##### 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, 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 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)701 Edgewater Drive, Suite 360, Wakefield, Massachusetts
    
    01880(Address of Principal Executive Offices)
    
    (Zip Code)(781) 486-8111
(Registrants Telephone Number, Including Area Code)
 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, 2006
    
    
    3Consolidated Statements of Income for the three and nine months ended
December 31, 2006 and 2005
    
    
    5Consolidated Statements of Cash Flows for the nine months ended
December 31, 2006 and 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    23Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4.
    
    Controls and Procedures
    
    
    33PART IIItem 1.
    
    Legal Proceedings
    
    
    34Item 1A.
    
    Risk Factors
    
    
    34Item 6.
    
    Exhibits
    
    
    41Signatures
    
    
    42Exhibit Index
    
    
    43EX-3.1 First Amendment to the Restated By-LawsEx-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)
 December 31,
    
    
    March 31,2006
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,327
    
    
    $
    9,101Accounts receivable (net of allowances
of $29,483 and $28,169 as of December 31
and March 31, 2006, respectively)
    
    
    104,597
    
    
    
    104,013Inventories
    
    
    44,638
    
    
    
    34,467Deferred income taxes
    
    
    4,334
    
    
    
    4,334Income tax receivable
    
    
    
    
    
    
    6,662Prepaid expenses and other current assets
    
    
    17,896
    
    
    
    9,896Total current assets
    
    
    172,792
    
    
    
    168,473Property, plant and equipment, net
    
    
    61,900
    
    
    
    64,678Goodwill
    
    
    64,598
    
    
    
    64,488Intangible assets, net
    
    
    43,593
    
    
    
    27,228Direct-response advertising, net
    
    
    99,488
    
    
    
    91,653Notes receivable
    
    
    9,641
    
    
    
    9,548Other assets
    
    
    8,850
    
    
    
    3,249Total assets
    
    $
    460,862
    
    
    $
    429,317
  3




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##### Table of Contents



PolyMedica Corporation
 Consolidated Balance Sheets
 (Unaudited)
 (In thousands, except share and per share amounts)
 December 31,
    
    
    March 31,2006
    
    
    2006LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    28,493
    
    
    $
    26,363Accrued expenses
    
    
    32,678
    
    
    
    20,652Current portion, capital lease obligations
    
    
    652
    
    
    
    596Total current liabilities
    
    
    61,823
    
    
    
    47,611Capital lease and other obligations
    
    
    1,756
    
    
    
    1,144Credit facility
    
    
    57,600
    
    
    
    190,000Convertible subordinated notes
    
    
    180,000
    
    
    
    Deferred income taxes
    
    
    11,035
    
    
    
    31,411Total liabilities
    
    
    312,214
    
    
    
    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; 22,559,900 and 23,050,924 shares
issued as of December 31 and March 31, 2006
    
    
    226
    
    
    
    230Additional paid-in capital
    
    
    143,793
    
    
    
    142,468Retained earnings
    
    
    4,629
    
    
    
    16,453Total shareholders equity
    
    
    148,648
    
    
    
    159,151Total liabilities and shareholders equity
    
    $
    460,862
    
    
    $
    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
    
    
    Nine Months EndedDec. 31,Dec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,
    
    
    20052006
    
    
    2005
    
    
    2006
    
    
    As RestatedNet revenues
    
    $
    177,215
    
    
    $
    131,931
    
    
    $
    497,214
    
    
    $
    350,886Cost of sales
    
    
    98,934
    
    
    
    62,999
    
    
    
    270,642
    
    
    
    161,526Gross margin
    
    
    78,281
    
    
    
    68,932
    
    
    
    226,572
    
    
    
    189,360Selling, general and administrative expenses
    
    
    61,040
    
    
    
    52,328
    
    
    
    181,519
    
    
    
    140,650Income from operations
    
    
    17,241
    
    
    
    16,604
    
    
    
    45,053
    
    
    
    48,710Other income and expense:Investment income
    
    
    351
    
    
    
    232
    
    
    
    737
    
    
    
