PLMD Polymedica Corp (MM)

United States
Securities and Exchange Commission

Washington, DC 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

Filed by the Registrant   þ		Filed by a Party other than the Registrant   o

Check the appropriate box:
o Preliminary Proxy Statement
o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Pursuant to §240.14a-12

PolyMedica Corporation

(Name of Registrant as Specified In Its Charter)

n/a

(Name of Person(s) Filing Proxy Statement, if Other than Registrant)

Payment of Filing Fee (Check the appropriate box):

o No fee required.
o Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

	1)		Title of each class of securities to which transaction applies:
			Common Stock, $0.01 par value per share, of PolyMedica Corporation (“PolyMedica Common Stock”).
	2)		Aggregate number of securities to which transaction applies:
	•		23,437,817 shares of PolyMedica Common Stock (includes restricted stock)
	•		Options to purchase 2,692,911 shares of PolyMedica Common Stock at an exercise price of less than $53.00 per share
	•		1.00% Convertible Subordinated Notes due September 15, 2011 (the “Convertible Notes) entitled to receive approximately $214,400,000 upon conversion in connection to the transaction
	3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined):

The maximum aggregate value was determined based upon the sum of (A) 23,437,817 shares of PolyMedica Common Stock multiplied by $53.00 per share, (B) options to purchase 2,688,347 shares of PolyMedica Common Stock with exercise prices less than $53.00 multiplied by $21.6822 (which is the difference between $53.00 and the weighted average exercise price of such options of $31.3178 per share), and (C) approximately $214,400,000 to be paid to holders of the Convertible Notes upon the conversion of such Convertible Notes in connection with the transaction. In accordance with Section 14(g) of the Securities Exchange Act of 1934, as amended, the filing fee was determined by multiplying 0.00003070 by the sum calculated in the preceding sentence.

	4)		Proposed maximum aggregate value of transaction:
			$1,514,893,578
	5)		Total fee paid:
			$46,507.23*
			* Fee is 0.00003070 of transaction value

þ		Fee paid previously with preliminary materials.
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

	1)		Amount Previously Paid:
	2)		Form, Schedule or Registration Statement No.:
	3)		Filing Party:
	4)		Date Filed:

 

POLYMEDICA CORPORATION
701 EDGEWATER ROAD, SUITE 360
WAKEFIELD, MASSACHUSETTS 01880
(781) 486-8111

 

September 28, 2007

 

DEAR POLYMEDICA CORPORATION SHAREHOLDER:

 

You are cordially invited to attend a special meeting of the shareholders of PolyMedica Corporation, which will be held at the Sheraton Colonial Hotel located at One Audubon Road, Wakefield, Massachusetts, on Wednesday, October 31, 2007, beginning at 10:00 a.m., local time.

 

At the special meeting, we will ask you to consider and vote on a proposal to approve the Agreement and Plan of Merger, dated as of August 27, 2007, among Medco Health Solutions, Inc., Macq Corp. and PolyMedica Corporation providing for the acquisition of PolyMedica Corporation by Medco Health Solutions, Inc. If the merger is completed, PolyMedica Corporation will become a wholly-owned subsidiary of Medco Health Solutions, Inc., and you will receive $53.00 in cash, without interest and less any applicable withholding taxes, for each share of our common stock that you own and you will cease to have an ownership interest in the continuing business of PolyMedica Corporation. A copy of the merger agreement is attached as Annex A to the accompanying proxy statement and you are encouraged to read it in its entirety.

 

After careful consideration, our board has unanimously adopted the merger agreement and determined that the merger and the merger agreement are advisable, fair to and in the best interests of PolyMedica Corporation and its shareholders. OUR BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “ FOR ” THE APPROVAL OF THE MERGER AGREEMENT.

 

The proxy statement attached to this letter provides you with information about the merger and the special meeting. Please read the entire proxy statement carefully. You may also obtain additional information on PolyMedica Corporation from documents filed with the Securities and Exchange Commission.

 

Your vote is very important.  The merger cannot be completed unless PolyMedica Corporation shareholders holding two-thirds (2/3) of the outstanding shares entitled to vote at the special meeting of shareholders vote to approve the merger agreement. If you fail to vote on the merger agreement, such failure to vote will have the same effect as voting against the approval of the merger agreement.

 

Whether or not you plan to attend the special meeting in person, please complete, sign, date and return promptly the enclosed proxy card in the enclosed postage-paid return envelope. If you hold shares through a broker or other nominee, you should follow the procedures provided by your broker or nominee. These actions will not limit your right to vote in person if you wish to attend the special meeting and vote in person.

 

If you have any questions or need assistance voting your shares, please call The Altman Group, which is assisting us, toll-free at (800) 499-8410 or collect at (201) 806-7300.

 

On behalf of the Board of Directors of PolyMedica Corporation, I thank you in advance for your cooperation and continued support.

 

On behalf of your Board of Directors,

 

James J. Mahoney, Jr.

Chairman of the Board

 

Neither the Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved the merger, passed upon the merits or fairness of the merger or passed upon the adequacy or accuracy of the disclosure in this document. Any representation to the contrary is a criminal offense.

 

This proxy statement is dated September 28, 2007 and is first being mailed to shareholders on or about October 1, 2007.

 

POLYMEDICA CORPORATION
701 EDGEWATER ROAD, SUITE 360
WAKEFIELD, MASSACHUSETTS 01880
(781) 486-8111

 

 

of record and do attend the meeting and wish to vote in person, you may withdraw your proxy and vote in person.

 

Please carefully read the proxy statement and other material concerning our company, the merger and the other proposals enclosed with this notice for a more complete statement regarding the matters to be acted upon at the special meeting.

 

By Order of the Board of Directors,

 

DEVIN J. ANDERSON, Secretary

 

Wakefield, Massachusetts

September 28, 2007

 

 

 

 

TABLE OF CONTENTS

 

 

SUMMARY

 

This summary highlights selected information from this proxy statement and may not contain all of the information that is important to you. To understand the merger fully, and for a more complete description of the legal terms of the merger, you should carefully read this entire proxy statement and the annexes attached to this proxy statement. The Agreement and Plan of Merger, which we refer to as the merger agreement, dated as of August 27, 2007, among Medco Health Solutions, Inc., Macq Corp. and PolyMedica Corporation is attached as Annex A to this proxy statement. We have included page references in parentheses to direct you to the appropriate place in this proxy statement for a more complete description of the topics presented in this summary.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As long as you do not vote for the approval of the merger agreement, failure to vote against the approval of the merger agreement would not constitute a waiver of any appraisal rights you may have. However, in order to exercise your appraisal rights, you must comply with the procedures as required by Part 13 of the MBCA. A copy of Part 13 of the MBCA is attached to this proxy statement as Annex C .

 

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

 

The following questions and answers are intended to address some commonly asked questions regarding the special meeting and the proposed merger. These questions and answers may not address all questions that may be important to you as a PolyMedica Corporation shareholder. Please refer to the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to in this proxy statement.

 

 

 

 

 

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

 

This proxy statement, and the documents to which we refer you in this proxy statement, contain forward-looking statements about our plans, objectives, expectations and intentions. Forward-looking statements include information concerning possible or assumed future results of operations of our company, the expected completion and timing of the merger and other information relating to the merger. Generally these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “may,” “will,” “should,” “plan,” “intend,” “project” or phrases such as “will be well-positioned to,” “will benefit,” “will gain” and similar expressions. You should read statements that contain these words carefully. They discuss our future expectations or state other forward-looking information, and may involve known and unknown risks over which we have no control. Those risks include, without limitation:

 

 

We believe that the assumptions on which our forward-looking statements are based are reasonable. However, we cannot assure you that the actual results or developments we anticipate will be realized or, if realized, that they will have the expected effects on the business or operations of the company. All subsequent written and oral forward-looking statements concerning the merger or other matters addressed in this proxy statement and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Forward-looking statements speak only as of the date of this proxy statement or the date of any document incorporated by reference in this document. Except as required by applicable law or regulation, we do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.

 

THE SPECIAL MEETING OF SHAREHOLDERS

 

This proxy statement is furnished in connection with the solicitation of proxies in connection with a special meeting of our shareholders.

 

Date, Time and Place

 

We will hold the special meeting at the Sheraton Colonial Hotel, located at One Audubon Road, Wakefield, Massachusetts, on Wednesday, October 31, 2007, beginning at 10:00 a.m., local time.

 

Purpose of the Special Meeting

 

At the special meeting, we will ask you to (1) approve the merger agreement and (2) approve the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to approve the merger agreement.

 

Recommendation of Our Board of Directors

 

Our Board of Directors, by unanimous vote, (1) approved and adopted the merger agreement and approved the merger and the transactions contemplated by the merger agreement and (2) determined that the merger is advisable and fair to and in the best interests of PolyMedica Corporation and our shareholders. ACCORDINGLY, OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “ FOR ” APPROVAL OF THE MERGER AGREEMENT .

 

Record Date; Stock Entitled to Vote; Quorum

 

Only holders of record of our common stock at the close of business on September 24, 2007, the record date, are entitled to notice of and to vote at the special meeting. On the record date, 23,437,817 shares of our common stock were issued and outstanding and held by approximately 524 holders of record. Each holder of record of common stock will be entitled to one vote per share at the special meeting on the proposal to approve the merger agreement and the other matters to be voted on at the meeting.

