-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NdkTPM4CSMcdmWj7dJPUxudSMtL84DU96e65ufzr8XxjXmW6bU9Uioze5O0OKFAO dyGnfn6EZoxDMk3C1yGz0g== 0000950135-02-003171.txt : 20020628 0000950135-02-003171.hdr.sgml : 20020628 20020628165909 ACCESSION NUMBER: 0000950135-02-003171 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLYMEDICA CORP CENTRAL INDEX KEY: 0000878748 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 043033368 STATE OF INCORPORATION: MA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13690 FILM NUMBER: 02692011 BUSINESS ADDRESS: STREET 1: 11 STATE ST CITY: WOBURN STATE: MA ZIP: 01801 BUSINESS PHONE: 6179332020 MAIL ADDRESS: STREET 1: 11 STATE STREET CITY: WOBURN STATE: MA ZIP: 01801 FORMER COMPANY: FORMER CONFORMED NAME: POLYMEDICA INDUSTRIES INC DATE OF NAME CHANGE: 19930328 10-K 1 b43472pce10vk.txt POLYMEDICA CORPORATION SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 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 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE PER SHARE -------------------------------------- (Title of class) PREFERRED STOCK PURCHASE RIGHTS --------------------------------------- (Title of class) 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [X] The aggregate market value of voting Common Stock held by nonaffiliates of the registrant was $205,715,000 based on the closing price of the Common Stock as reported by The Nasdaq Stock Market on June 27, 2002. As of June 27, 2002, there were 12,154,107 shares of the registrant's Common Stock outstanding and an additional 1,160,875 shares held in treasury. Documents incorporated by reference: The Registrant intends to file a definitive proxy statement pursuant to Regulation 14A, promulgated under the Securities Exchange Act of 1934, as amended, to be used in connection with the Registrant's Annual Meeting of Stockholders to be held on September 12, 2002. The information required in response to Items 10 - 13 of Part III of this Form 10-K is hereby incorporated by reference to such proxy statement. PART I ITEM 1. BUSINESS THE COMPANY General PolyMedica Corporation ("PolyMedica") is a leading provider of direct-to-consumer medical products and services, conducting business through its 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 V 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 had a database of over 440,000 active Medicare-eligible diabetes customers as of March 31, 2002, as compared with over 355,000 as of March 31, 2001, many of whom suffer from other chronic diseases, to whom we sell name-brand products. We now 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 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 440,000 active Medicare-eligible diabetes customers, we serve approximately 6.3% 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. 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 urological and suppository products. Similar to the service we provide in our Chronic Care segment, we deliver products to customers' homes and bill Medicare and private insurance 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 March 31, 2002, we had a database of over 46,000 active Medicare-eligible customers for our prescription respiratory supplies, as compared with over 34,000 as of March 31, 2001. We now 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. 2 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 Supply, Inc. ("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 440,000 customers. In addition, we now have over 46,000 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 this fiscal year, 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 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. Major Customers For the fiscal years ended March 31, 2002, 2001, and 2000, no customer represented more than 10% of our consolidated revenues. As of March 31, 2002 and 2001, the amounts included in billed accounts receivable due from Medicare were $19.40 million and $14.17 million, respectively. Major Products For the fiscal years ended March 31, 2002, 2001, and 2000, sales of diabetes test strips and related products represented more than 10% of our consolidated net revenues, amounting to $201.01 million, $165.50 million, and $125.97 million, respectively, or 71.9%, 75.2%, and 80.3%, respectively, of our consolidated net revenues. Sale of Certain Assets of Thermometry Business In September 2000, we sold certain assets of our thermometry business which were included in the Consumer Healthcare segment. Under the terms of the sale, the purchaser paid us $300,000 in cash and issued a promissory note in the face amount of $1.12 million at a 7% annual interest rate, maturing September 20, 2003. In March 2001, we accepted $900,000 as final settlement of this note in consideration of the financial position of the borrower. 3 Trade Secrets We have proprietary manufacturing processes and trade secrets related to our in-house pharmaceutical production. Manufacturing We manufacture in-house several established products, including AZO CRANBERRY(R), AQUACHLORAL(R), B&O(R), CYSTOSPAZ(R), AZO MENOPAUSE(R), AZO PMS(R), AZO YEAST(R), and URISED(R). Our state-of-the-art automated suppository machine forms, fills and seals suppositories automatically and the computer-controlled, hands-off equipment provides improved manufacturing efficiency. We purchase certain of our Consumer Healthcare and Professional products from other manufacturers. Government Regulation Medicare Medicare is a federally funded program that provides health insurance coverage for persons age 65 or older and for some disabled persons. Medicare provides reimbursement for the majority of the products that we sell. This portion of our business is therefore subject to extensive regulation. Medicare reimbursement payments are sometimes lower than the reimbursement payments of other third-party payers, such as traditional indemnity insurance companies. Current Medicare reimbursement guidelines stipulate among other things, that quarterly orders of diabetes supplies to existing customers be verified with the customers before shipment and that all doctor's orders for supplies be re-validated every six months prior to billing. In addition, the regulations require that individuals with Type I diabetes who test more frequently than three times per day and individuals with Type II diabetes who test more frequently than one time per day visit their physician every six months and maintain a thirty-day log book to verify frequency of testing. We accept assignment of Medicare claims, as well as claims with respect to other third-party payers, on behalf of our customers. We process claims, accept payments and assume the risks of delay or nonpayment. We also employ the administrative personnel necessary to transmit claims for product reimbursement directly to Medicare and private health insurance carriers. Medicare reimburses at 80% of the government-distributed list containing reimbursement prices for Medicare-covered products (the "Medicare Fee Schedule") for approved diabetes testing and prescription respiratory supplies, and we bill the remaining 20% of the Medicare Fee Schedule to either third-party payers or directly to customers. In the year ended March 31, 2002, we provided 7.5% of net revenues as an allowance for doubtful accounts. We exclude from revenue all amounts in excess of the Medicare Fee Schedule. The processing of third-party reimbursements is a labor-intensive effort, and delays in processing claims for reimbursement may increase working capital requirements. The regulations that govern Medicare reimbursement are complex and our compliance with those regulations may be reviewed by federal agencies, including the United States 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 conducting investigations of alleged healthcare fraud by Liberty Medical and Liberty Home Pharmacy Corporation ("Liberty Home Pharmacy"). Both civil and criminal investigations are being conducted. We are cooperating fully with these investigations. If these investigations result 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 that could, either individually or in the aggregate, materially and adversely affect 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. Internal Regulatory Affairs Liberty Medical, Liberty Home Pharmacy, and related companies have a Regulatory Affairs Department that is comprised of five separate areas within the department: corporate compliance, monitoring, compliance/external responses, compliance/internal reviews and contracts and licensing. Although each area within the department is distinct, activities are coordinated within the department under the direction of the Vice President of Regulatory Affairs to promote the common goal of ensuring compliance with all federal, state and local laws and regulations applicable to the businesses of these companies. In the area of corporate compliance, there is a formal healthcare compliance program to assist all personnel in meeting their 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 4 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 between employees and customers, healthcare professionals, payers and other outside contacts. The compliance/external communications group monitors communications with external sources, such as payers, state and federal agencies and other third parties, to ensure the timely response to document and other requests and the receipt and 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. The contracts and licensing group monitors compliance with provider contracting and licensing requirements, which includes random, internal onsite inspections. As appropriate, PolyMedica also utilizes external audit resources to supplement its 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 3 of Part I, 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. Pharmacy Licensing In general, our pharmacy operations are regulated by the State of Florida Board of Pharmacy and the statutes of the State of Florida where we are licensed to do business as a pharmacy. Many of the states into which we deliver prescription pharmaceuticals have laws and regulations governing our activities, although they generally permit our pharmaceutical activities so long as they are permitted under the laws and regulations of Florida. Nevertheless, as of May 31, 2002 we had applied for pharmacy licenses in 42 states and had been granted licenses in all of them for our prescription respiratory supplies pharmacy. For our pharmacy that distributes prescription oral medications not covered by Medicare, we had applied for pharmacy licenses in 42 states, had been granted pharmacy licenses in 40 of them, and were awaiting decision in the remaining 2 states as of May 31, 2002. An additional 8 states do not require non-resident pharmacy licenses. We believe that we are in material compliance with the laws and regulations governing pharmaceutical activities in every state in which we deliver prescription pharmaceuticals. General Numerous federal, state and local laws relating to controlled drug substances, safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances apply to portions of our operations. For example, the Drug Enforcement Administration ("DEA") regulates controlled drug substances, such as narcotics, under the Controlled Substances Act and the Controlled Substances Import and Export Act. Manufacturers, distributors and dispensers of controlled substances must be registered and inspected by the DEA, and are subject to inspection, labeling and packaging, export, import, security, production quota, record keeping and reporting requirements. In addition, labeling and promotional activities relating to medical devices and drugs are, in certain instances, subject to regulation by the Federal Trade Commission. To the extent we engage in new activities or expand current activities into new states, the cost of compliance with applicable regulations and licensing requirements could be significant. In addition, our manufacturing facility is subject to the Good Manufacturing Practices regulations of the FDA. The FDA enforces these regulations through its plant inspection program. In addition, our drug products are subject to the requirements of the Food, Drug and Cosmetics Act and related regulations. Competition We participate in highly competitive markets and have numerous competitors. Many of our competitors and potential competitors have substantially greater capital resources, purchasing power and advertising budgets, as well as more experience in marketing and distributing products. Our competitors include: - retail pharmacies; 5 - healthcare product distributors; - disease management companies; and - pharmacy benefit management companies. In the urinary discomfort category, our AZO STANDARD(R) urinary analgesic holds a leading position. Competitors include a number of major pharmaceutical companies. In the Professional Products market, numerous pharmaceutical companies develop and market prescription products that compete with our products on a branded and generic basis. We believe that the principal competitive factors in the Chronic Care, Professional Products and Consumer Healthcare markets include attracting new customers, identifying and responding to customer needs, the quality and breadth of service and product offerings, and expertise with respect to the reimbursement process. We believe that we compete effectively in all of these areas because of: - Liberty Medical's brand recognition, supported by a national television advertising campaign; - Our expertise in the Medicare reimbursement and compliance process; and - Our significant investment in employee training, computer systems and order processing systems to assure high quality customer service, cost-effective order processing, and regulatory compliance. Employees As of March 31, 2002, we had 1,497 full-time employees. We expect to employ additional personnel as we expand our operations. We believe that employee relations are good. ITEM 2. PROPERTIES Our facilities are located in Woburn, Massachusetts and Port St. Lucie, Palm City and Stuart, Florida. Our corporate headquarters are located in Woburn in a 60,000 square foot facility which we own. We also own a 72,000 square foot facility in Port St. Lucie, Florida, which was purchased in May 1999 and expect to complete construction of a new warehouse and respiratory supplies facility in Port St. Lucie in the second quarter of fiscal year 2003, resulting in an additional 123,000 square feet of owned property. These new facilities will place all of our Florida-based businesses in close proximity and minimize our need for leasing space. We believe that our existing facilities and those either currently under construction or lease are adequate for our current and anticipated needs. ITEM 3. LEGAL PROCEEDINGS The U.S. Attorney's Office for the Southern District of Florida, with the assistance of the FBI and OIG, is conducting investigations of alleged healthcare fraud by Liberty Medical and Liberty Home Pharmacy. Both civil and criminal investigations are being conducted. We are cooperating fully with the investigations. We cannot accurately predict the outcome of these proceedings at this time, and have therefore not recorded any charges relating to the outcome of these uncertainties. On December 4, 2001, we received notice that the Securities and Exchange Commission ("SEC") was conducting a formal investigation of PolyMedica. On April 8, 2002, the SEC notified us that it had terminated its investigation of PolyMedica and that no enforcement action had been recommended to the Commission. 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 PolyMedica and one of its 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 PolyMedica and one of its officers. The Trust Advisors Complaint asserts the same claims, makes the same allegations and seeks the same relief as the Bowe 6 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 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 will file answers to the consolidated amended complaint shortly. We 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 PolyMedica's 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 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 but has not yet rendered any decision with regard thereto. The directors and named officers 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 PolyMedica's 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our security holders during the last quarter of the fiscal year ended March 31, 2002. 7 EXECUTIVE OFFICERS OF THE REGISTRANT Our current executive officers are as follows:
NAME AGE POSITION ---- --- -------- Steven J. Lee.................................... 55 Chairman and Chief Executive Officer Arthur A. Siciliano, Ph.D........................ 59 President; President, PolyMedica Pharmaceuticals (U.S.A.), Inc. John K.P. Stone, III............................. 69 Vice Chairman, General Counsel, and Senior Vice President Eric G. Walters.................................. 50 Executive Vice President and Clerk Warren K. Trowbridge............................. 50 Senior Vice President; President, Liberty Medical Supply, Inc. Stephen C. Farrell............................... 37 Chief Financial Officer
Mr. Lee has been Chairman of PolyMedica since June 1996 and Chief Executive Officer and a director of PolyMedica since May 1990. Mr. Lee served as President of PolyMedica from May 1990 through June 1996. From March 1990 to May 1990, Mr. Lee was a Manager in the Mergers and Acquisitions practice at Coopers & Lybrand LLP. From November 1987 to March 1990, Mr. Lee was President and a director of Shawmut National Ventures, the venture capital division of Shawmut Bank, N.A. From 1984 to 1986, he was President, Chief Executive Officer and a director of RepliGen Corporation, a biotechnology company. Mr. Lee also spent eleven years in venture capital as President of Venture Management Advisors and at Bankers Trust Company. Mr. Lee currently serves as a director of ICN Pharmaceuticals, Inc., Kensey Nash Corporation, and Fibersense Technology Corporation and as a trustee of The Wang Center for the Performing Arts. Mr. Lee is a graduate of the Fordham University School of Law and the Wharton School of Finance of the University of Pennsylvania. Dr. Siciliano has been President of PolyMedica since June 1996. Formerly, he served as Executive Vice President from July 1994 to June 1996, as Senior Vice President from January 1993 to July 1994, as Vice President, Pharmaceuticals from July 1991 to January 1993, and as Vice President, Manufacturing from June 1990 to July 1991. From PolyMedica's inception until June 1990, he served as Chief Operating Officer. From 1984 to 1986, Dr. Siciliano served as President of Microfluidics Corporation, a high technology equipment manufacturer and a subsidiary of the Biotechnology Development Corporation and then helped found a subsidiary, MediControl Corporation, and served as its President from 1986 to 1989. He served as President of the Heico Chemicals Division of the Whittaker Corporation from 1982 to 1984, as General Manager of Reheis Chemicals (Ireland), Ltd. during 1981 and as Technical Director for Reheis Chemical Co., a division of Revlon Inc., from 1975 to 1982. Dr. Siciliano also served as Director of Corporate Research for Kolmar Laboratories, Inc. from 1973 to 1975 and as Senior Scientist for The Gillette Company from 1969 to 1973. Mr. Stone joined PolyMedica in March 2002 and was appointed a Director, Vice Chairman, General Counsel, and Senior Vice President of PolyMedica in June 2002. Prior to joining PolyMedica, Mr. Stone was a senior partner at Hale and Dorr, LLP, a leading Boston based law firm. His corporate law practice focused on emerging companies primarily in the high technology and medical fields and the private and public financing, mergers, acquisitions and strategic relationships of such companies. In his practice, he also assisted U.S. companies in structuring, establishing and financing their U.S. operations. Mr. Stone has lectured and written on numerous tax, corporate, and international subjects, and is a member of the American and Massachusetts Bar Associations. He is a former director of Essex County Community Foundation, Inc., and formerly served as a member of the Board of Governors and the Executive Committee of the New England Aquarium, and as a member of the Corporate Advisory Executive Committee of the Museum of Fine Arts. He is a past President of the American Bar Retirement Association, and a former member and Chairman of the Planning Board of the Marblehead, Massachusetts School Committee. Mr. Stone is a graduate of Harvard Law School and Princeton University. Mr. Walters who had served as PolyMedica's Chief Financial Officer since 1990, was promoted to Executive Vice President effective May 2001. He is responsible for managing PolyMedica's finance, investor communications and compliance functions. From 1987 to 1990, Mr. Walters served in various positions at John Hancock Capital Growth Management, Inc., most recently as Assistant Treasurer. From 1983 to 1987, Mr. Walters served as Controller of Venture Founders Corporation and from 1979 to 1983, he was employed at Coopers & Lybrand LLP, most recently as an Audit Supervisor. Mr. Walters is a Certified Public Accountant. Mr. Trowbridge joined PolyMedica in February 1999 as Chief Operating Officer of Liberty Medical. On May 1, 1999, he was appointed President of Liberty Medical and was also elected Vice President of PolyMedica. Effective May 15, 2002, he was promoted to Senior Vice President of PolyMedica. From December 1997 to February 1999, he served as President; and from November 1994 to December 1997 he served as Executive Vice President of U.S. Operations for Transworld Healthcare, Inc. an international healthcare company, where he was responsible for three domestic operating units including MK Diabetes Support Services. From August 1991 to October 1994, Mr. Trowbridge served as Chairman and Chief Executive Officer of 8 Medical Associates of America, a national integrated network of physician owned pharmacies. Mr. Trowbridge also served as Executive Vice President of T2 Medical from January 1988 to August 1991. Mr. Farrell joined PolyMedica in August 1999 as Treasurer. Effective May 2001, he was promoted to Chief Financial Officer. From 1994 to 1999, Mr. Farrell served in various positions at PricewaterhouseCoopers, LLP, most recently as a Senior Manager of the high technology team. A graduate of Harvard University, Mr. Farrell holds an MBA from the University of Virginia and is a Certified Public Accountant. 9 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS As of March 31, 2002, our Common Stock was held by 688 holders of record. We believe that the actual number of beneficial owners of our Common Stock is significantly greater than the stated number of holders of record because a substantial portion of the Common Stock outstanding is held in "street name". Our Common Stock is traded on the Nasdaq National Market under the symbol "PLMD". The following table sets forth the high and low closing sales price per share of Common Stock on the Nasdaq National Market: FISCAL YEAR 2002 -------------------------- HIGH LOW ------ ------ 1st Quarter $40.80 $23.31 2nd Quarter 48.43 11.25 3rd Quarter 24.36 14.81 4th Quarter 25.95 17.16 FISCAL YEAR 2001 -------------------------- HIGH LOW ------ ------ 1st Quarter $57.69 $25.94 2nd Quarter 47.88 33.63 3rd Quarter 58.25 22.81 4th Quarter 44.00 17.00 We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we expect to retain our earnings to finance the growth of our business. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations included elsewhere in this Form 10-K. The balance sheet data as of March 31, 2002 and 2001 and the statements of operations data for the three years ended March 31, 2002 have been derived from the audited consolidated financial statements for such years, included elsewhere in this Form 10-K. The balance sheet data as of March 31, 2000, 1999, and 1998 and the statements of operations data for the two years ended March 31, 1999 have been derived from the audited consolidated financial statements for such years, not included in this Form 10-K.