    931Interest and other expense
    
    
    (2,097
    )
    
    
    (1,696
    )
    
    
    (8,454
    )
    
    
    (2,970
    )(1,746
    )
    
    
    (1,464
    )
    
    
    (7,717
    )
    
    
    (2,039
    )Income from continuing operations before income taxes
    
    
    15,495
    
    
    
    15,140
    
    
    
    37,336
    
    
    
    46,671Income tax provision
    
    
    5,656
    
    
    
    5,526
    
    
    
    13,628
    
    
    
    17,042Income from continuing operations, net of income taxes
    
    
    9,839
    
    
    
    9,614
    
    
    
    23,708
    
    
    
    29,629Discontinued operations, net of income taxes
    
    
    
    
    
    
    264
    
    
    
    
    
    
    
    23,904Net income
    
    $
    9,839
    
    
    $
    9,878
    
    
    $
    23,708
    
    
    $
    53,533Income from continuing operations per weighted
average share, basic
    
    $
    0.44
    
    
    $
    0.40
    
    
    $
    1.04
    
    
    $
    1.16Income from discontinued operations per weighted
average share, basic
    
    
    
    
    
    
    0.01
    
    
    
    
    
    
    
    0.95Net income per weighted average share, basic
    
    $
    0.44
    
    
    $
    0.41
    
    
    $
    1.04
    
    
    $
    2.11Income from continuing operations per weighted
average share, diluted
    
    $
    0.43
    
    
    $
    0.40
    
    
    $
    1.01
    
    
    $
    1.14Income from discontinued operations per weighted
average share, diluted
    
    
    
    
    
    
    0.01
    
    
    
    
    
    
    
    0.93Net income per weighted average share, diluted
    
    $
    0.43
    
    
    $
    0.41
    
    
    $
    1.01
    
    
    $
    2.07Cash dividend per share
    
    $
    0.15
    
    
    $
    0.15
    
    
    $
    0.45
    
    
    $
    0.45Weighted average shares, basic
    
    
    22,546
    
    
    
    23,787
    
    
    
    22,895
    
    
    
    25,412Weighted average shares, diluted
    
    
    23,151
    
    
    
    24,270
    
    
    
    23,419
    
    
    
    25,922
  5




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PolyMedica Corporation
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 (In thousands)
 Nine Months EndedDecember 31,20052006
    
    
    As RestatedOperating activities:Net income
    
    
    23,708
    
    
    $
    53,533Income from discontinued operations
    
    
    
    
    
    
    (23,904
    )Adjustments to reconcile net income to net cash flows:Depreciation and amortization
    
    
    17,766
    
    
    
    11,010Amortization of direct-response advertising
    
    
    36,235
    
    
    
    31,246Direct-response advertising expenditures
    
    
    (44,145
    )
    
    
    (40,560
    )Provision for bad debts
    
    
    15,824
    
    
    
    14,477Provision for sales allowances/returns
    
    
    9,770
    
    
    
    12,113Stock-based compensation expense
    
    
    8,954
    
    
    
    1,144Tax benefit from exercise of stock options
    
    
    921
    
    
    
    Deferred income taxes
    
    
    (3,268
    )
    
    
    (Gain)/loss
on sale of property and equipment
    
    
    (532
    )
    
    
    (126
    )Loss on impairment of direct-response advertising
    
    
    75
    
    
    
    382Imputed interest on note payable
    
    
    
    
    
    
    101Changes in assets and liabilities excluding effects of acquisitions
and dispositions:Accounts receivable
    
    
    (26,178
    )
    
    
    (52,308
    )Income tax receivable
    
    
    6,662
    
    
    
    1,085Inventories
    
    
    (10,171
    )
    
    
    (10,308
    )Prepaid expenses and other assets
    
    
    (7,464
    )
    
    
    (2,037
    )Accounts payable
    
    
    2,130
    
    
    
    10,388Accrued expenses and other liabilities
    
    
    12,027
    
    
    
    (3,812
    )Net cash flows provided by continuing operations
    
    
    42,314
    
    
    