 

The holders of a majority of the outstanding shares of common stock entitled to vote must be present, either in person or by proxy, to constitute a quorum at the special meeting. We will count abstentions, either in person or by proxy, and broker non-votes (shares held by a broker or other nominee that does not have the authority to vote on a matter) for the purpose of establishing a quorum. If a quorum is not present at the special meeting, the holders of a majority of the common stock represented at the special meeting may adjourn the meeting to solicit additional proxies. In the event that a quorum is not present at the special meeting, it is expected that the meeting will be adjourned or postponed to solicit additional proxies. See “Proposal 2 — Adjournment or Postponement of the Special Meeting” on page 54.

 

Vote Required

 

The approval of the merger agreement requires the affirmative vote of two-thirds (2/3) of the outstanding shares entitled to vote on the merger agreement at the special meeting. If you abstain from voting, either in person or by proxy, or do not instruct your broker or other nominee how to vote your shares, it will effectively count as a vote against the approval of the merger agreement. The affirmative vote of a majority of the votes cast is required for approval of the adjournment or postponement of the special meeting, if necessary, to solicit additional proxies in favor of approval of the merger agreement if there are insufficient votes at the time of the meeting to approve the merger agreement.

 

Voting of Proxies

 

To vote your shares, you should mark, sign, date and return the enclosed proxy in the enclosed postage-paid envelope. Voting your proxy does not limit your right to vote in person should you decide to attend the special meeting. If your shares are held in the name of a bank, broker or other nominee, you will be provided

voting instructions from the nominee and, in order to vote at the special meeting, you must obtain a legal proxy, executed in your name, from the nominee.

 

If you vote by mail and the returned proxy card is completed, signed and dated, your shares will be voted at the special meeting in accordance with your instructions. If you vote by mail and your proxy card is returned unsigned, then your vote cannot be counted. If you vote by mail and the returned proxy card is signed and dated, but you do not fill out the voting instructions on the proxy card, the shares represented by your proxy will be voted “FOR” the approval of the merger agreement, and the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies in favor of approval of the merger agreement if there are insufficient votes at the time of the meeting to approve the merger agreement.

 

Shareholders who hold their shares of our common stock in “street name,” meaning in the name of a bank, broker or other nominee who is the record holder, should follow the directions provided by your bank, broker or other nominee regarding how to instruct your broker to vote your shares.

 

We do not expect that any matter other than the ones discussed in this proxy statement will be brought before the special meeting. If, however, any other matters are properly presented, the persons named as proxies will vote in accordance with their judgment as to matters that they believe to be in the best interests of our shareholders.

 

Do not send your stock certificate(s) with your proxy. A letter of transmittal with instructions for the surrender of your common stock certificate(s) will be mailed to you as soon as practicable after completion of the merger.

 

Revocability of Proxies

 

If you hold your shares in your name, you have the unconditional right to revoke your proxy at any time prior to its exercise by employing any of the following methods:

 

 

The revocation of your proxy by written notice or your later-dated proxy will be effective only if the secretary of PolyMedica Corporation receives the written notice or later-dated proxy prior to the day of the special meeting or if the judge of elections receives the written notice or later-dated proxy at the special meeting. Your attendance at the special meeting without further action will not automatically revoke your proxy.

 

If you have instructed a bank, broker or other nominee to vote your shares, you must follow the directions received from such nominee to revoke a previously submitted proxy.

 

Solicitation of Proxies

 

PolyMedica Corporation is soliciting your proxy. In addition to the solicitation of proxies by use of the mail, officers and other employees of PolyMedica Corporation may solicit the return of proxies by personal interview, telephone, e-mail or facsimile. We will not pay additional compensation to our officers and employees for their solicitation efforts, but we will reimburse them for any out-of-pocket expenses they incur in their solicitation efforts. We will request that brokerage houses and other custodians, nominees and fiduciaries forward solicitation materials to the beneficial owners of stock registered in their names. We will bear all costs of preparing, assembling, printing and mailing the Notice of Special Meeting of Shareholders, this proxy statement, the enclosed proxy and any additional materials, as well as the cost of forwarding solicitation materials to the beneficial owners of stock and all other costs of solicitation.

We have retained The Altman Group to aid in the solicitation of proxies for the special meeting. The Altman Group will receive a base fee of $7,500 plus reimbursement of out-of-pocket fees and expenses. The solicitation is on customary terms, and total costs are not expected to exceed $35,000.

 

Assistance

 

Shareholders who have questions regarding the materials, need assistance voting their shares or require additional copies of the proxy statement or proxy card should contact or call The Altman Group, our proxy solicitor:

 

The Altman Group
1200 Wall Street West 3rd Floor
Lyndhurst, New Jersey 07071
(800) 499-8410 (toll-free)
or
(201) 806-7300 (call collect)

 

Share Certificates

 

Please do not send any certificates representing shares of our common stock with your proxy card. The procedure for the exchange of certificates representing shares of our common stock will be as described in this proxy statement. For a description of procedures for exchanging certificates representing shares of our common stock, see “The Merger Agreement — Conversion of Shares; Procedures for Exchange of Certificates.”

 

Appraisal Rights

 

Section 13.02(a)(1) of the MBCA generally provides that shareholders of Massachusetts corporations are entitled to appraisal rights in the event of a merger. An exemption set forth in Section 13.02(a)(1)(A) of the MBCA provides that shareholders are not entitled to appraisal rights in transactions similar to this merger where cash is the sole consideration received by the shareholders. However, in the event that certain persons or entities are determined to have a direct or indirect material financial interest in the merger for purposes of the MBCA, this exemption would be inapplicable with respect to the merger. Accordingly, if such a determination were made, our shareholders may be entitled to appraisal rights under Massachusetts law. We do not believe that holders of our common stock are entitled to appraisal rights in connection with the merger because shareholders will receive only cash for their shares and no director, officer or controlling shareholder has any direct or indirect material financial interest in the merger other than in their capacity as a shareholder of ours or a director, officer or employee of ours pursuant to a bona fide arrangement with us. However, Section 13.02 of the MBCA has not yet been the subject of judicial interpretation. Any shareholder who believes he or she is entitled to appraisal rights and who wishes to preserve those rights should carefully review Sections 13.01 through 13.31 of Part 13 of the MBCA, attached as Annex C to this proxy statement, which sets forth the procedures to be complied with in perfecting any such rights. Failure to strictly comply with the procedures specified in Part 13 of the MBCA would result in the loss of any appraisal rights to which such shareholder may be entitled. In light of the complexity of Section 13.02 of the MBCA, those shareholders of ours who may wish to dissent from the merger and pursue appraisal rights should consult their legal advisors.

 

Anti-Takeover Considerations

 

Chapters 110C, 110D and 110F of the Massachusetts General Laws create certain anti-takeover restrictions for Massachusetts corporations, but such restrictions do not apply to the merger.

 

THE PARTIES TO THE MERGER AGREEMENT

 

PolyMedica Corporation

 

PolyMedica Corporation, which we refer to as PolyMedica, is organized under the laws of the Commonwealth of Massachusetts. Through our largest segment, Diabetes, under the Liberty brand, we are a leading provider of direct-to-consumer diabetes testing supplies, primarily to seniors. Through our Pharmacy segment, we sell prescription medications directly to our existing Diabetes patients and their spouses. Headquartered in Wakefield, Massachusetts, we have approximately 2,264 employees and generated net revenues of approximately $675 million in our fiscal year ended March 31, 2007. Our common stock is traded on the NASDAQ Global Select Market under the symbol “PLMD”. Our principal executive offices are located at 701 Edgewater Road, Suite 360, Wakefield, Massachusetts 01880, and our telephone number is (781) 486-8111.

 

Medco Health Solutions, Inc.

 

Medco Health Solutions, Inc., which we refer to as Medco, is the nation’s leading pharmacy benefit manager based on net revenues, with 2006 net revenues in excess of $42 billion. Medco and its subsidiaries employ approximately 16,000 employees. Medco’s common stock is traded on the New York Stock Exchange under the symbol MHS. Medco’s principal executive offices are located at 100 Parsons Pond Drive, Franklin Lakes, New Jersey 07417, and its telephone number is (201) 269-3400.

 

Macq Corp.

 

Macq Corp., a corporation organized under the laws of the Commonwealth of Massachusetts, is a newly formed wholly-owned subsidiary of Medco. Macq Corp. has not engaged in any prior activities other than in connection with or as contemplated by the merger agreement.

 

THE MERGER

 

Background of the Merger

 

In December 2005, a company in the healthcare industry, which we refer to as Company 1, contacted Patrick T. Ryan, the Chief Executive Officer of PolyMedica, to discuss a strategic transaction between PolyMedica and Company 1. After consultation with the Board of Directors of PolyMedica, Mr. Ryan indicated to Company 1 that PolyMedica was focused on various strategic initiatives, including implementing its strategy to participate in the Medicare Prescription Drug Program (Part D), and was not interested in discussing a transaction at that time.

