##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)11 State Street, Woburn, Massachusetts
    
    01801(Address of principal executive offices)
    
    (Zip Code)
 (781)933-2020
 þ o
 þ 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, 2005
    
    
    3Consolidated Statements of Income for the three and six months ended September 30, 2005 and 2004
    
    
    5Consolidated Statements of Cash Flows for the six months ended September 30, 2005 and 2004
    
    
    7Notes to Consolidated Financial Statements
    
    
    9Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    38Item 4.
    
    Controls and Procedures
    
    
    39PART IIItem 1.
    
    Legal Proceedings
    
    
    40Item 2(c).
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    40Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    41Item 6.
    
    Exhibits
    
    
    42Signatures
    
    
    
    
    43Exhibit Index
    
    
    
    
    44Ex-10.53 Form of Option AgreementEx-10.54 Form of Restricted Stock AgreementEx-10.55 Equity Purchase AgreementEx-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)
 Sept. 30,
    
    
    March 31,2005
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    60,322
    
    
    $
    72,246Marketable securities
    
    
    
    
    
    
    6,804Accounts receivable (net of allowances of $30,031 and $25,827 as of
September 30 and March 31, 2005, respectively)
    
    
    72,091
    
    
    
    62,054Inventories
    
    
    37,293
    
    
    
    25,730Deferred income taxes
    
    
    14,477
    
    
    
    14,477Income tax receivable
    
    
    
    
    
    
    1,085Prepaid expenses and other current assets
    
    
    9,711
    
    
    
    7,327Current assets of discontinued operations
    
    
    1,544
    
    
    
    6,651Total current assets
    
    
    195,438
    
    
    
    196,374Property, plant and equipment, net
    
    
    60,108
    
    
    
    59,984Goodwill
    
    
    52,099
    
    
    
    10,498Intangible assets, net
    
    
    27,949
    
    
    
    14,954Direct response advertising, net
    
    
    87,311
    
    
    
    78,499Other assets
    
    
    8,131
    
    
    
    438Long-term assets of discontinued operations
    
    
    
    
    
    
    8,316Total assets
    
    $
    431,036
    
    
    $
    369,063
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##### Table of Contents



POLYMEDICA CORPORATION
Consolidated Balance Sheets
(Unaudited)  (In thousands, except share and per share amounts)
 Sept. 30,
    
    
    March 31,2005
    
    
    2005LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    39,358
    
    
    $
    13,545Accrued expenses
    
    
    30,394
    
    
    
    15,574Current portion, capital lease obligations
    
    
    570
    
    
    
    559Current liabilities of discontinued operations
    
    
    2,224
    
    
    
    3,588Total current liabilities
    
    
    72,546
    
    
    
    33,266Capital lease, note payable and other obligations
    
    
    3,261
    
    
    
    3,113Long term credit facility
    
    
    135,000
    
    
    
    Deferred income taxes
    
    
    31,659
    
    
    
    31,659Total liabilities
    
    
    242,466
    
    
    
    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,
28,122,743 and 27,923,712 shares issued and outstanding
as of September 30 and March 31, 2005, respectively
    
    
    281
    
    
    
    279Treasury stock, at cost; 3,936,948 shares issued as of September
30, 2005 and no shares issued as of March 31, 2005
    
    
    (148,848
    )
    
    
    Deferred compensation
    
    
    (5,568
    )
    
    
    (476
    )Additional paid-in capital
    
    
    166,058
    
    
    
    162,837Retained earnings
    
    
    176,647
    
    
    
    138,385Total shareholders equity
    
    
    188,570
    
    
    
    301,025Total liabilities and shareholders equity
    
    $
    431,036
    
    
    $
    369,063
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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,
    
    
    Sept. 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues
    
    $
    116,427
    
    
    $
    92,096
    
    
    $
    218,955
    
    
    $
    183,652Cost of sales
    
    
    53,453
    
    
    
    40,418
    
    
    
    98,527
    
    
    
    80,388Gross margin
    
    
    62,974
    
    
    
    51,678
    
    
    
    120,428
    
    
    
    103,264Selling, general and administrative expenses
    
    
    46,285
    
    
    
    41,485
    
    
    
    88,322
    
    
    
    78,618Settlement charge
    
    
    
    
    
    
    29,987
    
    
    