    2,424Net cash flows provided by discontinued operations
    
    
    
    
    
    
    9,295Net cash flows provided by operating activities
    
    
    42,314
    
    
    
    11,719Investing activities:Purchase of marketable securities
    
    
    
    
    
    
    (2,288
    )Proceeds from maturing marketable securities
    
    
    
    
    
    
    9,092Proceeds from sale of businesses
    
    
    
    
    
    
    42,098Purchase of business
    
    
    
    
    
    
    (75,373
    )Issuance of note receivable
    
    
    
    
    
    
    (5,000
    )Purchase of property, plant and equipment
    
    
    (8,143
    )
    
    
    (7,943
    )Purchase of intangible assets
    
    
    (26,598
    )
    
    
    (7,051
    )Proceeds from sale of equipment
    
    
    3,885
    
    
    
    545Net cash flows used for continuing operations
    
    
    (30,856
    )
    
    
    (45,920
    )Net cash flows used for discontinued operations
    
    
    
    
    
    
    (101
    )Net cash flows used for investing activities
    
    
    (30,856
    )
    
    
    (46,021
    )Financing activities:Proceeds from issuance of common and restricted stock
    
    
    4,583
    
    
    
    5,902Proceeds 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
(paid for)/received from line of credit
    
    
    (132,400
    )
    
    
    167,500Repurchase of common stock
    
    
    (29,624
    )
    
    
    (190,977
    )
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Nine Months EndedDecember 31,20052006
    
    
    As RestatedPayment of costs for stock repurchase
    
    
    
    
    
    
    (1,233
    )Payment of dividends declared on common stock
    
    
    (10,408
    )
    
    
    (11,490
    )Payment of debt issuance costs
    
    
    (5,812
    )
    
    
    (1,155
    )Proceeds from equipment line of credit
    
    
    678
    
    
    
    Excess tax benefit from exercise of stock options
    
    
    523
    
    
    
    Payment of capital lease obligations
    
    
    (504
    )
    
    
    (420
    )Net cash flows provided by (used for) financing activities
    
    
    (19,232
    )
    
    
    (31,873
    )Net change in cash and cash equivalents
    
    
    (7,774
    )
    
    
    (66,175
    )Cash and cash equivalents at beginning of period
    
    
    9,101
    
    
    
    72,246Cash and cash equivalents at end of period
    
    $
    1,327
    
    
    $
    6,071Supplemental disclosure of cash flow information:Disposal of equipment
    
    $
    4,078
    
    
    $
    1,954
  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
  Nine Months EndedDec. 31, 2005As Reported
    
   As
RestatedIncome from discontinued operations, net of
income taxes
    
    $
    26,344
    
    
    $
    23,904Net income
    
    $
    55,973
    
    
    $
    53,533Income from discontinued operations per
weighted average share, basic
    
    $
    1.04
    
    
    $
    0.95Net income per weighted average share, basic
    
    $
    2.20
    
    
    $
    2.11Income from discontinued operations per
weighted average share, diluted
    
    $
    1.02
    
    
    $
    0.93Net income per weighted average share, diluted
    
    $
    2.16
    
    
    $
    2.07
 2. Accounts receivable and revenue
     9




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PolyMedica Corporation
Notes to Consolidated Financial Statements
  3. Inventories
  4. Direct-Response Advertising
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Capitalized direct-response advertising
additions
    
    $
    14,833
    
    
    $
    10,948
    
    
    $
    44,145
    
    
    $
    40,560Direct-response advertising amortization
    
    
    (12,540
    )
    
    
    (10,828
    )
    
    
    (36,235
    )
    
    
    (31,246
    )Impairment of direct-response advertising
    
    
    (75
    )
    
    
    
    
    
    
    (75
    )
    
    
    (382
    )Increase in direct-response advertising
asset, net
    
    
    2,218
    
    
    
    120
    
    
    
    7,835
    
    
    
    8,932Beginning direct-response advertising asset,
net
    
    
    97,270
    
    
    
    87,311
    
    
    