 

In January 2006, Company 1 again contacted Mr. Ryan, regarding a potential strategic transaction, and another participant company in the healthcare industry, which we refer to as Company 2, contacted Mr. Ryan to inquire about the same. After discussing the inquiries with the Board of Directors, Mr. Ryan had several separate conversations over the next few weeks with Company 1 and Company 2 regarding PolyMedica’s publicly disclosed information and initiatives. Company 1 and Company 2 each entered into confidentiality agreements with PolyMedica in February 2006 and March 2006, respectively, and each performed a preliminary due diligence review of PolyMedica. During this time, PolyMedica’s Board of Directors met and was informed of Company 1’s and Company 2’s expressions of interest in pursuing a potential acquisition of PolyMedica. The Board of Directors determined that an evaluation of strategic alternatives might become appropriate in light of the expressions of interest received. PolyMedica’s general counsel and representatives of Weil, Gotshal & Manges LLP, PolyMedica’s outside counsel, reviewed with the Board of Directors its fiduciary duties in connection with an evaluation of strategic alternatives. In March 2006, PolyMedica engaged an investment bank to provide financial advice in connection with PolyMedica’s strategic alternatives.

 

On March 1, 2006, the Board of Directors formed a special committee comprised of Messrs. Pyle, Mahoney, Ryan and Van Faasen and Ms. Hooper. The special committee was formed in order to act as a

smaller working group to review and negotiate offers from Company 1 and Company 2 and make recommendations to the full Board of Directors. Throughout March 2006, the special committee and the Board of Directors met several times to evaluate a possible transaction with Company 1 or Company 2. At these meetings, the investment bank engaged by PolyMedica gave presentations on PolyMedica’s strategic alternatives and potential acquirors. Members of PolyMedica’s management also made presentations regarding the opportunities and risks facing PolyMedica. Company 1 made a preliminary offer to acquire PolyMedica for $53 per share of PolyMedica common stock, subject to customary conditions such as satisfactory completion of due diligence review and negotiation of transaction documentation, and indicated that its offer was subject to PolyMedica entering into an exclusivity agreement. Company 2 did not make a preliminary offer and informed PolyMedica and its advisors that it would not be able to compete with the price offered by Company 1. After discussions regarding the fiduciary duties of the Board of Directors and strategic alternatives available to PolyMedica, and in light of the view that there was a high probability of Company 1 following through to close a transaction and that Company 2 would not be able to compete with the pricing set forth in Company 1’s offer, PolyMedica agreed to enter into a proposed exclusivity agreement with Company 1 on March 20, 2006. PolyMedica, Company 1, and their respective advisors worked extensively to negotiate the terms and documentation for the proposed $53 per share transaction. In May 2006, such negotiations ceased when Company 1 completed its due diligence review of PolyMedica and concluded that it was not prepared to complete the $53 per share transaction and, accordingly, the parties could not reach agreement on satisfactory terms. Upon termination of the preceding negotiations, the special committee disbanded.

 

PolyMedica also had discussions with Medco in the spring of 2006 regarding potential strategic relationships between the parties. As a result of these discussions, in July 2006, PolyMedica entered into two seven-year agreements with Medco pursuant to which (i) Medco provides pharmacy fulfillment services to PolyMedica, and (ii) PolyMedica provides products and services to Medco beneficiaries under Medicare Part B.

 

During the summer of 2006, the Board of Directors met numerous times to discuss potential strategic alternatives available to PolyMedica. Throughout the summer and fall of 2006, PolyMedica pursued simultaneous discussions regarding potential business combinations and operational projects with various third parties. PolyMedica also continued discussions with Company 2 regarding operational projects during the summer and fall of 2006.

 

Mr. Ryan discussed a potential strategic transaction with a company in the pharmacy industry, which we refer to as Company 3, during several calls and meetings in the fall of 2006 and into the summer of 2007.

 

In May 2007, PolyMedica held preliminary discussions with Medco about expanding the existing partnership or exploring a possible combination of PolyMedica and Medco. In May and June 2007, Mr. Ryan had discussions with three additional parties after receiving calls regarding possible strategic transactions with each of them. Mr. Ryan held discussions with these three companies and Medco to determine the seriousness of their respective interest in a strategic transaction with PolyMedica and their respective abilities to finance an acquisition of PolyMedica. During this period, Mr. Ryan and PolyMedica’s Chief Operating Officer, Keith Jones, worked with the Board of Directors to assess the potential suitors and evaluate other strategic alternatives available to PolyMedica. Mr. Ryan also had conversations with senior management of Company 3 in late July of 2007. Company 3 expressed its continued interest in exploring a strategic transaction or partnership. Mr. Ryan made clear that the company was in conversations with other parties and that the Board of Directors was going to determine its strategic course in the near term. The executives of Company 3 expressed skepticism with their organization’s ability to reach a decision in the near term given other commitments.

 

On July 31, 2007, the PolyMedica Board of Directors met and determined to conduct a formal process to assess the interest and the financial terms on which each of the parties would be willing to pursue a transaction and to further evaluate the strategic alternatives available to PolyMedica. In making its decision to conduct a formal process with a definitive timeline applicable to all participants, the Board of Directors took into consideration certain disruption and negative impacts that the 2006 strategic alternative discussions had on PolyMedica’s business and team members and the extensive discussions Mr. Ryan held in 2006 with a wide range of third parties, including both potential strategic and financial acquirors. The Board of Directors concluded that, given the fact that any transaction would be disclosed publicly and therefore provide the Board

of Directors with the option to accept a higher offer, then at least until further discussions ensued, the process would not be expanded beyond the four companies that had expressed interest in pursuing a transaction most recently. PolyMedica engaged Deutsche Bank Securities Inc., which we refer to as Deutsche Bank, to provide financial advice in connection with this process and PolyMedica’s assessment of its strategic alternatives.

 

On August 3, 2007, Deutsche Bank distributed letters to Medco and the other three interested parties to establish the process pursuant to which such third parties could receive information from PolyMedica and submit proposals for strategic alternatives to PolyMedica. The August 3, 2007 letter indicated that interested parties should submit final binding offers on or before August 24, 2007. Each of these four companies had previously entered into confidentiality agreements with PolyMedica, and throughout August PolyMedica and its advisors provided due diligence information to the interested parties and responded to diligence inquires.

 

On August 7, 2007, and August 8, 2007, initial expressions of interest were received from Medco and two of the other interested parties. The proposed prices received from the three parties were in the $49 to $50 range. The other interested party indicated that it would not be in a position to consider a strategic transaction along the proposed timeline and expressed concern with its ability to meet the likely pricing terms.

 

PolyMedica continued to actively engage with Medco and the other interested parties, which conducted extensive due diligence. A draft merger agreement was distributed to the three interested parties on August 13, 2007, and a draft of the disclosure schedules was provided on August 20, 2007. On August 20, 2007, Deutsche Bank provided such third parties a second process letter confirming that final binding offers should be submitted on or before August 24, 2007.

 

The PolyMedica Board of Directors met on the afternoon of August 21, 2007. PolyMedica management, Deutsche Bank and Weil, Gotshal & Manges LLP reviewed with the Board of Directors the status of the potential sale process. PolyMedica management provided information about the financial data provided to bidders in order to ensure that such information was consistent with the Board of Directors’ understanding of PolyMedica’s financial position and business plan. Deutsche Bank then provided a detailed presentation outlining the alternatives available to PolyMedica, including continuing the existing operations in a status-quo manner, transformational acquisitions pursuant to which PolyMedica would acquire or partner with other companies, a leveraged recapitalization, and a sale of PolyMedica. Deutsche Bank’s presentation indicated that it was not likely that PolyMedica would be able to effect a transformational acquisition or merger of equals that would create a net present value per share that matched the initial indications of interest that PolyMedica had received, and further noted that even if such a transaction were feasible it would be subject to additional execution and integration risks. Deutsche Bank’s presentation also indicated that under the debt market conditions then prevailing a leveraged recapitalization would not result in a net present value per share that matched the initial indications of interest and would also be subject to significant execution risks because of the unsettled nature of the leverage credit markets. With respect to continuing existing operations in a status-quo manner, Deutsche Bank’s presentation indicated that the trading price of PolyMedica’s stock would not in the near term likely reach the levels that produced a net present value matching the indications of interest, and noted that, in addition, PolyMedica faced various risks operating as a stand-alone company, including those described in “Proposal 1 — The Merger - Reasons for the Merger — Challenges Faced by Us as an Independent Company” below. Deutsche Bank’s analysis supported a conclusion that a sale of PolyMedica would provide the highest likelihood of maximizing value to PolyMedica shareholders. The Board of Directors and management discussed the analysis at length with Deutsche Bank and amongst themselves. The Board of Directors also discussed their fiduciary duties to PolyMedica shareholders with Weil, Gotshal & Manges LLP, PolyMedica’s legal counsel. As part of this discussion, the Board of Directors again considered whether to engage in further market checks. Reflecting on the extensive discussions that PolyMedica previously had with third parties regarding a strategic transaction involving PolyMedica and the disruption in business that resulted from that process in 2006, the Board of Directors determined that, at least pending receipt of binding bids, further market checks were not in the best interests of PolyMedica and its shareholders.