    
    
    
    
    29,987Income (loss) from continuing operations
    
    
    16,689
    
    
    
    (19,794
    )
    
    
    32,106
    
    
    
    (5,341
    )Other income and expense:Investment income
    
    
    218
    
    
    
    316
    
    
    
    699
    
    
    
    501Interest expense
    
    
    (1,106
    )
    
    
    (15
    )
    
    
    (1,274
    )
    
    
    (32
    )(888
    )
    
    
    301
    
    
    
    (575
    )
    
    
    469Income (loss) from continuing operations before income
taxes
    
    
    15,801
    
    
    
    (19,493
    )
    
    
    31,531
    
    
    
    (4,872
    )Income tax provision/(benefit)
    
    
    5,735
    
    
    
    (7,716
    )
    
    
    11,516
    
    
    
    (2,306
    )Income (loss) from continuing operations, net of income
taxes
    
    
    10,066
    
    
    
    (11,777
    )
    
    
    20,015
    
    
    
    (2,566
    )Discontinued operations:Income from discontinued operations, net of income taxes
    
    
    1,626
    
    
    
    4,630
    
    
    
    3,837
    
    
    
    9,192Gain on disposal of discontinued operations, net of income
taxes of $15,379
    
    
    22,243
    
    
    
    
    
    
    
    22,243
    
    
    
    Income from discontinued operations, net of income taxes
    
    
    23,869
    
    
    
    4,630
    
    
    
    26,080
    
    
    
    9,192Net income (loss)
    
    $
    33,935
    
    
    $
    (7,147
    )
    
    $
    46,095
    
    
    $
    6,626
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PolyMedica Corporation
Consolidated Statements of Income
 (Unaudited)
 (In thousands, except per share amounts)
 Three Months Ended
    
    
    Six Months EndedSept. 30,
    
    
    Sept. 30,
    
    
    Sept. 30,
    
    
    Sept. 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Income from continuing operations per weighted average share, basic
    
    $
    0.41
    
    
    $
    (0.43
    )
    
    $
    0.76
    
    
    $
    (0.09
    )Income from discontinued operations per weighted average share, basic
    
    
    0.07
    
    
    
    0.17
    
    
    
    0.15
    
    
    
    0.33Gain on disposal of discontinued operations per weighted average
share, basic
    
    
    0.91
    
    
    
    
    
    
    
    0.85
    
    
    
    Net income (loss) per weighted average share, basic
    
    
    1.39
    
    
    
    (0.26
    )
    
    
    1.76
    
    
    
    0.24Income from continuing operations per weighted average share, diluted
    
    
    0.40
    
    
    
    (0.43
    )
    
    
    0.75
    
    
    
    (0.09
    )Income from discontinued operations per weighted average share, diluted
    
    
    0.07
    
    
    
    0.17
    
    
    
    0.14
    
    
    
    0.33Gain on disposal of discontinued operations per weighted average
share, diluted
    
    
    0.89
    
    
    
    
    
    
    
    0.83
    
    
    
    Net income (loss) per weighted average share, diluted
    
    $
    1.36
    
    
    $
    (0.26
    )
    
    $
    1.72
    
    
    $
    0.24Weighted average shares, basic
    
    
    24,473
    
    
    
    27,275
    
    
    
    26,224
    
    
    
    27,073Weighted average shares, diluted
    
    
    25,053
    
    
    
    27,832
    
    
    
    26,748
    
    
    
    27,680Weighted average shares, diluted, used in the calculation of net loss
per weighted
average share
    
    
    
    
    
    
    27,275
    
    
    
    
    
    
    
    27,073
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PolyMedica Corporation
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 (In thousands)
 Six Months EndedSeptember 30,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    46,095
    
    
    $
    6,626(Income) from discontinued operations
    
    
    (3,837
    )
    
    
    (9,192
    )Gain on disposal of discontinued operations
    
    
    (22,243
    )
    
    
    Adjustments to reconcile income from continuing operations to net
cash flows:Depreciation and amortization
    
    
    6,657
    
    
    
    3,877Amortization of direct-response advertising
    
    
    20,418
    
    
    
    15,693Direct-response advertising expenditures
    
    
    (29,612
    )
    
    
    (22,229
    )Provision for bad debts
    
    
    9,525
    
    
    
