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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
|_| 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
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3033368
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
As of August 14, 2002, there were 12,156,274 shares of the registrant's
Common Stock outstanding and an additional 1,158,708 shares held in treasury.
POLYMEDICA CORPORATION
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets as of
June 30 (unaudited) and March 31, 2002 3
Unaudited Consolidated Statements of Operations
for the three months ended June 30, 2002 and 2001 5
Unaudited Consolidated Statements of Cash Flows
for the three months ended June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 33
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 34
Item 5 - Other Information 35
Item 6 - Exhibits and Reports on Form 8-K 35
Signatures 36
Exhibit Index 37
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POLYMEDICA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
JUNE 30,
2002 MARCH 31,
(UNAUDITED) 2002
----------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 26,075 $ 27,884
Accounts receivable (net of allowances of
$18,174 and $15,539 as of June 30 and
March 31, 2002, respectively) 47,288 44,059
Inventories 26,095 21,663
Deferred tax asset 10,622 10,622
Prepaid expenses and other
current assets 3,127 1,727
-------- --------
Total current assets 113,207 105,955
Property, plant and equipment, net 39,268 34,603
Goodwill 29,748 29,748
Intangible assets, net 514 698
Direct response advertising, net 55,118 52,112
Other assets 2,319 1,276
-------- --------
Total assets $240,174 $224,392
======== ========
The accompanying notes are an integral part of
these unaudited consolidated financial statements.
3
POLYMEDICA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
JUNE 30,
2002 MARCH 31,
(UNAUDITED) 2002
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,292 $ 10,270
Amounts due to Medicare and others 4,789 4,798
Accrued expenses 9,874 12,990
Current portion, capital lease obligations 740 742
--------- ---------
Total current liabilities 34,695 28,800
Long-term note payable, capital lease and other obligations 2,551 1,485
Deferred income taxes 20,524 20,524
--------- ---------
Total liabilities 57,770 50,809
Commitments and contingencies (Note 13)
Shareholders' 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; 13,314,982 and 13,300,477 shares issued as of June
30 and March 31, 2002, respectively 133 133
Treasury stock, at cost (1,160,875 and 1,143,158 shares as of June
30 and March 31, 2002, respectively) (22,703) (22,185)
Additional paid-in capital 120,079 119,891
Retained earnings 84,895 75,744
--------- ---------
Total shareholders' equity 182,404 173,583
--------- ---------
Total liabilities and shareholders' equity $ 240,174 $ 224,392
========= =========
The accompanying notes are an integral part of
these unaudited consolidated financial statements.
4
POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
THREE MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001
-------- --------
Net revenues $ 81,601 $ 63,021
Cost of sales 28,857 21,265
-------- --------
Gross margin 52,744 41,756
Selling, general and administrative expenses 38,028 27,905
-------- --------
Income from operations 14,716 13,851
Other income and expense:
Investment income, net 44 540
Interest expense (37) (43)
Minority interest -- (314)
Other income and expense (11) --
-------- --------
(4) 183
Income before income taxes 14,712 14,034
Income tax provision 5,561 5,389
-------- --------
Net income $ 9,151 $ 8,645
======== ========
Net income per weighted average share:
Basic $ .75 $ .67
Diluted $ .73 $ .65
Weighted average shares, basic 12,167 12,955
Weighted average shares, diluted 12,578 13,284
The accompanying notes are an integral part of
these unaudited consolidated financial statements.
5
POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
THREE MONTHS ENDED
JUNE 30,
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 9,151 $ 8,645
Adjustments to reconcile net income to net cash flows:
Depreciation and amortization 1,332 1,338
Amortization of direct-response advertising 8,507 6,578
Direct-response advertising (11,513) (9,305)
Minority interest -- 314
Provision for bad debts 5,941 4,805
Provision for sales allowances 3,715 3,046
Provision for inventory obsolescence 401 --
Changes in assets and liabilities:
Accounts receivable (12,885) (9,676)
Inventories (4,833) 2,744
Prepaid expenses and other assets (1,297) (339)
Accounts payable 9,022 (3,446)
Amounts due to Medicare and others (9) --
Accrued expenses and other liabilities (1,862) (273)
-------- --------
Total adjustments (3,481) (4,214)
-------- --------
Net cash flows from operating activities 5,670 4,431
-------- --------
Cash flows from investing activities:
Purchase of marketable securities -- (5,499)
Purchase of property, plant and equipment (5,763) (1,724)
-------- --------
Net cash flows from investing activities (5,763) (7,223)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 330 205
Repurchase of common stock (659) (2,974)
Contributions to deferred compensation plans (1,204) (1,016)
Payment of obligations under capital leases and note payable (183) (152)
-------- --------
Net cash flows from financing activities (1,716) (3,937)
-------- --------
Net decrease in cash and cash equivalents (1,809) (6,729)
Cash and cash equivalents at beginning of period 27,884 39,571
-------- --------
Cash and cash equivalents at end of period $ 26,075 $ 32,842
======== ========
Supplemental disclosure of cash flow information:
Disposal of equipment $ 29 $ 15
Assets purchased under capital lease 63 167
The accompanying notes are an integral part of
these unaudited consolidated financial statements.
6
POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited consolidated financial statements included herein have been
prepared by PolyMedica Corporation ("PolyMedica" or the "Company") pursuant to
the rules and regulations of the Securities and Exchange Commission (the "SEC")
and include, in the opinion of management, all adjustments, consisting of
normal, recurring adjustments, necessary for a fair presentation of interim
period results. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The results for the interim periods presented are not necessarily
indicative of results to be expected for the full fiscal year. It is suggested
that these interim consolidated financial statements be read in conjunction with
the audited consolidated financial statements included in our Annual Report on
Form 10-K for the fiscal year ended March 31, 2002.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reported period. Estimates and judgments are used for,
including, but not limited to, determination of appropriate Medicare
reimbursement rates, the allowance for doubtful accounts and sales returns,
valuation of inventory, accrued expenses, amounts due to Medicare and others,
uncertainties that management determines are estimable and probable, and
depreciation and amortization. Actual results could differ from those estimates.
In addition, certain amounts in the prior period consolidated financial
statements have been reclassified to conform with the current period
presentation.
2. We recognize revenue on product shipments to customers who have placed
orders, upon shipment, provided that risk of loss has passed to the customer and
that we have received and verified the required written Authorization of
Benefits and Doctor's Order to bill Medicare (if applicable), other third-party
payers, and customers. We record revenue at the amounts expected to be collected
from Medicare, other third-party payers, and directly from customers. Revenue
recognition is delayed for product shipments for which we have not yet received
a written Authorization of Benefits and Doctor's Order, if applicable, until the
period in which those documents are collected and verified.
Approximately $56.90 million and $46.25 million of revenues for the three
months ended June 30, 2002 and 2001, respectively, were reimbursable by Medicare
for products and services provided to Medicare beneficiaries.
3. Sales allowances are recorded for estimated product returns using
historical return trends and are recorded as a reduction of revenue. These
allowances are adjusted to reflect actual returns and collection history. During
the three months ended June 30, 2002 and 2001, we provided for sales allowances
at a rate of approximately 4.4% and 4.6% of gross sales, respectively. We
analyze sales allowances using historical data adjusted for significant changes
in volume, customer demographics, and business conditions. At the time of
revenue recognition, we follow the government-distributed list containing
reimbursement prices for Medicare-covered products (the "Medicare Fee Schedule")
and exclude from revenue amounts billed in excess of the Medicare Fee Schedule.
As a result, our
7
contractual allowances are immaterial. The reimbursements that Medicare pays us
are subject to review by appropriate government regulators. Medicare reimburses
at 80% of the Medicare (Durable Medical Equipment Prosthetics Orthotics
Supplies) Fee Schedule for reimbursable supplies and we bill the
remaining balance to either third-party payers or directly to customers.
4. Inventories consist of the following:
(In thousands)
June 30, March 31,
2002 2002
------- -------
Raw materials $ 1,039 $ 616
Work in process 980 832
Finished goods 24,076 20,215
------- -------
$26,095 $21,663
======= =======
Due to the medical nature of the products we provide, customers sometimes
request supplies before we have received the required written forms to bill
Medicare (if applicable), other third-party payers, and customers. As a result,
included in inventories as of June 30 and March 31, 2002, is $3.76 million and
$3.77 million, respectively, of inventory shipped to customers for which we have
received an order but have not yet received the required written documents.
5. In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 requires that ratable amortization of
goodwill and certain intangible assets be replaced with periodic tests of the
goodwill's impairment and that other intangible assets be amortized over their
useful lives unless these lives are determined to be indefinite. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001, and thus was
adopted by us effective at the beginning of fiscal year 2003.