 

Early in the week of August 20, 2007, PolyMedica had telephonic discussions or in-person meetings with all remaining interested parties, at each interested party’s request. During these discussions and meetings, PolyMedica was informed of the pricing and conditions of each of such parties’ respective bids. In each case, PolyMedica was informed that the bids from the remaining bidders did not exceed a per-share price of $52 per

share, and that such bids were further subject to closing conditions such as long-term employment agreements with executive management. The bidders other than Medco also indicated that their bids contained financing contingencies that would require an extended and undetermined period of time to consummate a transaction in light of the unstable condition of the debt markets, and, in the case of one interested party, shareholder approval. On August 23, 2007, senior executives of Medco had a series of conversations with PolyMedica. Medco indicated that it was prepared to increase its per share offer from the $50 per share price indicated in its initial indication of interest to $52, and that it intended to submit that price formally on the deadline for final binding offers on August 24. During the course of the day, Mr. Ryan and representatives of Deutsche Bank contacted the remaining parties to confirm the bid terms that had been orally communicated to PolyMedica previously, and none of the parties other than Medco indicated a willingness to increase their offers above $52 per share. Negotiations with Medco continued throughout the course of the day and evening. As a result of those discussions, Medco indicated that it would increase its offer to $53 per share only if PolyMedica agreed to enter into an exclusivity agreement for a period continuing through September 2007. The proposed exclusivity letter would allow PolyMedica to accept bids during the exclusivity period, but required PolyMedica to negotiate exclusively with Medco during the stated period. PolyMedica communicated to Medco that if PolyMedica would be willing to enter into an exclusivity letter, it would only be willing to negotiate with Medco exclusively through August 28, 2007, to allow PolyMedica the flexibility to work with other third parties in the event a transaction with Medco was not signed prior to August 28, 2007.

 

The PolyMedica Board of Directors met the evening of August 23, 2007. Mr. Ryan provided the Board of Directors an update on the process during the prior 24-hour period. Deutsche Bank provided a presentation on the offer made by Medco and compared the offer to other possible alternatives available to PolyMedica, which alternatives had been discussed at length with the Board of Directors on August 21, 2007. Deutsche Bank also compared the terms of the Medco offer to the terms of other recent acquisitions in the industry. The Board of Directors and management discussed the offer and alternatives, and Weil, Gotshal & Manges LLP provided information about the process that would be necessary to sign and announce a transaction prior to the open of the market on August 28, 2007, as requested by Medco. As part of this discussion, the Board of Directors and Weil, Gotshal & Manges LLP discussed the Board of Directors’ fiduciary duties to the PolyMedica shareholders and the process pursuant to which PolyMedica could accept a higher offer from a third party after entering into an agreement with Medco. The Board of Directors and management also discussed the arrangements with management that were being discussed with Medco in connection with the proposed transaction. The Board of Directors noted Medco’s existing partnership with PolyMedica and recognized the professionalism and integrity with which Medco has worked with PolyMedica as part of its determination that Medco’s offer provided the greatest certainty of closing a transaction, and therefore, the greatest certainty of maximizing shareholder value. As part of its discussion about whether to enter into the exclusivity letter with Medco, the Board of Directors again considered whether to engage in discussions with additional third parties. The Board of Directors discussed the fact that in the past year PolyMedica had discussed possible strategic alternatives involving PolyMedica with many of the third parties that Deutsche Bank had identified as potential acquirers of PolyMedica, and the Board of Directors concluded that further market checks would be unlikely to yield an offer superior to the Medco proposal. The Board of Directors also discussed the business disruption that resulted from the process in 2006 and the fact that Medco’s offer might be at risk if PolyMedica commenced discussions with additional parties at that time. The Board of Directors also considered the likelihood that contacting additional third parties would generate rumors within the market and the PolyMedica workforce, the impact of which could be very negative in the near term. Finally, the Board of Directors considered the fact that entering into an agreement with Medco would neither preclude another third party from making an offer to acquire PolyMedica nor, subject to paying the termination fee pursuant to the merger agreement, prohibit PolyMedica from entering into an agreement constituting a superior proposal to Medco’s offer. Considering these factors, the Board of Directors determined that contacting additional third parties regarding a potential acquisition would not be fruitful and would not be in the best interests of PolyMedica and its shareholders. Further, based upon the recent meetings and oral discussions between PolyMedica and the remaining interested parties where PolyMedica was informed of bid terms that were uncertain in light of financing and other additional contingencies and recent disruptions in the debt markets, the Board of Directors determined that the Medco bid represented the highest likelihood of closing and the highest and best available

price. After discussion and questions, the Board of Directors determined it was in the best interests of PolyMedica and its shareholders to enter into the proposed exclusivity arrangement with Medco and unanimously approved entering into the exclusivity letter and negotiating an acquisition agreement with Medco. PolyMedica and Medco entered into the exclusivity letter on August 23, 2007.

 

On August 23, 2007, PolyMedica and Medco and their respective advisors began actively negotiating the merger agreement, disclosure schedules, and ancillary documents. Medco’s legal counsel, Sullivan & Cromwell LLP, delivered a revised version of the merger agreement immediately following the execution of the exclusivity agreement. Medco and PolyMedica and their respective legal counsels negotiated the terms of the merger agreement and the ancillary documents through the weekend of Saturday, August 25, 2007, and Sunday, August 26, 2007. While the general parameters of management arrangements were discussed at the Board of Directors meeting and with Medco on August 23, 2007, management and Medco continued to negotiate the specific terms of the management arrangements over the weekend of August 25 and August 26, 2007, concurrently with the negotiation of the merger agreement.

 

The PolyMedica Board of Directors met again the evening of Sunday, August 26, 2007, to discuss updates in the process. Weil, Gotshal & Manges LLP identified the remaining open issues in the merger agreement, and Mr. Ryan discussed a proposed communications plan should a transaction be entered into. Mr. Ryan discussed with the Board of Directors the negotiation of Medco’s management arrangements with Mr. Jones, himself and other senior management of PolyMedica. The Board of Directors continued its discussion of whether the proposed transaction was in the best interests of PolyMedica and its shareholders.

 

Medco, PolyMedica and their respective legal counsel continued to negotiate the terms of the merger agreement, management arrangements and related documents, and Medco and its counsel completed their due diligence review of PolyMedica throughout the day on August 27, 2007. The amount of the termination fee set forth in the merger agreement and the ability of PolyMedica to accept superior proposals from third parties were heavily negotiated, and the PolyMedica Board of Directors focused on keeping the amount of the fee as low as possible to provide PolyMedica sufficient flexibility to receive and accept superior proposals from third parties.

 

The PolyMedica Board of Directors reconvened the afternoon of Monday, August 27, 2007, to consider the proposed transaction with Medco. Weil, Gotshal & Manges LLP again discussed with the Board of Directors the legal duties of directors in connection with a transaction such as the proposed merger. Weil, Gotshal & Manges LLP also presented to the Board of Directors the final terms of the merger agreement (substantially final copies of which had been provided to the members of the Board of Directors prior to the meeting) and other legal aspects of the proposal by Medco. The Board of Directors also discussed the management arrangements, including cash and equity issuances for certain members of PolyMedica management as described more fully below in “Proposal 1 — The Merger — Interests of Our Directors and Executive Officers in the Merger” beginning on page 28.

 

During the August 27, 2007 Board of Directors meeting, Deutsche Bank reviewed with the Board of Directors the financial aspects of Medco’s offer. The Board of Directors again discussed whether a higher price could be obtained from other bidders or Medco, and the Board of Directors concluded that a higher price could not be obtained and that a number of the terms of the merger agreement negotiated in PolyMedica’s favor were based on Medco’s belief that $53 per share of common stock would be the transaction price. After further discussions, the Board of Directors requested that Deutsche Bank render an opinion, as investment bankers, as to the fairness, from a financial point of view, to the holders of the outstanding shares of PolyMedica common stock of the merger consideration of $53 in cash per share to be received by such holders pursuant to the latest draft of the merger agreement. Deutsche Bank delivered to the Board of Directors an oral opinion, which was subsequently confirmed by delivery of a written opinion dated August 27, 2007, that, as of such date and based upon and subject to the various qualifications, factors, assumptions and limitations described in the Deutsche Bank opinion, the merger consideration of $53 in cash per share to be received by holders of PolyMedica common stock was fair, from a financial point of view, to such holders. During the course of Deutsche Bank’s presentation and rendering of its opinion, representatives of Deutsche Bank responded to questions from members of the Board of Directors confirming or clarifying their

understanding of the analysis performed by Deutsche Bank and the opinion rendered by Deutsche Bank, as described in more detail under “The Merger — Opinion of Deutsche Bank Securities Inc.” beginning on page 22. The full text of the written opinion of Deutsche Bank, which sets forth the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with such opinion, is attached as Annex B to this proxy statement.

 

Following additional discussion and deliberation, the Board of Directors unanimously approved and adopted the merger agreement and the transactions contemplated by the merger agreement, determined that the merger was advisable, fair to, and in the best interests of, the shareholders of PolyMedica and unanimously resolved to recommend that PolyMedica’s shareholders vote to approve the merger agreement.

 

In the evening of August 27, 2007, Medco informed PolyMedica that the Medco board of directors had also approved the transaction, and later that evening PolyMedica, Medco and Macq Corp. executed the merger agreement.

 

Prior to the opening of the U.S. financial markets on August 28, 2007, PolyMedica and Medco issued a press release announcing the execution of the merger agreement.

 

Reasons for the Merger

 

In reaching its determinations, approvals and recommendations referred to in the section captioned “The Merger — Recommendation of Our Board of Directors,” our Board of Directors consulted with senior management and legal counsel and financial advisor. The following describes material reasons, factors and information taken into account by our Board of Directors in deciding to approve and adopt the merger agreement and the transactions contemplated thereby and to recommend that our shareholders approve the merger agreement.