    9,205Provision for sales allowances/returns
    
    
    7,946
    
    
    
    7,031(Gain)/loss on sale of equipment
    
    
    (151
    )
    
    
    567Stock-based compensation
    
    
    579
    
    
    
    Loss on impairment of direct-response advertising
    
    
    382
    
    
    
    Loss on impairment of customer list
    
    
    
    
    
    
    152Imputed interest on note payable
    
    
    74
    
    
    
    Changes in assets and liabilities excluding effects of
acquisitions and dispositions:Accounts receivable
    
    
    (24,165
    )
    
    
    (3,230
    )Income tax receivable
    
    
    1,085
    
    
    
    (289
    )Inventories
    
    
    (7,582
    )
    
    
    (10,011
    )Prepaid expenses and other assets
    
    
    (2,848
    )
    
    
    (1,791
    )Accounts payable
    
    
    19,443
    
    
    
    (4,085
    )Accrued expenses and other liabilities
    
    
    (1,278
    )
    
    
    30,497Net cash flows provided by continuing operations
    
    
    20,488
    
    
    
    22,821Net cash flows provided by discontinued operations
    
    
    9,468
    
    
    
    14,347Net cash flows provided by operating activities
    
    
    29,956
    
    
    
    37,168Cash flows from investing activities:Purchase of marketable securities
    
    
    (2,288
    )
    
    
    (7,954
    )Proceeds from maturing marketable securities
    
    
    9,092
    
    
    
    8,741Proceeds from sale of businesses
    
    
    42,269
    
    
    
    Purchase of business
    
    
    (55,335
    )
    
    
    Issuance of note receivable
    
    
    (5,000
    )
    
    
    Purchase of property, plant and equipment
    
    
    (4,082
    )
    
    
    (4,639
    )Purchase of patient lists
    
    
    (5,210
    )
    
    
    (5,692
    )Proceeds from sale of equipment
    
    
    545
    
    
    
    Net cash flows (used for) continuing operations
    
    
    (20,009
    )
    
    
    (9,544
    )Net cash flows (used for) discontinued operations
    
    
    (101
    )
    
    
    (81
    )Net cash flows (used for) investing activities
    
    
    (20,110
    )
    
    
    (9,625
    )
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PolyMedica Corporation
Consolidated Statements of Cash Flows
(Unaudited)  (In thousands)
 Six Months EndedSeptember 30,2005
    
    
    2004Cash flows from financing activities:Proceeds from issuance of common and restricted stock
    
    
    4,069
    
    
    
    9,505Proceeds from line of credit
    
    
    135,000
    )
    
    
    Contributions to deferred compensation plans
    
    
    (342
    )
    
    
    (95
    )Payment of costs for stock repurchase
    
    
    (1,233
    )
    
    
    Repurchase of common stock
    
    
    (150,000
    )
    
    
    Payment of dividends declared on common stock
    
    
    (7,833
    )
    
    
    (8,107
    )Payment of debt issuance costs
    
    
    (1,155
    )
    
    
    Payment of capital lease and note payable obligations
    
    
    (276
    )
    
    
    (167
    )Net cash flows provided by (used for) continuing operations
    
    
    (21,770
    )
    
    
    1,136Net cash flows provided by discontinued operations
    
    
    
    
    
    
    Net cash flows provided by (used for) financing activities
    
    
    (21,770
    )
    
    
    1,136Net change in cash and cash equivalents
    
    
    (11,924
    )
    
    
    28,679Cash and cash equivalents at beginning of period
    
    
    72,246
    
    
    
    69,229Cash and cash equivalents at end of period
    
    $
    60,322
    
    
    $
    97,908Supplemental disclosure of cash flow information:Assets purchased under capital lease
    
    $
    
    
    
    $
    979Disposal of equipment
    
    
    1,844
    
    
    
    1,107
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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
    
    
    Six months endedSept. 30,
    
    
    Sept. 30,
    
    
    Sept. 30,
    
    
    Sept. 30,(in thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Income (loss) from continuing
operations, net of income taxes
    
    $
    10,066
    
    
    $
    (11,777
    )
    
    $
    20,015
    
    
    $
    (2,566
    )Add back: Stock compensation costs,
net of tax, on restricted stock
granted below fair market value
    
