According to the firm's SEC 10-K filing for the fiscal year ended March 31, 2004, the lawsuits were dismissed following PolyMedica's announcement on September 4, 2003 that they had concluded the Company's discussions with the SEC concerning their capitalization of advertising costs under the direct-response advertising exception in Statement of Position 93-7 (“SOP 93-7”) and would not restate their historical financial statements.
The Complaint alleges that throughout the Class Period, defendants issued statements, press releases, and filed quarterly and annual reports with the SEC describing the Company's business operations and financial condition. These representations were materially false and misleading because they failed to disclose that throughout the Class Period, the Company had materially misstated its operating earnings.
Specifically, during the relevant time period, it has been reported that PolyMedica overstated earnings by capitalizing direct response advertising costs related to the acquisition of new customers rather than expensing them as incurred. Consequently, PolyMedica recorded such advertising costs as assets rather than as expenses. By accounting for these expenses as assets, PolyMedica could spread the cost over a two to four year period rather than accounting for the expense in the quarter in which they were incurred. This allowed PolyMedica to understate operating expenses, overstate assets, and create a false impression of operating efficiencies with the overall effect being that the Company misled investors concerning the Company's growth and earnings. This contrivance violates Generally Accepted Accounting Principles and the SEC has closely scrutinized this practice.
Further, the complaint alleges that on June 30, 2003, after the stock market closed, PolyMedica issued a press release announcing that as a result of discussions with the SEC regarding the expensing of the Company's direct response advertising costs, PolyMedica may be forced to restate results for the fiscal years 2002 and 2003. The Company said the restatement would reduce its fiscal 2002 earnings to $1.76 from $2.38 per share, a reduction of 26%, its fiscal 2003 to $2.61 from $3.21, a reduction of 19%, and fiscal 2004 first quarter earnings expectations to $.66-.72 from $.84-.90. On this news, shares of PolyMedica, which had closed at $45.86 on
June 30, 2003, opened for trading on July 1, 2003, at $38.56, down $7.30, or
15.9%. PolyMedica shares closed later that day at $37.39 per share for a loss
of $8.47 per share, or 18.5%.