Effective April 1, 2002, in accordance with the provisions of SFAS No.
142, we ceased amortizing goodwill. Under SFAS No. 142, goodwill is no longer
amortized but is tested for impairment under a two-step process. Under the first
step, an entity's net assets are broken down into reporting units and compared
to their fair value. If the carrying amount of a reporting unit exceeds its fair
value, the second step of the goodwill impairment test is performed to measure
the amount of impairment loss, if any. The second step compares the implied fair
value of a reporting unit's goodwill with the carrying amount of that goodwill.
If the carrying amount of a reporting unit's goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an amount equal to
that excess. In addition, within six months of adopting the accounting standard,
a transitional impairment test must be completed, and any impairments identified
must be treated as a cumulative effect of a change in accounting principle.
Additionally, new criteria have been established that determine whether an
acquired intangible asset should be recognized separately from goodwill. We
adopted the provisions of SFAS No. 142, as required, on April 1, 2002. As a
result of adopting SFAS No. 142 effective April 1, 2002, approximately $385,000
of goodwill amortization was not recognized in the quarter ended June 30, 2002.
We are required to complete the transitional impairment test for the $29.75
million of goodwill related to our reporting units by September 30,
8
2002, as provided by SFAS No. 142. We are required to perform impairment tests
under SFAS No. 142 annually and whenever events or changes in circumstance
suggest that the carrying value of an asset may not be recoverable. The adoption
of SFAS No. 142 could have a material impact on our consolidated financial
statements, as we will replace ratable amortization of goodwill with periodic
impairment tests. Impairment tests performed under SFAS No. 142 could indicate
an impairment loss that would need to be recorded as a cumulative effect of a
change in accounting principle in fiscal 2003.
The following is a reconciliation of reported net income to adjusted net
income and reported earnings per share to adjusted earnings per share had SFAS
No. 142 been in effect for the three months ended June 30, 2001 (table in
thousands, except per share amounts):
Three Months Ended
June 30, 2001
------------------
Net income $ 8,645
Add back: Impact of goodwill amortization, net of tax benefit of $148 237
---------
Adjusted net income $ 8,882
=========
Net income per share, basic $ 0.67
Add back: Impact of goodwill amortization, net of taxes 0.02
---------
Adjusted net income per share, basic $ 0.69
=========
Net income per share, diluted $ 0.65
Add back: Impact of goodwill amortization, net of taxes 0.02
---------
Adjusted net income per share, diluted $ 0.67
=========
We have two reporting units with goodwill, Chronic Care and Professional
Products, which are also reportable segments. The carrying amounts of goodwill
and intangible assets as of June 30, 2002 and March 31, 2002, by reportable
segment, are as follows (table in thousands):
June 30, March 31,
2002 2002
-------- --------
CHRONIC CARE:
Goodwill $ 4,951 $ 4,951
======== ========
Customer list $ 1,816 $ 1,816
Accumulated amortization (1,513) (1,448)
-------- --------
$ 303 $ 368
======== ========
PROFESSIONAL PRODUCTS:
Goodwill $ 24,797 $ 24,797
======== ========
Covenant not to compete $ 6,800 $ 6,800
Accumulated amortization (6,589) (6,470)
-------- --------
$ 211 $ 330
======== ========
Total Goodwill $ 29,748 $ 29,748
======== ========
Amortizable intangible assets $ 8,616 $ 8,616
Accumulated amortization (8,102) (7,918)
-------- --------
Total intangible assets, net $ 514 $ 698
======== ========
9
Amortization expense on intangible assets was approximately $184,000 for
each of the three months ended June 30, 2002 and 2001. As of June 30, 2002,
amortization expense on existing intangibles for the remainder of fiscal 2003
and the next four fiscal years is as follows (table in thousands):
2003 $ 406
2004 108
2005 --
2006 --
2007 --
-----
Total $514
=====
6. Included in other assets are restricted investments of $2.01 million and
$868,000 as of June 30 and March 31, 2002, respectively, which represent amounts
we set aside under the executive deferred compensation plans (the "Plans"). The
related liability is included in long-term liabilities ("long-term note payable,
capital lease and other obligations" as captioned on the balance sheet). Changes
in the fair value of investments held in the Plans are recorded as investment
income or loss ("investment income, net" as captioned on the statements of
operations) with a corresponding adjustment to compensation expense and to other
assets and long-term liabilities ("long-term note payable, capital lease and
other obligations" as captioned on the balance sheet). As of June 30, 2002, the
fair value of these investments was not materially different from cost. Amounts
set aside for the Plans in the three months ended June 30, 2002 and 2001 totaled
$1.20 million and $1.02 million, respectively.
The investments held in the Plans, which are accounted for pursuant to
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", have been classified as trading, are included in other assets, and
are recorded at fair value.
7. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of SFAS No. 146 are effective for exit or disposal activities that are initiated
after December 31, 2002. We do not expect adoption of this statement to have a
material impact on our financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Nos. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No.
10
145 rescinds FASB No. 4, "Reporting Gains and Losses from Extinguishment of
Debt", an amendment of that statement, and FASB Statement No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No.
145 also rescinds FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers" and FASB No. 13, "Accounting for Leases", to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Adoption of certain provisions of this standard was required after
May 15, 2002, while other provisions must be adopted with financial statements
issued after May 15, 2002 or the year beginning after May 15, 2002. We do not
expect adoption of this statement to have a material impact on our financial
position or results of operations.
In October 2001 the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides guidance on
the accounting for the impairment on disposal of long-lived assets. The
objectives of SFAS No. 144 are to address issues relating to the implementation
of SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", and to develop a model for long-lived
assets to be disposed of by sale, whether previously held and used or newly
acquired. We adopted SFAS No. 144 on April 1, 2002, as required. The adoption
did not have a material impact on our financial position or results of
operations in the quarter ended June 30, 2002, but could have a significant
impact on our financial position or results of operations should there be future
asset impairments or disposals.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." The provisions of SFAS No.
143 apply to all entities that incur obligations associated with the retirement
of tangible long-lived assets. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002 and thus will
be adopted, as required, on April 1, 2003. This accounting pronouncement is not
expected to have a significant impact on our financial position or results of
operations.
8. In accordance with Statement of Position 93-7 ("SOP 93-7"), we incurred
and capitalized direct-response advertising of $11.51 million and $9.31 million
in the three months ended June 30, 2002 and 2001, respectively. A total of $8.51
million and $6.58 million in direct-response advertising was amortized and
charged to selling, general and administrative expenses for the three months
ended June 30, 2002 and 2001, respectively. Management assesses the
realizability of the amounts of direct-response advertising costs reported as
assets at each balance sheet date by comparing the carrying amounts of such
assets to the probable remaining future net cash flows expected to result
directly from such advertising. We expense in the period all other advertising
that does not meet the capitalization requirements of SOP 93-7.
Any change in existing accounting rules or business change that reduces
revenues or earnings or that shortens or eliminates the amortization period of
our direct-response advertising costs, currently four years for our diabetes
products and two years for our respiratory products, could result in accelerated
charges against our earnings.
9. Amounts due to Medicare and others of $4.79 million as of June 30, 2002,
represent probable amounts due to Medicare and related amounts due to insurers
and Medicare beneficiaries, related to a
11
change in interpretation of the reimbursement formula for albuterol and
ipratropium combinations used in our Professional Products segment. Beginning
September 6, 2001 through November 8, 2001, we received administrative
overpayment notices from one Durable Medical Equipment Regional Carrier
("DMERC") relating to this reimbursement formula that has resulted in $1.06
million of refunds or credits to the DMERC and others. No administrative
overpayment notices have been received from November 8, 2001 to August 13, 2002.
DMERCs are private insurance companies used by Medicare to administer
reimbursement payments. The liability of $4.79 million is the remaining
difference between reimbursement under the two interpretations of the
reimbursement formula for all relevant transactions and assumes that the other
three DMERCs issue similar administrative overpayment notices. We are processing
administrative overpayment notices as received and refunds are being issued.
When we established the liability in the quarter ended September 30, 2001, $5.03
million was charged to selling, general and administrative expenses for billing
adjustments prior to July 1, 2001 and $823,000 represented billing adjustments
related to the quarter ended September 30, 2001.
10. All outstanding minority interests in our subsidiaries previously held by
certain of our executives were reacquired by the respective subsidiaries at no
cost on February 12, 2002 and are classified as additional paid in capital in
the shareholders' equity section of our consolidated balance sheets as of June
30, 2002 and March 31, 2002. As a result of these transactions, there were no
outstanding minority interests in any of our subsidiaries as of June 30, 2002.
The minority interest amounts in the consolidated statements of operations of $0
and $314,000 for the three months ended June 30, 2002 and 2001, respectively,
represented the percentage of these subsidiaries' results allocated to the
former minority interests.