(In thousands, except share and per share data) YEAR ENDED MARCH 31, 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Statements of Operations Data: Net revenues $279,661 $220,046 $156,920 $104,825 $73,825 Net income 30,411 22,734 15,119 7,644 7,619 Net income per weighted average share, basic 2.43 1.73 1.37 .86 .88 Net income per weighted average share, diluted 2.38 1.67 1.27 .78 .79 Weighted average shares, basic 12,506 13,176 11,049 8,898 8,652 Weighted average shares, diluted 12,780 13,596 11,876 9,786 9,691
10 Pro forma amounts assuming retroactive application of SAB 101(before cumulative effect of change in accounting principle): Net income $ 30,411 $ 29,660 $ 13,371 $ 6,185 $ 4,957 Net income per weighted average share, basic 2.43 2.26 1.21 .70 .57 Net income per weighted average share, diluted 2.38 2.18 1.13 .63 .51 Balance Sheet Data: Cash and cash equivalents $ 27,884 $ 39,571 $ 40,687 $10,191 $ 6,440 Total assets 224,392 201,564 175,596 112,939 92,401 Total liabilities and minority interest 50,809 42,914 39,446 49,894 39,473 Total debt and obligations 2,227 3,164 3,332 24,666 22,906 Shareholders' equity 173,583 158,650 136,150 63,045 52,928
During the fiscal year ended March 31, 2002, net income included $3.19 million, net of related taxes, or $0.25 per diluted weighted average share, attributable to unusual legal and related expenses as a result of the previously reported investigations of Liberty Medical and Liberty Home Pharmacy and $3.60 million, net of related taxes, or $0.28 per diluted weighted average share, for an adjustment to earnings for probable amounts due to Medicare and others. See Note K to the consolidated financial statements. Excluding the effect of these unusual charges, earnings per diluted weighted average share would have been $2.91 for the fiscal year ended March 31, 2002. During the fourth quarter of fiscal year 2001, we implemented Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial Statements" retroactive to April 1, 2000. Effective April 1, 2000, we recorded the cumulative effect of the change in accounting principle. During the fiscal year ended March 31, 2001, net income included a $6.93 million charge, net of related taxes, or $0.51 per diluted weighted average share, related to the cumulative effect of a change in accounting principle for the adoption of SAB 101. See Note C to the consolidated financial statements. In the fiscal year ended March 31, 2000, net income included a $1.34 million loss, net of related taxes, or $0.12 per diluted weighted average share, related to the extraordinary loss on retirement of debt. During the fiscal year ended March 31, 1998, net income included $2.74 million, net of related taxes, or $0.29 per diluted weighted average share, related to the gain on the July 1997 sale of our wound care business. During the fiscal year ended March 31, 1999, net income included $976,000, net of related taxes, or $0.10 per diluted weighted average share, related to this sale. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FUTURE OPERATING RESULTS This Annual Report on Form 10-K contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes", "anticipates", "plans", "expects", and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause our actual results to differ materially from those indicated or suggested by such forward-looking statements. These factors include, without limitation, those set forth below in the section titled "Factors Affecting Future Operating Results" in this Annual Report on Form 10-K. OVERVIEW Business PolyMedica is a leading provider of direct-to-consumer medical products and services, conducting business through our Chronic Care, Professional Products and Consumer Healthcare segments. Through our Chronic Care segment, we sell diabetes supplies and related products and provide services to Medicare-eligible seniors suffering from diabetes and related chronic diseases. 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 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 products are distributed primarily to food and drug retailers 11 and mass merchandisers nationwide through our Consumer Healthcare segment. Our AZO brand holds a leading position in the over-the-counter ("OTC") urinary health market. Critical Accounting Policies Our discussion and analysis of PolyMedica's 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. PolyMedica's significant accounting policies are presented within Note B to our consolidated financial statements, and the following summaries should be read in conjunction with our consolidated financial statements and the related notes included in this Form 10-K. 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 effect 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 effect the timing and amount of costs recognized. 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 12 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 conducting investigations of alleged healthcare fraud by Liberty Medical and Liberty Home Pharmacy. Both civil and criminal investigations are being conducted. We are cooperating fully with the investigations. We cannot accurately predict the outcome of these proceedings at this time, and have not recorded any charges related to the outcome of these uncertainties in our March 31, 2002 consolidated financial statements. 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 that could, either individually or in the aggregate, materially and adversely affect our financial position and results of operations. PolyMedica and three of its 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 officers of PolyMedica in Massachusetts state court alleging certain breaches of fiduciary duty. PolyMedica, the named officers, and the Board of Directors believe that they have meritorious defenses to the claims made against them in the actions in which they 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 the outcome of these uncertainties. An unfavorable outcome could have a material effect on our financial position and results of operations. Recent Transactions On February 12, 2002, all outstanding minority interests in our subsidiaries previously held by certain Company executives, having a recorded book value of $1.37 million as of February 12, 2002, were reacquired by the respective subsidiaries at no cost and are classified as additional paid in capital in the shareholders' equity section of our consolidated balance sheets as of March 31, 2002. As a result of these transactions, there were no outstanding minority interests in PolyMedica or any of its subsidiaries as of March 31, 2002. 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. 13 Period to period comparisons of changes in net revenues are not necessarily indicative of results to be expected for any future period. RESULTS OF OPERATIONS Year Ended March 31, 2002 Compared to Year Ended March 31, 2001 Total net revenues increased by 27.1% to $279.66 million in the fiscal year ended March 31, 2002, as compared with $220.05 million in the fiscal year ended March 31, 2001. This increase was primarily the result of the growth in revenues from our Chronic Care and Professional Products segments which increased 24.3% and 48.5%, respectively, in the fiscal year ended March 31, 2002, as compared with the fiscal year ended March 31, 2001. See Note V to the consolidated financial statements for segment information. Net revenues in the Chronic Care segment increased by 24.3% to $207.26 million in the fiscal year ended March 31, 2002, as compared with $166.77 million in the fiscal year ended March 31, 2001. This growth 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 increase 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, including diabetes test strips, 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 beginning July 1, 2001. In addition, due to the late implementation by the government of the January 1, 2001 cost of living adjustment, which went into effect July 1, 2001, an incremental 3.28% cost of living adjustment was recorded from July 1, 2001 to December 31, 2001. This incremental 3.28% cost of living adjustment ended on December 31, 2001. Net revenues from Professional Products increased 48.5% to $64.86 million in the fiscal year ended March 31, 2002, as compared with $43.67 million in the fiscal year ended March 31, 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 decreased 21.5% to $7.54 million in the fiscal year ended March 31, 2002, as compared with $9.61 million in the fiscal year ended March 31, 2001, due primarily to the sale of certain assets of our thermometry business in September 2000. As a percentage of total net revenues, overall gross margins were 65.1% in the fiscal year ended March 31, 2002 and 65.0% in the fiscal year ended March 31, 2001. Gross margins in the fiscal year ended March 31, 2002 increased slightly due primarily to a cost of living adjustment described above, and increased sales in our higher margin Professional Products segment, partially offset by a change in the interpretation of the reimbursement formula for albuterol and ipratropium combinations (see Note K to the consolidated financial statements for more details), 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. As a percentage of total net revenues, selling, general and administrative expenses were 47.8% for the fiscal year ended March 31, 2002, as compared with 44.3% for the fiscal year ended March 31, 2001. Selling, general and administrative expenses increased by 37.0% in the fiscal year ended March 31, 2002 to $133.61 million, as compared with $97.55 million in the fiscal year ended March 31, 2001. This increase in selling, general and administrative expenses as a percentage of net revenues was primarily attributable to unusual legal and related expenses of $5.06 million and a charge of $5.03 million for probable amounts due to Medicare and others which relates to a change in interpretation of the reimbursement formula for albuterol and ipratropium combinations used in our Professional Products segment, in the fiscal year ended March 31, 2002. We do not expect any further charges to income as a result of this change in interpretation. See Note K to the consolidated financial statements for more information. The unusual legal and related expenses incurred in the fiscal year ended March 31, 2002 of approximately $5.06 million were primarily attributable to previously reported investigations of Liberty Medical and Liberty Home Pharmacy. We expect that we will continue to incur unusual legal and related expenses in the fiscal year ending March 31, 2003. Selling, general and administrative expenses further increased due to an increase in direct-response advertising amortization of $10.70 million to $30.31 million in the fiscal year ended March 31, 2002, from $19.60 million in the fiscal year ended March 31, 2001. Amortization increased as a result of the growth in the direct-response advertising asset value. See Note B to the consolidated financial statements for more information. Investment income, net decreased 61.5% to $1.11 million in the fiscal year ended March 31, 2002, as compared with $2.87 million in the fiscal year ended March 31, 2001, due to a lower average cash balance and lower interest rates. Interest expense decreased 41.3% to $166,000 in the fiscal year ended March 31, 2002, as compared with $282,000 in the fiscal year ended March 31, 2001, due 14 primarily to the elimination of interest expense on Liberty Medical's Port St. Lucie facility mortgage as a result of the $1.36 million repayment in December 2000. Pretax income before the cumulative effect of a change in accounting principle was $48.89 million in the fiscal year ended March 31, 2002, a 3.4% increase as compared with $47.30 million in the fiscal year ended March 31, 2001. The marginal increase was primarily attributable to approximately $5.06 million of unusual legal and related expenses and a $5.85 million adjustment to earnings for probable amounts due to Medicare and others, recorded in the fiscal year ended March 31, 2002, without which the increase in pretax income would have been greater. The provision for income taxes was $18.48 million and $17.65 million in the fiscal years ended March 31, 2002 and 2001, respectively, which resulted in an effective tax rate of 37.8% and 37.3% in fiscal years 2002 and 2001, respectively. The effective tax rates in fiscal years 2002 and 2001 were higher than the Federal U.S. statutory rates due primarily to state taxes and other permanent differences. We anticipate that the effective tax rate for fiscal year 2003 will be at or near the fiscal 2002 effective tax rate. Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss, changes to federal or state tax laws, future expansion into areas with varying country, state, or local income tax rates, and the deductibility of certain costs and expenses by jurisdiction. Our income before the cumulative effect of a change in accounting principle, net of taxes, was $30.41 million, or $2.38 per diluted weighted average share, for the fiscal year ended March 31, 2002, as compared with $29.66 million, or $2.18 per diluted weighted average share, for the fiscal year ended March 31, 2001. Excluding $3.19 million of unusual legal and related expenses, net of related taxes, and a $3.60 million adjustment to earnings for probable amounts due to Medicare and others, net of related taxes, earnings per diluted weighted average share were $2.91 in the fiscal year ended March 31, 2002. Net income was $30.41 million, or $2.38 per diluted weighted average share, for the fiscal year ended March 31, 2002, as compared with $22.73 million, or $1.67 per diluted weighted average share, for the fiscal year ended March 31, 2001. Year Ended March 31, 2001 Compared to Year Ended March 31, 2000 Total net revenues increased by 40.2% to $220.05 million in the fiscal year ended March 31, 2001, as compared with $156.92 million in the fiscal year ended March 31, 2000. This increase was primarily the result of the growth in revenues from our Chronic Care and Professional Products segments which increased 32.4% and 164.6%, respectively, in the fiscal year ended March 31, 2001, as compared with the fiscal year ended March 31, 2000. See Note V to the consolidated financial statements for segment information. Net revenues in the Chronic Care segment increased by 32.4% to $166.77 million in the fiscal year ended March 31, 2001, as compared with $126.00 million in the fiscal year ended March 31, 2000. This growth 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 increase in order to further the expansion of our Chronic Care segment. Net revenues from Professional Products increased 164.6% to $43.67 million in the fiscal year ended March 31, 2001, as compared with $16.50 million in the fiscal year ended March 31, 2000. This increase was mainly attributable 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 increase in order to further the expansion of our Professional Products segment. Net revenues from Consumer Healthcare products decreased 33.3% to $9.61 million in the fiscal year ended March 31, 2001, as compared with $14.42 million in the fiscal year ended March 31, 2000, due in large part to the sale of certain assets of our thermometry business in September 2000. As a percentage of total net revenues, overall gross margins were 65.0% in the fiscal year ended March 31, 2001, and 58.9% in the fiscal year ended March 31, 2000. Gross margins in the fiscal year ended March 31, 2001 increased due primarily to improved gross margins in the Chronic Care segment, resulting from favorable product mix, increased sales volume and ongoing price reductions from suppliers, as well as increased sales volume and improving margins in the Professional Products segment. As a percentage of total net revenues, selling, general and administrative expenses were 44.3% for the fiscal year ended March 31, 2001, as compared with 41.8% for the fiscal year ended March 31, 2000. Selling, general and administrative expenses increased by 48.8% in the fiscal year ended March 31, 2001 to $97.55 million, as compared with $65.56 million in the fiscal year ended March 31, 2000. This increase was primarily attributable to increased amortization of direct-response advertising of $10.57 million and increased bad debt provisions of $4.24 million. Investment income, net increased by 113.0% to $2.87 million in the fiscal year ended March 31, 2001, as compared with $1.35 million in the fiscal year ended March 31, 2000, as we earned interest on higher average cash balances primarily as a result of a full year of interest earned in fiscal 2001 on proceeds from our October 1999 secondary public offering. Interest expense decreased by 80.0% to 15 $282,000 in the fiscal year ended March 31, 2001, as compared with $1.41 million in the fiscal year ended March 31, 2000, due to the October 1999 retirement of the Guaranteed Senior Secured Notes due January 31, 2003 (the "Hancock Notes") to the John Hancock Mutual Life Insurance Company ("Hancock"). Pretax income was $47.30 million in the fiscal year ended March 31, 2001, as compared with $26.67 million in the fiscal year ended March 31, 2000. This 77.4% increase in pretax income was primarily the result of increased sales volume and improved gross margins partially offset by increased selling, general and administrative expenses. The provision for income taxes was $17.65 million and $10.22 million in the fiscal years ended March 31, 2001 and 2000, respectively, which resulted in an effective tax rate of 37.3% and 38.3% in fiscal years 2001 and 2000, respectively. The effective tax rates in fiscal years 2001 and 2000 were higher than the Federal U.S. statutory rates due primarily to state taxes and other permanent differences. Our net income was $22.73 million, or $1.67 per diluted weighted average share, in the fiscal year ended March 31, 2001, as compared with $15.12 million, or $1.27 per diluted weighted average share in the fiscal year ended March 31, 2000. Net income, excluding the $6.93 million cumulative effect of a change in accounting principle, net of related taxes, was $29.66 million, or $2.18 per diluted weighted average share, for the fiscal year ended March 31, 2001, as compared with net income, excluding the $1.34 million extraordinary loss on retirement of debt, net of related taxes, of $16.46 million, or $1.39 per diluted weighted average share, for the fiscal year ended March 31, 2000. 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 thirteen 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 $11.69 million to $27.88 million as of March 31, 2002, due primarily to $18.00 million of cash used for the repurchase of shares of our common stock plus cash used for capital expenditures for new facilities, offset by cash flows generated from operations. Cash flows from operations of $22.90 million for the fiscal year ended March 31, 2002, were generated by net income of $30.41 million, offset by cash used to fund certain areas of our operations, such as increased spending for direct-response advertising of $11.01 million to $42.48 million in the fiscal year ended March 31, 2002, as compared with $31.47 million in the fiscal year ended March 31, 2001, to further expand our customer base, both for diabetes testing and prescription respiratory supplies. The following table summarizes our contractual obligations for future annual minimum lease and rental commitments as of March 31, 2002, under all of our leases, capital and operating: CAPITAL OPERATING (In thousands) LEASES LEASES ------- --------- 2003 $ 855 $ 1,339 2004 416 688 2005 177 433 2006 78 38 2007 and thereafter 42 18 ------ ------- Total minimum payments $1,568 $ 2,516 ====== ======= In the fiscal years ended March 31, 2002 and 2001, we used $15.23 million and $7.74 million of cash for investing activities, respectively. The $7.49 million increase in total cash used for investing activities was primarily due to a $6.34 million increase in property, plant and equipment purchases in the fiscal year ended March 31, 2002, as compared with the fiscal year ended March 31, 2001. Higher spending in the current fiscal year for property, plant and equipment is primarily related to the ongoing construction of two new facilities in Port St. Lucie, Florida included in the construction in process category of property, plant and equipment. The cumulative amount spent through March 31, 2002 related to this construction was $8.60 million, which will not be depreciated until the construction is completed. In fiscal 2003, we estimate that we will spend an additional $5.00 million on the construction of these two new facilities, for which no liability has been recorded as of March 31, 2002, because we have no contractual obligation to complete the construction. In the fiscal year ended March 31, 2002, we used $19.36 million of cash for financing activities, $18.00 million of which was used to repurchase 1,009,000 shares of our common stock. 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 March 31, 2002, 1,246,000 shares had been repurchased under these programs for an aggregate of $24.64 million or an average price of $19.78 per share. As of March 31, 2002, 754,000 shares remained authorized for repurchase under the August 2001 authorized share repurchase program. Other financing activities included the receipt of proceeds from the issuance of common stock, payments of capital lease obligations and the setting aside of amounts for executive deferred compensation plans. 16 In November 2000, we filed an amendment to a shelf registration statement 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. It will be in effect until November 2002. No shares of common stock had been sold under this shelf registration statement as of March 31, 2002. We believe that our cash and cash equivalents balance as of March 31, 2002 of $27.88 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. We are conducting an active search for the strategic acquisition of complementary businesses, products or technologies which leverage our marketing, sales and distribution infrastructure. We currently have no commitments or agreements with respect to any such acquisition. 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. We hold certain investments related to executive deferred compensation plans, see Note B to the consolidated financial statements, which are accounted for pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). 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 March 31, 2002, the fair value of these investments was not materially different from cost. ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 supercedes Accounting Principles Bulletin No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS 142 supercedes Accounting Principles Bulletin No. 17, "Intangible Assets." These new statements require use of the purchase method of accounting for all business combinations initiated after June 30, 2001, thereby eliminating use of the pooling-of-interests method. Goodwill will no longer be amortized but will be 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. The provisions of SFAS 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted, as required, on April 1, 2002. The adoption of SFAS 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 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. We have not yet determined what effect these impairment tests will have on our consolidated financial statements in the future. As a result of adopting SFAS 142 effective April 1, 2002, approximately $1.54 million of goodwill amortization will not be recognized in fiscal 2003. In August 2001, the FASB issued SFAS No. 143 "Accounting for Obligations Associated with the Retirement of Long-Lived Assets" ("SFAS 143"). The provisions of SFAS 143 apply to all entities that incur obligations associated with the retirement of tangible long-lived assets. SFAS 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. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 provides guidance on the accounting for the impairment or disposal of long-lived assets. The objectives of SFAS 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 single model (based on the framework established in SFAS No. 121) for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and thus will be adopted, as required, on April 1, 2002. Generally, its provisions 17 are to be applied prospectively. This accounting pronouncement could have a significant impact on our financial position or results of operations should there be future asset impairments or disposals. FACTORS AFFECTING FUTURE OPERATING RESULTS The statements contained in this Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 PolyMedica and three of its 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 officers of PolyMedica in Massachusetts state court alleging certain breaches of fiduciary duty. PolyMedica, the named officers, and the Board of Directors believe that they have meritorious defenses to the claims made against them in the actions in which they 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 the outcome of these uncertainties. An unfavorable outcome could have a material effect on our financial position and results of operations. 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 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 conducting investigations of alleged healthcare fraud by Liberty Medical and Liberty Home Pharmacy. Both civil and criminal investigations are being conducted. We are cooperating fully with the investigations. We cannot accurately predict the outcome of these proceedings at this time, and have therefore not recorded any charges relating to the outcome of these uncertainties. 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. 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. 18 We plan to continue our rapid expansion; if we do not manage our growth successfully, our growth and profitability may slow or stop 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. 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 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 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. 19 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; - 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. 20 ITEM 7A. 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 these market-risk sensitive instruments are held for trading purposes. 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. 21 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (a) The following documents are filed as part of this Annual Report on Form 10-K.