    91,653
    
    
    
    78,499Ending direct-response advertising asset, net
    
    $
    99,488
    
    
    $
    87,431
    
    
    $
    99,488
    
    
    $
    87,431
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PolyMedica Corporation
Notes to Consolidated Financial Statements
 5. Goodwill and Other Intangible Assets
  December 31,
    
    
    March 31,(in thousands)
    
    2006
    
    
    2006Goodwill:Diabetes
    
    $
    64,598
    
    
    $
    64,488Intangible assets:Diabetes patient lists
    
    $
    56,782
    
    
    $
    30,436Diabetes managed care and other contracts
    
    
    8,558
    
    
    
    8,341Accumulated amortization
    
    
    (21,747
    )
    
    
    (11,549
    )Total consolidated intangible assets, net
    
    $
    43,593
    
    
    $
    27,228
  December 31, 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
    
    
    $
    56,782
    
    
    $
    (19,979
    )
    
    $
    36,803
    
    
    $
    30,436
    
    
    
    (10,847
    )
    
    $
    19,589Other contracts
    
    
    2-9
    
    
    
    8,133
    
    
    
    (1,542
    )
    
    
    6,591
    
    
    
    8,133
    
    
    
    (649
    )
    
    
    7,484Covenants not to
compete
    
    
    < 1
    
    
    
    425
    
    
    
    (226
    )
    
    
    199
    
    
    
    208
    
    
    
    (53
    )
    
    
    155Total
    
    
    
    
    
    $
    65,340
    
    
    $
    (21,747
    )
    
    $
    43,593
    
    
    $
    38,777
    
    
    $
    (11,549
    )
    
    $
    27,228
  Remainder of fiscal year 2007
    
    $
    4,093Fiscal year 2008
    
    
    14,469Fiscal year 2009
    
    
    12,164Fiscal year 2010
    
    
    8,3672011 and thereafter
    
    
    4,500Total
    
    $
    43,593
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PolyMedica Corporation
Notes to Consolidated Financial Statements
 6. Accrued Expenses
  December 31,
    
    
    March 31,(In thousands)
    
    2006
    
    
    2006Compensation and Benefits
    
    $
    5,900
    
    
    $
    8,270Proposed Settlement of Class Action Lawsuit
    
    
    5,500
    
    
    
    Income Tax
    
    
    5,494
    
    
    
    Inventory Receipts
    
    
    7,956
    
    
    
    2,791Other
    
    
    7,828
    
    
    
    9,591$
    32,678
    
    
    $
    20,652
    7. Credit Facility and Convertible Subordinated Notes
 Credit facility
   Convertible subordinated notes
  12




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PolyMedica Corporation
Notes to Consolidated Financial Statements
      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
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net revenues:Diabetes
    
    $
    122,047
    
    
    $
    110,481
    
    
    $
    352,527
    
    
    $
    288,997Pharmacy
    
    
    55,168
    
    
    
    21,450
    
    
    
    144,687
    
    
    
    61,889Total
    
    $
    177,215
    
    
    $
    131,931
    
    
    $
    497,214
    
    
    $
    350,886Gross margin:Diabetes
    
    $
    68,918
    
    
    $
    60,941
    
    
    $
    199,392
    
    
    $
    167,558Pharmacy
    
    
    9,363
    
    
    
    7,991
    
    
    
    27,180
    
    
    
    21,802Total
    
    $
    78,281
    
    
    $
    68,932
    
    
    $
    226,572
    
    
    $
    189,360Reconciliation of segment gross margin to
income from continuing operations before
income taxes:Diabetes gross margin
    
    $
    68,918
    
    
    $
    60,941
    
    
    $
    199,392
    
    
    $
    167,558Pharmacy gross margin
    
    
    9,363
    
    
    
    7,991
    
    
    
    27,180
    
    
    
    21,802Selling, general and administrative expenses
    
    
    (61,040
    )
    
    
    (52,328
    )
    
    
    (181,519
    )
    
    
    (140,650
    )Other income and expense
    
    
    (1,746
    )
    
    
    (1,464
    )
    
    
    (7,717
    )
    
    
    (2,039
    )Income from continuing operations before
income taxes
    
    $
    15,495
    
    
    $
    15,140
    
    
    $
    37,336
    
    
    $
    46,671
 December 31,
    
    
    March 31,2006
    
    
    2006Segment assets:Diabetes
    
    $
    369,270
    
    
    $
    365,546Pharmacy
    
    
    36,572
    
    
    
    18,279Corporate Headquarters and Liberty Healthcare
Group, Inc.
    