11. We have three reportable segments:
Chronic Care - We sell diabetes supplies and related products and services
to Medicare-eligible seniors suffering from diabetes and related chronic
diseases through our Chronic Care segment. We offer a wide array of diabetes
products from a full range of name-brand manufacturers, contact the patient's
doctor to obtain the required prescription information and written
documentation, file the appropriate insurance forms and bill Medicare and
private insurers directly. This service frees the patient from paying for his or
her chronic disease-related upfront expenses and offers the convenience of free
home delivery of supplies.
Professional Products - We sell prescription respiratory supplies to
Medicare-eligible seniors, prescription oral medications not covered by Medicare
to our existing customers, and develop, manufacture, and distribute prescription
urology and suppository products through our Professional Products segment.
Consumer Healthcare - We offer the AZO line of products which includes
over-the-counter female urinary tract discomfort products and home medical
diagnostic kits through our Consumer Healthcare segment.
Depreciation and amortization expense attributable to our corporate
headquarters is allocated to the operating segments according to the segments'
relative percentage of total revenues. However, segment assets belonging to our
corporate headquarters are not allocated, as management evaluates these
separately from the assets of the reportable segments. As a result of these
allocations, the segment information may not be indicative of the financial
position or results of operations that would
12
have been achieved had these segments operated as unaffiliated entities. The
depreciation and amortization amounts below include amortization of
direct-response advertising. We do not organize our units geographically, as our
products and services are sold throughout the United States only. There are no
intersegment sales for the periods presented. Information concerning the
operations in these reportable segments is as follows:
Three months ended
June 30, June 30,
(In thousands) 2002 2001
-------- --------
NET REVENUES:
Chronic Care $ 58,514 $ 46,694
Professional Products 20,707 14,474
Consumer Healthcare 2,380 1,853
-------- --------
Total $ 81,601 $ 63,021
======== ========
DEPRECIATION AND AMORTIZATION EXPENSE:
Chronic Care $ 5,515 $ 4,314
Professional Products 4,323 3,601
Consumer Healthcare 1 1
-------- --------
Total $ 9,839 $ 7,916
======== ========
INCOME BEFORE INCOME TAXES:
Chronic Care $ 9,288 $ 9,127
Professional Products 4,794 4,201
Consumer Healthcare 630 706
-------- --------
Total $ 14,712 $ 14,034
======== ========
June 30, March 31,
2002 2002
-------- --------
SEGMENT ASSETS:
Chronic Care $144,735 $133,009
Professional Products 62,084 62,670
Consumer Healthcare 2,603 1,777
Corporate Headquarters 30,752 26,936
-------- --------
Total $240,174 $224,392
======== ========
12. In June 2000, our Board of Directors authorized the repurchase of up to
1,000,000 shares of our common stock on the open market, with any shares
repurchased to be held in treasury. In August 2001, our Board of Directors
authorized the repurchase of an additional 1,000,000 shares. In the quarter
ended June 30, 2002, 25,000 shares of common stock were repurchased for $659,000
or an average price of $26.37 per share. In total, 1,271,000 shares had been
repurchased for $25.30 million or an average price of $19.91 per share, as of
June 30, 2002. Of the 2,000,000 shares originally authorized by the Board of
Directors, 729,000 shares remained authorized for repurchase as of August 13,
2002.
13. We are subject to risks and uncertainties common to companies in the
healthcare industry, including but not limited to, development by us or our
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, receipt of third-party healthcare
13
reimbursement, litigation, and compliance with government regulations. The
regulations that govern Medicare reimbursement are complex and our compliance
with those regulations may be reviewed by federal agencies, including the
Department of Health and Human Services, the Department of Justice ("DOJ"), and
the Food and Drug Administration ("FDA"). The U.S. Attorney's Office for the
Southern District of Florida, with the assistance of the Federal Bureau of
Investigation ("FBI") and Department of Health & Human Services' Office of
Inspector General ("OIG"), is investigating allegations of healthcare fraud,
improper revenue recognition and obstruction of justice by PolyMedica. Both
civil and criminal investigations are being conducted. We are cooperating with
the investigations. We cannot accurately predict the outcome of these
proceedings at this time, and have therefore not recorded any charges relating
to their outcome.
We and three individuals who are or were officers are defendants in a
lawsuit alleging violations of certain sections and rules of the Securities
Exchange Act of 1934 (the "Exchange Act"). In addition, there is a derivative
action against the directors and two individuals who are or were officers in
Massachusetts state court alleging certain breaches of fiduciary duty. We, the
named individuals, and the Board of Directors believe that we have meritorious
defenses to the claims made against us in the actions in which we are defendants
and intend to contest the claims vigorously. Although we do not consider an
unfavorable outcome to the various claims probable, we cannot accurately predict
their ultimate disposition, and have therefore not recorded any charges related
to their outcome. An unfavorable outcome could have a material effect on our
financial position and results of operations. Please see Item 1 of Part II,
Legal Proceedings, for a more complete description of these claims.
If any of these investigations results in a determination that we have
failed to comply with the regulations governing Medicare reimbursement or
financial reporting or have otherwise committed healthcare fraud or securities
law violations, we could be subject to delays or loss of reimbursement,
substantial fines or penalties, and other sanctions. An adverse determination
could have a material effect on our financial position and results of
operations.
In June 2002, Liberty Medical received an administrative subpoena from
the U.S. Attorney's Office for the Southern District of Illinois seeking
documents relevant to an ongoing investigation of Medicare reimbursement of
"depth shoes and inserts". Liberty Medical has been informed that it is not a
target of that investigation.
We have certain contingent liabilities that arise in the ordinary course
of our business activities, in addition to those described above.
We accrue contingent liabilities when it is probable that future
expenditures will be made and such expenditures can be reasonably estimated.
14. Our total net income and comprehensive income were $9.15 million and $8.65
million for the three months ended June 30, 2002 and 2001, respectively.
14
15. Calculations of earnings per share are as follows:
(In thousands, except per share data) Three Months Ended
June 30, June 30,
2002 2001
------- -------
Net income $ 9,151 $ 8,645
BASIC:
Weighted average common stock outstanding, net of treasury stock,
end of period 12,167 12,955
Net income per weighted average share, basic $ .75 $ .67
======= =======
DILUTED:
Weighted average common stock outstanding, net of treasury stock,
end of period 12,167 12,955
Weighted average dilutive common stock equivalents 411 329
------- -------
Weighted average common stock and dilutive common stock equivalents
outstanding, net of treasury stock 12,578 13,284
Net income per weighted average share, diluted $ .73 $ .65
======= =======
Options to purchase 664,537 and 661,599 shares of common stock were
outstanding during the three months ended June 30, 2002 and 2001, respectively,
but were not included in the computation of diluted earnings per share, because
the options' exercise prices were greater than the average market price of the
common shares.
16. On August 4, 2002, Steven J. Lee, Chief Executive Officer, Chairman and a
director of PolyMedica, informed the Board of Directors of his intention to
retire as Chief Executive Officer, effective as of that date. Mr. Lee has agreed
to continue serving as Chairman and a director through December 31, 2002. Samuel
L. Shanaman, a director since November 2001, has been elected to the new
position of Lead Director, and will perform the functions of the chief executive
officer on an interim basis until a successor is named.
In connection with Mr. Lee's termination of employment agreement, we
expect to incur a one-time selling, general and administrative expense of
approximately $1.30 million in the quarter ending September 30, 2002. Pursuant
to this agreement, these amounts will generally be paid in cash over a twenty
four-month period.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
BUSINESS
We are a leading provider of direct-to-consumer medical products and
services, conducting business through our Chronic Care, Professional Products
and Consumer Healthcare segments. We sell diabetes supplies and related products
and provide services to Medicare-eligible seniors suffering from diabetes and
related chronic diseases through our Chronic Care segment. Through our
Professional Products segment we provide direct-to-consumer prescription
respiratory supplies and services to Medicare-eligible seniors suffering from
chronic obstructive pulmonary disease ("COPD"). We also market, manufacture and
distribute a broad line of prescription urological and suppository products. In
addition, during fiscal 2002, we began selling prescription oral medications not
covered by Medicare to our existing customers through our Professional Products
segment. Our AZO brand holds a leading position in the over-the-counter ("OTC")
urinary health market. Our AZO products are distributed primarily to food and
drug retailers and mass merchandisers nationwide through our Consumer Healthcare
segment. For selected financial information about our operating segments, see
Note 11 to the consolidated financial statements.
