    41,750Total assets acquired
    
    $
    63,578
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PolyMedica Corporation
Notes to Consolidated Financial Statements
 Accounts payable
    
    $
    6,370Accrued expenses
    
    
    1,060Total liabilities assumed
    
    
    7,430Net assets acquired
    
    $
    56,148
   Three months ended
    
    Nine months endedDec. 31,
    
    Dec. 31,
    
    Dec. 31,
    
    Dec. 31,(in thousands)
    
    2005
    
    2004
    
    2005
    
    2004Net revenues
    
    $
    131,931
    
    
    $
    114,519
    
    
    $
    377,748
    
    
    $
    331,859Income from
continuing
operations, net of
income taxes
    
    $
    9,614
    
    
    $
    9,246
    
    
    $
    28,496
    
    
    $
    6,458Income from
continuing
operations per
weighted average
share, diluted
    
    $
    0.40
    
    
    $
    0.33
    
    
    $
    1.10
    
    
    $
    0.23
     13




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PolyMedica Corporation
Notes to Consolidated Financial Statements
 3. Discontinued Operations
  Three months ended
    
    
    Nine months endedDec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,(in thousands)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Income from
discontinued
operations, before
income taxes
    
    $
    433
    
    
    $
    7,794
    
    
    $
    44,302
    
    
    $
    22,561Income tax provision
    
    
    169
    
    
    
    2,939
    
    
    
    17,958
    
    
    
    8,514Income from
discontinued
operations, net of
income taxes
    
    $
    264
    
    
    $
    4,855
    
    
    $
    26,344
    
    
    $
    14,047
  Three months ended
    
    Nine months endedDec. 31,
    
    Dec. 31,
    
    Dec. 31,
    
    Dec. 31,(in thousands)
    
    2005
    
    2004
    
    2005
    
    2004Net revenues
    
    $
    8,431
    
    
    $
    14,378
    
    
    $
    28,616
    
    
    $
    44,862Income before income taxes
    
    $
    687
    
    
    $
    6,172
    
    
    $
    4,251
    
    
    $
    17,740
 4. Inventories
  14




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PolyMedica Corporation
Notes to Consolidated Financial Statements
 5. Goodwill and Other Intangible Assets
  Dec. 31,
    
    
    March 31,(in thousands)
    
    2005
    
    
    2005Goodwill:Diabetes
    
    $
    69,367
    
    
    $
    10,498Pharmacy
    
    
    
    
    
    
    Total consolidated goodwill
    
    $
    69,367
    
    
    $
    10,498Intangible assets:Diabetes patient lists
    
    $
    30,245
    
    
    $
    18,982Diabetes managed care and other contracts
    
    
    8,341
    
    
    
    Accumulated amortization
    
    
    (9,281
    )
    
    
    (4,028
    )Total consolidated intangible assets, net
    
    $
    29,305
    
    
    $
    14,954
    2006
    
    $
    2,2632007
    
    
    8,2002008
    
    
    7,6552009
    
    
    6,1302010 and thereafter
    
    
    5,057Total
    
    $
    29,305
 6. Direct-Response Advertising
  15




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PolyMedica Corporation
Notes to Consolidated Financial Statements
    Three months ended
    
    
    Nine months endedDec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,(in thousands)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Capitalized direct-response advertising
    
    $
    10,948
    
    
    $
    12,606
    
    
    $
    40,560
    
    
    $
    34,835Direct-response advertising amortization
    
    
    (10,828
    )
    
    
    (9,422
    )
    
    
    (31,246
    )
    
    
    (27,519
    )Impairment of direct-response advertising
    
    
    
    
    
    
    
    
    
    
    (382
    )
    
    
    Increase in direct-response advertising
asset, net
    
    
    120
    
    
    
    3,184
    
    
    
    8,932
    
    
    
    7,316Beginning direct-response advertising asset,
net
    
    
    87,311
    
    
    
    69,085
    
    
    
    78,499
    
    
    
    64,953Ending direct-response advertising asset, net
    
    $
    87,431
    
    
    $
    72,269
    
    
    $
    87,431
    
    
    $
    72,269
  7. Accrued Expenses
  Dec. 31,
    
    
    March 31,(In thousands)
    
    2005
    
    
    2005Compensation and benefits
    
    $
    8,402
    
    
    $
    7,972Income tax payable
    
    
    13,771
    
    
    
    Overpayments by Medicare and others
    
    
    
    
    
    
    1,720Other
    
    
    8,615
    
    
    