    
    259
    
    
    
    
    
    
    
    367
    
    
    
    Less: Stock compensation costs, net
of tax, had all employee options and
restricted stock been recorded at
fair value
    
    
    (2,321
    )
    
    
    (1,781
    )
    
    
    (3,926
    )
    
    
    (2,668
    )Adjusted income (loss) from
continuing operations, net of income
taxes
    
    $
    8,004
    
    
    $
    (13,558
    )
    
    $
    16,456
    
    
    $
    (5,234
    )Income (loss) from continuing
operations, per weighted average
share, basic, as reported
    
    $
    0.41
    
    
    $
    (0.43
    )
    
    $
    0.76
    
    
    $
    (0.09
    )Income (loss) from continuing
operations per weighted average
share, diluted, as reported
    
    $
    0.40
    
    
    $
    (0.43
    )
    
    $
    0.75
    
    
    $
    (0.09
    )Adjusted income (loss) from
continuing operations per weighted
average share, basic
    
    $
    0.33
    
    
    $
    (0.50
    )
    
    $
    0.63
    
    
    $
    (0.19
    )Adjusted income (loss) from
continuing operations per weighted
average share, diluted
    
    $
    0.32
    
    
    $
    (0.50
    )
    
    $
    0.62
    
    
    $
    (0.19
    )
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PolyMedica Corporation
Notes to Consolidated Financial Statements
  Three months ended
    
    Six months endedSept. 30,
    
    Sept. 30,
    
    Sept. 30,
    
    Sept. 30,2005
    
    2004
    
    2005
    
    2004Dividend yield
    
    
    1.67
    %
    
    
    2.01
    %
    
    
    1.70
    %
    
    
    1.99
    %Expected volatility
    
    
    38.67
    %
    
    
    86.13
    %
    
    
    42.65
    %
    
    
    86.44
    %Risk-free interest rate
    
    
    3.91
    %
    
    
    3.33
    %
    
    
    3.83
    %
    
    
    3.41
    %Expected life
    
    
    3.75
    
    
    
    5.0
    
    
    
    3.75
    
    
    
    5.0
 Three months ended
    
    Six months endedSept. 30,
    
    Sept. 30,
    
    Sept. 30,
    
    Sept. 30,2005
    
    2004
    
    2005
    
    2004Weighted average fair value of options
granted
    
    $
    35.93
    
    
    $
    18.28
    
    
    $
    35.23
    
    
    $
    18.46Weighted average fair value of Employee
Stock Purchase Plan rights granted
below fair value
    
    
    
    
    
    
    
    
    
    $
    6.43
    
    
    $
    9.67
 2. Business Acquisitions
   Cash and cash equivalents
    
    $
    723Accounts receivable, net
    
    
    4,924Prepaid expenses and other assets
    
    
    653Inventory
    
    
    3,980Property, plant and equipment, net
    
    
    898Intangible assets, net
    
    
    10,650Goodwill
    
    
    41,660Total assets acquired
    
    $
    63,488
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PolyMedica Corporation
Notes to Consolidated Financial Statements
 Accounts payable
    
    $
    6,370Accrued expenses
    
    
    1,060Total liabilities assumed
    
    
    7,430Net assets acquired
    
    $
    56,058
   Three months ended
    
    Six months endedSept. 30,
    
    Sept. 30,
    
    Sept. 30,
    
    Sept. 30,(in thousands)
    
    2005
    
    2004
    
    2005
    
    2004Net revenues
    
    $
    126,035
    
    
    $
    109,442
    
    
    $
    245,817
    
    
    $
    217,340Income (loss) from
continuing
operations, net of
income taxes
    
    $
    9,614
    
    
    $
    (11,338
    )
    
    $
    19,822
    
    
    $
    (2,168
    )Income (loss) from
continuing
operations per
weighted average
share, diluted
    
    $
    0.38
    
    
    $
    (0.42
    )
    
    $
    0.74
    
    
    $
    (0.08
    )
  3. Discontinued Operations
   Three months ended
    
    Six months endedSept. 30,
    
    Sept. 30,
    
    Sept. 30,
    
    Sept. 30,2005
    
    2004
    
    2005
    
    2004Income from
discontinued operations, before income taxes
    
    $
    2,676
    
    
    $
    7,457
    
    
    $
    6,247
    
    
    $
    14,767Income tax
provision
    
    
    1,050
    
    
    