    
    55,020
    
    
    
    45,492Total
    
    $
    460,862
    
    
    $
    429,317
 10. Shareholders Equity
  Balance at March 31, 2006
    
    $
    159,151Nine months ended December 31, 2006:Net income
    
    
    23,708Proceeds from sale of warrants
    
    
    20,736Tax benefit of derivatives
    
    
    17,108Stock-based compensation
    
    
    8,954Proceeds from the exercise of stock options
    
    
    4,583Tax benefit from exercise of stock options
    
    
    1,444Dividends paid
    
    
    (10,408
    )Repurchase of common stock
    
    
    (29,624
    )Purchase of note hedge, net of fees
    
    
    (47,004
    )Balance at December 31, 2006
    
    $
    148,648
  
 16




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##### Table of Contents



PolyMedica Corporation
Notes to Consolidated Financial Statements
 11. Stock-Based Compensation
   SFAS
No. 123(R).
   Stock Options
 17




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##### Table of Contents



PolyMedica Corporation
Notes to Consolidated Financial Statements
   Three months ended
    
    Nine months endedDec. 31,
    
    Dec. 31,
    
    Dec. 31,
    
    Dec. 31,2006
    
    2005
    
    2006
    
    2005Dividend yield
    
    
    1.50
    %
    
    
    1.70
    %
    
    
    1.49
    %
    
    
    1.70
    %Expected volatility
    
    
    31.72
    %
    
    
    36.11
    %
    
    
    33.26
    %
    
    
    40.47
    %Risk-free interest
rate
    
    
    4.62
    %
    
    
    4.37
    %
    
    
    4.77
    %
    
    
    3.92
    %Expected life
    
    
    3.75
    
    
    
    3.75
    
    
    
    3.75
    
    
    
    3.75
 Three months ended
    
    Nine months endedDec. 31,
    
    Dec. 31,
    
    Dec. 31,
    
    Dec. 31,2006
    
    2005
    
    2006
    
    2005Weighted average
fair value of
options granted
    
    $
    10.85
    
    
    $
    10.31
    
    
    $
    9.06
    
    
    $
    11.42Weighted average
fair value of
Employee Stock
Purchase Plan
rights granted
below fair value
    
    $
    10.15
    
    
    $
    6.49
    
    
    $
    9.09
    
    
    $
    6.46
  Weighted AverageWeighted
    
    Aggregate
    
    RemainingOption
    
    Average
    
    Intrinsic Value
    
    Contractual TermShares
    
    Option Price
    
    (in thousands)
    
    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
    
    
    
    7.62Granted
    
    
    34,000
    
    
    
    40.00Exercised
    
    
    (10,000
    )
    
    
    24.80Cancelled
    
    
    (35,000
    )
    
    
    22.65Outstanding as of December 31, 2006
    
    
    3,027,436
    
    
    
    29.91
    
    
    $
    31,823
    
    
    
    7.49Vested and exercisable as of
December 31, 2006
    
    
    1,857,993
    
    
    
    27.18
    
    
    $
    24,574
    
    
    
    6.96
 18




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##### Table of Contents



PolyMedica Corporation
Notes to Consolidated Financial Statements
   Restricted Stock Awards
  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
    
    
    $
    32.57Granted
    
    
    23,850
    
    
    $
    0.01
    
    
    $
    41.93Vested
    
    
    (3,095
    )
    
    $
    0.01
    
    
    $
    35.62Cancelled
    
    
    
    
    