Chronic Care
Through our Chronic Care segment, we are a national, direct-mail provider
of diabetes supplies and related products and services to Medicare-eligible
seniors suffering from diabetes and related chronic diseases. We have a database
of over 472,000 active Medicare-eligible diabetes customers, many of whom suffer
from other chronic diseases, to whom we sell name-brand products. We define a
person as an active customer if that person places orders and we ship supplies
to that person one or more times per year. We deliver products to customers'
homes and, as a service to our customers, bill Medicare (if applicable) and
private insurance companies directly for those supplies that are reimbursable.
We meet the needs of seniors suffering from diabetes by:
- providing mail order delivery of supplies direct to our customers'
homes;
- billing Medicare and/or private insurance companies directly;
- providing 24-hour telephone support to customers; and
- using sophisticated software and advanced order fulfillment systems
to provide products and support quickly and efficiently.
In the United States, there are approximately 17.0 million people with
diabetes, including at least 7.0 million seniors. There are approximately 16.0
million additional people with pre-diabetes, an increasingly common condition in
which blood glucose levels are higher than normal but not yet diabetic. With our
database of over 472,000 active Medicare-eligible diabetes customers, we serve
approximately 6.7% of the senior diabetic marketplace. While many of the 7.0
million seniors with diabetes are covered by managed care or reside in extended
care facilities, we believe that the balance are potential customers of ours.
16
Professional Products
Through our Professional Products segment we provide direct-to-consumer
prescription respiratory supplies and services to Medicare-eligible seniors
suffering from COPD. We also market, manufacture and distribute a broad line of
prescription urology and suppository products. Similar to the service we
provide in our Chronic Care segment, we deliver products to customers' homes and
bill Medicare (if applicable) and private insurance companies directly for those
prescription respiratory supplies that are reimbursable. As a participating
Medicare provider and third-party insurance biller, we provide a simple,
reliable way for seniors to obtain their supplies for respiratory disease
treatment. As of June 30, 2002, we had a database of over 50,000 active
Medicare-eligible customers for our prescription respiratory supplies. We define
a person as an active customer if that person places orders and we ship supplies
to that person one or more times per year. In addition, during fiscal 2002, we
began selling prescription oral medications not covered by Medicare to our
existing customers through our Professional Products segment. Our broad line of
prescription urology products includes urinary analgesics, antispasmodics, local
anesthetics and analgesic suppositories. Our primary customers for these urology
products are large drug wholesalers in the United States.
Consumer Healthcare
Our Consumer Healthcare segment primarily sells over-the-counter female
urinary discomfort products. We sell these products under the AZO brand name
through an extensive network of large drug store chains, major supermarkets,
mass merchandisers and drug wholesalers in the United States.
Business Strategies
Our principal strategy is to leverage our technology-based operating
platform and compliance management protocol to expand our business while
maintaining strict adherence to all applicable regulations. This strategy
includes the following elements:
Continue growth in our Chronic Care and Professional Products businesses
by expanding our customer base. Since the August 1996 acquisition of Liberty
Medical, we have invested in an ongoing program of television advertising to
reach a larger portion of the Medicare-eligible patient market. This campaign
has resulted in a significant increase in sales as we have increased our active
Medicare-eligible diabetes customers from approximately 17,000 at the time of
Liberty Medical's acquisition to more than 472,000 active Medicare-eligible
customers. In addition, we now have over 50,000 active Medicare-eligible
customers for our prescription respiratory supplies. We also utilize radio and
print advertising to further broaden our customer base. We continue to seek
opportunities to deliver new products to a broader customer base by leveraging
our efficient mail-order distribution system and software for billing and
customer monitoring. To manage our growth effectively, we are continually
expanding and upgrading our operations, information systems, and regulatory
compliance to maintain our high level of customer service.
Continue adding complementary products and businesses. New business
initiatives commenced in fiscal year 2002, in various stages of development,
include offering prescription oral medications not covered by Medicare, offering
therapeutic footwear for diabetics deemed at risk for developing lower extremity
complications, and the creation of a new clinical laboratory that will offer a
glycohemoglobin ("HbA1c") test, the results of which tell the patient or
physician what the patient's blood glucose level has averaged over the previous
two or three months. In order to take advantage
17
of economies of scale in production and marketing, we continue to evaluate
opportunities for the acquisition of businesses and products to complement our
existing product lines or new business initiatives underway. In selecting and
evaluating acquisition candidates, we examine the potential market opportunities
for products that can be distributed through our existing marketing
infrastructure by utilizing our strengths in sales, marketing and distribution.
We will consider adding businesses, manufacturing capabilities and new products
that capitalize upon our established brand franchises.
Expand non-Medicare initiatives. During fiscal year 2002 we took a major
step in our strategy of leveraging our core business expertise and technology
base with the launch of Liberty Medical's non-Medicare operation, Liberty
Medical Supply Pharmacy, Inc. ("LMSP"). LMSP offers prescription oral
medications not covered by Medicare to our existing customers through our
Professional Products segment.
Subsequent Events
On August 4, 2002, Steven J. Lee, Chief Executive Officer, Chairman and a
director of PolyMedica, informed the Board of Directors of his intention to
retire as Chief Executive Officer, effective as of that date. Mr. Lee has
agreed to continue serving as Chairman and a director through December 31,
2002. Samuel L. Shanaman, a director since November 2001, has been elected to
the new position of Lead Director, and will perform the functions of the chief
executive officer on an interim basis until a successor is named.
In connection with Mr. Lee's termination of employment agreement, we
expect to incur a one-time selling, general, and administrative expense of
approximately $1.30 million in the quarter ending September 30, 2002. Pursuant
to this agreement, these amounts will generally be paid in cash over a twenty
four-month period.
Other
We do not believe our net product sales, in the aggregate, are subject to
material seasonal fluctuations.
Other non-direct-response advertising, promotional, and marketing costs
are charged to earnings in the period in which they are incurred. Promotional
and sample costs whose benefit is expected to assist future sales, are expensed
as the related materials are used.
We operate from manufacturing and distribution facilities located in
Massachusetts and Florida. Virtually all of our product sales are denominated in
U.S. dollars.
Expense items include cost of sales and selling, general and
administrative expenses.
- Cost of sales consists primarily of purchased finished goods for
sale in our markets and, to a lesser extent, materials, direct
labor, and overhead costs for products that we manufacture in our
facility and shipping and handling fees.
- Selling, general and administrative expenses consist primarily of
expenditures for personnel and benefits, as well as legal and
related expenses, allowances for bad debts, rent, amortization of
capitalized direct-response advertising costs and other amortization
and depreciation.
Period to period comparisons of changes in net revenues are not
necessarily indicative of results to be expected for any future period.
18
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles. The
preparation of these consolidated financial statements requires us to make
significant estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. These items are regularly monitored and analyzed by management
for changes in facts and circumstances, and material changes in these estimates
could occur in the future. Changes in estimates are recorded in the period in
which they become known. We base our estimates on historical experience and
various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from our estimates if past experience
or other assumptions do not turn out to be substantially accurate.
The following summaries of our critical accounting policies should be read
in conjunction with our consolidated financial statements and the related notes
included in our Annual Report on Form 10-K for the fiscal year ended March 31,
2002. While all of our accounting policies impact the consolidated financial
statements, certain policies may be viewed to be critical. Critical accounting
policies are those that are both most important to the portrayal of our
financial condition and results of operations and that require management's most
subjective or complex judgments and estimates. Management believes the policies
that fall within this category are the policies on revenue recognition and sales
allowances, accounts receivable and the allowance for doubtful accounts,
inventories, direct-response advertising, amounts due to Medicare and others,
and uncertainties.
Revenue Recognition
We recognize revenue related to product sales to customers who have placed
orders upon shipment, provided that risk of loss has passed to the customer and
we have received and verified the required written forms to bill Medicare (if
applicable), other third-party payers, and customers. We record revenue at the
amounts expected to be collected from Medicare, other third-party payers, and
directly from customers. We analyze various factors in determining revenue
recognition, including a review of specific transactions, current Medicare
regulations and reimbursement rates, historical experience, and the
credit-worthiness of customers. The determination of appropriate Medicare rates
for billing and revenue recognition are subjective and complex and therefore
require management's interpretation. Sales allowances are recorded for estimated
product returns as a reduction of revenue. We analyze sales allowances using
historical data adjusted for significant changes in volume, customer
demographics, and business conditions. These allowances are adjusted to reflect
actual returns. Changes in these factors could affect the timing and amount of
revenue and costs recognized.
Accounts Receivable and Allowance for Doubtful Accounts
The valuation of accounts receivable is based upon the credit-worthiness
of customers and third-party payers as well as our historical collection
experience. Allowances for doubtful accounts are recorded as a selling, general
and administrative expense for estimated amounts expected to be uncollectible
from third-party payers and customers. We base our estimates on our historical
collection and write-off experience, current trends, credit policy, and on our
analysis of accounts receivable by aging category. Changes in judgment regarding
these factors could affect the timing and amount of costs recognized.