    2,827
    
    
    
    2,410
    
    
    
    5,575Income from
discontinued operations, net of income taxes
    
    $
    1,626
    
    
    $
    4,630
    
    
    $
    3,837
    
    
    $
    9,192
  Three months ended
    
    Six months endedSept. 30,
    
    Sept. 30,
    
    Sept. 30,
    
    Sept. 30,(in thousands)
    
    2005
    
    2004
    
    2005
    
    2004Net revenues
    
    $
    9,426
    
    
    $
    14,702
    
    
    $
    20,185
    
    
    $
    30,484Income before
income taxes
    
    $
    1,059
    
    
    $
    5,642
    
    
    $
    3,565
    
    
    $
    11,568
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PolyMedica Corporation
Notes to Consolidated Financial Statements
 4. Inventories
  Sept. 30,
    
    
    March 31,(in thousands)
    
    2005
    
    
    2005Raw materials
    
    $
    496
    
    
    $
    345Work in process
    
    
    55
    
    
    
    29Finished goods
    
    
    36,742
    
    
    
    25,356$
    37,293
    
    
    $
    25,730
  5. Goodwill and Other Intangible Assets
  Sept. 30,
    
    
    March 31,(in thousands)
    
    2005
    
    
    2005Goodwill:Diabetes
    
    $
    52,099
    
    
    $
    10,498Intangible assets:Diabetes patient lists
    
    $
    28,620
    
    
    $
    18,990Diabetes managed care contracts
    
    
    6,230
    
    
    
    Accumulated amortization
    
    
    (6,901
    )
    
    
    (4,036
    )Total consolidated intangible assets, net
    
    $
    27,949
    
    
    $
    14,954
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PolyMedica Corporation
Notes to Consolidated Financial Statements
  2006
    
    $
    4,1142007
    
    
    7,4232008
    
    
    7,0432009
    
    
    5,4762010 and thereafter
    
    
    3,893Total
    
    $
    27,949
 6. Direct-Response Advertising
    15




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PolyMedica Corporation
Notes to Consolidated Financial Statements
  Three months ended
    
    
    Six months endedSept. 30,
    
    
    Sept. 30,
    
    
    Sept. 30,
    
    
    Sept. 30,(in thousands)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Capitalized direct-response advertising
    
    $
    14,345
    
    
    $
    11,676
    
    
    $
    29,612
    
    
    $
    22,229Direct-response advertising amortization
    
    
    (10,487
    )
    
    
    (9,059
    )
    
    
    (20,418
    )
    
    
    (18,097
    )Impairment of direct-response advertising
    
    
    (324
    )
    
    
    
    
    
    
    (382
    )
    
    
    Increase in direct-response advertising
asset, net
    
    
    3,534
    
    
    
    2,617
    
    
    
    8,812
    
    
    
    4,132Beginning direct-response advertising asset,
net
    
    
    83,777
    
    
    
    66,468
    
    
    
    78,499
    
    
    
    64,953Ending direct-response advertising asset, net
    
    $
    87,311
    
    
    $
    69,085
    
    
    $
    87,311
    
    
    $
    69,085
  7. Accrued Expenses
  Sept. 30,
    
    
    March 31,(In thousands)
    
    2005
    
    
    2005Compensation and benefits
    
    $
    6,133
    
    
    $
    7,972Income tax payable
    
    
    17,609
    
    
    
    Overpayments by Medicare and others
    
    
    91
    
    
    
    1,720Other
    
    
    6,561
    
    
    
    5,882$
    30,394
    
    
    $
    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
     Commitments
  
 17




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##### Table of Contents



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




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##### Table of Contents



PolyMedica Corporation
Notes to Consolidated Financial Statements
  Three months ended
    
    
    Six months endedSept. 30,
    
    
    Sept. 30,
    
    
    Sept. 30,
    
    
    Sept. 30,(in thousands)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues:Diabetes
    
    $
    95,346
    
    
    $
    76,581
    
    
    $
    178,516
    
    
    $
    155,031Pharmacy
    
    
    21,081
    
    
    
    15,515
    
    
    
    40,439
    
    
    