 

Merger Consideration Premium.   The $53.00 per share merger consideration represents a significant premium to the current and historical closing trading price of our common stock. The $53.00 per share merger consideration represents a premium of approximately 17% to the closing price of our common stock on August 27, 2007, the last full trading day before the public announcement of the execution of the merger agreement, approximately 23% to the average daily closing price of our common stock over the 30 trading day period ended August 27, 2007 and approximately 27% to the average daily closing price of our common stock over the six month trading day period ended August 27, 2007.

 

Terms of the Merger Agreement.   Our Board of Directors’ consideration of the financial and other terms and conditions of the merger agreement, by themselves and in comparison to the terms of agreements in other similar transactions, including:

 

(2) would not preclude a third party interested in PolyMedica from acquiring the company pursuant to a superior proposal;

 

 

Opinion of Deutsche Bank Securities Inc.   The financial analyses reviewed by Deutsche Bank at the meeting of our Board of Directors on August 27, 2007, including its opinion as to the fairness, from a financial point of view, to holders of our common stock of the consideration to be received by such shareholders in the merger. See “Opinion of Deutsche Bank Securities Inc.” on page 22.

 

The Market Price of Our Common Stock Was at a Record High.   In the full week immediately prior to the announcement of the execution of the merger agreement, the price of our common stock reached a record high. There is no assurance that we will continue to enjoy such favorable stock prices. The price of our common stock could fluctuate substantially based on a variety of factors, including, among others:

 

 

Furthermore, stock prices for many companies fluctuate widely for reasons that may be unrelated to their operating results. These fluctuations, coupled with changes in our results of operations and general economic, political and market conditions, may adversely affect the market price of our common stock.

 

Challenges Faced by Us as an Independent Company.   Our Board of Directors’ view that the merger was more favorable to shareholders than any other alternative reasonably available to us and our shareholders, including continuing to operate the business as a stand-alone, independent company in light of the risks involved in implementing our business plan. The Board of Directors believes that a sale to Medco is more favorable to our shareholders than remaining independent based on the potential value of such alternative and the assessment of our Board of Directors of the risks associated with remaining independent, after taking into account the presentation to the Board of Directors by management. See “The Merger — Background of the Merger.” In assessing the potential risks of remaining independent, our Board of Directors considered and discussed, among other things, our financial condition, results of operations, management, competitive position, business and prospects and current economic, industry and market conditions.

 

Challenges faced by us as an independent company also include the following:

 

 

 

 

 

Our Board of Directors also identified and considered a variety of risks and other potentially negative factors relating to the merger in its deliberations, including the following:

 

Failure to Close.   The risks and costs to us if the merger does not close, including the diversion of management and employee attention, employee attrition and the effect on customer and vendor relationships.

 

Becoming a Wholly-Owned Subsidiary.   The fact that we will no longer exist as an independent, publicly traded company and our shareholders will no longer participate in any of our future earnings or growth and will not benefit from any appreciation in value of our company.

 

Taxation.   The fact that gains realized from an all-cash transaction would generally be taxable to our U.S. shareholders for U.S. federal income tax purposes.

 

Operating Restrictions.   The fact that, pursuant to the merger agreement, we must generally conduct our business in the ordinary course and we are subject to a variety of other restrictions on the conduct of our business prior to the closing of the merger or termination of the merger agreement, which may delay or prevent us from pursuing business opportunities that may arise or preclude actions that would be advisable if we were to remain an independent company.

 

No Solicitation; Termination Fee.   The fact that under the terms of the merger agreement, we cannot solicit other acquisition proposals and must pay to Medco a termination fee of $52,500,000 if the merger agreement is terminated under certain circumstances, which, in addition to being costly, might have the effect of discouraging other parties from proposing an alternative transaction that might be more advantageous to our shareholders than the merger.

 

Officers and Directors.   The interests of our executive officers and directors in the merger which may be different or in addition to the interests of our shareholders generally. See “Interests of Our Directors and Executive Officers in the Merger.”

 

The foregoing discussion summarizes the material factors considered by the Board of Directors in its consideration of the merger. After considering these factors, the Board of Directors concluded that the positive factors relating to the merger agreement and the merger outweighed the negative factors. In view of the wide variety of factors considered by the Board of Directors, the board did not find it practicable to quantify or otherwise assign relative weights to the foregoing factors. In addition, individual directors may have assigned different weights to various factors. The Board of Directors approved and recommends the merger agreement and the merger based upon the totality of the information presented to and considered by it.

 

Recommendation of Our Board of Directors

 

On August 27, 2007, after evaluating a variety of business, financial and market factors and consulting with our legal and financial advisors, and after due discussion and due consideration, our Board of Directors unanimously determined that the acquisition of PolyMedica by Medco is advisable, fair to and in the best interests of PolyMedica and our shareholders and approved, adopted and declared advisable the merger agreement and the transactions contemplated thereby, including the merger. ACCORDINGLY, OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF POLYMEDICA VOTE “ FOR ” THE APPROVAL OF THE MERGER AGREEMENT.

 

Opinion of Deutsche Bank Securities Inc.

 

Pursuant to the terms of an engagement letter dated August 7, 2007, we engaged Deutsche Bank to act as our financial advisor. Deutsche Bank provided us with certain financial advisory and investment banking services and was asked by the Board of Directors to render an opinion, as investment bankers, as to the fairness, from a financial point of view, to the holders of the outstanding shares of our common stock of the merger consideration of $53.00 in cash per share to be received by such holders pursuant to the merger agreement.

 

At the meeting of the Board of Directors on August 27, 2007, Deutsche Bank rendered its oral opinion, which was subsequently confirmed in writing, that, as of August 27, 2007, and based upon and subject to the various qualifications, factors, assumptions and limitations described in the Deutsche Bank opinion, the merger consideration of $53.00 in cash per share to be received by holders of our common stock was fair, from a financial point of view, to such holders.

 

The full text of Deutsche Bank’s opinion, dated August 27, 2007, which describes, among other things, the assumptions made, procedures followed, matters considered and limitations on the review undertaken by Deutsche Bank, is attached as Annex B to this proxy statement and is incorporated herein by reference. Deutsche Bank’s opinion, which was addressed to, and for the use and benefit of, our Board of Directors was not a recommendation to our shareholders to approve the merger. The opinion was limited to the fairness, from a financial point of view, of the merger consideration to the holders of the outstanding shares of our common stock as of the date of the opinion, and Deutsche Bank expressed no opinion as to the merits of the underlying decision by us to engage in the merger or as to how any holder of shares of our common stock should vote with respect to the merger. The summary of Deutsche Bank’s opinion set forth in this proxy statement is qualified in its entirety by reference to the full text of such opinion. Holders of our common stock are encouraged to, and should, read Deutsche Bank’s opinion carefully and in its entirety, including all text and tables.

 

In connection with Deutsche Bank’s role as our financial advisor, and in arriving at its opinion, Deutsche Bank has, among other things:

 

 

Deutsche Bank did not assume responsibility for independent verification of, and has not independently verified, any information, whether publicly available or furnished to it, concerning us or Medco, including, without limitation, any financial information or forecasts considered in connection with the rendering of its opinion. Accordingly, for purposes of its opinion, Deutsche Bank assumed and relied upon the accuracy and completeness of all such information. Deutsche Bank did not conduct a physical inspection of any of our properties or assets, and did not prepare or obtain any independent evaluation or appraisal of any of our assets or liabilities. With respect to the financial forecasts we made available to Deutsche Bank and which it used in its analyses, Deutsche Bank has assumed that they were reasonably prepared on bases reflecting the best currently available estimates and judgments of our management as to the matters covered thereby. In rendering

its opinion, Deutsche Bank expressed no view as to the reasonableness of such forecasts or the assumptions on which they are based. Deutsche Bank’s opinion was necessarily based upon economic, market and other conditions as in effect on, and the information made available to it as of, the date of the opinion.

 

For purposes of rendering its opinion, Deutsche Bank assumed that the final terms of the merger agreement would not differ materially from the terms set forth in the draft it had reviewed. Deutsche Bank also assumed that, in all respects material to its analysis:

 

 

Deutsche Bank also assumed that all material governmental, regulatory or other approvals and consents required in connection with the consummation of the merger would be obtained and that in connection with obtaining any necessary governmental, regulatory or other approvals and consents, or any amendments, modifications or waivers to any agreements, instruments or orders to which either Medco or PolyMedica is a party or is subject or by which it is bound, no limitations, restrictions or conditions would be imposed or amendments, modifications or waivers would be made that would have a material adverse effect on Medco or PolyMedica or materially reduce the contemplated benefits of the merger.

 

Based upon and subject to the foregoing qualifications, limitations, factors and assumptions and those set forth in the opinion, Deutsche Bank was of the opinion that, as of August 27, 2007, the $53.00 in cash per share of our common stock to be received by the holders of our common stock in the merger was fair, from a financial point of view, to such holders.

 

In connection with rendering its opinion to our Board of Directors on August 27, 2007, Deutsche Bank performed a variety of financial and comparative analyses, including those described below. The following summary of Deutsche Bank’s analyses is not a complete description of the analyses underlying its opinion. The preparation of an opinion is a complex process involving subjective judgments and various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, an opinion is not necessarily susceptible to partial analysis or summary description. In arriving at its opinion, Deutsche Bank made qualitative judgments as to the significance and relevance of each analysis and factor that it considered.