    
    Non-vested as of December 31, 2006
    
    
    333,665
    
    
    $
    0.01
    
    
    $
    33.21
   19




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##### Table of Contents



PolyMedica Corporation
Notes to Consolidated Financial Statements
    Three Months
    
    
    Nine MonthsEnded
    
    
    EndedDecember 31,
    
    
    December 31,(in thousands, except per share data)
    
    2005
    
    
    2005Income from continuing operations, net of
income taxes
    
    $
    9,614
    
    
    $
    29,629Add back: Stock compensation costs, net of
tax, on options and restricted stock
granted below fair market value
    
    
    360
    
    
    
    727Less: Stock compensation costs, net of tax,
had all employee options and restricted
stock been recorded at fair value
    
    
    (1,928
    )
    
    
    (5,854
    )Adjusted net income
    
    $
    8,046
    
    
    $
    24,502Net income per weighted average share,
basic, as reported
    
    $
    0.40
    
    
    $
    1.16Net income per weighted average share,
diluted, as reported
    
    $
    0.40
    
    
    $
    1.14Adjusted net income per weighted average
share, basic
    
    $
    0.34
    
    
    $
    0.96Adjusted net income per weighted average
share, diluted
    
    $
    0.33
    
    
    $
    0.95
  20




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##### Table of Contents



PolyMedica Corporation
Notes to Consolidated Financial Statements
 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)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Income from continuing operations, net of income taxes
    
    $
    9,839
    
    
    $
    9,614
    
    
    $
    23,708
    
    
    $
    29,629BASIC:Weighted average common stock issued and outstanding,
end of period
    
    
    22,546
    
    
    
    23,787
    
    
    
    22,895
    
    
    
    25,412Income from continuing operations, net of income
taxes, per weighted average share, basic
    
    $
    0.44
    
    
    $
    0.40
    
    
    $
    1.04
    
    
    $
    1.16DILUTED:Weighted average common stock issued and outstanding,
end of period
    
    
    22,546
    
    
    
    23,787
    
    
    
    22,895
    
    
    
    25,412Weighted average dilutive common stock equivalents
    
    
    605
    
    
    
    483
    
    
    
    524
    
    
    
    510Weighted average common stock and dilutive common
stock equivalents outstanding
    
    
    23,151
    
    
    
    24,270
    
    
    
    23,419
    
    
    
    25,922Income from continuing operations, net of income
taxes, per weighted average share, diluted
    
    $
    0.43
    
    
    $
    0.40
    
    
    $
    1.01
    
    
    $
    1.14
 Potentially Dilutive Common Stock Equivalents
   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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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Future Operating Results
   Overview
  Diabetes
  -
    
    providing 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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##### Table of Contents



Critical Accounting Policies
   Stock-based compensation
  Seasonality
   25




---



##### Table of Contents



Other
   Results of Operations
 Three Months Ended December 31, 2006 Compared to Three Months Ended December 31, 2005
 Net Revenues
  Three Months Ended December 31,2006
    
    
    2005Net
    
    
    % Net
    
    
    Net
    
    
    % Net(in thousands)
    
    Revenues
    
    
    Revenues
    
    
    Revenues
    
    
    Revenues
    
    
    $ Change
    
    
    % ChangeNet revenues:Diabetes
    
    $
    122,047
    
    
    
    68.9
    %
    
    $
    110,481
    
    
    
    83.7
    %
    
    $
    11,566
    
    
    
    10.5
    %Pharmacy
    
    
    55,168
    
    
    
    31.1
    
    
    
    21,450
    
    
    
    16.3
    
    
    
    33,718
    
    
    
    157.2Total net revenues
    
    $
    177,215
    
    
    
    100.0
    %
    
    $
    131,931
    
    
    
    100.0
    %
    
    $
    45,284
    
    
    
    34.3
    %
   26




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##### Table of Contents



Gross Margin
  Three Months Ended December 31,2006
    
    
    2005Gross
    
    
    Gross
    
    
    Gross
    
    
    Gross(in thousands)
    