    28,621Total
    
    $
    116,427
    
    
    $
    92,096
    
    
    $
    218,955
    
    
    $
    183,652Depreciation and
amortization expense:Diabetes
    
    $
    13,818
    
    
    $
    10,136
    
    
    $
    26,884
    
    
    $
    19,424Pharmacy
    
    
    97
    
    
    
    83
    
    
    
    191
    
    
    
    146Total
    
    $
    13,915
    
    
    $
    10,219
    
    
    $
    27,075
    
    
    $
    19,570Income (loss) from
continuing operations
before income taxes:Diabetes
    
    $
    13,596
    
    
    $
    11,291
    
    
    $
    27,429
    
    
    $
    26,031Pharmacy
    
    
    2,205
    
    
    
    (797
    )
    
    
    4,102
    
    
    
    (916
    )Settlement Charge
    
    
    
    
    
    
    (29,987
    )
    
    
    
    
    
    
    (29,987
    )Total
    
    $
    15,801
    
    
    $
    (19,493
    )
    
    $
    31,531
    
    
    $
    (4,872
    )Sept. 30,
    
    March 31,2005
    
    
    
    2005Segment assets:Diabetes
    
    
    
    
    
    
    
    
    
    $
    338,894
    
    
    $
    240,739Pharmacy
    
    
    
    
    
    
    
    
    
    
    11,691
    
    
    
    17,234Corporate Headquarters
    
    
    
    
    
    
    
    
    
    
    78,907
    
    
    
    96,122Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    1,544
    
    
    
    14,968Total
    
    
    
    
    
    
    
    
    
    $
    431,036
    
    
    $
    369,063
 11. Shareholders Equity
    19




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PolyMedica Corporation
Notes to Consolidated Financial Statements
  2006
    
    $
    1,1032007
    
    
    1,7442008
    
    
    1,3162009
    
    
    1,2222010
    
    
    183Total
    
    $
    5,568
 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)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Income (loss) from continuing operations, net of
income taxes
    
    $
    10,066
    
    
    $
    (11,777
    )
    
    $
    20,015
    
    
    $
    (2,566
    )BASIC:Weighted average common stock outstanding, net of
treasury stock, end of period
    
    
    24,473
    
    
    
    27,275
    
    
    
    26,224
    
    
    
    27,073Net income (loss) from continuing operations per
weighted average share, basic
    
    $
    0.41
    
    
    $
    (0.43
    )
    
    $
    0.76
    
    
    $
    (0.09
    )DILUTED:Weighted average common stock outstanding, net of
treasury stock, end of period
    
    
    24,473
    
    
    
    27,275
    
    
    
    26,224
    
    
    
    27,073Weighted average dilutive common stock equivalents
    
    
    580
    
    
    
    
    
    
    
    524
    
    
    
    Weighted average common stock and dilutive common
stock equivalents outstanding, net of treasury
stock
    
    
    25,053
    
    
    
    27,275
    
    
    
    26,748
    
    
    
    27,073Income (loss) from continuing operations, net of
income taxes, per weighted average share,
diluted
    
    $
    0.40
    
    
    $
    (0.43
    )
    
    $
    0.75
    
    
    $
    (0.09
    )
 Potentially Dilutive Stock Options
  13. Comprehensive Income
  20




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PolyMedica Corporation
Notes to Consolidated Financial Statements
 14. Subsequent Events
   21




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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 24-hour telephone support to patients; and
    
    using sophisticated software and advanced order fulfillment systems to provide
diabetes related products.
   22




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Pharmacy
    23




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Critical Accounting Policies
  Other
    24




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Results of Operations
 Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004
 Net Revenues
  Three Months Ended September 30,2005
    
    
    2004Net
    
    
    % Net
    
    
    Net
    
    
    % Net(in thousands)
    
    Revenues
    
    
    Revenues
    
    
    Revenues
    
    
    Revenues
    
    
    % ChangeDiabetes
    
    $
    95,346
    
    
    
    81.9
    %
    
    $
    76,581
    
    
    
    83.1
    %
    
    
    24.5
    %Pharmacy
    
    
    21,081
    
    
    
    18.1
    
    
    
    15,515
    
    
    
    16.9
    
    
    
    35.9Total net revenues
    
    $
    116,427
    
    
    
    100.0
    %
    
    $
    92,096
    
    
    