 

Accordingly, Deutsche Bank believes that its analyses and the summary below must be considered as a whole and that selecting portions of its analyses and factors or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analysis, could create a misleading or incomplete view of the processes underlying Deutsche Bank’s analyses and opinion. Deutsche Bank did not form an opinion as to whether any individual analysis or factor, whether positive or negative, considered in isolation, supported or failed to support Deutsche Bank’s opinion. Rather, Deutsche Bank arrived at its ultimate opinion based on the results of all analyses undertaken by it and assessed as a whole, and believes that the totality of the factors considered and analyses it performed in connection with its opinion operated collectively to support its determination as of the date of Deutsche Bank’s opinion as to the fairness of the merger consideration, from a financial point of view, to the holders of our common stock.

 

The financial forecasts and estimates of our future performance provided by our senior management to Deutsche Bank and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In performing its analyses, Deutsche Bank considered industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond our control. No company, transaction, or business used in Deutsche Bank’s analyses as a comparison is identical to us or the proposed merger, and an evaluation of the results of those analyses is not

entirely mathematical. Rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies, business segments or transactions analyzed. Estimates of the financial value of companies or securities do not purport to be appraisals or to reflect the prices at which companies or securities may actually be sold. Accordingly, Deutsche Bank’s analyses and estimates are inherently subject to substantial uncertainty.

 

The merger consideration was determined through negotiation between us and Medco and the decision to enter into the merger agreement was solely that of our Board of Directors. Deutsche Bank’s opinion and financial analyses were only one of many factors considered by our Board of Directors in its evaluation of the proposed merger and should not be viewed as determinative of the views of the Board of Directors or management with respect to the merger or the merger consideration. Deutsche Bank’s opinion was provided to our Board of Directors to assist it in connection with its consideration of the proposed merger and does not constitute a recommendation to any person, including the holders of our common stock as to how to vote with respect to the proposed merger.

 

The following is a summary of the material financial analyses underlying Deutsche Bank’s opinion, dated August 27, 2007, that Deutsche Bank presented to our Board of Directors in connection with the merger at a meeting of our Board of Directors on August 27, 2007. The order of the analyses described below does not represent relative importance or weight given to those analyses by Deutsche Bank. The financial analyses summarized below include information presented in tabular format. In order to fully understand Deutsche Bank’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Deutsche Bank’s financial analyses.

 

Selected Publicly Traded Companies Analysis.   Deutsche Bank reviewed certain financial information and calculated commonly used valuation measurements for us and compared them to the same metrics derived from publicly available information for each of the Selected Companies (defined below).

 

The Selected Companies forming the group to which PolyMedica was compared were comprised of three subcategories: (i) Pharmacy Benefit Manager (or PBM) companies (referred to as PBM Companies) consisting of Express Scripts, Inc., Healthextras, Inc. and Medco, (ii) medical supply distribution companies (referred to as Distributor Companies) consisting of AmerisourceBergen Corp., Cardinal Health, Inc., Henry Schein, Inc., McKesson Corp., MWI Veterinary Supply, Inc., Owens & Minor, Inc., Patterson Companies, Inc. and PSS World Medical, Inc., and (iii) chronic care management companies (referred to as Chronic Care Management Companies) consisting of Healthways, Inc., Matria Healthcare, Inc. and Omnicare, Inc.

 

The financial information and valuation measurements reviewed by Deutsche Bank included, among other things:

 

 

Estimates for the Selected Companies were based on IBES consensus estimates. Estimates for us were based on IBES consensus estimates and on management forecasts provided to Deutsche Bank by us.

 

Deutsche Bank calculated the CY2007E TEV/EBITDA multiples for us and for each of the Selected Companies, as well as the median CY2007E TEV/EBITDA multiples for each of the PBM Companies, the Distributor Companies and the Chronic Care Management Companies. Deutsche Bank similarly calculated the CY2008E P/E multiples for us and for each of the Selected Companies, as well as the median CY2008E P/E

Multiples for each of the PBM Companies, the Distributor Companies and the Chronic Care Management Companies. The following table indicates the comparisons of the median ratios to our ratios based on both IBES estimates and management estimates:

 

 

Based on the foregoing EBITDA multiples, Deutsche Bank derived a reference range of CY2007E TEV/EBITDA multiples of 10.5x to 13.5x for us, which implied a range of per share values for our common stock of $37.50 to $49.00, relative to the merger consideration of $53.00 per share. Additionally, based on the foregoing P/E multiples, Deutsche Bank derived a reference range of CY2008E P/E multiples of 16.5x to 19.5x for us, which implied a range of per share values for our common stock of $43.00 to $50.50, relative to the merger consideration of $53.00 per share.

 

Although the Selected Companies were compared to us for purposes of these analyses, Deutsche Bank noted that no Selected Company is identical to us because of differences between the business mix, operations and other characteristics of us and the Selected Companies. In evaluating the Selected Companies, Deutsche Bank made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of us, such as the impact of competition on us and on the industry generally, industry growth and the absence of any adverse material change on the financial condition and prospects of the Company, the industry or the markets generally. Mathematical analysis (such as determining the average or median) is not in itself a meaningful method of using the data derived from the Selected Companies.

 

Selected Precedent Transaction Analysis.   Deutsche Bank reviewed and compared the proposed financial terms of the merger to corresponding publicly available financial terms for recent precedent transactions that Deutsche Bank deemed generally comparable to the merger. Each of these transactions was publicly announced on or after July 11, 2000 and was selected based on the similarity of the products and services offered and markets served by the target company in each of the transactions. The selected precedent transactions, in order of announcement date, were:

 

 

 

 

For each of the precedent transactions Deutsche Bank derived the ratio of the target’s TEV as of the announcement date of the transaction to the target’s latest twelve-month (referred to as LTM) EBITDA.

Deutsche Bank also calculated the mean and median multiples of TEV to LTM EBITDA for the precedent transactions, as shown in the following table:

 

 

Based on the foregoing, Deutsche Bank derived a reference range of TEV/LTM EBITDA transaction multiples of 13.0x to 17.0x, which implied a range of per share values for our common stock of $40.00 to $52.00, relative to the merger consideration of $53.00 per share.

 

Discounted Cash Flow Analysis.   Deutsche Bank calculated the discounted cash flow values for us as the sum of (i) the net present values of the estimated future free cash flows that we would generate for the fiscal years 2008 through 2012, plus (ii) a terminal value at the end of that period. The estimated future cash flows were based on our management’s projections. The range of estimated terminal values was calculated by applying terminal value multiples ranging from 10.5x to 13.5x to estimated 2012 EBITDA. The terminal value multiples range was based on the TEV/LTM EBITDA multiples of the Selected Companies. The present value of the free cash flows and terminal values were calculated using discount rates ranging from 9% to 11%. The discount rate ranges were selected by performing weighted average cost of capital (“WACC”) analyses of the Selected Companies. Based on this analysis, and assuming a midpoint WACC of 10%, Deutsche Bank calculated the range of present values of the terminal value as $1,144 million to $1,470 million and the present value of unlevered free cash flows as $247 million. The discounted cash flow analysis resulted in an implied per share value ranging from a low of $48.50 to a high of $59.50.

 

General.   As described above, Deutsche Bank’s opinion to our Board of Directors was among many factors taken into consideration by our Board of Directors in making its determination to approve the merger agreement and recommend the merger proposal. Such decisions were solely those of our Board of Directors. The opinion of Deutsche Bank was provided to our Board of Directors and does not constitute a recommendation to any person, including the holders of our common stock, as to how such person should vote or act on any matter related to the merger proposal.

 

Under the terms of Deutsche Bank’s engagement letter, we have agreed to pay Deutsche Bank a fee of $7 million for its services in connection with the merger, $1 million of which will be payable upon the first to occur of the closing of the merger or the date which is 120 days after the date of delivery of the opinion and the balance of which is contingent upon consummation of the merger. In addition, we have also agreed to reimburse Deutsche Bank for its expenses, and to indemnify Deutsche Bank against certain liabilities, in connection with its engagement.

 

Deutsche Bank is an affiliate of Deutsche Bank AG (together with its affiliates, the “DB Group”). One or more members of the DB Group have, from time to time, provided investment banking, commercial banking (including extension of credit) and other financial services to us for which it has received compensation, including in 2006, acting as Joint Bookrunner of a public offering of our $180,000,000 aggregate principal amount of convertible subordinated notes due 2011, and currently participating in our revolving credit facility. One or more members of the DB Group have, from time to time, provided investment banking and commercial banking (including extension of credit) services to Medco for which it has received compensation, including currently participating in Medco’s revolving credit facility. Members of the DB Group may, in the future, provide investment and commercial banking services to Medco or us, for which we would expect DB Group to receive compensation. In the ordinary course of business, members of the DB Group may actively trade in the securities and other instruments and obligations of Medco or PolyMedica for their own accounts and for the accounts of their customers. Accordingly, the DB Group may at any time hold a long or short position in such securities, instruments and obligations.

 

We selected Deutsche Bank as our financial advisor in connection with the merger due to Deutsche Bank’s reputation as an internationally recognized investment banking firm with substantial experience in similar transactions. Deutsche Bank, as part of its investment banking services, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, strategic transactions,

corporate restructurings, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes.

 

Certain Effects of the Merger

 

If the merger agreement is approved by our shareholders and certain other conditions to the closing of the merger are either satisfied or waived, a wholly-owned subsidiary of Medco created solely for the purpose of engaging in the transactions contemplated by the merger agreement, will be merged with and into us, and we will be the surviving corporation. When the merger is completed, we will cease to be a publicly traded company and will instead become a wholly-owned subsidiary of Medco.