    5,882$
    30,788
    
    
    $
    15,574
  16




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##### Table of Contents



PolyMedica Corporation
Notes to Consolidated Financial Statements
   8. Commitments and Contingencies
 Contingencies
 Class Action Lawsuit
      17




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##### Table of Contents



PolyMedica Corporation
Notes to Consolidated Financial Statements
 Commitments
  9. Note Payable and Credit Facility
 Note payable
  Credit facility
  10. Segment Information
  18




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PolyMedica Corporation
Notes to Consolidated Financial Statements
 Diabetes
 Pharmacy
   Three months ended
    
    
    Nine months endedDec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,(in thousands)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues:Diabetes
    
    $
    110,481
    
    
    $
    78,656
    
    
    $
    288,997
    
    
    $
    233,687Pharmacy
    
    
    21,450
    
    
    
    17,208
    
    
    
    61,889
    
    
    
    45,829Total
    
    $
    131,931
    
    
    $
    95,864
    
    
    $
    350,886
    
    
    $
    279,516Depreciation and
amortization
expense:Diabetes
    
    $
    15,083
    
    
    $
    11,066
    
    
    $
    41,967
    
    
    $
    30,490Pharmacy
    
    
    98
    
    
    
    91
    
    
    
    289
    
    
    
    237Total
    
    $
    15,181
    
    
    $
    11,157
    
    
    $
    42,256
    
    
    $
    30,727Income from
continuing
operations before
income taxes:Diabetes
    
    $
    13,452
    
    
    $
    13,821
    
    
    $
    40,880
    
    
    $
    39,852Pharmacy
    
    
    1,688
    
    
    
    833
    
    
    
    5,791
    
    
    
    (83
    )Settlement Charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,987
    )Total
    
    $
    15,140
    
    
    $
    14,654
    
    
    $
    46,671
    
    
    $
    9,782
 19




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PolyMedica Corporation
Notes to Consolidated Financial Statements
 Dec. 31,
    
    
    March 31,2005
    
    
    2005Segment assets:Diabetes
    
    $
    379,100
    
    
    $
    240,739Pharmacy
    
    
    16,118
    
    
    
    17,234Corporate Headquarters
    
    
    23,834
    
    
    
    96,122Discontinued Operations
    
    
    1,399
    
    
    
    14,968Total
    
    $
    420,451
    
    
    $
    369,063
 11. Shareholders Equity
      20




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PolyMedica Corporation
Notes to Consolidated Financial Statements
 2006
    
    $
    5652007
    
    
    1,7952008
    
    
    1,3162009
    
    
    1,2222010
    
    
    183Total
    
    $
    5,081
 12. Calculations of Earnings Per Share
  Three months ended
    
    
    Nine months endedDec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,(In thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Income from continuing operations, net of income taxes
    
    $
    9,614
    
    
    $
    9,242
    
    
    $
    29,629
    
    
    $
    6,676BASIC:Weighted average common stock outstanding, end of period
    
    
    23,787
    
    
    
    27,501
    
    
    
    25,412
    
    
    
    27,216Income from continuing operations, net of income taxes,
per weighted average share, basic
    
    $
    0.40
    
    
    $
    0.33
    
    
    $
    1.16
    
    
    $
    0.24DILUTED:Weighted average common stock outstanding, end of period
    
    
    23,787
    
    
    
    27,501
    
    
    
    25,412
    
    
    
    27,216Weighted average dilutive common stock equivalents
    
    
    483
    
    
    
    661
    
    
    
    510
    
    
    
    625Weighted average common stock and dilutive common stock
equivalents outstanding
    
    
    24,270
    
    
    
    28,162
    
    
    
    25,922
    
    
    
    27,841Income from continuing operations, net of income taxes,
per weighted average share, diluted
    
    $
    0.40
    
    
    $
    0.33
    
    
    $
    1.14
    
    
    $
    0.24
 Potentially Dilutive Stock Options
  13. Comprehensive Income
  14. New Accounting Pronouncements
  21




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PolyMedica Corporation
Notes to Consolidated Financial Statements
     15. Subsequent Events
    22




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PolyMedica Corporation
Notes to Consolidated Financial Statements
  23




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




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Pharmacy
    25




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Critical Accounting Policies
  Other
    26




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Results of Operations
 Three Months Ended December 31, 2005 Compared to Three Months Ended December 31, 2004
 Net Revenues
  Three Months Ended December 31,(in thousands)
    