1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Report of Independent Accountants 23 Consolidated Balance Sheets as of March 31, 2002 and 2001 24 Consolidated Statements of Operations for the years ended March 31, 2002, 2001, and 2000 25 Consolidated Statements of Shareholders' Equity for the years ended March 31, 2002, 2001, and 2000 26 Consolidated Statements of Cash Flows for the years ended March 31, 2002, 2001, and 2000 27 Notes to Consolidated Financial Statements 28 2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE The following consolidated financial statement schedule is included in Item 14(d): Schedule II - Valuation and Qualifying Accounts
22 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of PolyMedica Corporation: In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 8(a)(1) present fairly, in all material respects, the financial position of PolyMedica Corporation and its subsidiaries at March 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the consolidated financial statement schedule listed in the index appearing under Item 8(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note C to the consolidated financial statements, during the year ended March 31, 2001 the Company changed its method of recognizing revenue. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts May 15, 2002 23 POLYMEDICA CORPORATION (In thousands, except share and per share amounts) CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31, 2002 2001 --------- --------- ASSETS Current assets: Cash and cash equivalents $27,884 $39,571 Accounts receivable (net of allowances of $15,539 and $13,729 as of March 31, 2002 and 2001, respectively) 44,059 31,969 Inventories 21,663 22,791 Deferred tax asset 10,622 9,558 Prepaid expenses and other current assets 1,727 1,073 -------- ------- Total current assets 105,955 104,962 Property, plant, and equipment, net 34,603 22,199 Intangible assets, net 30,446 32,723 Direct response advertising, net 52,112 39,940 Other assets 1,276 1,740 --------- -------- Total assets $224,392 $201,564 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $10,270 $13,118 Amounts due to Medicare and others 4,798 -- Accrued expenses 12,990 8,277 Current portion, capital lease obligations 742 587 -------- ------- Total current liabilities 28,800 21,982 Long-term note payable, capital lease and other obligations 1,485 2,576 Deferred income taxes 20,524 17,551 -------- -------- Total liabilities 50,809 42,109 Minority interest -- 805 Commitments and contingencies (Note M) Shareholders' equity: Preferred stock, $.01 par value; 2,000,000 shares authorized, none issued or outstanding -- -- Common stock, $.01 par value; 50,000,000 shares authorized; 13,300,477 and 13,275,993 shares issued as of March 31, 2002 and 2001, respectively 133 133 Treasury stock, at cost (1,143,158 and 205,325 shares as of March 31, 2002 and 2001, respectively) (22,185) (5,526) Additional paid-in capital 119,891 118,710 Retained earnings 75,744 45,333 -------- -------- Total shareholders' equity 173,583 158,650 -------- -------- Total liabilities and shareholders' equity $224,392 $201,564 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 24 POLYMEDICA CORPORATION (In thousands, except per share amounts) CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31, 2002 2001 2000 ----------------------------------------------------------------------------------------------------------- Net revenues $279,661 $220,046 $156,920 Cost of sales 97,519 76,973 64,487 -------- -------- -------- Gross margin 182,142 143,073 92,433 Selling, general and administrative expenses 133,609 97,554 65,557 -------- -------- -------- Income from operations 48,533 45,519 26,876 Other income and expense: Investment income, net 1,105 2,867 1,346 Interest and other expense (180) (348) (1,411) Minority interest (564) (733) (141) -------- -------- -------- 361 1,786 (206) Income before income taxes 48,894 47,305 26,670 Income tax provision 18,483 17,645 10,215 -------- -------- -------- Income before cumulative effect of change in accounting principle and extraordinary loss 30,411 29,660 16,455 Extraordinary loss on retirement of debt, net of taxes of $829 -- -- (1,336) Cumulative effect of change in accounting principle, net of taxes of $4,121 -- (6,926) -- -------- -------- -------- Net income $ 30,411 $ 22,734 $ 15,119 ======== ======== ======== Net income per weighted average share before cumulative effect of change in accounting principle and extraordinary loss on retirement of debt: Basic $ 2.43 $ 2.26 $ 1.49 Diluted $ 2.38 $ 2.18 $ 1.39 Cumulative effect of change in accounting principle: Basic $ -- $ (.53) $ -- Diluted $ -- $ (.51) $ -- Extraordinary loss on retirement of debt: Basic $ -- $ -- $ (.12) Diluted $ -- $ -- $ (.12) -------- -------- -------- Net income per weighted average share: Basic $ 2.43 $ 1.73 $ 1.37 ======== ======== ======== Diluted $ 2.38 $ 1.67 $ 1.27 ======== ======== ======== Weighted average shares, basic 12,506 13,176 11,049 Weighted average shares, diluted 12,780 13,596 11,876
The accompanying notes are an integral part of the consolidated financial statements. 25 POLYMEDICA CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY for the years ended March 31, 2000, 2001, and 2002 (Dollars in thousands)
Common stock Treasury stock Notes Total ----------------- -------------------- Additional receivable share- Number of Number of paid - in Retained from holders' shares Amount shares Amount capital earnings officers equity ---------- ------ ----------- --------- ---------- -------- ------- -------- Balance at March 31, 1999 9,197,075 $ 92 (78,003) $ (458) $ 56,557 $ 7,480 $(626) $ 63,045 Exercise of stock options and warrants 615,718 6 3,002 3,008 Receipt of treasury stock in connection with stock option and warrant exercises 822,882 8 (80,725) (1,780) 1,772 -- Payments of officer notes receivable (19,400) (560) 626 66 Tax benefit from stock options exercised 2,571 2,571 Issuance of treasury stock under the 1992 Employee Stock Purchase Plan 12,684 6,634 27 109 136 Issuance of common and treasury stock in the October 1999 secondary offering 2,460,308 25 169,291 2,703 50,077 52,805 Offering expenses (600) (600) Net income 15,119 15,119 ---------- ---- ----------- --------- --------- ------ ------- -------- Balance at March 31, 2000 13,108,667 131 (2,203) (68) 113,488 22,599 136,150 Exercise of stock options and warrants 155,476 2 33,878 1,183 808 1,993 Repurchase of common stock (237,000) (6,641) (6,641) Tax benefit from stock options exercised 4,087 4,087 Issuance of common stock under the 1992 Employee Stock Purchase Plan 11,850 327 327 Net income 22,734 22,734 ---------- ---- ----------- --------- --------- ------ ------- -------- Balance at March 31, 2001 13,275,993 133 (205,325) (5,526) 118,710 45,333 158,650 Exercise of stock options and warrants, net of receipt of 19,242 shares for exercises 71,167 1,343 (1,231) 112 Repurchase of common stock (1,009,000) (18,002) (18,002) Tax benefit from stock options exercised 620 620 Issuance of common stock under the 1992 Employee Stock Purchase Plan 24,484 423 423 Contribution of minority interests 1,369 1,369 Net income 30,411 30,411 ---------- ---- ----------- --------- --------- ------ ------- -------- Balance at March 31, 2002 13,300,477 $133 (1,143,158) $(22,185) $ 119,891 $ 75,744 $ -- $173,583 ========== ==== ========== ========= ========== ======== ======= ========
The accompanying notes are an integral part of the consolidated financial statements. 26 POLYMEDICA CORPORATION (In thousands) CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31, 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 30,411 $ 22,734 $ 15,119 Adjustments to reconcile net income to net cash flows: Depreciation and amortization 5,733 5,214 4,004 Amortization of direct-response advertising 30,306 19,604 9,036 Direct-response advertising (42,478) (31,467) (21,436) Minority interest 564 662 141 Deferred income taxes 1,909 (1,533) 4,314 Tax benefit from stock options exercised 620 4,087 2,571 Provision for bad debts 21,000 15,530 11,292 Provision for sales allowances 12,525 11,899 9,822 Provision for inventory obsolescence 948 1,788 253 Provision for amounts due to Medicare and others 5,848 -- -- Extraordinary loss on retirement of debt -- -- 2,165 Other 32 674 220 Changes in assets and liabilities: Accounts receivable (45,615) (19,635) (28,626) Inventories 180 (16,997) (2,323) Prepaid expenses and other assets (997) 604 (998) Accounts payable (2,848) (969) 1,555 Amounts due to Medicare and others (1,050) -- -- Accrued expenses and other liabilities 5,811 2,429 2,970 -------- -------- -------- Total adjustments (7,512) (8,110) (5,040) -------- -------- -------- Net cash flows from operating activities 22,899 14,624 10,079 -------- -------- -------- Cash flows from investing activities: Purchase of marketable securities (5,499) (20,300) -- Proceeds from the sale of marketable securities 5,499 20,300 -- Proceeds from sale of certain assets -- 1,300 -- Investment in other assets -- (200) (157) Purchase of property, plant, and equipment (15,251) (8,912) (9,077) Proceeds from sale of equipment 22 72 8 -------- -------- -------- Net cash flows from investing activities (15,229) (7,740) (9,226) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock 532 2,320 3,145 Net proceeds from secondary offering -- -- 52,205 Repurchase of common stock (18,002) (6,641) -- Contributions to deferred compensation plans (1,125) (1,768) -- Payment of obligations under capital leases (762) (529) (350) Repayment of line of credit -- -- (4,000) Repayment of officer notes receivable -- -- 66 Premium paid on retirement of debt -- -- (1,806) Repayment of senior debt and note payable -- (1,382) (19,617) -------- -------- -------- Net cash flows from financing activities (19,357) (8,000) 29,643 -------- -------- -------- Net increase/(decrease) in cash and cash equivalents (11,687) (1,116) 30,496 Cash and cash equivalents at beginning of period 39,571 40,687 10,191 -------- -------- -------- Cash and cash equivalents at end of period $ 27,884 $ 39,571 $ 40,687 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 166 $ 293 $ 1,889 Income taxes paid 17,677 9,617 2,725 Assets purchased under capital lease or note payable 642 116 2,302 Disposal of equipment 135 523 236
The accompanying notes are an integral part of the consolidated financial statements. 27 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. NATURE OF BUSINESS: PolyMedica Corporation (the "Company") was incorporated as Emerging Sciences, Inc. in Massachusetts on November 16, 1988, and commenced commercial operations in October 1989. In July 1990, the Company changed its name to PolyMedica Industries, Inc. In June 1996, the Company distributed to its shareholders all of its shares of CardioTech International, Inc. ("CardioTech") in a transaction that qualified as a tax-free spinoff. In August 1996, the Company purchased Liberty Medical Supply, Inc. ("Liberty Medical"), a diabetes supply company. In July 1997, the Company sold certain assets of its U.S. and U.K. professional wound care operations. In September 1997, the Company changed its name to PolyMedica Corporation. In September 2000, the Company sold certain assets of its thermometry business. The Company and its subsidiaries operate from manufacturing, distribution, and laboratory facilities located in Massachusetts and Florida. The Company generates sales of diabetes supplies and related products through its Chronic Care segment, prescription respiratory supplies, prescription oral medications and prescription urologicals through its Professional Products segment and over-the-counter ("OTC") urinary discomfort products through its Consumer Healthcare segment. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-and majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. As of March 31, 2002, all of the Company's subsidiaries were wholly-owned. USE OF ESTIMATES 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 revenue 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. UNCERTAINTIES The Company is subject to risks and uncertainties common to companies in the healthcare industry, including but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, receipt of third-party healthcare 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 conducting investigations of alleged healthcare fraud by Liberty Medical and Liberty Home Pharmacy Corporation ("Liberty Home Pharmacy"). Both civil and criminal investigations are being conducted. The Company is cooperating fully with the investigations. It cannot accurately predict the outcome of these proceedings at this time, and has therefore not recorded any charges relating to the outcome of these uncertainties. 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 the Company's financial position and results of operations. PolyMedica and three of its 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 officers of PolyMedica in Massachusetts state court alleging certain breaches of fiduciary duty. PolyMedica, the named officers, and the Board of Directors believe that they have meritorious defenses to the claims made against them in the actions in which they are defendants and intend to contest the claims vigorously. Although the Company does not consider an unfavorable outcome to the various claims probable, it cannot accurately predict their ultimate disposition, and has therefore not recorded any charges related to the outcome of these uncertainties. An unfavorable outcome could have a material effect on the Company's financial position and results of operations. 28 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CASH AND CASH EQUIVALENTS AND INVESTMENTS The Company considers all highly liquid short-term investments purchased with an initial maturity of three months or less to be cash equivalents. The Company places its cash and cash equivalents and investments with high-credit-quality financial institutions. In fiscal years 2002 and 2001, the Company invested primarily in commercial paper with initial maturities of 90 days or less and classifies all investments as held-to-maturity. All investments held as of March 31, 2002 and 2001, excluding investments held in the Company's executive deferred compensation plans ("the Plans"), have been classified as cash equivalents and are carried at amortized cost which approximates market value. The investments held in the Plans, which are accounted for pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") have been classified as trading, are included in other assets, and are recorded at fair value. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS The valuation of accounts receivable is based upon the credit-worthiness of customers and third-party payers and the Company's historical collection experience. The Company maintains allowances for doubtful accounts for estimated amounts expected to be uncollectible from third-party payers and customers. Estimates are based on historical collection and write-off experience, current trends, credit policy, and on the Company's analysis of accounts receivable by aging category. INVENTORIES Inventories gross value is based on the lower of cost (first-in, first-out method) or market. The carrying value of inventories is based on the types and levels of inventory held, forecasted demand, and pricing. Due to the medical nature of the products the Company provides, customers sometimes request supplies before the Company has 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 the Company has received an order but has not yet received the required written documents and therefore has 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. OTHER ASSETS Included in other assets are restricted investments of $868,000 and $1.63 million as of March 31, 2002 and 2001, respectively, which represent amounts set aside by the Company under 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 March 31, 2002, the fair value of these investments was not materially different from cost. In the fiscal year ended March 31, 2002, $1.88 million was paid directly to certain beneficiaries from the Plans. Amounts set aside for the Plans in the fiscal years ended March 31, 2002 and 2001 totaled $1.13 million and $1.77 million, respectively. The investments held in the Plans, which are accounted for pursuant to SFAS 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. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the various assets which is 30 years for buildings and ranges from five to twelve years for office equipment, furniture and fixtures, laboratory equipment, commercial vehicles, and manufacturing equipment. Amortization of leasehold improvements is computed using the straight-line method based on estimated useful lives or terms of the lease, whichever is shorter. Upon retirement or disposal of fixed assets, the costs and accumulated depreciation are removed from the accounts, and any gain or loss is reflected in income. Expenditures for repairs and maintenance are charged to expense as incurred. Construction in progress is not depreciated until placed in service. 29 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DIRECT-RESPONSE ADVERTISING In accordance with Statement of Position 93-7 ("SOP 93-7"), direct-response advertising and associated costs for the Company's diabetes supplies and related products, included in the Chronic Care segment, for all periods presented are capitalized and amortized to selling, general and administrative expenses on an accelerated basis during the first two years of a four-year period. The amortization rate is such that 55% of such costs are expensed after two years from the date they are incurred, and the remaining 45% is expensed on a straight-line basis over the next two years. 