 

When the merger is completed, each share of our common stock issued and outstanding immediately prior to the effective time of the merger (other than shares owned by us, Medco or any of their respective direct or indirect wholly-owned subsidiaries) will be converted into the right to receive $53.00 in cash, without interest.

 

In connection with the merger, all outstanding options to purchase shares of our common stock, whether vested or unvested, will be cancelled and each holder of an option, whether or not vested, shall be paid in full satisfaction of such option, an amount of cash equal to the difference, if any, between the $53.00 per share merger consideration and the exercise price per share of the option, multiplied by the number of shares subject to the option, without interest and less any applicable withholding tax. All shares of common stock granted subject to vesting or other lapse pursuant to any PolyMedica stock incentive or similar plan will vest and become free of such restrictions.

 

The benefit of the merger to our shareholders is the right to receive $53.00 in cash, without interest, for each share of our common stock. The detriments are that our shareholders will cease to have ownership interests in PolyMedica or rights as PolyMedica shareholders. Therefore, our shareholders will not participate in any future earnings or growth of PolyMedica and will not benefit from any appreciation in value of PolyMedica. An additional detriment is that our shareholders’ receipt of payment for their shares generally will be a taxable transaction for United States federal income tax purposes. See “The Merger — Material United States Federal Income Tax Consequences of the Merger.”

 

Our common stock is currently registered under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, and is quoted on the NASDAQ Global Select Market under the symbol “PLMD”. As a result of the merger, PolyMedica will be a wholly-owned subsidiary of Medco, the common stock will cease to be quoted on the NASDAQ Global Select Market and there will be no public market for our common stock. In addition, registration of the common stock under the Exchange Act will be terminated and we will no longer be required to file periodic reports with the SEC on account of our common stock.

 

When the merger becomes effective, the directors and officers of the wholly-owned subsidiary of Medco that will be merged with and into us will be the directors and officers of the surviving corporation. Our Articles of Organization and By-Laws will be amended and restated in their entirety as of the effective time of the merger to be substantially in the forms attached to the merger agreement.

 

Under the terms of the merger agreement, Medco has generally agreed to cause the surviving corporation to indemnify our current officers and directors for any acts or omissions in their capacity as an officer or director occurring on or before the effective time of the merger, and Medco has generally agreed to provide for liability insurance for a period of six years from and after the effective time of the merger, subject to certain conditions.

 

Effects on PolyMedica if the Merger is Not Completed

 

In the event that the merger agreement is not approved by our shareholders or if the merger is not completed for any other reason, our shareholders will not receive any payment for their shares in connection with the merger. Instead, we will remain an independent public company and our common stock will continue to be listed on the NASDAQ Global Select Market. In addition, if the merger is not completed, we expect that management will operate our business in a manner similar to that in which it is being operated today and that our shareholders will continue to be subject to the same risks and opportunities as they currently are.

Furthermore, if the merger is not completed, the announcement of the proposed transaction may result in risks associated with diversion of management and employee attention, employee attrition and the effect on customer and vendor relationships.

 

Accordingly, if the merger is not consummated, there can be no assurance as to the effect of these risks and opportunities on the future value of your shares of our common stock. In the event the merger is not completed, our Board of Directors will continue to evaluate and review our business operations, properties, dividend policy and capitalization, among other things, make such changes as are deemed appropriate and continue to seek to identify strategic alternatives to enhance shareholder value. If the merger agreement is not approved by our shareholders or if the merger is not consummated for any other reason, there can be no assurance that any other transaction acceptable to us will be offered or that our business, prospects or results of operation will not be adversely impacted.

 

If the merger agreement is terminated, under certain circumstances, we will be obligated to pay a termination fee of $52,500,000, plus expenses of up to $6,000,000, to Medco. For a description of the circumstances triggering payment of the termination fee see “Proposal 1 — The Merger Agreement — Expenses and Termination Fee” beginning on page 42 of this proxy statement.

 

Interests of Our Directors and Executive Officers in the Merger

 

In addition to their interests in the merger as shareholders, certain of our executive officers and directors have interests in the merger that differ from, or are in addition to, your interests as a shareholder. In considering the recommendation of our Board of Directors to vote “FOR” the approval of the merger agreement, you should be aware of these interests. Our Board of Directors was aware of, and considered the interests of, our directors and executive officers in approving the merger agreement, the merger and the transactions contemplated by the merger agreement. All interests are described below, to the extent material, and, except as described below, such persons have, to our knowledge, no material interest in the merger that differ from your interests generally.

 

Stock Options.   Like many of our employees, our directors and officers participate in our stock option programs. The merger agreement provides that at the effective time all outstanding options to purchase shares of our common stock, whether vested or unvested, will be cancelled and each holder of an option, whether or not vested, shall be paid in full satisfaction of such option, an amount of cash equal to the difference, if any, between the $53.00 per share merger consideration and the exercise price per share of the option, multiplied by the number of shares subject to the option, without interest and less any applicable withholding tax.

 

Based on the number and exercise prices of options held on September 10, 2007 by our executive officers and directors as set forth in the following table, our executive officers and directors will receive the amounts set forth in the table below (before any applicable state and federal withholding taxes) in settlement of their respective options if the merger is completed.

 

Restricted Stock.   In addition, all shares of common stock granted subject to vesting or other lapse restrictions pursuant to any PolyMedica stock incentive or similar plan, including performance-based restricted shares, granted to our executive officers and directors under our 2000 Stock Incentive Plan, will vest and become free of such restrictions, if any, and the stock will be converted into the right to receive $53.00 per share, the merger consideration, without interest and less applicable withholding taxes. As of September 10, 2007, the following executive officers and directors held shares of restricted common stock, whose vesting will accelerate in connection with the merger, and will receive the amounts set forth in the table below (before any applicable state and federal withholding taxes) in settlement of their respective shares of restricted common stock if the merger is completed. The table below sets forth such outstanding restricted shares and options, assuming a closing of November 2, 2007.

The following table sets forth equity-award payments that will be made to PolyMedica current and past (during the fiscal year ended March 31, 2007) directors and senior members of PolyMedica management if the merger is completed:

 

 

 

 

Severance Provisions in Employment Agreements.   We have previously entered into employment agreements with change in control severance provisions with our five named executive officers.

 

The respective severance provisions for Mr. Ryan, Mr. Jones, Mr. Farrell and Mr. Anderson provide that if the executive officer is terminated “without cause” or the executive officer terminates his employment for “good reason” within twenty-four months following a “change in control date” (each as defined in the employment agreement), we are required to:

 

to (a) 3.3, multiplied by (b) the “base amount” as defined under Section 280G of the Internal Revenue Code, sufficient to pay for any additional tax imposed on the executive pursuant to Section 280G and any additional interest or penalties imposed on the executive with respect to such tax, plus applicable federal, state and local taxes with respect to the gross-up amount.

 

The severance provision for Mr. Starr provides that, if he is terminated “without cause,” he is entitled to (i) a severance payment equal to 1.5 times the sum of his highest base salary during the three-year period immediately preceding his termination date (or during the period that he was employed by us, if shorter than three years) payable in equal monthly installments over eighteen (18) months, (ii) any deferred compensation, and (iii) continuation of benefits under our health and life insurance plans for eighteen (18) months either directly or by reimbursing the executive. Mr. Starr’s agreement does not include a “good reason” provision, as described above in the other four executive’s agreements.

 

A “change in control” under these agreements will occur upon consummation of the merger. “Good reason” for the executives to terminate employment under the agreements is generally any reduction in compensation or benefits, loss of title or position, significant diminution of duties and responsibilities or relocation requirement.

 

Mr. Ryan’s, Mr. Farrell’s, Mr. Jones’ and Mr. Anderson’s agreements provide that each such executive officer, subject to certain limitations, will receive gross-up payments for excise taxes that may be payable under Section 4999 of the Internal Revenue Code, which we refer to as gross-up payments.

 

It is expected that Mr. Ryan’s and Mr. Anderson’s respective employment agreements will be amended to provide that the severance payments payable under their respective agreements will be paid in 2008 in connection with the closing of the transaction.

 

Mr. Jones has entered into employment arrangements with Medco, and we anticipate Mr. Starr will enter into employment arrangements with Medco, pursuant to which Mr. Jones and Mr. Starr will receive cash payments and Medco equity compensation, subject to and conditioned upon the closing of the transactions to be effected pursuant to the merger agreement and certain conditions set forth in such employment arrangements, that will supersede the severance provisions in their respective existing PolyMedica employment agreements. If the transactions do not close, and also in the case of Mr. Starr, if he does not enter into such employment arrangements with Medco, the severance provisions in Mr. Jones’ and Mr. Starr’s existing PolyMedica employment agreements will remain in effect.

 

New Management Arrangements.   Contemporaneously with the execution and delivery of the merger agreement, Mr. Jones and one other non-executive employee entered into employment arrangements with Medco. While these arrangements set forth the terms of Mr. Jones’ and the other employee’s employment following the closing of the transactions, the arrangements do not have a term and provide that Mr. Jones and the other employee will be at-will employees, subject to participation in Medco’s executive severance plan.