    2005
    
    
    2004Net
    
    
    % Net
    
    
    Net
    
    
    % NetRevenues
    
    
    Revenues
    
    
    Revenues
    
    
    Revenues
    
    
    % ChangeDiabetes
    
    $
    110,481
    
    
    
    83.7
    %
    
    $
    78,656
    
    
    
    82.1
    %
    
    
    40.5
    %Pharmacy
    
    
    21,450
    
    
    
    16.3
    
    
    
    17,208
    
    
    
    17.9
    
    
    
    24.7Total net revenues
    
    $
    131,931
    
    
    
    100.0
    %
    
    $
    95,864
    
    
    
    100.0
    %
    
    
    37.6
    %
     Gross Margin
  Three Months Ended December 31,(in thousands)
    
    2005
    
    
    2004Gross
    
    
    Gross
    
    
    Gross
    
    
    GrossMargin
    
    
    Margin %
    
    
    Margin
    
    
    Margin %
    
    
    % ChangeGross margin:Diabetes
    
    $
    60,941
    
    
    
    55.2
    %
    
    $
    48,135
    
    
    
    61.2
    %
    
    
    26.6
    %Pharmacy
    
    
    7,991
    
    
    
    37.3
    
    
    
    5,424
    
    
    
    31.5
    
    
    
    47.3Total gross margin
    
    $
    68,932
    
    
    
    52.2
    %
    
    $
    53,559
    
    
    
    55.9
    %
    
    
    28.7
    %
 27




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Selling, General and Administrative Expenses
 Three Months Ended December 31,(in thousands)
    
    2005
    
    
    2004Selling, general and
    
    
    % Net
    
    
    Selling, general and
    
    
    % Netadministrative expenses
    
    
    Revenues
    
    
    administrative expenses
    
    
    Revenues
    
    
    % ChangeDiabetes
    
    $
    46,283
    
    
    
    41.9
    %
    
    $
    34,616
    
    
    
    44.0
    %
    
    
    33.7
    %Pharmacy
    
    
    6,045
    
    
    
    28.2
    
    
    
    4,638
    
    
    
    27.0
    
    
    
    30.3Total
selling, general and administrative expenses
    
    $
    52,328
    
    
    
    39.7
    %
    
    $
    39,254
    
    
    
    40.9
    %
    
    
    33.3
    %
  Other income and expense
  Three Months Ended December 31,(in thousands)
    
    2005
    
    
    2004
    
    
    $ Change
    
    
    % ChangeInvestment income
    
    $
    232
    
    
    $
    372
    
    
    $
    (140
    )
    
    
    (37.6
    )%Interest expense
    
    $
    (1,696
    )
    
    $
    (23
    )
    
    $
    (1,673
    )
    
    
    (7273.9
    )%
  28




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Income Taxes
  Three Months EndedDecember 31,(in thousands)
    
    2005
    
    
    2004Income tax provision
    
    $
    5,526
    
    
    $
    5,412Effective tax rate
    
    
    36.5
    %
    
    
    36.9
    %
  Discontinued Operations
  Nine Months Ended December 31, 2005 Compared to Nine Months Ended December 31, 2004
 Net Revenues
  Nine Months Ended December 31,(in thousands)
    
    2005
    
    
    2004Net
    
    
    % Net
    
    
    Net
    
    
    % NetRevenues
    
    
    Revenues
    
    
    Revenues
    
    
    Revenues
    
    
    % ChangeDiabetes
    
    $
    288,997
    
    
    
    82.4
    %
    
    $
    233,687
    
    
    
    83.6
    %
    
    
    23.7
    %Pharmacy
    
    
    61,889
    
    
    
    17.6
    
    
    
    45,829
    
    
    
    16.4
    
    
    
    35.0Total net revenues
    
    $
    350,886
    
    
    
    100.0
    %
    
    $
    279,516
    
    
    
    100.0
    %
    
    
    25.5
    %
   29




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Gross Margin
  Nine Months Ended December 31,(in thousands)
    
    2005
    
    
    2004Gross
    
    
    Gross
    
    
    Gross
    
    
    GrossMargin
    
    
    Margin %
    
    
    Margin
    
    
    Margin %
    
    
    % ChangeGross margin:Diabetes
    
    $
    167,558
    
    
    
    58.0
    %
    
    $
    142,929
    
    
    
    61.2
    %
    
    
    17.2
    %Pharmacy
    
    
    21,802
    
    
    
    35.2
    
    
    