19
Inventories
The carrying value of inventories is based upon the types and levels of
inventory held, forecasted demand, and pricing. Due to the medical nature of the
products we provide, customers sometimes request supplies before we have
received the required written forms to bill Medicare (if applicable), other
third-party payers, and customers. As a result, included in inventories are
items shipped to customers for which we have received an order but have not yet
received the required written documents and therefore have not recognized
revenue. The carrying value of inventory shipped to customers is based upon
historical experience of collection of documents required to bill Medicare (if
applicable), other third-party payers, and customers. Changes in judgment
regarding the recoverability of inventories, including the carrying value of
inventory shipped to customers, could result in the recording of additional
income or expense.
Direct-Response Advertising
In accordance with Statement of Position 93-7("SOP 93-7") we capitalize
and amortize direct-response advertising and related costs when we can
demonstrate that customers have directly responded to our advertisements. We
assess the realizability of the amounts of direct-response advertising costs
reported as assets at each balance sheet date by comparing the carrying amounts
of such assets to the probable remaining future net cash flows expected to
result directly from such advertising. A business change that impacts expected
net cash flows or that shortens the period over which such net cash flows are
estimated to be realized could result in accelerated charges against our
earnings.
Amounts due to Medicare and others
The determination of appropriate Medicare rates for billing are subjective
and complex. Amounts due to Medicare and others are recorded when, based upon
our assessment of the facts and circumstances, we believe that the amounts due
are probable and estimable. Changes in judgment regarding amounts due to
Medicare and others could result in income or expenses that are different from
our estimates.
Uncertainties
The regulations that govern Medicare reimbursement are complex and our
compliance with those regulations may be reviewed by federal agencies, including
the Department of Health and Human Services, the DOJ, and the FDA. The U.S.
Attorney's Office for the Southern District of Florida, with the assistance of
the FBI and OIG, is investigating allegations of health care fraud, improper
revenue recognition and obstruction of justice by the Company. Both civil and
criminal investigations are being conducted. We are cooperating with the
investigations. We cannot accurately predict the outcome of these proceedings at
this time, and have therefore not recorded any charges relating to their
outcome.
We and three individuals who are or were officers are defendants in a
lawsuit alleging violations of certain sections and rules of the Securities
Exchange Act of 1934 (the "Exchange Act"). In addition, there is a derivative
action against the directors and two individuals who are or were officers in
Massachusetts state court alleging certain breaches of fiduciary duty. We, the
named individuals, and the Board of Directors believe that we have meritorious
defenses to the claims made against us in the actions in which we are defendants
and intend to contest the claims vigorously. Although we do not consider an
unfavorable outcome to the various claims probable, we cannot accurately predict
their ultimate disposition, and have therefore not recorded any charges related
to their outcome. An unfavorable outcome could have a material effect on our
financial position and results of operations. Please see Item 1 of Part II,
Legal Proceedings, for a more complete description of these claims.
If any of these investigations results in a determination that we have
failed to comply with the regulations governing Medicare reimbursement or
financial reporting or have otherwise committed healthcare fraud or securities
law violations, we could be subject to delays or loss of reimbursement,
substantial fines or penalties, and other sanctions. An adverse determination
could have a material effect on our financial position and results of
operations.
20
In June 2002, Liberty Medical received an administrative subpoena from
the U.S. Attorney's Office for the Southern District of Illinois seeking
documents relevant to an ongoing investigation of Medicare reimbursement of
"depth shoes and inserts". Liberty Medical has been informed that it is not a
target of that investigation.
We have certain contingent liabilities that arise in the ordinary course
of our business activities, in addition to those described above.
We accrue contingent liabilities when it is probable that future
expenditures will be made and such expenditures can be reasonably estimated.
Internal Regulatory Affairs
Liberty Medical, Liberty Home Pharmacy Corporation ("Liberty Home
Pharmacy"), and related companies have a Regulatory Affairs Department that is
comprised of five groups: corporate compliance, monitoring, compliance/external
responses, compliance/internal reviews and contracts and licensing. Although
each group is distinct, the Vice President of Regulatory Affairs coordinates
activities within the department in order to promote the common goal of ensuring
compliance with all federal, state and local laws and regulations applicable to
the businesses of these companies.
The corporate compliance group administers a formal healthcare compliance
program to assist us in meeting our compliance obligations. The compliance
program is designed to prevent violations of applicable fraud and abuse laws
and, if such violations occur, to promote early and accurate detection and
prompt resolution. This objective is achieved through education, monitoring,
disciplinary action and other appropriate remedial measures. All personnel, as a
condition of employment, are required to attend corporate compliance
certification classes annually. In addition, each employee receives a compliance
manual that has been developed to communicate standards of conduct and
compliance policies and procedures.
The monitoring group performs oversight functions to ensure compliance
with policies and procedures and applicable laws. These functions include
telephonic monitoring of contacts between employees and customers, healthcare
professionals, payers and other outside contacts.
The compliance/external communications group monitors communications with
third parties to ensure timely responses to document and other requests and
oversee the receipt and timely dissemination of supplier bulletin information.
The compliance/internal reviews group is responsible for conducting a
variety of internal reviews of operations to ensure compliance with healthcare
program requirements and applicable laws.
21
The contracts and licensing group monitors compliance with provider
contracting and licensing requirements, which includes random, internal onsite
inspections. As appropriate, we also utilize external audit resources to
supplement our internal auditing and monitoring activities.
In August 2001, our Board of Directors appointed an Oversight Committee
(the "Committee") for the purpose of establishing an independent committee to
act for the Board with respect to the investigations and related litigation
described in Item 1 of Part II, Legal Proceedings. The Committee is advised on
legal matters by our legal counsel and other appropriate independent advisors.
The Committee will continue to play an active role as these investigations
proceed. The Committee's authority includes monitoring the Regulatory Affairs
Department and its compliance program to ensure compliance with Medicare and
internal Company policies. The Committee currently consists of three
non-management members of the Board of Directors.
22
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Total net revenues increased 29.5% to $81.60 million in the three months
ended June 30, 2002, as compared with $63.02 million in the three months ended
June 30, 2001. This increase was primarily the result of the growth in net
revenues from our Chronic Care and Professional Products segments, which
increased 25.3% and 43.1%, respectively, in the three months ended June 30,
2002, as compared with the three months ended June 30, 2001. See Note 11 to the
consolidated financial statements for segment information.
Net revenues in the Chronic Care segment increased 25.3% to $58.51 million
in the three months ended June 30, 2002, as compared with $46.69 million in the
three months ended June 30, 2001. This increase was due primarily to the growth
in our customer base as a result of our direct-response advertising spending. We
currently expect our promotional and direct-response advertising spending to
continue in order to further the expansion of our Chronic Care segment. Revenue
growth was aided by a cost of living adjustment implemented by the government
for certain durable medical equipment products and services under the Medicare,
Medicaid and SCHIP Benefits Improvement and Protection Act of 2000, which added
3.7% to the revenue of many of our Chronic Care segment products.
Net revenues in the Professional Products segment increased 43.1% to
$20.71 million in the three months ended June 30, 2002, as compared with $14.47
million in the three months ended June 30, 2001. This increase was due primarily
to the growth in our customer base as a result of our direct-response
advertising spending. As with our Chronic Care segment, we currently expect our
promotional and direct-response advertising spending to continue in order to
further the expansion of our Professional Products segment.
Net revenues from Consumer Healthcare products increased 28.4% to $2.38
million in the three months ended June 30, 2002, as compared with $1.85 million
in the three months ended June 30, 2001, due primarily to the growth in our
customer base for over-the-counter female urinary discomfort products as a
result of increased advertising spending.
As a percentage of total net revenues, overall gross margins were 64.6% in
the three months ended June 30, 2002, down from 66.3% in the three months ended
June 30, 2001. This decrease was due primarily to increasing sales from new
business initiatives that have lower margins than our average and a change in
the product mix for our Chronic Care and Professional Products segments,
partially offset by a cost of living adjustment described above, which added
3.7% to the revenue of many of our Chronic Care segment products in the quarter
ended June 30, 2002, and increased sales in our higher margin Professional
Products segment.