    100.0
    %
    
    
    26.4
    %
    25




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##### Table of Contents



Gross Margin
  Three Months Ended September 30,2005
    
    
    2004Gross
    
    
    Gross
    
    
    Gross
    
    
    Gross(in thousands)
    
    Margin
    
    
    Margin %
    
    
    Margin
    
    
    Margin %
    
    
    % ChangeGross margin:Diabetes
    
    $
    55,644
    
    
    
    58.4
    %
    
    $
    47,130
    
    
    
    61.5
    %
    
    
    18.1
    %Pharmacy
    
    
    7,330
    
    
    
    34.8
    
    
    
    4,548
    
    
    
    29.3
    
    
    
    61.2Total gross margin
    
    $
    62,974
    
    
    
    54.1
    %
    
    $
    51,678
    
    
    
    56.1
    %
    
    
    21.9
    %
  Selling, General and Administrative Expenses
 Three Months Ended September 30,% Net
    
    
    
    
    
    % Net(in thousands)
    
    2005
    
    Revenues
    
    2004
    
    RevenuesReported selling, general and administrative expenses
    
    $
    46,285
    
    
    
    39.8
    %
    
    $
    41,485
    
    
    
    45.1
    %Primary components of selling, general and
administrative expenses:Direct-response advertising amortization
    
    $
    10,487
    
    
    
    9.0
    %
    
    $
    8,097
    
    
    
    8.8
    %Provision for doubtful accounts
    
    $
    4,953
    
    
    
    4.3
    %
    
    $
    4,602
    
    
    
    5.0
    %Employee compensation
    
    $
    17,010
    
    
    
    14.6
    %
    
    $
    13,554
    
    
    
    14.7
    %
  Settlement Charge
  26




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Other income and expense
  Three Months Ended September 30,(in thousands)
    
    2005
    
    2004
    
    $ Change
    
    % ChangeInvestment income
    
    $
    218
    
    
    $
    316
    
    
    $
    (98
    )
    
    
    (31.0
    )%Interest expense
    
    $
    (1,106
    )
    
    $
    (15
    )
    
    $
    (1,091
    )
    
    
    (7273.3
    )%
  Income Taxes
  Three Months Ended September 30,(in thousands)
    
    2005
    
    
    2004Income tax provision (benefit)
    
    $
    5,735
    
    
    $
    (7,716
    )Effective tax rate
    
    
    36.3
    %
    
    
    39.6
    %
  Six Months Ended September 30, 2005 Compared to Six Months Ended September 30, 2004
 Net Revenues
  Six Months Ended September 30,2005
    
    
    2004Net
    
    
    % Net
    
    
    Net
    
    
    % Net(in thousands)
    
    Revenues
    
    
    Revenues
    
    
    Revenues
    
    
    Revenues
    
    
    % ChangeDiabetes
    
    $
    178,516
    
    
    
    81.5
    %
    
    $
    155,031
    
    
    
    84.4
    %
    
    
    15.2
    %Pharmacy
    
    
    40,439
    
    
    
    18.5
    
    
    
    28,621
    
    
    
    15.6
    
    
    
    41.3Total net revenues
    
    $
    218.955
    
    
    
    100.0
    %
    
    $
    183,652
    
    
    
    100.0
    %
    
    
    19.2
    %
 27




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Gross Margin
  Six Months Ended September 30,2005
    
    
    2004Gross
    
    
    Gross
    
    
    Gross
    
    
    Gross(in thousands)
    
    Margin
    
    
    Margin %
    
    
    Margin
    
    
    Margin %
    
    
    % ChangeGross margin:Diabetes
    
    $
    106,617
    
    
    
    59.7
    %
    
    $
    94,794
    
    
    
    61.2
    %
    
    
    12.5
    %Pharmacy
    
    
    13,811
    
    
    
    34.2
    
    
    
    8,470
    
    
    
    29.6
    
    
    
    63.1Total gross margin
    
    $
    120,428
    
    
    
    55.0
    %
    
    $
    103,264
    
    
    
    56.2
    %
    
    
    16.6
    %
  28




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Selling, General and Administrative Expenses
 Six Months Ended September 30,% Net
    
    
    
    
    
    % Net(in thousands)
    