    13,894
    
    
    
    30.3
    
    
    
    56.9Total gross margin
    
    $
    189,360
    
    
    
    54.0
    %
    
    $
    156,823
    
    
    
    56.1
    %
    
    
    20.7
    %
  Selling, General and Administrative Expenses
 Nine Months Ended December 31,(in thousands)
    
    2005
    
    
    2004Selling, general and
    
    
    % Net
    
    
    Selling, general and
    
    
    % Netadministrative expenses
    
    
    Revenues
    
    
    administrative expenses
    
    
    Revenues
    
    
    % ChangeDiabetes
    
    $
    125,001
    
    
    
    43.3
    %
    
    $
    103,790
    
    
    
    44.4
    %
    
    
    20.4
    %Pharmacy
    
    
    15,649
    
    
    
    25.3
    
    
    
    14,082
    
    
    
    30.7
    
    
    
    11.1Total
selling, general and administrative expenses
    
    $
    140,650
    
    
    
    40.1
    %
    
    $
    117,872
    
    
    
    42.2
    %
    
    
    19.3
    %
  30




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Settlement Charge
  Other income and expense
  Nine Months Ended December 31,(in thousands)
    
    2005
    
    2004
    
    $ Change
    
    % ChangeInvestment income
    
    $
    931
    
    
    $
    872
    
    
    $
    59
    
    
    
    6.8
    %Interest expense
    
    $
    (2,970
    )
    
    $
    (54
    )
    
    $
    (2,916
    )
    
    
    (5,400.0
    )%
  Income Taxes
  Nine Months Ended December 31,(in thousands)
    
    2005
    
    2004Income tax provision
    
    $
    17,042
    
    
    $
    3,106Effective tax rate
    
    
    36.5
    %
    
    
    31.8
    %
  Discontinued Operations
  31




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Liquidity and Capital Resources
  Nine Months Ended December 31,(in thousands)
    
    2005
    
    
    2004Net cash provided by operating activities
    
    $
    12,235
    
    
    $
    2,621Net cash used for investing activities
    
    
    (46,021
    )
    
    
    (14,653
    )Net cash provided by (used for)
financing activities
    
    
    (32,389
    )
    
    
    2,977Net change in cash and cash equivalents
    
    $
    (66,175
    )
    
    $
    (9,055
    )
     32




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New Accounting Pronouncements
    33




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34




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##### Table of Contents



Factors Affecting Future Operating Results
  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
   Competitive bidding for durable medical equipment suppliers could negatively affect our Diabetes
segment
   We are subject to a corporate integrity agreement
  35




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##### Table of Contents



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 material adverse effect on our stock price
  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.
  36




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##### Table of Contents



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 Diabetes segment 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 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
  37




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##### Table of Contents



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 and/or may incur fines and other expenses
  We depend on key employees and the loss of a key employee could adversely affect our business.
  Our quarterly revenues or operating results could vary, which may cause the market price of our
securities to decline
  
    
    changes in reimbursement guidelines and amounts;
    
    changes in regulations affecting the healthcare industry;
    
    changes in suppliers;
    
    the timing of patient orders;
    
    the timing and cost of our advertising campaigns;
    
    the timing of the introduction or acceptance of new products offered by us or our competitors; and
    
    changes in the mix of our products; product costs are significantly influenced by the product
brand chosen by the patients of our diabetes 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
  38




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##### Table of Contents




    
    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.
  We may issue preferred stock with rights senior to our common stock
  39




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  40




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Item 4. Controls and Procedures
 (1) Disclosure controls and procedures
  (2) Changes in internal controls
  41




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 2c. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 Average
    
    
    Total Number of Shares
    
    
    Maximum Number ofTotal Number
    
    
    Price
    
    
    Purchased as Part of Publicly
    
    
    Shares that may yet beof Shares
    
    
    Paid per
    
    
    Announced Plans or
    
    
    Purchased under the(in thousands)
    
    Purchased
    
    
    Share
    
    
    Programs
    
    
    Plans or ProgramsOctober 1  October 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000,000November 1  November 30,
2005
    
    
    689,941
    
    
    $
    36.68
    
    
    
    689,941
    
    
    
    1,310,059December 1  December 31,
2005
    
    
    449,959
    
    
    $
    37.06
    
    
    
    449,959
    
    
    
    860,100Total
    
    
    1,139,900
    
    
    $
    36.83
    
    
    
    1,139,900
 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
    
    
    
    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.
 45