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. Direct-response advertising and related costs for the Company's prescription respiratory supplies, included in the Professional Products segment, for all periods presented are capitalized and amortized to selling, general and administrative expenses on a straight-line basis over a two-year period. The Company incurred and capitalized direct-response advertising of $42.48 million, $31.47 million and $21.44 million in fiscal years 2002, 2001 and 2000, respectively. As of March 31, 2002 and 2001, accumulated amortization was $66.87 million and $36.57 million, respectively, which resulted in a net capitalized direct-response advertising asset of $52.11 million and $39.94 million, respectively. A total of $30.31 million, $19.60 million and $9.04 million in direct-response advertising was amortized and charged to selling, general and administrative expenses in fiscal years 2002, 2001 and 2000, respectively. The Company expenses in the period all other advertising that does not meet the capitalization requirements of SOP 93-7. INTANGIBLE ASSETS The Company capitalizes and includes in intangible assets the costs of acquiring patents on its products, customer lists, covenants-not-to-compete, and goodwill, which is the cost in excess of the fair value of the net assets of acquired companies and product lines. All amortization is computed on a straight-line basis over the shorter of the economic life of the asset or the term of the underlying agreement. Customer lists, covenants-not-to-compete, and goodwill are amortized over seven, ten, and seven to thirty years, respectively. Upon adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") on April 1, 2002, ratable amortization of goodwill will be replaced with tests of the goodwill's impairment at various periods, specifically upon adoption of SFAS 142, annually, and as a result of a specific event or activity, and that intangible assets other than goodwill be amortized over their useful lives. LONG-LIVED ASSETS Management's policy is to evaluate the recoverability of its long-lived assets when the facts and circumstances suggest that these assets may be impaired. The test of such recoverability is a comparison of the book value of the asset to expected cumulative (undiscounted) operating cash flows resulting from the underlying asset over its remaining life. If the book value of the long-lived asset exceeds undiscounted cumulative operating cash flows, the write-down is computed as the excess of the asset over the present value of the operating cash flow discounted at the Company's weighted average cost of capital over the remaining amortization period. REVENUE RECOGNITION In conjunction with the Company's change in accounting principle for revenue recognition, as described in Note C, revenue related to product sales to customers who have placed orders is recognized upon shipment, provided that risk of loss has passed to the customer and the Company has received and verified the required written forms to bill Medicare (if applicable), other third-party payers, and customers. The Company records revenue at the amounts expected to be collected from Medicare, other third-party payers, and directly from customers. Revenue recognition is delayed for shipments for which the Company has 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. 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 years ended March 31, 2002 and 2001, the Company provided for sales allowances at a rate of approximately 4.3% and 5.4% of gross sales, respectively. The Company analyzes sales allowances using historical data adjusted for significant changes in volume, customer demographics, and business conditions. At the time of revenue recognition, the Company follows the government-distributed list containing reimbursement prices for Medicare-covered products (the "Medicare Fee Schedule") and excludes from revenue amounts billed in excess of the Medicare Fee Schedule. As a result, the Company's contractual allowances are immaterial. The reimbursements that Medicare pays to the Company are subject to review by 30 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS appropriate government regulators. Medicare reimburses at 80% of the Medicare Fee Schedule for reimbursable supplies and the Company bills the remaining balance to either third-party payers or directly to customers. Approximately $196.80 million, $151.42 million and $99.77 million of revenues for the years ended March 31, 2002, 2001 and 2000, respectively, were reimbursable by Medicare for products and services provided to Medicare beneficiaries. RESEARCH AND DEVELOPMENT Research and development costs are charged to expense as incurred. MARKETING AND PROMOTIONAL COSTS Advertising (other than direct-response), promotional, and other 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. INCOME TAXES The Company recognizes deferred tax assets and liabilities based on temporary differences between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates expected to be in effect when they are realized. EARNINGS PER WEIGHTED AVERAGE SHARE Basic earnings per share ("EPS") is calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect of outstanding stock options using the "treasury stock" method. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. ACCOUNTING FOR STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), issued in 1995, defined a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. As provided for in SFAS 123, the Company elected to continue to apply Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its employee stock-based compensation plans. The required disclosures under SFAS 123 are included in Note T. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 supercedes Accounting Principles Bulletin No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS 142 supercedes Accounting Principles Bulletin No. 17, "Intangible Assets." These new statements require use of the purchase method of accounting for all business combinations initiated after June 30, 2001, thereby eliminating use of the pooling-of-interests method. Goodwill will no longer be amortized but will be 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. The provisions of SFAS 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted, as required, on April 1, 2002. The adoption of SFAS 142 could have a material impact on our consolidated financial statements, as we will replace ratable amortization of goodwill with periodic 31 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS impairment tests. Impairment tests performed under SFAS 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. We have not yet determined what effect these impairment tests will have on our consolidated financial statements. As a result of adopting SFAS 142 effective April 1, 2002, approximately $1.54 million of goodwill amortization will not be recognized in fiscal 2003. In August 2001, the FASB issued SFAS No. 143 "Accounting for Obligations Associated with the Retirement of Long-Lived Assets" ("SFAS 143"). The provisions of SFAS 143 apply to all entities that incur obligations associated with the retirement of tangible long-lived assets. SFAS 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. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 provides guidance on the accounting for the impairment or disposal of long-lived assets. The objectives of SFAS 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. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and thus will be adopted, as required, on April 1, 2002. Generally, its provisions are to be applied prospectively. This accounting pronouncement could have a significant impact on our financial position or results of operations should there be future asset impairments or disposals. RECLASSIFICATIONS Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current year presentation. C. CHANGE IN ACCOUNTING PRINCIPLE: In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", subsequently updated by SAB 101A and SAB 101B ("SAB 101"). SAB 101 summarizes certain areas of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. Historically, the Company recognized revenue upon receipt of a customer order and shipment of the related product, provided that the required verbal authorizations had been received. Under the new accounting method adopted retroactive to April 1, 2000, revenue related to product shipments to customers who have placed orders is recognized upon shipment, provided that risk of loss has passed to the customer and the Company has received and verified the written Authorization of Benefits and Doctor's Order required to bill Medicare (if applicable), other third-party payers, and customers. The Company delays revenue recognition for product shipments for which the Company has not yet received a written Authorization of Benefits and Doctor's Order, until the period in which those documents are collected and verified. During the fourth quarter ended March 31, 2001, the Company implemented the SEC's SAB 101 guidelines, retroactive to the beginning of the fiscal year. The cumulative effect of the change in accounting principle on prior years resulted in a charge to income of $6.93 million (net of income taxes of $4.12 million), or $0.51 per diluted weighted average share, which was applied retroactively as of April 1, 2000 and is included in income for the fiscal year ended March 31, 2001. The results for the first three quarters of the fiscal year ended March 31, 2001 were adjusted in accordance with SAB 101. See Note W. Due to the medical nature of the products the Company provides, customers sometimes request supplies before the Company has received the required written forms to bill Medicare (if applicable), other third-party payers, and customers and recognize revenue. As a result, included in inventories as of March 31, 2002 and 2001, is $3.77 million and $6.07 million, respectively, of inventory shipped to customers for which the Company has received an order but has not yet received the required written documents. The following table represents management's estimate of the unaudited pro forma results of operations, giving effect to the adoption of SAB 101 as if the change in accounting principle had been retroactively applied. Unaudited pro forma results (in thousands, except Year ended Three months ended per share amounts) March 31, 2000 March 31, 2000 ----------------------------- -------------- ------------------ Net income $13,371 $5,077 Net income per weighted average share, basic $1.21 $0.39 Net income per weighted average share, diluted $1.13 $0.38 32 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS D. SALE OF CERTAIN ASSETS OF THE THERMOMETRY BUSINESS: In September 2000, the Company sold certain assets of its thermometry business which were included in the Consumer Healthcare segment. Under the terms of the sale, the purchaser paid the Company $300,000 in cash and issued to the Company a promissory note in the face amount of $1.12 million at a 7% interest rate, maturing September 20, 2003. In March 2001, we accepted $900,000 as final settlement of this note in consideration of the financial position of the borrower. E. EXTRAORDINARY LOSS ON RETIREMENT OF DEBT: In October 1999, the Company repaid all amounts due to the John Hancock Mutual Life Insurance Company ("Hancock"). See Note L. In connection with this repayment, an extraordinary loss on retirement of debt of $2.17 million was recognized, consisting of an early payment penalty fee, unamortized debt issuance costs and the unamortized Hancock warrant valuation. The extraordinary loss for the year ended March 31, 2000 was as follows (in thousands): 2000 ------ Extraordinary loss on retirement of debt $2,165 Income tax benefit related to loss 829 ------ Extraordinary loss, net of income taxes $1,336 ====== Net income per diluted weighted average share before loss $ 1.39 Net income per diluted weighted average share related to loss .12 ------ Net income per diluted weighted average share $ 1.27 ====== F. SHELF REGISTRATION: In November 2000, the Company filed an amendment to a shelf registration statement it had originally filed in April 2000, to enable it to offer from time to time, shares of its 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. It will be in effect until November 2002. No shares of common stock had been sold under this shelf registration statement as of March 31, 2002. G. INVENTORIES: (In thousands) Inventories consist of the following: March 31, March 31, 2002 2001 --------- --------- Raw materials $ 616 $ 685 Work in process 832 783 Finished goods 20,215 21,323 ------- ------- $21,663 $22,791 ======= ======= 33 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Due to the medical nature of the products the Company provides, customers sometimes request supplies before the Company has received the required written forms to bill Medicare (if applicable), other third-party payers, and customers. As a result, included in inventories as of March 31, 2002 and 2001 is $3.77 million and $6.07 million, respectively, of inventory shipped to customers for which the Company has received an order but has not yet received the required written documents to bill Medicare (if applicable), other third-party payers, and customers and recognize revenue. H. PROPERTY, PLANT, AND EQUIPMENT: (In thousands) Property, plant, and equipment consists of the following: March 31, March 31, 2002 2001 --------- --------- Furniture, fixtures, and office equipment $18,234 $12,086 Building 9,330 8,936 Land 3,588 3,952 Manufacturing equipment 1,871 1,711 Leasehold improvements 1,426 1,249 Laboratory equipment 222 222 Commercial vehicles 55 -- Construction in process 9,603 415 ------- ------- 44,329 28,571 Less accumulated depreciation and amortization (9,726) (6,372) ------- ------- $34,603 $22,199 ======= ======= Depreciation and amortization expense for property, plant, and equipment for the years ended March 31, 2002, 2001 and 2000 was approximately $3.46 million, $2.94 million, and $1.67 million, respectively. In January 2001, the Company acquired land in Port St. Lucie, Florida for $1.69 million for the construction of a new warehouse and respiratory supplies facility. In the fiscal years ended March 31, 2002 and 2001, $642,000 and $116,000, respectively, of assets classified in furniture, fixtures and office equipment were acquired through capital lease obligations. I. INTANGIBLE ASSETS: (In thousands) Intangible assets consist of the following: March 31, March 31, 2002 2001 --------- --------- Goodwill $42,816 $42,816 Covenant-not-to-compete 6,800 6,800 Customer list 1,816 1,816 ------- ------- 51,432 51,432 Less accumulated amortization (20,986) (18,709) ------- ------- $30,446 $32,723 ======= ======= 34 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amortization expense associated with intangible assets was $2.28 million for each of the three years ended March 31, 2002, 2001 and 2000. J. ACCRUED EXPENSES: (In thousands) Accrued expenses consist of the following: March 31, March 31, 2002 2001 --------- --------- Salaries and benefits $7,224 $2,201 Income tax payable 695 2,215 Inventory receipts 1,745 562 Property and equipment purchases 1,539 -- Refunds owed regulatory agencies -- 1,187 Other 1,787 2,112 ------- ------ $12,990 $8,277 ======= ====== K. AMOUNTS DUE TO MEDICARE AND OTHERS: Amounts due to Medicare and others of $4.80 million as of March 31, 2002, represent probable amounts due to Medicare and related amounts due to insurers and Medicare beneficiaries, related to a change in interpretation of the reimbursement formula for albuterol and ipratropium combinations used in the Company's Professional Products segment. Beginning September 6, 2001 through November 8, 2001, the Company 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 June 26, 2002. DMERCs are private insurance companies used by Medicare to administer reimbursement payments. The liability of $4.80 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. The Company is processing administrative overpayment notices as received and refunds are being issued. When the Company 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. L. LONG-TERM DEBT: Senior Debt In connection with the purchase of the WEBCON product line, in January 1993, the Company and its wholly-owned subsidiary, PolyMedica Pharmaceuticals (U.S.A.), Inc. ("PMP USA") sold to Hancock $25.0 million of 10.65% Guaranteed Senior Secured Notes due January 31, 2003 (the "Hancock Notes"), and a warrant for the purchase of up to 500,000 shares of common stock of the Company. In October 1999, the Company repaid all amounts, including $20.0 million in principal and a prepayment penalty of $1.8 million, due to Hancock under the Hancock Notes. Concurrently, Hancock exercised its warrants in a cashless exercise in which Hancock received 410,987 shares of common stock. There was no interest expense recorded for the Hancock Notes in the fiscal years ended March 31, 2002 and 2001. In the fiscal year ended March 31, 2000, $1.22 million was recorded as interest expense for the Hancock Notes. 35 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Mortgage To support the growth of Liberty Medical, in May 1999 the Company purchased a 72,000 square foot building in Port St. Lucie, Florida for $2.0 million, financed by a $1.4 million mortgage. In December 2000, the Company repaid all amounts owed under the mortgage, consisting of $1.34 million of principal and $15,000 of interest including the settlement of an interest rate swap. M. COMMITMENTS AND CONTINGENCIES: Operating leases The Company leases its facilities and certain equipment under operating leases expiring through fiscal year 2007. Rental expense under these leases amounted to approximately $1.40 million, $1.41 million, and $1.08 million for the fiscal years ended March 31, 2002, 2001 and 2000, respectively. Capital leases The Company has various capital lease agreements for furniture, fixtures and office equipment. These obligations extend through fiscal year 2007. Most leases contain renewal options or options to purchase at fair market value and 3 contain bargain purchase options. No leases contain restrictions on the Company's activities concerning dividends, additional debt or further leasing. Property, plant, and equipment as included in the consolidated balance sheets include the following amounts for capitalized leases: (in thousands) March 31, March 31, 2002 2001 --------- --------- Furniture, fixtures, and office equipment $ 3,009 $2,418 Less accumulated depreciation (1,370) (811) ------- ------ Net assets $ 1,639 $1,607 ======= ====== Future annual minimum lease and rental commitments as of March 31, 2002, under all of the Company's leases, capital and operating, are: Capital Operating (In thousands) Leases Leases ------- --------- 2003 $ 855 $ 1,339 2004 416 688 2005 177 433 2006 78 38 2007 and thereafter 42 18 ------ ------- Total minimum payments 1,568 $ 2,516 ======= Less amounts representing interest (195) ------ Present value of net payments $1,373 Less current portion capital lease obligation (742) ------ Long-term capital lease obligation $ 631 ====== Contingencies The U.S. Attorney's Office for the Southern District of Florida, with the assistance of the FBI and OIG, is conducting investigations of alleged healthcare fraud by Liberty Medical and Liberty Home Pharmacy Corporation. Both civil and criminal investigations are being conducted. The Company is cooperating fully with the investigations. It cannot accurately predict the outcome of these proceedings at this time, and has therefore not recorded any charges relating to the outcome of these uncertainties. On December 4, 2001, the Company received notice that the SEC was conducting a formal investigation of PolyMedica. On April 8, 2002, the SEC notified the Company that it had terminated its investigation of PolyMedica and that no enforcement action had been recommended to the Commission. 