    2005
    
    Revenues
    
    2004
    
    RevenuesReported selling, general and
administrative expenses
    
    $
    88,322
    
    
    
    40.3
    %
    
    $
    78,618
    
    
    
    42.8
    %Primary components of selling, general
and administrative expenses:Direct-response advertising amortization
    
    $
    20,418
    
    
    
    9.3
    %
    
    $
    15,693
    
    
    
    8.5
    %Provision for doubtful accounts
    
    $
    9,525
    
    
    
    4.4
    %
    
    $
    9,205
    
    
    
    5.0
    %Employee compensation
    
    $
    31,714
    
    
    
    14.5
    %
    
    $
    27,202
    
    
    
    14.8
    %
  Other income and expense
  Six Months Ended September 30,(in thousands)
    
    2005
    
    2004
    
    $ Change
    
    % ChangeInvestment income
    
    $
    699
    
    
    $
    501
    
    
    $
    198
    
    
    
    39.5
    %Interest expense
    
    $
    (1,274
    )
    
    $
    (32
    )
    
    $
    (1,242
    )
    
    
    (3881.3
    )%
  29




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Income Taxes
  Six Months Ended September 30,(in thousands)
    
    2005
    
    
    2004Income tax provision (benefit)
    
    $
    11,516
    
    
    $
    (2,306
    )Effective tax rate
    
    
    36.5
    %
    
    
    47.3
    %
  Liquidity and Capital Resources
  Six Months Ended September 30,(in thousands)
    
    2005
    
    
    2004Net cash provided by operating activities
    
    $
    29,956
    
    
    $
    37,168Net cash used for investing activities
    
    
    (20,110
    )
    
    
    (9,625
    )Net cash provided by (used for)
financing activities
    
    
    (21,770
    )
    
    
    1,136Net change in cash and cash equivalents
    
    $
    (11,924
    )
    
    $
    28,679
    30




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New Accounting Pronouncements
     31




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32




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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
  33




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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
  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
  34




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##### Table of Contents



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
  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 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
  35




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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 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;
    
    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
 36




---



##### Table of Contents




    
    incurrence of debt and related interest expense.
  We may issue preferred stock with rights senior to our common stock
  37




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  38




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##### Table of Contents



Item 4. Controls and Procedures
 (1) Disclosure controls and procedures
  (2) Changes in internal controls
  39




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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
 Total
    
    
    
    
    
    
    
    
    
    Maximum Number ofNumber of
    
    Average
    
    Total Number of Shares
    
    Shares that may yetShares
    
    Price Paid
    
    Purchased as Part of Publicly
    
    be Purchased underPurchased
    

per Share
    

Announced Plans or Programs
    
    the Plans or Programs(in
thousands)July
    
    
    4,000,000
    
    
    $
    37.50
    
    
    
    4,000,000
    
    
    
    2,000,000August
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    September
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    4,000,000
    
    
    $
    37.50
    
    
    
    4,000,000
    
    
    
    2,000,000
 40




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
   Nominees for Election as Directors:
    
    FOR
    
    WITHHELDThomas O. Pyle
    
    
    21,467,631
    
    
    
    1,204,439Samuel L. Shanaman
    
    
    21,804,716
    
    
    
    867,354Alan D. Solomont
    
    
    22,199,257
    
    
    
    472,813
  FOR
    
    AGAINST
    
    ABSTAIN
    
    BROKER NON-VOTES11,226,549
    
    
    6,239,452
    
    
    
    431,213
    
    
    
    4,774,8563. To ratify the selection by the Board of PricewaterhouseCoopers LLP as PolyMedicas public
accountants for the fiscal year ending March 31, 2006:FOR
    
    AGAINST
    
    ABSTAIN22,099,915
    
    
    534,706
    
    
    
    37,449
 41




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Item 6. Exhibits
  42




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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)
  43




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Exhibit Index
 ExhibitNumber
    
    
    
    Description10.53
    
    
    
    Form of option agreement for issuances from the Companys 2000 Stock Incentive Plan.10.54
    
    

    
    Form of restricted stock agreement for issuances from the Companys 2000 Stock Incentive Plan.10.55
    
    
    
    Equity Purchase Agreement by and
between the Registrant and National Diabetic Pharmacies, Inc., dated
August 5, 2005.31.1
    
    
    
    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.
 44