    Margin
    
    
    Margin %
    
    
    Margin
    
    
    Margin %
    
    
    $ Change
    
    
    % ChangeGross margin:Diabetes
    
    $
    68,918
    
    
    
    56.5
    %
    
    $
    60,941
    
    
    
    55.2
    %
    
    $
    7,977
    
    
    
    13.1
    %Pharmacy
    
    
    9,363
    
    
    
    17.0
    
    
    
    7,991
    
    
    
    37.3
    
    
    
    1,372
    
    
    
    17.2Total gross margin
    
    $
    78,281
    
    
    
    44.2
    %
    
    $
    68,932
    
    
    
    52.2
    %
    
    $
    9,349
    
    
    
    13.6
    %
    Selling, General and Administrative Expenses
  Dec. 31,
    
    
    Dec. 31,2006
    
    
    2005Employee compensation and benefits
    
    $
    23,499
    
    
    $
    22,261Direct-response advertising amortization
    
    
    12,540
    
    
    
    10,828Depreciation expense
    
    
    2,492
    
    
    
    1,964Amortization of intangible assets
    
    
    4,061
    
    
    
    2,389Provision for doubtful accounts
    
    
    4,495
    
    
    
    4,952Stock-based compensation
    
    
    3,001
    
    
    
    565Other
    
    
    10,952
    
    
    
    9,369Selling, general and administrative expenses
    
    $
    61,040
    
    
    $
    52,328Selling, general and administrative expenses as a percentage of net revenues
    
    
    34.4
    %
    
    
    39.7
    %
  27




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##### Table of Contents



Other Income and Expense
  Three Months Ended December 31,(in thousands)
    
    2006
    
    2005
    
    $ Change
    
    % ChangeInvestment income
    
    $
    351
    
    
    $
    232
    
    
    $
    119
    
    
    
    51.3
    %Interest and other expense
    
    $
    (2,097
    )
    
    $
    (1,696
    )
    
    $
    (401
    )
    
    
    (23.6
    )%
  Income Taxes
  Three Months Ended December 31,(in thousands)
    
    2006
    
    2005Income tax provision
    
    $
    5,656
    
    
    $
    5,526Effective tax rate
    
    
    36.5
    %
    
    
    36.5
    %
 ,
 Nine Months Ended December 31, 2006 Compared to Nine Months Ended December 31, 2005
 Net Revenues
  28




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Nine Months Ended December 31,2006
    
    
    2005Net
    
    
    % Net
    
    
    Net
    
    
    % Net(in thousands)
    
    Revenues
    
    
    Revenues
    
    
    Revenues
    
    
    Revenues
    
    
    % ChangeDiabetes
    
    $
    352,527
    
    
    
    70.9
    %
    
    $
    288,997
    
    
    
    82.4
    %
    
    
    22.0
    %Pharmacy
    
    
    144,687
    
    
    
    29.1
    
    
    
    61,889
    
    
    
    17.6
    
    
    
    133.8Total net revenues
    
    $
    497,214
    
    
    
    100.0
    %
    
    $
    350,886
    
    
    
    100.0
    %
    
    
    41.7
    %
  Nine Months EndedDecember 31, 2005Net
    
    
    % Net(in thousands)
    
    Revenues
    
    
    RevenuesDiabetes
    
    $
    315,859
    
    
    
    83.6
    %Pharmacy
    
    
    61,889
    
    
    
    16.4Total net revenues
    
    $
    377,748
    
    
    
    100.0
    %
    Gross Margin
  Nine Months Ended December 31,2006
    
    
    2005Gross
    
    
    Gross
    
    
    Gross
    
    
    Gross(in thousands)
    
    Margin
    
    
    Margin %
    
    
    Margin
    
    
    Margin %
    
    
    % ChangeGross margin:Diabetes
    
    $
    199,392
    
    
    
    56.6
    %
    
    $
    167,558
    
    
    
    58.0
    %
    
    
    19.0
    %Pharmacy
    
    
    27,180
    
    
    
    18.8
    
    
    
    21,802
    
    
    
    35.2
    
    
    