36 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company and three of its 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 officers of the Company in Massachusetts state court alleging certain breaches of fiduciary duty. The Company, the named officers, and the Board of Directors believe that they have meritorious defenses to the claims made against them in the actions in which they are defendants and intend to contest the claims vigorously. Although the Company does not consider an unfavorable outcome to the various claims probable, it cannot accurately predict their ultimate disposition, and has therefore not recorded any charges relating to the outcome of these uncertainties. An unfavorable outcome could have a material effect on the Company's financial position and results of operations. N. MINORITY INTEREST: Minority interest in the consolidated balance sheets of $805,000 as of March 31, 2001, represents the ownership interests in certain subsidiaries of the Company purchased and held by certain Company executives. The minority interest amounts in the consolidated statements of operations of $564,000 and $733,000 for the fiscal years ended March 31, 2002 and 2001, respectively, represent the percentage of these subsidiaries' results allocated to these minority interests. All outstanding minority interests in the Company's subsidiaries previously held by certain Company executives, having a recorded book value of $1.37 million as of February 12, 2002, 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 the Company's consolidated balance sheets as of March 31, 2002. As a result of these transactions, there were no outstanding minority interests in any of the Company's subsidiaries as of March 31, 2002. 37 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS O. COMPREHENSIVE INCOME: The Company's total net income and comprehensive income were $30.41 million, $22.73 million and $15.12 million for the fiscal years ended March 31, 2002, 2001, and 2000, respectively. P. EARNINGS PER SHARE: Calculation of per share earnings is as follows:
(In thousands except per share data) Fiscal Year Ended March 31, ------------------------------- 2002 2001 2000 ------- ------- ------- Net income $30,411 $22,734 $15,119 BASIC: Weighted average common stock outstanding, net of treasury stock, end of period 12,506 13,176 11,049 Net income per weighted average share, basic $ 2.43 $ 1.73 $ 1.37 ======= ======= ======= DILUTED: Weighted average common stock outstanding, net of treasury stock, end of period 12,506 13,176 11,049 Weighted average common stock equivalents 274 420 827 ------- ------- ------- Weighted average common stock and dilutive common stock equivalents outstanding, net of treasury stock, end of period 12,780 13,596 11,876 Net income per weighted average share, diluted $ 2.38 $ 1.67 $ 1.27 ======= ======= =======
Options to purchase 1,055,207, 649,255, and 90,001 shares of common stock were outstanding as of March 31, 2002, 2001, and 2000, 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. Q. SHAREHOLDERS' EQUITY: Prior to January 23, 2002, each holder of outstanding common stock had a preferred stock purchase right (a "Right") for each share of common stock. Each Right entitled the holder to purchase from the Company one one-hundredth of a share of Series A junior participating preferred stock at a cash exercise price to be determined by the Board of Directors. Initially, the Rights would have been attached to all common stock certificates and would not have been exercisable. The Rights would have become exercisable upon the earlier of certain events, including an acquisition by a person or group of 15% or more of the outstanding common stock (an "Acquiring Person"), or the commencement of a tender offer or exchange offer that would result in an Acquiring Person beneficially owning 15% or more of the outstanding common stock. The Company would generally have been entitled to redeem the Rights at $.01 per share at any time until the tenth day following public announcement that a 15% stock position had been acquired. The Rights expired on January 23, 2002. In June 2000, the Company's Board of Directors authorized the repurchase of up to 1,000,000 shares of the Company's 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. In the fiscal years ended March 31, 2002 and 2001, 1,009,000 shares and 237,000 shares, respectively, were repurchased under this program for $18.00 million and $6.64 million, respectively. The average price per share for these repurchases was $17.84 and $28.02 for the fiscal years ended March 31, 2002 and 2001, respectively. The purpose of this repurchase program is, in part, to provide shares of common stock for issuance pursuant to the 1992 Employee Stock Purchase Plan. 38 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS R. INCOME TAXES: Income before income taxes was generated as follows in the years ended March 31: (In thousands) 2002 2001 2000 ------- ------- ------- United States $48,894 $47,313 $26,677 Foreign -- (8) (7) ------- ------- ------- $48,894 $47,305 $26,670 The provision for income taxes consists of the following for the years ended March 31: (In thousands) 2002 2001 2000 ------- ------- ------- Federal - current $13,639 $16,753 $ 5,276 - deferred 3,246 (1,056) 3,584 ------- ------- ------- 16,885 15,697 8,860 State - current 1,552 2,425 625 - deferred 46 (477) 730 ------- ------- ------- 1,598 1,948 1,355 ------- ------- ------- Total Federal and State $18,483 $17,645 $10,215 ======= ======= ======= A reconciliation between the Company's effective tax rate for operations and the U.S. statutory rate is as follows: 2002 2001 2000 ------ ------ ------ U. S. statutory rate 35.0% 35.0% 34.0% State income taxes, net of U.S. Federal Income Tax effect 2.1% 2.7% 3.7% Other .7% (.4)% .6% ----- ----- ----- Effective tax rate 37.8% 37.3% 38.3% ===== ===== ===== Realization of the net deferred tax assets is dependent on generating sufficient taxable income. Although realization is not assured, management believes that it is more likely than not that such net deferred tax assets will be realized. The following is a summary of the significant components of the Company's deferred tax assets and liabilities as of March 31, 2002 and 2001:
(In thousands) 2002 2001 ------- -------- Deferred tax assets (liabilities) - current: Reserves $ 10,622 $ 9,558 ======== ======== Deferred tax assets (liabilities) - long term: Intangible assets (2,938) (2,550) Property, plant and equipment (1,079) (735) Direct-response advertising (19,245) (14,965) Amounts due to Medicare and others 1,772 -- Other 966 699 -------- -------- Net deferred tax liability - long term $(20,524) $(17,551) ======== ========
39 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS S. MAJOR CUSTOMERS: For the fiscal years ended March 31, 2002, 2001, and 2000, no customer represented more than 10% of our consolidated revenues. As of March 31, 2002 and 2001, the amounts included in billed accounts receivable due from Medicare were $19.40 million and $14.17 million, respectively. T. STOCK OPTIONS: Effective September 2000, the Company's shareholders approved the 2000 Stock Incentive Plan (the "2000 Plan"), which replaced the 1998 Stock Incentive Plan (the "1998 Plan"). The 2000 Plan provides for the grant to certain individuals of stock options to purchase up to 1,800,000 shares of the Company's common stock. At the Annual Meeting of Stockholders held on September 13, 2001, an amendment was approved to increase the number of authorized shares of common stock available under the 2000 Plan to 1,800,000 shares from 1,200,000. Generally, when shares acquired pursuant to the exercise of incentive stock options are sold within one year of exercise or within two years from the date of grant, the Company derives a tax deduction measured by the amount that the fair market value exceeds the option price at the date the options are exercised. When non-qualified stock options are exercised, the Company derives a tax deduction measured by the amount that the fair market value exceeds the option price at the date the options are exercised. The tax benefit from these deductions is recognized as additional paid-in capital. Options are typically granted with ten year lives subject to Board approval and vest over periods ranging from one to three years. Option activity under the Plans is as follows: Weighted Average Option Shares Option Price ------------- ---------------- Outstanding, March 31, 1999 1,756,763 $ 5.80 ---------- Granted 250,000 22.62 Exercised (1,027,613) 4.66 Cancelled (30,699) 11.12 ---------- Outstanding, March 31, 2000 948,451 $11.29 ---------- Granted 667,700 41.38 Exercised (189,354) 10.54 Cancelled (15,484) 14.83 ---------- Outstanding, March 31, 2001 1,411,313 $25.59 ========== Granted 620,750 23.54 Exercised (90,409) 6.10 Cancelled (10,903) 17.13 ---------- Outstanding, March 31, 2002 1,930,751 $25.89 ========== 40 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of March 31, 2002, 1,416,609 shares were exercisable and 514,142 will vest principally over three years under the Plans. There were 519,750 shares remaining as of March 31, 2002 that were authorized for future option grants under the 2000 Plan. Employee Stock Purchase Plan Under the Company's 1992 Employee Stock Purchase Plan (the "plan"), an aggregate of 261,972 shares of common stock were made available for purchase by employees upon exercise of options granted semi-annually. Those who have been employed by the Company for six months prior to the beginning of an option period are eligible to enroll in the plan. The options are exercisable immediately after grant, at the lower of 85% of the fair market value of the common stock at the beginning or the end of the six-month accumulation period. Amounts are accumulated through payroll deductions ranging from 1% to 10% of each participating employee's compensation, as defined in the plan, but in no event more than $12,500 during any six-month option period. Supplemental Disclosures for Stock-Based Compensation The Company applies APB Opinion No. 25 ("APB 25") in accounting for the Plans. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), issued in 1995, defined a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. The Company adopted the disclosure only provisions of SFAS 123, accordingly no compensation expense is recognized from the stock option plans. The required disclosures under SFAS 123 are as follows: Summarized information about stock options outstanding as of March 31, 2002, is as follows:
Number of Weighted Avg. Number of Options Weighted Avg. Range of Exercise Options Remaining Weighted Avg. Outstanding - Exercise - Price Prices Outstanding Contractual Life Exercise Price Exercisable Exercisable ----------------- ----------- ---------------- -------------- ----------------- ---------------- $3.30 - 4.64 53,622 4.57 $ 4.15 53,622 $ 4.15 $5.38 - 7.75 252,061 5.75 $ 6.66 252,061 $ 6.66 $8.63 - 11.88 122,179 5.66 $11.36 122,179 $ 11.36 $13.50 - 20.06 317,174 4.38 $18.33 184,643 $ 17.17 $21.44 - 27.53 524,844 8.56 $25.79 343,348 $ 25.20 $35.50 - 41.50 660,871 8.46 $41.39 460,756 $ 41.43 --------- --------- 1,930,751 1,416,609
The fair value of each option granted during fiscal years 2002, 2001, and 2000 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: 2002 2001 2000 ---- ---- ---- Dividend yield......................... None None None Expected volatility.................... 85.0% 85.0% 65.0% Risk-free interest rate................ 4.30% 5.90% 6.05% Expected life.......................... 3.6 4.0 4.0 Weighted-average fair value of options granted at fair value during: 2002 $14.05 2001 26.86 2000 12.31 41 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Employee Stock Purchase Plan weighted-average fair value of options: 2002 $ 6.46 2001 13.85 2000 2.63 Had compensation cost for the Company's fiscal 2002, 2001, and 2000 stock option grants been determined consistent with SFAS 123, the Company's net income and net income per share would approximate the pro forma amounts below: Net income per diluted Net income weighted average share ----------- ---------------------- As reported: 2002 $30,411,000 $2.38 2001 $22,734,000 $1.67 2000 $15,119,000 $1.27 Pro forma: 2002 $24,301,000 $1.90 2001 $17,327,000 $1.27 2000 $14,083,000 $1.19 The effect of applying SFAS 123 in this pro forma disclosure is not indicative of future compensation amounts. SFAS 123 does not apply to awards made prior to 1995. Additional awards in future years are anticipated. U. 401(K) PLAN: The PolyMedica Corporation 401(k) Plan and Trust (the "401(k) Plan") is a voluntary savings plan for all eligible employees which is intended to qualify under Section 401(k) of the Internal Revenue Code. Each eligible employee may elect to contribute to the 401(k) Plan, through payroll deductions, up to 60% of his or her salary, subject to statutory limitations. The Company may make matching contributions on behalf of participating employees of half of the dollar amount of each participating employee's contribution, up to a maximum of 3% of an employee's total cash compensation, subject to certain limitations. For the fiscal years ended March 31, 2002, 2001 and 2000, the Company accrued and paid matching contributions of $502,000, $394,000 and $232,000, respectively, for the 401(k) Plan participants. V. SEGMENT INFORMATION: The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") during the year ended March 31, 1999. SFAS 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments. It also established standards for related disclosures about products, services and geographic areas. The Company's reportable segments are strategic business units or divisions that offer different products or services. These units have separate financial information that is evaluated by senior management. The Company has three reportable segments: Chronic Care - The Company sells diabetes supplies and related products and provides services to Medicare-eligible seniors suffering from diabetes and related chronic diseases through its Chronic Care segment. It offers a wide array of diabetes products from a full range of name-brand manufacturers, contacts the patient's doctor to obtain the required prescription information and written documentation, files the appropriate insurance forms and bills 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 - The Company sells prescription respiratory supplies to Medicare-eligible seniors, prescription oral medications not covered by Medicare to its existing customers, and develops, manufactures, and distributes prescription urology products. Consumer Healthcare - The Company offers the AZO line of products which includes over-the-counter female urinary tract discomfort products and home medical diagnostic kits; and, until September 2000, was a distributor of private-label and branded digital thermometers. In September 2000, the Company sold certain assets of its Consumer Healthcare segment. See Note D for information on the sale. 42 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Depreciation and amortization expense attributable to the Company's corporate headquarters is allocated to the operating segments according to the segment's relative percentage of total revenue. However, segment assets belonging to the Company's corporate headquarters are not allocated, as they are considered separately for management evaluation purposes. As a result of these allocations, the segment information may not be indicative of the financial position or results of operations that would have been achieved had these segments operated as unaffiliated entities. The depreciation and amortization amounts below include amortization of direct-response advertising. The Company does not organize its units geographically, as its 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:
Fiscal Year Ended March 31, ------------------------------------------- (In thousands) 2002 2001 2000 --------- --------- -------- NET REVENUES: Chronic Care $207,262 $166,769 $125,999 Professional Products 64,856 43,666 16,501 Consumer Healthcare 7,543 9,611 14,420 -------- -------- -------- Total $279,661 $220,046 $156,920 ======== ======== ======== DEPRECIATION AND AMORTIZATION EXPENSE: Chronic Care $19,167 $14,897 $10,042 Professional Products 16,870 9,894 2,931 Consumer Healthcare 2 27 67 -------- -------- -------- Total $ 36,039 $ 24,818 $ 13,040 ======== ======== ======== INCOME BEFORE INCOME TAXES: Chronic Care $35,767 $33,762 $19,631 Professional Products 10,148 12,933 4,291 Consumer Healthcare 2,979 610 2,748 Cumulative effect of change in accounting principle -- (11,047) -- Extraordinary loss on retirement of debt -- -- (2,165) -------- -------- -------- Total $ 48,894 $ 36,258 $ 24,505 ======== ======== ========
March 31, March 31, March 31, 2002 2001 2000 --------- --------- -------- SEGMENT ASSETS: Chronic Care $133,009 $97,559 $81,513 Professional Products 62,670 56,158 44,384 Consumer Healthcare 1,777 1,611 6,504 Corporate Headquarters 26,936 46,236 43,195 -------- -------- -------- Total $224,392 $201,564 $175,596 ======== ======== ========
43 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS W. INTERIM INFORMATION (UNAUDITED): The following consolidated interim financial information is unaudited. Such information reflects all adjustments, consisting solely of normal recurring adjustments, which are in the opinion of management necessary for a fair presentation. The results for the first three quarters of the year ended March 31, 2001 have been restated in accordance with SAB 101.