As a percentage of total net revenues, selling, general and administrative
expenses were 46.6% in the three months ended June 30, 2002, as compared with
44.3% in the three months ended June 30, 2001. Selling, general and
administrative expenses increased 36.3% in the three months ended June 30, 2002
to $38.03 million, as compared with $27.91 million in the three months ended
June 30, 2001. This increase was attributable to legal and related expenses
pertaining to the previously reported ongoing investigations of our Liberty
Medical and Liberty Home Pharmacy subsidiaries, increased operating expenses of
new business initiatives commenced in fiscal year 2002
23
that are in various stages of development and increased amortization of
direct-response advertising incurred in the quarter ended June 30, 2002 as
compared with the quarter ended June 30, 2001. We expect that we will continue
to incur legal and related expenses pertaining to the previously reported
ongoing investigations of our Liberty Medical and Liberty Home Pharmacy
subsidiaries, in the coming quarters. These legal and related expenses were
$1.39 million in the three months ended June 30, 2002. No such legal and related
expenses were identified in the quarter ended June 30, 2001. Selling, general
and administrative expenses further increased due to an increase in
direct-response advertising amortization of $1.93 million to $8.51 million in
the quarter ended June 30, 2002, from $6.58 million in the quarter ended June
30, 2001.
Investment income, net decreased 91.8% to $44,000 in the three months
ended June 30, 2002, as compared with $540,000 in the three months ended June
30, 2001, due primarily to a lower average cash balance and lower interest
rates. Interest expense decreased 14.0% to $37,000 in the three months ended
June 30, 2002, as compared with $43,000 in the three months ended June 30, 2001.
Net income increased 5.9% to $9.15 million, for the quarter ended June
30, 2002, as compared with $8.65 million for the quarter ended June 30, 2001.
The increase in net income was primarily attributable to the growth in our
customer base as a result of our direct-response advertising, partially offset
by legal and related expenses pertaining to the previously reported ongoing
investigations of our Liberty Medical and Liberty Home Pharmacy subsidiaries,
recorded during the quarter ended June 30, 2002, increased amortization of
direct-response advertising, and increased expenses for new business
initiatives commenced in fiscal year 2002.
Liquidity and Capital Resources
Our business is currently funded through cash flow from operations. We
have generated positive cash flow from operations in each of the last fourteen
quarters and have reported positive annual cash flows from operations in each of
the last 4 fiscal years, with $22.90 million, $14.62 million, $10.08 million,
and $539,000 generated in the fiscal years ended March 31, 2002, 2001, 2000, and
1999, respectively. Our cash and cash equivalents balance decreased $1.81
million to $26.08 million as of June 30, 2002, as compared with $27.88 million
as of March 31, 2002, due primarily to cash used for capital expenditures,
offset by cash flows generated from operations. Cash flows from operations of
$5.67 million for the three months ended June 30, 2002 were generated by net
income of $9.15 million, offset by cash used to fund certain areas of our
operations, such as increased spending for direct-response advertising of $2.21
million to $11.51 million in the three months ended June 30, 2002, as compared
with $9.31 million in the three months ended June 30, 2001, to further expand
our customer base, both for diabetes testing and prescription respiratory
supplies.
Our contractual obligations for future annual minimum lease and rental
commitments as of June 30, 2002, were not materially different from those as of
March 31, 2002, disclosed in our Annual Report on Form 10-K for the fiscal year
ended March 31, 2002.
24
In the three months ended June 30, 2002 and 2001, we used $5.76 million
and $7.22 million of cash for investing activities, respectively. The $1.46
million decrease in total cash used for investing activities was due to an
investment of $5.50 million in marketable securities in the prior year with no
such investment in the current year, partially offset by an increase in capital
expenditures of $4.04 million in the three months ended June 30, 2002, as
compared with the three months ended June 30, 2001. Property, plant and
equipment purchases totaled $5.76 million and $1.72 million for the three months
ended June 30, 2002 and 2001, respectively. Higher spending in the current
fiscal year for capital expenditures is related to the ongoing construction of
two new facilities in Port St. Lucie, Florida to meet the expansion needs of our
growing Company. The cumulative amount spent through June 30, 2002 related to
this construction was $11.44 million, which will not be depreciated until the
construction is completed. In the remaining periods of fiscal 2003, we estimate
that we will spend an additional $2.00 million on the construction of these two
new facilities, for which no liability has been recorded as of June 30, 2002,
because we have no contractual obligation to complete the construction.
In the three months ended June 30, 2002, we used $1.72 million of cash for
financing activities, $1.20 million of which we set aside for executive deferred
compensation plans with an additional $659,000 used to repurchase 25,000 shares
of our common stock, for an average price of $26.37 per share. In June 2000, the
Board of Directors authorized the repurchase of up to 1,000,000 shares of our
common stock on the open market, with any shares repurchased to be held in
treasury. In August 2001, the Board of Directors authorized the repurchase of an
additional 1,000,000 shares. As of August 14, 2002, 1,271,000 shares had been
repurchased in total for $25.30 million or an average price of $19.91 per share.
Of the 2,000,000 shares originally authorized by the Board of Directors, 729,000
shares remained authorized for repurchase as of August 14, 2002. Other financing
activities included the receipt of proceeds from the issuance of common stock
and repayments of capital lease obligations.
In November 2000, we filed an amendment to a shelf registration statement
we originally filed in April 2000, to enable us to offer from time to time,
shares of our common stock having an aggregate value of up to $100 million. The
SEC declared the shelf registration statement effective during the quarter ended
December 31, 2000. No shares of common stock had been sold under this shelf
registration statement as of June 30, 2002.
We believe that our cash and cash equivalents balance as of June 30, 2002
of $26.08 million, including cash flows generated from operations, will be
sufficient to meet working capital, capital expenditure and financing needs for
future business operations for the foreseeable future. In the event that we
undertake to make acquisitions of complementary businesses, products or
technologies, we may require substantial additional funding beyond currently
available working capital and funds generated from operations. Other factors
which could negatively impact our liquidity include a reduction in the demand
for our products or a reduction in Medicare reimbursement for our products.
25
We hold certain investments related to executive deferred compensation
plans, see Note 6 to the consolidated financial statements, which are accounted
for pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Investments related to the executive deferred compensation
plans, which have been classified as trading, are included in other assets and
are recorded at fair value. As of June 30, 2002, the fair value of these
investments was not materially different from cost.
Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of SFAS No. 146 are effective for exit or disposal activities that are initiated
after December 31, 2002. We do not expect adoption of this statement to have a
material impact on our financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Nos. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS
No. 145 rescinds FASB No. 4, "Reporting Gains and Losses from Extinguishment of
Debt", and an amendment of that statement and FASB Statement No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No.
145 also rescinds FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers" and FASB No. 13, "Accounting for Leases", to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Adoption of certain provisions of this standard was required after
May 15, 2002, while other provisions must be adopted with financial statements
issued after May 15, 2002 or the year beginning after May 15, 2002. We do not
expect adoption of this statement to have a material impact on our financial
position or results of operations.
In October 2001 the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides guidance on
the accounting for the impairment on disposal of long-lived assets. The
objectives of SFAS No. 144 are to address significant issues relating to the
implementation of SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", and to develop a model for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired. We adopted SFAS No. 144 on April 1, 2002, as required. The
adoption did not have a material impact on our financial position or results of
operations in the quarter ended June 30, 2002, but could have a significant
impact on our financial position or results of operations should there be future
asset impairments or disposals.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." The provisions of SFAS No.
143 apply to all entities that incur obligations associated with the retirement
of tangible long-lived assets. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002, and will thus
be
26
adopted, as required, in fiscal year 2004. The impact of SFAS No. 143 on our
consolidated financial statements has not yet been determined.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 requires that ratable amortization of goodwill and certain
intangible assets be replaced with periodic tests of the goodwill's impairment
and that other intangible assets be amortized over their useful lives unless
these lives are determined to be indefinite. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001, and thus was adopted by us
effective at the beginning of fiscal year 2003.
Effective April 1, 2002 in accordance with the provisions of SFAS No. 142,
we ceased amortizing goodwill. Under SFAS No. 142, goodwill is no longer
amortized but is tested for impairment under a two-step process. Under the first
step, an entity's net assets are broken down into reporting units and compared
to their fair value. If the carrying amount of a reporting unit exceeds its fair
value, the second step of the goodwill impairment test is performed to measure
the amount of impairment loss, if any. The second step compares the implied fair
value of a reporting unit's goodwill with the carrying amount of that goodwill.
If the carrying amount of a reporting unit's goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an amount equal to
that excess. In addition, within six months of adopting the accounting standard,
a transitional impairment test must be completed, and any impairments identified
must be treated as a cumulative effect of a change in accounting principle.
Additionally, new criteria have been established that determine whether an
acquired intangible asset should be recognized separately from goodwill. We
adopted the provisions of SFAS No. 142, as required, on April 1, 2002. As a
result of adopting SFAS No. 142 effective April 1, 2002, approximately $385,000
of goodwill amortization was not recognized in the quarter ended June 30, 2002.