    24.7Total gross margin
    
    $
    226,572
    
    
    
    45.6
    %
    
    $
    189,360
    
    
    
    54.0
    %
    
    
    19.7
    %
  29




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##### Table of Contents



Nine Months EndedDecember 31, 2005Gross
    
    
    Gross(in thousands)
    
    Margin
    
    
    Margin %Gross margin:Diabetes
    
    $
    175,095
    
    
    
    55.4
    %Pharmacy
    
    
    21,802
    
    
    
    35.2Total gross margin
    
    $
    196,897
    
    
    
    52.1
    %
   Selling, General and Administrative Expenses
  Dec. 31,
    
    
    Dec. 31,2006
    
    
    2005Employee compensation and benefits
    
    $
    70,407
    
    
    $
    59,812Direct-response advertising amortization
    
    
    36,235
    
    
    
    31,246Depreciation expense
    
    
    7,568
    
    
    
    5,757Amortization of intangible assets
    
    
    10,198
    
    
    
    5,253Provision for doubtful accounts
    
    
    15,824
    
    
    
    14,477Stock-based compensation
    
    
    8,954
    
    
    
    1,144Other
    
    
    32,333
    
    
    
    22,961Selling, general and administrative expenses
    
    $
    181,519
    
    
    $
    140,650Selling, general and administrative expenses as a percentage of net revenues
    
    
    36.5
    %
    
    
    40.1
    %
   Other income and expense
  30




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##### Table of Contents



Nine Months Ended December 31,(in thousands)
    
    2006
    
    2005
    
    $ Change
    
    % ChangeInvestment income
    
    $
    737
    
    
    $
    931
    
    
    $
    (194
    )
    
    
    (20.8
    )%Interest expense
    
    $
    (8,454
    )
    
    $
    (2,970
    )
    
    $
    (5,484
    )
    
    
    (184.7
    )%
  Income Taxes
  Nine Months Ended December 31,(in thousands)
    
    2006
    
    2005Income tax provision (benefit)
    
    $
    13,628
    
    
    $
    17,042Effective tax rate
    
    
    36.5
    %
    
    
    36.5
    %
 ,
 Liquidity and Capital Resources
  Nine Months Ended December 31,(in thousands)
    
    2006
    
    
    2005Net cash provided by operating activities
    
    $
    42,314
    
    
    $
    11,719Net cash used for investing activities
    
    
    (30,856
    )
    
    
    (46,021
    )Net cash provided by (used for)
financing activities
    
    
    (19,232
    )
    
    
    (31,873
    )Net change in cash and cash equivalents
    
    $
    (7,774
    )
    
    $
    (66,175
    )
  31




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32




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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
 33




---



##### Table of Contents



Changes in internal controls
  
 PART
II  OTHER INFORMATION
 
 Item 1.  Legal Proceedings
      
 Item 1A.  Risk Factors
  34




---



##### Table of Contents



We could experience significantly reduced revenues and profits if payers change, delay or deny
reimbursement
   Our
ability to navigate the challenges of the Medicare Prescription Drug
program could negatively impact our Pharmacy segment
   Competitive bidding for durable medical equipment suppliers could negatively affect our Diabetes
segment
  35




---



##### Table of Contents



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
 ,
 The profitability of our segments will decrease if we do not receive recurring orders from patients
  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
  The market price of our common stock may experience substantial fluctuations for reasons over which
we have little control
  36




---



##### Table of Contents




    
    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
  We could experience a charge to earnings as a result of an impairment of our goodwill,
direct-response advertising or other intangible assets
  37




---



##### Table of Contents



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
  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
  38




---



##### Table of Contents




    
    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.
  A fundamental change and the provisions in the Notes related to the occurrence of a fundamental
change may adversely affect us
  39




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##### Table of Contents



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
  40




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##### Table of Contents



Item 6. Exhibits
  41




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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)  42




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##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    
    
    Description3.1
    
    -
    
    First Amendment to the Restated Bylaws of the Company adopted
November 17, 2006.31.1
    
    -
    
    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.
 43