(In thousands, except per share data) YEAR ENDED MARCH 31, 2002 -------------------------------------------------------------- QTR. 1 QTR. 2 QTR. 3 QTR. 4 ------- ------- -------- ------- Net revenues $63,021 $68,851 $72,696 $75,093 Gross margin 41,756 45,296 47,189 47,901 Net income 8,645 4,682 8,525 8,559 Net income per weighted average share, basic $0.67 $0.37 $0.69 $0.71 Net income per weighted average share, diluted $0.65 $0.36 $0.68 $0.69
(In thousands, except per share data) YEAR ENDED MARCH 31, 2001 -------------------------------------------------------------- QTR. 1 QTR. 2 QTR. 3 QTR. 4 ------- ------- -------- ------- Net revenues $50,368 $54,241 $56,403 $59,034 Gross margin 31,378 34,754 37,283 39,658 Net income before the cumulative effect of a change in accounting principle 6,017 7,350 8,027 8,266 Net income/(loss)* (909) 7,350 8,027 8,266 Net income per weighted average share, basic, before the cumulative effect of a change in accounting principle $0.46 $0.56 $0.61 $0.63 Net income/(loss) per weighted average share, basic ($0.07) $0.56 $0.61 $0.63 Net income per weighted average share, diluted, before the cumulative effect of a change in accounting principle $0.44 $0.54 $0.59 $0.61 Net income/(loss) per weighted average share, diluted* ($0.07) $0.54 $0.59 $0.61
* Includes $6,926,000 after-tax loss for the cumulative effect of a change in accounting principle or $0.51 per diluted share in the quarter ended June 30, 2000. X. RELATED PARTY TRANSACTIONS: On February 12, 2002, all outstanding minority interests in our subsidiaries previously held by certain Company executives, having a recorded book value of $1.37 million as of February 12, 2002, were reacquired by the respective subsidiaries at no cost and are classified as additional paid in capital in the shareholders' equity section of the Company's consolidated balance sheets as of March 31, 2002. As a result of these transactions, there were no outstanding minority interests in the Company or any of our subsidiaries as of March 31, 2002. In December 1994 and January 1997, certain executive officers of the Company purchased in the aggregate 100,000 and 100,000 shares, respectively, of the Company's common stock on the open market. The purchases, valued at $415,000 and $607,000, respectively, 44 POLYMEDICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS were funded by a note issued by the Company to each officer. The terms of the notes provide for each executive to repay the Company with Company shares within five years from the date of the note at a market value equal to the original principal of the note. The last repayment of $66,000 occurred in the year ended March 31, 2000. As of March 31, 2002 and 2001, there was no remaining balance of notes receivable. Y. SUBSEQUENT EVENTS (UNAUDITED): In June 2002, the Company repurchased 25,000 shares of common stock 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 26, 2002. Of the 2,000,000 shares originally authorized by the Board of Directors, 729,000 shares remained authorized for repurchase as of June 26, 2002. 45 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in accountants or disagreements on accounting and financial disclosure matters. 46 PART III ITEMS 10-13. The information required for Part III in this Annual Report on Form 10-K is incorporated by reference from the Company's definitive proxy statement for the Company's 2002 Annual Meeting of Shareholders. Such information will be contained in the sections of such proxy statement captioned "Election of Directors," "Board and Committee Meetings," "Compensation of Executive Officers," "Directors' Compensation," "Report of the Compensation Committee," "Compensation Committee Interlocks and Insider Participation," "Comparative Stock Performance," "SEC Reporting," "Security Ownership of Certain Beneficial Owners and Management, "Equity Compensation Plan Information," and "Certain Transactions." Information regarding executive officers of the Company is also furnished in Part I of this Annual Report on Form 10-K under the heading "Executive Officers of the Registrant." The following trademarks are used in this Annual Report on Form 10-K: URISED, CYSTOSPAZ, ANESTACON, AZO STANDARD, AZO CRANBERRY, AZO TEST STRIPS, AZO PMS, AZO MENOPAUSE, AZO YEAST, B&O, and AQUACHLORAL are registered trademarks of PolyMedica Corporation. 47 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) 1. CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements listed in the index to consolidated financial statements on page 22 are filed as part of this report. 2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE The following consolidated financial statement schedule is included in Item 14(d): Schedule II - Valuation and Qualifying Accounts Schedules other than those listed above have been omitted since they are either not required or information is otherwise included. 3. LISTING OF EXHIBITS The Exhibits which are filed with this report or which are incorporated by reference herein are set forth in the Exhibit Index on page 52 of this report. REPORTS ON FORM 8-K There were no current reports on Form 8-K filed by the Company during the last quarter of the period covered by this report. 48 ITEM 14(d). FINANCIAL STATEMENT SCHEDULE POLYMEDICA CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (in thousands)
ADDITIONS ----------------------- BALANCE AT CHARGED TO CHARGED BALANCE BEGINNING COST AND TO OTHER AT END DESCRIPTION OF PERIOD EXPENSES EXPENSES DEDUCTIONS OF PERIOD ----------- ---------- --------- -------- ---------- --------- Valuation reserve deducted in the balance sheet from asset to which it applies: Accounts receivable: 2002 Allowances for doubtful accounts and sales returns $13,729 $33,525 $ -- ($31,715) $15,539 ======= ======= ==== ========= ======= 2001 Allowances for doubtful accounts and sales returns $10,745 $27,429 $ -- ($24,445) $13,729 ======= ======= ==== ========= ======= 2000 Allowances for doubtful accounts and sales returns $ 7,330 $21,114 $ -- ($17,699) $10,745 ======= ======= ==== ========= =======
49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: June 28, 2002 PolyMedica Corporation By: /s/ Steven J. Lee ------------------------------------------ Steven J. Lee Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Dated: June 28, 2002 /s/ Steven J. Lee ----------------------------------------- Steven J. Lee Chairman, Chief Executive Officer and Director (Principal Executive Officer) Dated: June 28, 2002 /s/ John K.P. Stone, III ----------------------------------------- John K.P. Stone, III Director, Vice Chairman, General Counsel and Senior Vice President Dated: June 28, 2002 /s/ Eric G. Walters ----------------------------------------- Eric G. Walters Executive Vice President and Clerk (Principal Financial Officer) Dated: June 28, 2002 /s/ Stephen C. Farrell ----------------------------------------- Stephen C. Farrell Chief Financial Officer (Principal Accounting Officer) Dated: June 28, 2002 /s/ Frank W. Logerfo ----------------------------------------- Frank W. LoGerfo Director Dated: June 28, 2002 /s/ Daniel S. Bernstein ----------------------------------------- Daniel S. Bernstein Director Dated: June 28, 2002 /s/ Marcia J. Hooper ----------------------------------------- Marcia J. Hooper Director Dated: June 28, 2002 /s/ Thomas S. Soltys ----------------------------------------- Thomas S. Soltys Director 50 Dated: June 28, 2002 /s/ Herbert A. Denton ---------------------------------------- Herbert A. Denton Director Dated: June 28, 2002 /s/ Samuel L. Shanaman ---------------------------------------- Samuel L. Shanaman Director Dated: June 28, 2002 /s/ Edward A. Burkhardt ---------------------------------------- Edward A. Burkhardt Director Dated: June 28, 2002 /s/ Walter R. Maupay, Jr. ---------------------------------------- Walter R. Maupay, Jr. Director 51 EXHIBIT INDEX The following exhibits are filed as part of this Annual Report on Form 10-K.
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 - Restated Articles of Organization of the Company, as amended.(13) 3.2 - Restated By-Laws of the Company.(13) 4.1 - Specimen certificate for shares of Common Stock, $.01 par value, of the Company.(1) 10.01 - 1990 Stock Option Plan, as amended.(2) 10.03 - 1992 Directors' Stock Option Plan, as amended.(3) 10.11 - Processing Agreement dated December 11, 1992, by and between the Registrant and Alcon (Puerto Rico) Inc.(3) 10.12 - Processing Agreement dated December 11, 1992, by and between the Registrant and Alcon Laboratories, Inc.(3) 10.13 - Letter Agreement dated March 25, 1994 between Alcon (Puerto Rico) Inc. and the Registrant.(3) 10.14 - Amended and Restated License Agreement between the Registrant and CardioTech dated May 13, 1996.(5) 10.15 - Letter Agreement dated February 2, 1995, amending the Processing Agreement dated December 11, 1992, by and between the Registrant and Alcon (Puerto Rico), Inc.(6) 10.16 - Letter Agreement dated May 3, 1995, amending the Processing Agreement dated December 11, 1992, by and between the Registrant and Alcon (Puerto Rico), Inc.(6) 10.17 - Letter Agreement, dated March 20, 1995, by and between the Registrant and Alcon Laboratories, Inc.(7) 10.18 - Prepayment Agreement between Innovative Technologies Group plc and the Registrant dated June 30, 1998.(8) 10.20 - Employment Agreement by and between the Registrant and Steven J. Lee dated September 1, 2000.(10)(11) 10.21 - Employment Agreement by and between the Registrant and Dr. Arthur A. Siciliano dated September 1, 2000.(10)(11) 10.22 - Employment Agreement by and between the Registrant and Eric G. Walters dated September 1, 2000.(10)(11) 10.23 - Employment Agreement by and between the Registrant and Warren K. Trowbridge dated September 14, 2000.(10)(11) 10.24 - Retention Agreement by and between the Registrant and Steven J. Lee dated September 1, 2000.(10)(11) 10.25 - Retention Agreement by and between the Registrant and Dr. Arthur A. Siciliano dated September 1, 2000.(10)(11) 10.26 - Retention Agreement by and between the Registrant and Eric G. Walters dated September 1, 2000.(10)(11) 10.27 - Retention Agreement by and between the Registrant and Warren K. Trowbridge dated September 1, 2000.(10)(11) 10.28 - Amended Employment Agreement by and between the Registrant and Steven J. Lee dated April 1, 2001.(10)(12) 10.29 - Amended Employment Agreement by and between the Registrant and Dr. Arthur A. Siciliano dated April 1, 2001.(10)(12) 10.30 - Amended Employment Agreement by and between the Registrant and Eric G. Walters dated April 1, 2001.(10)(12) 10.31 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Warren K. Trowbridge dated December 14, 2000.(10)(12) 10.32 - Employment Agreement by and between the Registrant and Stephen C. Farrell dated September 1, 2000.(10)(12) 10.33 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Stephen C. Farrell dated April 16, 2001.(10)(12) 10.34 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Steven J. Lee dated April 2, 2001.(10)(12) 10.35 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Arthur A. Siciliano dated April 2, 2001.(10)(12)
52 10.36 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Eric G. Walters dated April 2, 2001.(10)(12) 10.37 - 2000 Stock Incentive Plan.(12) 10.38 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Warren K. Trowbridge dated September 24, 2001.(10)(13) 10.39 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Stephen C. Farrell dated September 24, 2001.(10)(13) 10.40 - Amendment to Employment Agreement by and between the Registrant and Steven J. Lee dated September 25, 2001.(10)(13) 10.41 - Amendment to Employment Agreement by and between the Registrant and Dr. Arthur A. Siciliano dated September 25, 2001.(10)(13) 10.42 - Amendment to Employment Agreement by and between the Registrant and Eric G. Walters dated September 25, 2001.(10)(13) 10.43 - Amendment to Employment Agreement by and between the Registrant and Warren K. Trowbridge dated October 4, 2001.(10)(13) 10.44 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Stephen C. Farrell dated October 12, 2001.(10)(13) 10.45 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Warren K. Trowbridge dated January 31, 2002.(10)(14) 10.46 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Mr. Steven J. Lee dated May 31, 2002.(10)* 10.47 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Dr. Arthur A. Siciliano dated May 31, 2002.(10)* 10.48 - Employment Agreement by and between the Registrant and John K.P. Stone, III dated March 27, 2002.(10)* 10.49 - Retention Agreement by and between the Registrant and John K.P. Stone, III dated March 28, 2002.(10)* 10.50 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Mr. Eric G. Walters dated May 31, 2002.(10)* 10.51 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Mr. Warren K. Trowbridge dated May 31, 2002.(10)* 10.52 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Mr. Stephen C. Farrell dated May 31, 2002.(10)* 21 - Subsidiaries of the Registrant.* 23.1 - Consent of PricewaterhouseCoopers LLP.*
- -------------------- * Filed herewith. 1 Incorporated herein by reference to the Company's Registration Statement on Form S-1 (File No. 33-45425). 2 Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1995, filed June 29, 1995 (Commission File No. 0-19842). 3 Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended March 31, 1994, filed June 29, 1994. 4 Incorporated herein by reference to the Company's Current Report on Form 8-K, filed March 13, 1992. 5 Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996, filed June 26, 1996. 6 Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997, filed June 27, 1997. 7 Incorporated herein by reference to the Company's Registration Statement on Form S-1 (File No. 33-97872). 8 Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed July 20, 1998. 53 9 Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999, filed February 14, 2000. 10 Management contract or compensation plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. 11 Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, filed November 14, 2000. 12 Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2001, filed June 25, 2001. 13 Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, filed November 14, 2001. 14 Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2001, filed February 14, 2002. 54 EX-10.46 3 b43472pcexv10w46.txt AMENDED EMPLOYMENT AGREEMENT W/ STEVEN J. LEE EXHIBIT 10.46 Mr. Steven J. Lee 112 Farm Road Sherborn, MA 01770 Re: AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT Dear Steve, This letter agreement serves to further amend the Amended Executive Employment Agreement dated as of April 1, 2001, by and between you and PolyMedica Corporation (the "Company") as amended on June 8, 2001 and September 25, 2001 (together, the "Executive Employment Agreement"). SALARY. The Base Salary, as defined in Section 3.1 of the Amended Executive Employment Agreement, shall be increased to $610,000 effective April 1, 2002. If the foregoing is acceptable to you, please indicate your agreement by signing a copy of this letter agreement and returning it to the undersigned. Very truly yours, /s/ Arthur A. Siciliano ----------------------------- Arthur A. Siciliano President ACCEPTED AND AGREED TO: /s/ Steven J. Lee - ------------------------------------ Steven J. Lee EX-10.47 4 b43472pcexv10w47.txt AMENDED EMPLOYMENT AGREEMENT W/ ARTHUR SICILIANO EXHIBIT 10.47 Arthur A. Siciliano, Ph.D. 13 Salt Marsh Lane Gloucester, MA 01930 Re: AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT Dear Art, This letter agreement serves to further amend the Amended Executive Employment Agreement dated as of April 1, 2001, by and between you and PolyMedica Corporation (the "Company") as amended on June 8, 2001 and September 25, 2001 (together, the "Executive Employment Agreement"). SALARY. The Base Salary, as defined in Section 3.1 of the Amended Executive Employment Agreement, shall be increased to $417,000 effective April 1, 2002. If the foregoing is acceptable to you, please indicate your agreement by signing a copy of this letter agreement and returning it to the undersigned. Very truly yours, /s/ Steven J. Lee ----------------------------------- Steven J. Lee Chairman and Chief Executive Officer ACCEPTED AND AGREED TO: /s/ Arthur A. Siciliano - ---------------------------- Arthur A. Siciliano EX-10.48 5 b43472pcexv10w48.txt EMPLOYMENT AGREEMENT WITH JOHN K.P. STONE EXHIBIT 10.48 Agreement made this 27th day of March, 2002 between PolyMedica Corporation, a Massachusetts corporation having its principal place of business at 11 State Street, Woburn, Massachusetts 01801 (the "Company" (which term shall include the Company's subsidiaries and affiliated entities)) and John K. P. Stone, III, an individual with an address at 72 Northern Boulevard, Newbury, Massachusetts 01951 (the "Executive"). TERMS OF AGREEMENT In consideration of this Agreement and the employment of the Executive by the Company, the parties agree as follows: 1. EMPLOYMENT. 1.1. Commencing March 28, 2002 and ending May 31, 2002, the Company agrees to employ Executive, on a transitional employment basis (as defined below), to act as an executive of the Company with the title "Special Adviser to the Chief Executive Officer" and to perform such acts and duties and furnish such services to the Company as the Company's Chief Executive Officer or Board of Directors shall from time to time reasonably direct, including without limitation attending meetings of senior management, directing special projects, advising with respect to business strategy and similar tasks. Executive hereby agrees to accept such employment. While so employed, Executive shall use his best and most diligent efforts to promote the interests of the Company; shall discharge his duties in a highly competent manner; and shall devote his best business judgment, skill and knowledge to the performance of his duties and responsibilities hereunder. Executive shall report directly to the Chief Executive Officer of the Company or such officer as may be designated by the Chief Executive Officer or the Board. For purposes of this Agreement, "transitional basis" shall mean an average of one day per week as reasonably specified by the Chief Executive Officer taking into account Executive's professional responsibilities as a Senior Partner of Hale and Dorr LLP. Commencing June 1, 2002, the Company shall employ Executive, on a full-time basis. Executive shall be the Senior Vice President and General Counsel of the Company upon his election to those positions by the Board of Directors of the Company. In such capacity, Executive's main duties and responsibilities will include coordination of all legal services provided to the Company. In addition, Executive will further familiarize himself with the business of the Company relative to his areas of responsibility and consult with the Company's senior management on strategy and its implementation. Executive hereby accepts said employment. Executive shall use his best and most diligent efforts to promote the interests of the Company; shall discharge his duties in a highly competent manner; and shall devote his full business time and his best business judgment, skill and knowledge to the performance of his duties and responsibilities hereunder. Executive shall report directly to the Chief Executive Officer of the Company. 1.2. Nothing contained herein shall preclude Executive from devoting incidental and insubstantial amounts of time to activities other than the business of the Company and which are not inconsistent with the best interests of the Company. 2. TERM OF EMPLOYMENT. The Company agrees to employ the Executive on a transitional basis for a two (2) month period commencing on March 28, 2002 (the "Transitional Employment Period") and on a full-time basis for a twelve (12) month period commencing on June 1, 2002 (the "Full-Time Employment Period"), the Transitional Employment Period and the Full-Time Employment Period are hereinafter referred to collectively as the "Employment Period." Notwithstanding the foregoing, both Executive and the Company shall have the right to terminate the Executive's employment under this Agreement upon thirty (30) days' written notice to the other party, subject to the Company's obligation to pay severance benefits under certain circumstances as provided in Section 3.6. If Executive shall remain in the employ of the Company beyond the Full-Time Employment Period, in the absence of any other express agreement between the parties, this Agreement shall be deemed to continue on a month-to-month basis (the "Extended Employment Period"). 3. COMPENSATION AND BENEFITS; DISABILITY. 3.1. SIGNING BONUS. The company shall pay a signing bonus of $295,000 to Executive upon the execution of this Agreement and the Invention and Non-Disclosure and Non-Competition and Non-Solicitation Agreements executed simultaneously herewith. 3.2. STOCK OPTION. Not later than April 5, 2002, the Company shall grant to Executive a non-qualified stock option for 25,000 shares of the Company's Common Stock at the closing price of such stock on the date of grant. Such option shall have a term of ten (10) years and shall be fully vested. 1 3.3. SALARY. a) During the Transitional Employment Period, the Company shall pay Executive, in addition to the signing bonus provided for in Section 3.1 above, a daily salary of $200 multiplied by the number of days actually worked by the Executive during the applicable month payable pursuant to the Company's customary payroll policies in force at the time of payment, less all required and authorized payroll deductions and state and federal withholdings. During the Full-Time Employment Period, the Company shall pay Executive an annualized base salary of $360,000 ("Base Salary") payable in equal installments pursuant to the Company's customary payroll policies in force at the time of payment (but in no event less frequently than monthly), less all required and authorized payroll deductions and state and federal withholdings. Executive's Base Salary may be adjusted from time to time in the sole discretion of the Board or the Compensation Committee of the Board (the "Compensation Committee") and shall be reviewed as of April 1, 2003 and thereafter annually by the Compensation Committee. 