We are required to complete the transitional impairment test for the $29.75
million of goodwill related to our reporting units by September 30, 2002 as
provided by SFAS No. 142. We are required to perform impairment tests under SFAS
No. 142 annually and whenever events or changes in circumstance suggest that the
carrying value of an asset may not be recoverable. The adoption of SFAS No. 142
could have a material impact on our consolidated financial statements, as we
will replace ratable amortization of goodwill with periodic impairment tests.
Impairment tests performed under SFAS No. 142 could indicate an impairment loss
that would need to be recorded as a cumulative effect of a change in accounting
principle in fiscal 2003.
27
FACTORS AFFECTING FUTURE OPERATING RESULTS
The statements contained in this Quarterly Report on Form 10-Q that are
not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, but not limited to, statements regarding our
expectations, hopes, intentions or strategies regarding the future.
Forward-looking statements include, among others: statements regarding future
benefits from our advertising and promotional expenditures; statements regarding
future net revenue levels; statements regarding product development,
introduction and marketing; and statements regarding future acquisitions. All
forward-looking statements included in this Quarterly Report on Form 10-Q are
based on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements. It is important to
note that our actual results could differ materially from those in such
forward-looking statements.
Our future operating results remain difficult to predict. We continue to
face many risks and uncertainties which could affect our operating results,
including without limitation, those described below.
We could experience significantly reduced profits if Medicare changes, delays or
denies reimbursement
Sales of a significant portion of our Chronic Care and Professional
Products supplies depend on the continued availability of reimbursement of our
customers by government and private insurance plans. Any reduction in Medicare
reimbursement currently available for our products would reduce our revenues.
Without a corresponding reduction in the cost of such products, the result would
be a reduction in our overall profit margin. Similarly, any increase in the cost
of such products would reduce our overall profit margin unless there was a
corresponding increase in Medicare reimbursement. Our profits could also be
affected by the imposition of more stringent regulatory requirements for
Medicare reimbursement or adjustments to previously reimbursed amounts.
Litigation may materially adversely affect us
We and three individuals who are or were officers are defendants in a
lawsuit alleging violations of certain sections and rules of the Securities
Exchange Act of 1934 (the "Exchange Act"). In addition, there is a derivative
action against the directors and two individuals who are or were officers in
Massachusetts state court alleging certain breaches of fiduciary duty. We, the
named individuals, and the Board of Directors believe that we have meritorious
defenses to the claims made against us in the actions in which we are defendants
and intend to contest the claims vigorously. Although we do not consider an
unfavorable outcome to the various claims probable, we cannot accurately predict
their ultimate disposition, and have therefore not recorded any charges related
to their outcome. An unfavorable outcome could have a material effect on our
financial position and results of operations. Please see Item 1 of Part II,
Legal Proceedings, for a more complete description of these claims.
We could experience significantly reduced profits as the result of an
unfavorable outcome to current governmental investigations
The regulations that govern Medicare reimbursement are complex and our
compliance with those regulations may be reviewed by federal agencies, including
the Department of Health and
28
Human Services, the DOJ, and the FDA. The U.S. Attorney's Office for the
Southern District of Florida, with the assistance of the FBI and OIG, is
investigating allegations of healthcare fraud, improper revenue recognition and
obstruction of justice by PolyMedica. Both civil and criminal investigations are
being conducted. We are cooperating with the investigations. We cannot
accurately predict the outcome of these proceedings at this time, and have
therefore not recorded any charges relating to their outcome.
If any of these investigations results in a determination that we have
failed to comply with the regulations governing Medicare reimbursement or
financial reporting or have otherwise committed healthcare fraud or securities
law violations, we could be subject to delays or loss of reimbursement,
substantial fines or penalties, and other sanctions. An adverse determination
could have a material effect on our financial position and results of
operations.
In June 2002, Liberty Medical received an administrative subpoena from the
U.S. Attorney's Office for the Southern District of Illinois seeking documents
relevant to an ongoing investigation of Medicare reimbursement of "depth shoes
and inserts". Liberty Medical has been informed that it is not a target of that
investigation.
Our stock price could be volatile, which could result in substantial changes in
share price
The trading price of our common stock has been volatile and is likely to
continue to be volatile. The stock market in general, and the market for
healthcare-related companies in particular, has experienced extreme volatility.
This volatility has often been unrelated to the operating performance of
particular companies. Investors may not be able to sell their common stock at or
above the price at which they purchased the stock. Prices for the common stock
will be determined in the marketplace and may be influenced by many factors,
including variations in our financial results, changes in earnings estimates by
industry research analysts, investors' perceptions of us and general economic,
industry and market conditions.
We plan to continue our rapid expansion; if we do not manage our growth
successfully, our growth and profitability may slow or stop; managing our growth
will be more difficult while we conduct a search for a new chief executive
officer
We have expanded our operations rapidly and plan to continue to expand.
This expansion has created significant demand on our administrative, operational
and financial personnel and other resources. Additional expansion in existing or
new markets could strain these resources and increase our need for capital. Our
personnel, systems, procedures, controls and existing space may not be adequate
to support further expansion. In addition, we are currently conducting a search
for a new chief executive officer due to the recent retirement of our former
Chief Executive Officer, Steven J. Lee. Managing our growth will be more
difficult during this process and the subsequent transition.
The profitability of our Chronic Care and Professional Products segments will
decrease if we do not receive recurring orders from customers
We generally incur losses and negative cash flow with respect to the first
order from a new customer for Chronic Care products and prescription respiratory
supplies, included in our
29
Professional Products segment, due primarily to the marketing and regulatory
compliance costs associated with initial customer qualification. Accordingly,
the profitability of these segments depends in large part, on recurring and
sustained reorders. Reorder rates are inherently uncertain due to several
factors, many of which are outside our control, including changing customer
preferences, competitive price pressures, customer transition to extended care
facilities, customer mortality and general economic conditions.
We could experience significantly reduced profits from our Chronic Care segment
if improved technologies that eliminate the need for consumable testing supplies
are developed for glucose monitoring
The majority of our Chronic Care net revenues are from consumable testing
supplies, used to draw and test small quantities of blood for the purpose of
measuring and monitoring glucose levels. Numerous research efforts are underway
to develop more convenient and less intrusive glucose measurement techniques.
The commercialization and widespread acceptance of new technologies that
eliminate or reduce the need for consumable testing supplies could negatively
affect our Chronic Care business.
We could be liable for harm caused by products that we sell
The sale of medical products entails the risk that users will make product
liability claims. A product liability claim could be expensive. While management
believes that our insurance provides adequate coverage, no assurance can be made
that adequate coverage will exist for these claims.
We could lose customers and revenues to new or existing competitors who have
greater financial or operating resources
Competition from other sellers of products offered through our Chronic
Care, Professional Products and Consumer Healthcare segments, manufacturers of
healthcare products, pharmaceutical companies and other competitors is intense
and expected to increase. Many of our competitors and potential competitors are
large companies with well-known names and substantial resources. These companies
may develop products and services that are more effective or less expensive than
any that we are developing or selling. They may also promote and market these
products more successfully than we promote and market our products.
Loss of use of manufacturing or data storage facilities would significantly
reduce revenues and profits from our businesses
We manufacture substantially all of our prescription urology and
suppository products and many of our Consumer Healthcare products at our
facility in Woburn, Massachusetts. In addition, we process and store most of our
customer data in our facility in Port St. Lucie, Florida. If we cannot use any
of these facilities as a result of the FDA, Occupational Safety and Health
Administration or other regulatory action, fire, natural disaster or other
event, our revenues and profits would decrease significantly. We might also
incur significant expense in remedying the problem or securing alternative
manufacturing or data storage sources.
If we or our suppliers do not comply with applicable government regulations, we
may be prohibited from selling our products
30
The majority of the products that we sell are regulated by the FDA and
other regulatory agencies. If any of these agencies mandate a suspension of
production or sales of our products or mandate a recall, we may lose sales and
incur expenses until we are in compliance with the regulations or change to
another acceptable supplier.
We could have difficulty selling our Consumer Healthcare and Professional
Products if we cannot maintain and expand our sales to distributors
We rely on third party distributors to market and sell our Consumer
Healthcare and prescription urology and suppository products. Our sales of these
products will therefore depend in part on our maintaining and expanding
marketing and distribution relationships with pharmaceutical, medical device,
personal care and other distributors and on the success of those distributors in
marketing and selling our products.
Shortening or eliminating amortization of our direct-response advertising costs
could adversely affect our operating results
Any change in existing accounting rules or a business change that impacts
expected net cash flows or that shortens the period over which such net cash
flows are estimated to be realized, currently four years for our diabetes
products and two years for our prescription respiratory supplies, could result
in accelerated charges against our earnings.