3.4. BONUS PAYMENT. Executive may receive, in the sole discretion of the Compensation Committee, an annual discretionary bonus payment in an amount, if any, to be determined by the Compensation Committee. 3.5. EXECUTIVE BENEFITS. During the Full-Time Employment Period, Executive shall be entitled to participate in all benefit programs that the Company establishes and makes available to its other executives and employees, if any, in accordance with the relevant plan documents and requirements, including but not limited to the following benefits: a) HEALTH INSURANCE. Health and dental insurance; and b) LIFE INSURANCE. Life insurance on the life of Executive with an Executive-directed beneficiary in the amount of 150% of Executive's Base Salary. c) STOCK BASED COMPENSATION. Executive will be eligible to participate in the Company's Employee Stock Purchase Plan and to be considered by the Compensation Committee for grants or awards of stock options or other stock-based compensation under the Company's Stock Incentive Plan or similar plans from time to time in effect. All such grants or awards shall be governed by the governing Plan and shall be evidenced by the Company's then standard form of stock option, restricted stock or other applicable agreement. 3.6. VACATION. During the Full-Time Employment Period, Executive may take four and one-half weeks of paid vacation during each year at such times as shall be consistent with the Company's vacation policies and (in the Company's judgment) with the Company's vacation schedule for executives and other employees. 3.7. DISABILITY. If during the Full-Time Employment Period Executive shall become ill, disabled or otherwise incapacitated so as to be unable to perform the essential functions of his position with or without reasonable accommodation, as may be required by state or federal law, (a) for a period in excess of ninety (90) consecutive days or (b) for more than one hundred-twenty (120) days in any twelve (12) month period, then the Company shall have the right to terminate this Agreement, in accordance with applicable laws, on thirty (30) days' notice to Executive. A determination of disability shall be made by a physician satisfactory to both the Executive and the Company, PROVIDED THAT if the Executive and the Company do not agree on a physician, the Employee and the Company shall each select a physician and these two together shall select a third physician, whose determination shall be binding on all parties. 3.8. SEVERANCE PAY. If at any time during the Full-Time Employment Period or any Extended Employment Period the Executive's employment is terminated by the Company without cause (i.e., other than pursuant to Section 3.5 or Section 4 hereof), subject to the Executive's execution and non-revocation of a severance agreement and release drafted by and satisfactory to counsel for the Company, the Company shall continue to pay Executive at his then current Base Salary for the remainder of the Full-Time Employment Period or for twelve (12) months, whichever is longer (the "Severance Period"). Neither party shall be entitled to any compensation or claim for good will or other loss suffered by reason of termination of this Agreement. Notwithstanding the foregoing, the Company's obligations under this Section 3.8 shall cease immediately upon the payment by the Company to the Executive of the lump sum payment described in Section 4.2(a)(i) of the Executive Retention Agreement, dated as of January 1, 2003, by and between the Company and the Executive. 3.9. BENEFITS DURING SEVERANCE PERIOD. Except as otherwise required by law, the Executive shall not be entitled to any employee benefits provided under Section 3.5 after termination of Executive's employment whether or not severance pay is being provided, except that (i) the Company shall continue in full force and effect, at its expense, the life insurance provided for in Section 3.5(b) for a period of twelve (12) months after termination of Executive's employment hereunder or until Executive becomes employed, whichever first occurs, and (ii) during the Severance Period, the Company shall offer continued health and dental insurance as required under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") or other law and shall reimburse the Executive for the full cost of that coverage. If Executive elects not to maintain health insurance pursuant to COBRA or other law, the Company is under no obligation to reimburse Executive for his otherwise elected coverage. Executive shall be obligated to give the Company prompt notice of his subsequent employment and at that time, the Company's obligations pursuant to this Section 3.9, if any, shall cease. 2 4. DISCHARGE FOR CAUSE. The Company may discharge Executive and terminate his employment under this Agreement for cause without further liability to the Company. As used in this Section 4, "cause" shall mean any or all of the following: a) a good faith finding by the Company of failure of the Executive to perform his assigned duties for the Company, including but not limited to dishonesty, gross negligence, misconduct, theft or embezzlement from the Company, the intentional provision of services to competitors of the Company, or improper disclosure of proprietary information. b) indictment, conviction (or the entry of a pleading of guilty or nolo contendere by Executive) of a fraud or felony or any criminal offense involving dishonesty, breach of trust or moral turpitude during Executive's employment; In the event the Company exercises its right to terminate Executive's employment under this Section 4, Executive shall not be entitled to receive any severance pay or other termination benefits. 5. TERMINATION WITHOUT CAUSE. The Company may terminate this Agreement without cause without further liability to the Company except as set forth in Section 3.8 and 3.9. 6. EXPENSES. Pursuant to the Company's customary policies in force at the time of payment, Executive shall be promptly reimbursed for business related expenses. 7. AGREEMENT NOT TO COMPETE. Executive acknowledges and confirms his Agreement Not to Compete and his Confidentiality and Proprietary Information Agreement, each dated the date hereof, (or under any similar later agreements) with the Company (the "Additional Agreements"), which shall survive the termination of this Agreement. 8. ARBITRATION. The Employee agrees that any dispute or controversy arising out of or relating in any way to the Employee's employment with and/or termination from the Company (including, but not limited to, all claims, demands or actions under any federal, state or local statute or regulation regarding employment discrimination, and/or all claims, demands or actions concerning the interpretation, construction, performance or breach of this Employment Agreement) shall be settled by arbitration held in Boston, Massachusetts in accordance with the Rules of the American Arbitration Association, before an arbitrator who shall have experience in the area of the matter in dispute. Each party shall bear its own costs and attorneys' fees in connection with any arbitration pursuant to this paragraph. Provided, however, that this paragraph shall not apply to any dispute or controversy arising out of or relating in any way to the interpretation, construction, performance or breach of the Non-Solicitation and Non-Competition Agreement contained at Paragraph 4 herein or the Confidential Information and Non-Disclosure Agreement attached hereto as Exhibit A, and no such dispute or controversy shall be deemed to be arbitrable in the absence of the Corporation's written agreement. 9. NOTICES. Any notice or communication given by any party hereto to the other party or parties shall be in writing and personally delivered or mailed by certified mail, return receipt requested, postage prepaid, to the addresses provided above. All notices shall be deemed given when actually received. Any person entitled to receive notice (or a copy thereof) may designate in writing, by notice to the others, another address to which notices to such person shall thereafter be sent. 10. MISCELLANEOUS. 10.1. ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties in respect of its subject matter and supersedes all prior agreements and understandings between the parties with respect to such subject matter; provided that nothing in this Agreement shall affect Executive's or the Company's obligations under the Additional Agreements. 10.2. AMENDMENT; WAIVER. This Agreement may not be amended, supplemented, cancelled or discharged, except by written instrument executed by the party affected thereby. No failure to exercise, and no delay in exercising, any right, power or privilege hereunder shall operate as a waiver thereof. No waiver of any breach of any provision of this Agreement shall be deemed to be a waiver of any preceding or succeeding breach of the same or any other provision. 10.3. BINDING EFFECT; ASSIGNMENT. The rights and obligations of this Agreement shall bind and inure to the benefit of any successor of the Company by reorganization, merger or consolidation, or any assignee of all or substantially all of the Company's business and properties. Executive's rights or obligations under this Agreement may not be assigned by Executive; except that Executive's right to compensation to the earlier of date of death or termination of actual employment shall pass to Executive's executor or administrator. 10.4. HEADINGS. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 3 10.5. APPLICABLE LAW. This Agreement shall be interpreted ad construed by the laws of the Commonwealth of Massachusetts, without regard to conflict of laws provisions. Executive hereby irrevocably submits and acknowledges and recognizes the jurisdiction of the courts of the Commonwealth of Massachusetts, or if appropriate, a federal court located in Massachusetts (which courts, for purposes of this Agreement, are the only courts of competent jurisdiction), over any suit, action or other proceeding arising out of, under or in connection with this letter agreement or the subject matter hereof. 10.6. OTHER AGREEMENTS. Executive hereby represents that he is not bound by the terms of any agreement with any previous employer or other party to refrain from using or disclosing any trade secret or confidential or proprietary information in the course of his employment with the Company, or to refrain from competing, directly or indirectly, with the business of such previous employer or any other party. Employee further represents that his performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by him in confidence or trust prior to his employment with the Company. 10.7. FURTHER ASSURANCES. Each of the parties agrees to execute, acknowledge, deliver and perform, or cause to be executed, acknowledged, delivered or performed, at any time, or from time to time, as the case may be, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and assurances as may be necessary or proper to carry out the provisions or intent of this Agreement. 10.8. SEVERABILITY. If any one or more of the terms, provisions, covenants or restrictions of this Agreement shall be determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. If, moreover, any one or more of the provisions contained in this Agreement shall for any reason be determined by a court of competent jurisdiction to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting or reducing it so as to be enforceable to the extent compatible with then applicable law. EXECUTION The parties executed this Agreement as a sealed instrument as of the date first above written, whereupon it becomes binding in accordance with its terms. POLYMEDICA CORPORATION /s/ Steven J. Lee ------------------------------------ Steven J. Lee Chairman and Chief Executive Officer ACCEPTED AND AGREED TO: /s/ John K.P. Stone, III - -------------------------------- John K.P. Stone, III 4 EX-10.49 6 b43472pcexv10w49.txt RETENTION AGREEMENT WITH JOHN K.P. STONE EXHIBIT 10.49 THIS EXECUTIVE RETENTION AGREEMENT by and between PolyMedica Corporation, a Massachusetts corporation (the "Company"), and John K. P. Stone, III (the "Executive") is made as of March 28, 2002, (the "Effective Date"). WHEREAS, the Company recognizes that, as is the case with many publicly-held corporations, the possibility of a change in control of the Company exists and that such possibility, and the uncertainty and questions which it may raise among key personnel, may result in the departure or distraction of key personnel to the detriment of the Company and its stockholders, and WHEREAS, the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued employment and dedication of the Company's key personnel without distraction from the possibility of a change in control of the Company and related events and circumstances. NOW, THEREFORE, as an inducement for and in consideration of the Executive remaining in its employ, the Company agrees that the Executive shall receive the severance benefits set forth in this Agreement in the event the Executive's employment with the Company is terminated under the circumstances described below subsequent to a Change in Control (as defined in Section 1.1). 1. Key Definitions. As used herein, the following terms shall have the following respective meanings: 1.1. "CHANGE IN CONTROL" means an event or occurrence set forth in any one or more of subsections (a) through (d) below (including an event or occurrence that constitutes a Change in Control under one of such subsections but is specifically exempted from another such subsection): a) the acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership of any capital stock of the Company if, after such acquisition, such Person beneficially owns (within the meaning of Rule 13d-3 promulgated under the Exchange Act) 20% or more of either (i) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then-outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company (excluding an acquisition pursuant to the exercise, conversion or exchange of any security exercisable for, convertible into or exchangeable for common stock or voting securities of the Company, unless the Person exercising, converting or exchanging such security acquired such security directly from the Company or an underwriter or agent of the Company), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i) and (ii) of subsection (c) of this Section 1.1; or b) such time as the Continuing Directors (as defined below) do not constitute a majority of the Board (or, if applicable, the Board of Directors of a successor corporation to the Company), where the term "Continuing Director" means at any date a member of the Board (i) who was a member of the Board on the date of the execution of this Agreement or (ii) who was nominated or elected subsequent to such date by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or whose election to the Board was recommended or endorsed by at least a majority of the directors who were Continuing Directors at the time of such nomination or election; provided, however, that there shall be excluded from this clause (ii) any individual whose initial assumption of office occurred as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents, by or on behalf of a person other than the Board; or c) the consummation of a merger, consolidation, reorganization, recapitalization or statutory share exchange involving the Company or a sale or other disposition of all or substantially all of the assets of the Company in one or a series of transactions (a "Business Combination"), unless, immediately following such Business Combination, each of the following two conditions is satisfied: (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors, respectively, of the resulting or acquiring corporation in such Business Combination (which shall include, without limitation, a corporation which as a result of such transaction owns the Company or substantially all of the Company's assets either directly or through one or more subsidiaries) (such resulting or acquiring corporation is referred to herein as the "Acquiring Corporation") in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, 1 respectively; and (ii) no Person (excluding the Acquiring Corporation or any employee benefit plan (or related trust) maintained or sponsored by the Company or by the Acquiring Corporation) beneficially owns, directly or indirectly, 20 % or more of the then outstanding shares of common stock of the Acquiring Corporation, or of the combined voting power of the then-outstanding securities of such corporation entitled to vote generally in the election of directors (except to the extent that such ownership existed prior to the Business Combination); or d) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. 1.2. "CHANGE IN CONTROL DATE" means the first date during the Term (as defined in Section 2) on which a Change in Control occurs. Anything in this Agreement to the contrary notwithstanding, if (a) a Change in Control occurs, (b) the Executive's employment with the Company is terminated prior to the date on which the Change in Control occurs, and (c) it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Agreement the "Change in Control Date" shall mean the date immediately prior to the date of such termination of employment. 1.3. "CAUSE" means: a) the Executive's willful and continued failure to substantially perform his reasonable assigned duties as an officer of the Company (other than any such failure resulting from incapacity due to physical or mental illness or any failure after the Executive gives notice of termination for Good Reason), which failure is not cured within 30 days after a written demand for substantial performance is received by the Executive from the Board of Directors of the Company which specifically identifies the manner in which the Board of Directors believes the Executive has not substantially performed the Executive's duties; or b) the Executive's willful engagement in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this Section 1.3, no act or failure to act by the Executive shall be considered "willful" unless it is done, or omitted to be done, in bad faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. 1.4. "GOOD REASON" means the occurrence, without the Executive's written consent, of any of the events or circumstances set forth in clauses (a) through (g) below. Notwithstanding the occurrence of any such event or circumstance, such occurrence shall not be deemed to constitute Good Reason if, prior to the Date of Termination specified in the Notice of Termination (each as defined in Section 3.2(a)) given by the Executive in respect thereof, such event or circumstance has been fully corrected and the Executive has been reasonably compensated for any losses or damages resulting therefrom (provided that such right of correction by the Company shall only apply to the first Notice of Termination for Good Reason given by the Executive). a) the assignment to the Executive of duties inconsistent in any material respect with the Executive's position (including status, offices, titles and reporting requirements), authority or responsibilities in effect immediately prior to the earliest to occur of (i) the Change in Control Date, (ii) the date of the execution by the Company of the initial written agreement or instrument providing for the Change in Control or (iii) the date of the adoption by the Board of Directors of a resolution providing for the Change in Control (with the earliest to occur of such dates referred to herein as the "Measurement Date"), or any other action or omission by the Company which results in a material diminution in such position, authority or responsibilities; b) a reduction in the Executive's annual base salary as in effect on the Measurement Date or as the same was or may be increased thereafter from time to time; c) the failure by the Company to (i) continue in effect any material compensation or benefit plan or program (including without limitation any life insurance, medical, health and accident or disability plan and any vacation or automobile program or policy) (a "Benefit Plan") in which the Executive participates or which is applicable to the Executive immediately prior to the Measurement Date, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan or program, (ii) continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Executive's participation relative to other participants, than the basis existing immediately prior to the Measurement Date or (iii) award cash bonuses to the Executive in amounts and in a manner substantially consistent with past practice in light of the Company's financial performance; d) a change by the Company in the location at which the Executive performs his principal duties for the Company to a new location that is both (i) outside a radius of 35 miles from the Executive's principal residence immediately prior 2 to the Measurement Date and (ii) more than 20 miles from the location at which the Executive performed his principal duties for the Company immediately prior to the Measurement Date; or a requirement by the Company that the Executive travel on Company business to a substantially greater extent than required immediately prior to the Measurement Date; e) the failure of the Company to obtain the agreement from any successor to the Company to assume and agree to perform this Agreement, as required by Section 6.1; f) a purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3.2(a); or g) any failure of the Company to pay or provide to the Executive any portion of the Executive's compensation or benefits due under any Benefit Plan within seven days of the date such compensation or benefits are due, or any material breach by the Company of this Agreement or any employment agreement with the Executive. The Executive's right to terminate his employment for Good Reason shall not be affected by his incapacity due to physical or mental illness. 1.5. "DISABILITY" means the Executive's absence from the full-time performance of the Executive's duties with the Company for 180 consecutive calendar days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. 2. TERM OF AGREEMENT. This Agreement, and all rights and obligations of the parties hereunder, shall take effect upon the Effective Date and shall expire upon the first to occur of (a) the expiration of the Term (as defined below) if a Change in Control has not occurred during the Term, (b) the date 24 months after the Change in Control Date, if the Executive is still employed by the Company as of such later date, or (c) the fulfillment by the Company of all of its obligations under Sections 4 and 5.2 if the Executive's employment with the Company terminates within 24 months following the Change in Control Date. "Term" shall mean the period commencing as of the Effective Date and continuing in effect through December 31, 2005; provided, however, that commencing on January 1, 2006 and each January 1 thereafter, the Term shall be automatically extended for one additional year unless, not later than 90 days prior to the scheduled expiration of the Term (or any extension thereof), the Company shall have given the Executive written notice that the Term will not be extended. 3. EMPLOYMENT STATUS; TERMINATION FOLLOWING CHANGE IN CONTROL. 3.1. NOT AN EMPLOYMENT CONTRACT. The Executive acknowledges that this Agreement does not constitute a contract of employment or impose on the Company any obligation to retain the Executive as an employee and that this Agreement does not prevent the Executive from terminating employment at any time. If the Executive's employment with the Company terminates for any reason and subsequently a Change in Control shall occur, the Executive shall not be entitled to any benefits hereunder except as otherwise provided pursuant to Section 1.2. 3.2. TERMINATION OF EMPLOYMENT. a) If the Change in Control Date occurs during the Term, any termination of the Executive's employment by the Company or by the Executive within 24 months following the Change in Control Date (other than due to the death of the Executive) shall be communicated by a written notice to the other party hereto (the "Notice of Termination"), given in accordance with Section 7. Any Notice of Termination shall: (i) indicate the specific termination provision (if any) of this Agreement relied upon by the party giving such notice, (ii) to the extent applicable, set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specify the Date of Termination (as defined below). The effective date of an employment termination (the "Date of Termination") shall be the close of business on the date specified in the Notice of Termination (which date may not be less than 15 days or more than 120 days after the date of delivery of such Notice of Termination), in the case of a termination other than one due to the Executive's death, or the date of the Executive's death, as the case may be. In the event the Company fails to satisfy the requirements of Section 3.2(a) regarding a Notice of Termination, the purported termination of the Executive's employment pursuant to such Notice of Termination shall not be effective for purposes of this Agreement. b) The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting any such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. 3 c) Any Notice of Termination for Cause given by the Company must be given within 90 days of the occurrence of the event(s) or circumstance(s) which constitute(s) Cause. Prior to any Notice of Termination for Cause being given (and prior to any termination for Cause being effective), the Executive shall be entitled to a hearing before the Board of Directors of the Company at which he may, at his election, be represented by counsel and at which he shall have a reasonable opportunity to be heard. Such hearing shall be held on not less than 15 days prior written notice to the Executive stating the Board of Directors' intention to terminate the Executive for Cause and stating in detail the particular event(s) or circumstance(s) which the Board of Directors believes constitutes Cause for termination. Any such Notice of Termination for Cause must be approved by an affirmative vote of two-thirds of the members of the Board of Directors. d) Any Notice of Termination for Good Reason given by the Executive must be given within 90 days of the occurrence of the events(s) or circumstance(s) which constitute(s) Good Reason. 4. BENEFITS TO EXECUTIVE. 4.1. STOCK ACCELERATION. If the Change in Control Date occurs during the Term, then, effective upon the Change in Control Date, (a) each outstanding option to purchase shares of Common Stock of the Company held by the Executive shall become immediately exercisable in full and will no longer be subject to a right of repurchase by the Company, (b) each outstanding restricted stock award shall be deemed to be fully vested and will no longer be subject to a right of repurchase by the Company. 4.2. COMPENSATION. If the Change in Control Date occurs during the Term and the Executive's employment with the Company terminates within 24 months following the Change in Control Date, the Executive shall be entitled to the following benefits: a) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If the Executive's employment with the Company is terminated by the Company (other than for Cause, Disability or Death) or by the Executive for Good Reason within 24 months following the Change in Control Date, then the Executive shall be entitled to the following benefits: i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: 1. the sum of (A) the Executive's base salary through the Date of Termination, (B) the product of (x) the annual bonus paid or payable (including any bonus or portion thereof which has been earned but deferred) for the most recently completed fiscal year and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (C) the amount of any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not previously paid (the sum of the amounts described in clauses (A), (B), and (C) shall be hereinafter referred to as the "Accrued Obligations"); and 2. the amount equal to (A) one multiplied by (B) the sum of (x) the Executive's highest annual base salary during the three-year period prior to the Change in Control Date and (y) the Executive's highest annual bonus during the three-year period prior to the Change in Control Date. i) for 12 months after the Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue to provide benefits to the Executive and the Executive's family at least equal to those which would have been provided to them if the Executive's employment had not been terminated, in accordance with the applicable Benefit Plans in effect on the Measurement Date or, if more favorable to the Executive and his family, in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies; provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive a particular type of benefits (e.g., health insurance benefits) from such employer on terms at least as favorable to the Executive and his family as those being provided by the Company, then the Company shall no longer be required to provide those particular benefits to the Executive and his family; ii) to the extent not previously paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive following the Executive's termination of employment under any plan, program, policy, practice, contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"); and iii) for purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits to which the Executive is entitled, the Executive shall be considered to have remained employed by the Company until 12 months after the Date of Termination. 4 b) RESIGNATION WITHOUT GOOD REASON; TERMINATION FOR DEATH OR DISABILITY. If the Executive voluntarily terminates his employment with the Company within 24 months following the Change in Control Date, excluding a termination for Good Reason, or if the Executive's employment with the Company is terminated by reason of the Executive's death or Disability within months following the Change in Control Date, then the Company shall (i) pay the Executive (or his estate, if applicable), in a lump sum in cash within 30 days after the Date of Termination, the Accrued Obligations and (ii) timely pay or provide to the Executive the Other Benefits. c) TERMINATION FOR CAUSE. If the Company terminates the Executive's employment with the Company for Cause within 24 months following the Change in Control Date, then the Company shall (i) pay the Executive, in a lump sum in cash within 30 days after the Date of Termination, the sum of (A) the Executive's annual base salary through the Date of Termination and (B) the amount of any compensation previously deferred by the Executive, in each case to the extent not previously paid, and (ii) timely pay or provide to the Executive the Other Benefits. 4.3. Taxes. a) Notwithstanding any other provision of this Agreement, in the event that the Company undergoes a Change in Ownership or Control (as defined below), the Company shall not be obligated to provide to the Executive a portion of any "Contingent Compensation Payments" (as defined below) that the Executive would otherwise be entitled to receive to the extent necessary to eliminate any "excess parachute payments" (as defined in Section 280G(b)(1) of the Internal Revenue Code of 1986, as amended (the "Code")) for the Executive. For purposes of this Section 4.3, the Contingent Compensation Payments so eliminated shall be referred to as the "Eliminated Payments" and the aggregate amount (determined in accordance with Proposed Treasury Regulation Section 1.280G-1, Q/A-30 or any successor provision) of the Contingent Compensation Payments so eliminated shall be referred to as the "Eliminated Amount." b) For purposes of this Section 4.3, the following terms shall have the following respective meanings: i) "Change in Ownership or Control" shall mean a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company determined in accordance with Section 280G(b)(2) of the Code. ii) "Contingent Compensation Payment" shall mean any payment (or benefit) in the nature of compensation that is made or made available (under this Agreement or otherwise) to a "disqualified individual" (as defined in Section 280G(c) of the Code) and that is contingent (within the meaning of Section 280G(b)(2)(A)(i) of the Code) on a Change in Ownership or Control of the Company. c) Any payments or other benefits otherwise due to the Executive following a Change in Ownership or Control that could reasonably be characterized (as determined by the Company) as Contingent Compensation Payments shall not be made until the determination, pursuant to this Section 4.3(c), of which Contingent Compensation Payments shall be treated as Eliminated Payments. Within 30 days after each date on which the Executive first becomes entitled to receive (whether or not then due) a Contingent Compensation Payment relating to such Change in Ownership or Control, the Company shall determine and notify the Executive (with reasonable detail regarding the basis for its determinations) (i) which of such payments and benefits constitute Contingent Compensation Payments and (ii) the Eliminated Amount. Within 30 days after delivery of such notice to the Executive, the Executive shall notify the Company which Contingent Compensation Payments, or portions thereof (the aggregate amount of which, determined in accordance with Proposed Treasury Regulation Section 1.280G-1, Q/A-30 or any successor provision, shall be equal to the Eliminated Amount), shall be treated as Eliminated Payments. In the event that the Executive fails to notify the Company pursuant to the preceding sentence on or before the required date, the Contingent Compensation Payments (or portions thereof) that shall be treated as Eliminated Payments shall be determined by the Company in its absolute discretion. In no event shall the Company be liable to the Executive as a result of any factual or legal determination made by it pursuant to this subsection (c) or for any information supplied by it to the Executive or his advisors. d) The provisions of this Section 4.3 are intended to apply to any and all payments or benefits available to the Executive under this Agreement or any other agreement or plan of the Company under which the Executive receives Contingent Compensation Payments. 4.4. MITIGATION. The Executive shall not be required to mitigate the amount of any payment or benefits provided for in this Section 4 by seeking other employment or otherwise. Further, except as provided in Section 4.2(a)(ii), the amount of any payment or benefits provided for in this Section 4 shall not be reduced by any compensation earned by the Executive as a result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company or otherwise. 5 4.5. OUTPLACEMENT SERVICES. In the event the Executive is terminated by the Company (other than for Cause, Disability or Death), or the Executive terminates employment for Good Reason, within 24 months following the Change in Control Date, the Company shall provide outplacement services through one or more outside firms of the Executive's choosing up to an aggregate amount to be negotiated by the Executive and the Company, with such services to extend until the earlier of (i) 12 months following the termination of Executive's employment or (ii) the date the Executive secures full time employment. 5. DISPUTES. 5.1. SETTLEMENT OF DISPUTES; ARBITRATION. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board of Directors of the Company and shall be in writing. Any denial by the Board of Directors of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board of Directors shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim. Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Boston, Massachusetts, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 5.2 EXPENSES. The Company agrees to pay as incurred, to the full extent permitted by law, all legal, accounting and other fees and expenses which the Executive may reasonably incur as a result of any claim or contest (regardless of the outcome thereof) by the Company, the Executive or others regarding the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive regarding the amount of any payment or benefits pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. 6. SUCCESSORS. 6.1. SUCCESSOR TO COMPANY. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain an assumption of this Agreement at or prior to the effectiveness of any succession shall be a breach of this Agreement and shall constitute Good Reason if the Executive elects to terminate employment, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as defined above and any successor to its business or assets as aforesaid which assumes and agrees to perform this Agreement, by operation of law or otherwise. 6.2. SUCCESSOR TO EXECUTIVE. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to the Executive or his family hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 7. NOTICE. All notices, instructions and other communications given hereunder or in connection herewith shall be in writing. Any such notice, instruction or communication shall be sent either (i) by registered or certified mail, return receipt requested, postage prepaid, or (ii) prepaid via a reputable nationwide overnight courier service, in each case addressed to the Company, at 11 State St., Woburn, MA 01801, and to the Executive at 72 Northern Boulevard, Newbury, MA 01551 (or to such other address as either the Company or the Executive may have furnished to the other in writing in accordance herewith). Any such notice, instruction or communication shall be deemed to have been delivered five business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, or one business day after it is sent via a reputable nationwide overnight courier service. Either party may give any notice, instruction or other communication hereunder using any other means, but no such notice, instruction or other communication shall be deemed to have been duly delivered unless and until it actually is received by the party for whom it is intended. 8. MISCELLANEOUS. 8.1. EMPLOYMENT BY SUBSIDIARY. For purposes of this Agreement, the Executive's employment with the Company shall not be deemed to have terminated solely as a result of the Executive continuing to be employed by a wholly-owned subsidiary of the Company. 8.2. SEVERABILITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 8.3. INJUNCTIVE RELIEF. The Company and the Executive agree that any breach of this Agreement by the Company is likely to cause the Executive substantial and irrevocable damage and therefore, in the event of any such breach, in addition to such other remedies which may be available, the Executive shall have the right to specific performance and injunctive relief. 6 8.4. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the internal laws of the Commonwealth of Massachusetts, without regard to conflicts of law principles. 8.5. WAIVERS. No waiver by the Executive at any time of any breach of, or compliance with, any provision of this Agreement to be performed by the Company shall be deemed a waiver of that or any other provision at any subsequent time. 8.6. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original but both of which together shall constitute one and the same instrument. 8.7. TAX WITHHOLDING. Any payments provided for hereunder shall be paid net of any applicable tax withholding required under federal, state or local law. 8.8. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of the subject matter contained herein; and any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and cancelled. Notwithstanding the foregoing, the effectiveness of the Employment Agreement, dated as of June 1, 1991, between the Company and the Executive (the "Prior Agreement") shall be suspended during the 24 months following the Change in Control Date (the "Protected Period"), except as specifically set forth herein; provided that if the Executive's employment is not terminated on or before the last day of the Protected Period, then the Prior Agreement shall be effective during the period, if any, from the end of the Protected Period through the end of the Employment Period (as defined in the Prior Agreement) 8.9. AMENDMENTS. This Agreement may be amended or modified only by a written instrument executed by both the Company and the Executive. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first set forth above. POLYMEDICA CORPORATION /s/ Steven J. Lee ------------------------------------ Steven J. Lee Chairman and Chief Executive Officer ACCEPTED AND AGREED TO: /s/ John K.P. Stone, III - ----------------------------- John K.P. Stone, III 7 EX-10.50 7 b43472pcexv10w50.txt AMENDED EMPLOYMENT AGREEMENT W/ ERIC G. WALTERS EXHIBIT 10.50 Mr. Eric G. Walters 167 Monument Street Concord, MA 01742 Re: AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT Dear Eric, This letter agreement serves to further amend the Amended Executive Employment Agreement dated as of April 1, 2001, by and between you and PolyMedica Corporation (the "Company") as amended on June 8, 2001 and September 25, 2001 (together, the "Executive Employment Agreement"). SALARY. The Base Salary, as defined in Section 3.1 of the Amended Executive Employment Agreement, shall be increased to $270,000 effective April 1, 2002. If the foregoing is acceptable to you, please indicate your agreement by signing a copy of this letter agreement and returning it to the undersigned. Very truly yours, /s/ Steven J. Lee ------------------------------------ Steven J. Lee Chairman and Chief Executive Officer ACCEPTED AND AGREED TO: /s/ Eric G. Walters - ------------------------------- Eric G. Walters EX-10.51 8 b43472pcexv10w51.txt AMENDED EMPLOYMENT AGREEMENT W/ WARREN TROWBRIDGE EXHIBIT 10.51 Warren K. Trowbridge 2421 S.E. Bahia Way Stuart, FL 34996-1908 Re: AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT Dear Keith, This letter agreement serves to further amend the Employment Agreement dated as of September 1, 2000, by and between you and PolyMedica Corporation (the "Company"), as amended December 14, 2000; September 24, 2001; October 4, 2001; and January 31, 2002 (together, the "Executive Employment Agreement"). SALARY. The Base Salary, as defined in Section 3.1. of the Executive Employment Agreement, shall be increased to $325,000 effective April 1, 2002. If the foregoing is acceptable to you, please indicate your agreement by signing a copy of this letter agreement and returning it to the undersigned. Very truly yours, /s/ Steven J. Lee ------------------------------------ Steven J. Lee Chairman and Chief Executive Officer ACCEPTED AND AGREED TO: /s/ Warren K. Trowbridge - ---------------------------- Warren K. Trowbridge EX-10.52 9 b43472pcexv10w52.txt AMENDED EMPLOYMENT AGREEMENT W/ STEPHEN FARRELL EXHIBIT 10.52 Stephen C. Farrell 8 Minute Man Lane Lexington, MA 02421 Re: AMENDMENT OF EMPLOYMENT AGREEMENT Dear Steve, This letter agreement serves to further amend the Employment Agreement dated as of September 1, 2000, by and between you and PolyMedica Corporation (the "Company"), as amended by certain letter agreements dated as of April 16, 2001; September 24, 2001; and October 12, 2001(together, the "Employment Agreement"). SALARY. The Base Salary, as defined in Section 3.1. of the Employment Agreement, shall be increased to $230,000 effective April 1, 2002. If the foregoing is acceptable to you, please indicate your agreement by signing a copy of this letter agreement and returning it to the undersigned. Very truly yours, /s/ Steven J. Lee ------------------------------------ Steven J. Lee Chairman and Chief Executive Officer ACCEPTED AND AGREED TO: /s/ Stephen C. Farrell - ------------------------------- Stephen C. Farrell EX-23.1 10 b43472pcexv23w1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-74156, 333-74160, 333-49356, 333-92695, 333-66685, 333-17387, 333-17415, 33-98348, 33-86836, 33-70626, 33-59202, 33-48134, 33-48130 and 33-48132) and on Form S-3 (Nos. 333-35312 and 333-86575) of PolyMedica Corporation of our report dated May 15, 2002 relating to the consolidated financial statements and consolidated financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts June 27, 2002 -----END PRIVACY-ENHANCED MESSAGE-----