Our quarterly revenues or operating results could vary, which may cause the
market price of our securities to decline
We have experienced fluctuations in our quarterly operating results and
anticipate that such fluctuations could continue. Results may vary significantly
depending on a number of factors, including:
- changes in reimbursement guidelines and amounts;
- changes in regulations affecting the healthcare industry;
- changes in the mix or cost of our products;
- the timing of customer orders;
- the timing and cost of our advertising campaigns; and
- the timing of the introduction or acceptance of new products and
services offered by us or our competitors.
We may make acquisitions that will strain our financial and operational
resources
We regularly review potential acquisitions of businesses and products.
Acquisitions involve a number of risks that might adversely affect our financial
and operational resources, including:
- 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;
- failure to assimilate operations of an acquired business;
- failure to retain the customers of an acquired business;
- possible operating losses and expenses of an acquired business;
31
- 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 the common stock
Our articles of organization authorize the issuance of up to 2,000,000
shares of preferred stock without stockholder approval. The shares may have
dividend, voting, liquidation and other rights and preferences that are senior
to the rights of the common stock. The rights and preferences of any such class
or series of preferred stock would be established by our Board of Directors in
its sole discretion.
32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We own certain money market funds and mutual funds that are sensitive to
market risks as part of our investment portfolio. The investment portfolio is
used to preserve our capital until it is required to fund operations. None of
the market-risk sensitive instruments held in our investment portfolio are held
for trading purposes. We do, however, hold some market-risk sensitive
instruments in our executive deferred compensation plans, for trading purposes.
These investments are accounting for under SFAS No. 115, "Accounting for certain
investments in Debt and Equity Securities." The investments are recorded at fair
value, and changes in fair value are recorded as compensation expense and
investment income, net for the period. We do not own derivative financial
instruments in our investment portfolio. We do not believe that the exposure to
market risks in our investment portfolio is material.
33
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The U.S. Attorney's Office for the Southern District of Florida, with the
assistance of the FBI and Department of Health & Human Services' OIG, is
investigating allegations of health care fraud, improper revenue recognition and
obstruction of justice by PolyMedica. Both civil and criminal investigations are
being conducted. We are cooperating with the investigations. We cannot
accurately predict the outcome of these proceedings at this time, and have
therefore not recorded any charges relating to their outcome.
On November 27, 2000, Richard Bowe SEP-IRA filed a purported class
action lawsuit in the United States District Court for the District of
Massachusetts (the "Bowe Complaint") against us and one of our then officers.
The Bowe Complaint claims violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated
thereunder and seeks unspecified damages, attorneys' fees and costs. On
December 19, 2000, Trust Advisors Equity Plus LLC filed a purported class
action lawsuit in the United States District Court for the District of
Massachusetts (the "Trust Advisors Complaint") against us and one of our then
officers. The Trust Advisors Complaint asserts the same claims, makes the same
allegations and seeks the same relief as the Bowe Complaint. On January 26,
2001, the plaintiffs in the Bowe and Trust Advisors Complaints moved to
consolidate the Bowe and Trust Advisors Complaints and to be appointed as lead
plaintiffs in the consolidated action pursuant to Section 21D(a)(3)(B) of the
Exchange Act. On July 30, 2001 the Court granted these motions and consolidated
the Bowe and Trust Advisor Complaints under the caption In re: PolyMedica Corp.
Securities Litigation, Civ. Act. No. 00-12426-REK.
Plaintiffs filed a consolidated amended complaint on October 9, 2001. The
consolidated amended complaint extended the class period (the amended class
period is October 26, 1998 through August 21, 2001), and named an additional two
officers as defendants. We and the named defendants moved to dismiss the
consolidated amended complaint on December 10, 2001. The plaintiffs filed their
opposition to this motion on February 11, 2002 and defendants filed a reply
memorandum on March 11, 2002. The Court denied the motion without a hearing on
May 10, 2002. We and the named defendants filed answers to the consolidated
amended complaint on June 20, 2002. We and the named defendants believe that we
have meritorious defenses to the claims made in the consolidated amended
complaint and intend to contest the claims vigorously. We are unable to express
an opinion as to the likely outcome of this litigation.
Between August 9, 2001 to August 24, 2001, four derivative actions were
filed in Massachusetts Superior Court for Middlesex County against our Board of
Directors: Casden v. Bernstein et al., Civ. Act. No. 01-3446; Vezmar v. Logerfo
et al., Civ. Act. No. 01-3612; Sullivan v. Bernstein et al., Civ. Act. No.
01-3656; and Messner v. Lee et al., Civ. Act. No. 01-3697. On August 31, 2001,
plaintiff filed a motion to consolidate the first three actions and to file an
amended
34
consolidated complaint within 60 days. The fourth derivative action was added to
the motion to consolidate on October 3, 2001. On October 11, 2001, the Court
granted plaintiffs' motion to consolidate all four derivative actions under the
caption In re: PolyMedica Corp. Shareholder Derivative Litigation, Civ. Act. No.
01-3446.
On December 17, 2001, plaintiffs filed a consolidated derivative
complaint. The consolidated complaint named two additional officer defendants.
The Complaint alleges that the directors and officers breached their fiduciary
duties by, among other things, failing to exercise reasonable care in the
oversight of corporate affairs and management with respect to the operations of
Liberty Medical and by acquiescing in alleged misconduct by Liberty Medical. The
Complaint seeks unspecified damages, the return of compensation, and other
relief, including injunctive relief. The defendants filed a motion to dismiss
the consolidated complaint on January 31, 2002. Plaintiffs filed an opposition
to the motion on March 22, 2002 and defendants filed a reply memorandum on April
19, 2002. The Court heard arguments on the motion to dismiss on April 30, 2002
and entered an order denying the motion to dismiss on July 16, 2002. The
directors and defendants believe they have meritorious defenses to the claims
made in the consolidated complaint and intend to contest the claims vigorously.
We are unable to express an opinion as to the likely outcome of this litigation.
A shareholder derivative complaint, Minasian v. Bernstein et. al., Civ.
Act. No. 01-11485REK, was filed against our Board of Directors in United States
District Court for the District of Massachusetts on August 17, 2001. The
Complaint alleged that the directors breached their fiduciary duties by, among
other things, failing to exercise reasonable care in the oversight of corporate
affairs and management with respect to the operations of Liberty Medical and by
acquiescing in alleged misconduct by Liberty Medical, and sought unspecified
damages, the return of director compensation, and other injunctive relief. On
November 16, 2001, plaintiff filed an assented-to motion to dismiss the
complaint without prejudice, and the case was closed on November 21, 2001.
In June 2002, Liberty Medical received an administrative subpoena from the
U.S. Attorney's Office for the Southern District of Illinois seeking documents
relevant to an ongoing investigation of Medicare reimbursement of "depth shoes
and inserts". Liberty Medical has been informed that it is not a target of that
investigation.
ITEM 5. OTHER INFORMATION
On August 4, 2002, Steven J. Lee, Chief Executive Officer, Chairman and a
director of PolyMedica, informed the Board of Directors of his intention to
retire as Chief Executive Officer, effective as of that date. Mr. Lee has agreed
to continue serving as Chairman and a director through December 31, 2002. Samuel
L. Shanaman, a director since November 2001, has been elected to the new
position of Lead Director, and will perform the functions of the chief executive
officer on an interim basis until a successor is named.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index immediately following this report, which is incorporated
herein by reference.
(b) There were no reports on Form 8-K filed during the three months ended June
30, 2002.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PolyMedica Corporation
----------------------
(registrant)
/s/ Samuel L. Shanaman
----------------------
Samuel L. Shanaman
Lead Director and Interim Chief Executive Officer
(Principal Executive Officer)
/s/ Eric G. Walters
----------------------
Eric G. Walters
Executive Vice President and Clerk
(Principal Financial Officer)
/s/ Stephen C. Farrell
----------------------
Stephen C. Farrell
Chief Financial Officer
(Principal Accounting Officer)
Dated: August 14, 2002
-36-
Exhibit Index
Exhibit Description
10.53 - Retention Agreement by and between the Registrant and Stephen C.
Farrell dated March 7, 2002.
10.54 - Letter Agreement amendment to Employment Agreement by and between
the Registrant and Arthur A. Siciliano dated July 15, 2002.
10.55 - Letter Agreement amendment to Employment Agreement by and between
the Registrant and Eric G. Walters dated July 15, 2002.
10.56 - Letter Agreement amendment to Employment Agreement by and between
the Registrant and Warren K. Trowbridge dated July 15, 2002.
10.57 - Letter Agreement amendment to Employment Agreement by and between
the Registrant and Stephen C. Farrell dated July 15, 2002.
10.58 - Termination of Employment Agreement by and between the Registrant
and Steven J. Lee dated August 4, 2002.
99.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
-37-