 

We anticipate Mr. Starr will enter into employment arrangements with Medco. The “Cash Payments” information set forth below includes cash retention awards to be paid to Mr. Jones and Mr. Starr by Medco. Medco will also grant restricted stock units to Mr. Jones and Mr. Starr. Mr. Jones will also receive, among other standard employee benefits, an annual base salary and an opportunity for incentive bonus compensation. If Mr. Starr enters into employment arrangements with Medco, we anticipate he will receive similar benefits and anticipate that the described cash award and restricted stock unit grant will be reflected in that arrangement.

 

Mr. Ryan will be employed by Medco following the closing of the transaction, although no definitive agreement has been entered into with respect thereto. Mr. Anderson will continue to be employed during a transition period following the closing of the transaction.

 

Cash Payments.   In connection with the closing of the merger, in addition to the amounts that will become payable as described in the “Severance Provisions in Employment Agreements” section above, Medco will make cash payments in connection with the closing of the transaction or, in the case of Mr. Anderson, following completion of the aforementioned transition period. Medco will also make restricted stock unit grants to Mr. Jones and Mr. Starr pursuant to the Medco 2002 Stock Incentive Plan. The award of the cash

payments and restricted stock unit grants is contingent upon the signing, prior to the effective time, of a letter prepared by Medco (subject to our review and approval, such approval not to be unreasonably withheld), that includes, among other things, (i) the waiver of rights under such employee’s employment agreement with us and the termination of such existing employment agreement at the effective time and (ii) with respect to Mr. Jones and Mr. Starr, a key employee agreement with Medco. Payment of the awards will also be conditioned upon the employee signing a general release of claims; provided, however, Mr. Ryan, Mr. Farrell and Mr. Anderson will receive their respective severance payments pursuant to the terms of their respective employment agreements, and Mr. Ryan, Mr. Jones and Mr. Anderson will receive gross-up payments pursuant to their respective employment agreements. The cash payment to Mr. Ryan and a portion of the cash payment to Mr. Jones were conditioned upon the closing of an acquisition of a third party by PolyMedica, which acquisition has now closed.

 

The following table sets forth cash payments and Medco equity payments to which senior members of PolyMedica management will, subject to the conditions described above, be entitled if the merger is completed:

 

 

 

 

Deferred Compensation Plan.   We have a 2005 Executive Compensation Plan under which executives may participate. The purpose of this plan is to allow participants to defer a portion of their compensation until a future point in time. Upon a change in control, the full value of the participant’s account shall be distributed as a lump sum to the participant or to his beneficiaries as soon as practicable to the extent permitted under Section 409A of the Internal Revenue Code of 1986 and the Treasury Regulations thereunder.

 

Directors’ and Officers’ Indemnification and Insurance.   The merger agreement provides that Medco shall cause the surviving corporation to, and the surviving corporation will indemnify and hold harmless, to the fullest extent permitted by applicable law, each person who at or prior to the effective time of the merger is or was an officer or director of us or any of our subsidiaries, against all claims, liabilities and losses in connection with any claims, suits or actions based on or arising out of acts or omissions of such person in his or her capacity as an officer or director of us or any of our subsidiaries or taken at the request of us or our subsidiaries at or at any time prior to the effective time of the merger.

 

The merger agreement further provides that we will and, if we are unable to, Medco will use its reasonable best efforts to cause the surviving corporation to obtain and fully pay for “tail” insurance policies with a claims period of at least six years from and after the effective time of the merger. If the “tail” insurance

is not obtained for the six-year period commencing immediately after the effective time of the merger, Medco will maintain in effect for a period of six years following the effective time of the merger our current directors’ and officers’ liability insurance covering acts or omissions occurring at or prior to the effective time of the merger for the benefit of the indemnified persons on terms, and in an amount, not less favorable to such individuals than those of our policy in effect as of the date of the merger agreement.

 

Appraisal Rights

 

The Massachusetts legislature adopted the Massachusetts Business Corporation Act, which we refer to as the MBCA, in July 2004, which repealed and replaced the Massachusetts Business Corporation Law, including the provisions related to appraisal rights.

 

General.   Section 13.02(a)(1) of the MBCA generally provides that shareholders of Massachusetts corporations are entitled to appraisal rights in the event of a merger, but an exemption set forth in Section 13.02(a)(1)(A) of the MBCA provides that shareholders are not entitled to appraisal rights in transactions similar to the merger where cash is the sole consideration received by the shareholders. However, in the event that certain persons or entities are determined to have a direct or indirect material financial interest in the merger for purposes of the MBCA, this exemption would be inapplicable with respect to the merger. Accordingly, if such a determination were made, PolyMedica shareholders may be entitled to appraisal rights under Massachusetts law.

 

PolyMedica does not believe that holders of PolyMedica common stock are entitled to appraisal rights in connection with the merger because shareholders will receive only cash for their shares and no director, officer, or controlling shareholder has any direct or indirect material financial interest in the merger other than in their capacity as a shareholder of PolyMedica or a director, officer, employee or consultant of PolyMedica pursuant to a bona fide arrangement with PolyMedica. However, Section 13.02 of the MBCA has not yet been the subject of judicial interpretation. Any shareholder who believes he or she is entitled to appraisal rights and who wishes to preserve those rights should carefully review the following discussion and Sections 13.01 through 13.31 of Part 13 of the MBCA, attached as Annex C to this Proxy Statement, which sets forth the procedures to be complied with in perfecting any such rights. Failure to strictly comply with the procedures specified in Part 13 of the MBCA would result in the loss of any appraisal rights to which such shareholder may be entitled.

 

Notice of Intent and Demand for Payment.   Any holder of PolyMedica common stock wishing to seek appraisal under Part 13 of the MBCA must satisfy each of the following conditions:

 

 

Generally, a shareholder may assert appraisal rights only if the shareholder seeks them with respect to all of the holder’s shares of stock. A shareholder of record for more than one beneficial shareholder may assert appraisal rights with respect to fewer than all the shares registered in such shareholder’s name as holder of record, provided that such shareholder asserts appraisal rights with respect to all shares owned by each such beneficial shareholder and notifies PolyMedica in writing of the name and address of each beneficial shareholder on whose behalf such shareholder is asserting appraisal rights. Shareholders who hold their shares in brokerage accounts or other nominee forms and who wish to exercise appraisal rights are

urged to consult with their brokers to determine the appropriate procedures for the making of a demand for appraisal by the nominee.

 

Any shareholder wishing to exercise appraisal rights is urged to consult legal counsel before attempting to exercise appraisal rights.

 

Delisting and Deregistration of Our Common Stock

 

If the merger is completed, our common stock will be delisted from the NASDAQ Global Select Market and deregistered under the Exchange Act and we will no longer file periodic reports with the Securities and Exchange Commission.

 

Accounting Treatment

 

We expect that the merger will be accounted for by Medco using the purchase method of accounting, in accordance with generally accepted accounting principles. This means that Medco will record as goodwill the excess, if any, of the purchase price over the fair value of our identifiable assets, including intangible assets, and liabilities.

 

Material United States Federal Income Tax Consequences of the Merger

 

The following is a discussion of the material U.S. federal income tax consequences of the merger to U.S. holders (as defined below) whose shares of our common stock are converted into the right to receive cash under the merger. The discussion is based upon the Internal Revenue Code of 1986, as amended, the Treasury regulations promulgated thereunder, Internal Revenue Service rulings and judicial and administrative decisions in effect as of the date of this proxy statement, all of which are subject to change (possibly with retroactive effect) or to different interpretations. The following discussion does not purport to consider all aspects of federal income taxation that might be relevant to our shareholders. This discussion applies only to shareholders who, on the date on which the merger is completed, hold shares of our common stock as a capital asset. The following discussion does not address taxpayers subject to special treatment under U.S. federal income tax laws, such as insurance companies, financial institutions, dealers in securities, tax-exempt organizations, mutual funds, real estate investment trusts, investors in pass-through entities, S corporations and taxpayers subject to the alternative minimum tax. In addition, the following discussion may not apply to shareholders who acquired their shares of our common stock upon the exercise of employee stock options or otherwise as compensation for services or through a tax-qualified retirement plan or who hold their shares as part of a hedge, straddle, conversion transaction or other integrated transaction. If our common stock is held through a partnership, the U.S. federal income tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships that are holders of our common stock and partners in such partnerships are urged to consult their own tax advisors regarding the tax consequences to them of the merger.

 

The following discussion does not address potential foreign, state, local and other tax consequences of the merger. All shareholders are urged to consult their own tax advisors regarding the U.S. federal income tax consequences, as well as the foreign, state and local tax consequences, of the disposition of their shares in the merger.

 

For purposes of this summary, a “U.S. holder” is a holder of shares of our common stock, who is, for U.S. federal income tax purposes:

 

 

Except with respect to the backup withholding discussion below, this discussion does not discuss the tax consequences to any shareholder who, for U.S. federal income tax purposes, is not a U.S. holder.

 

For U.S. federal income tax purposes, the merger will be treated as a taxable sale or exchange of our common stock for cash by each of our shareholders. Accordingly, the U.S. federal income tax consequences to a shareholder receiving cash in the merger will generally be as follows:

 

 

Cash payments made pursuant to the merger will be reported to our shareholders and the Internal Revenue Service to the extent required by the Internal Revenue Code of 1986, as amended, and applicable Treasury regulations. These amounts will ordinarily not be subject to withholding of U.S. federal income tax. However, backup withholding of the tax at applicable rates will apply to all cash payments to which a U.S. holder is entitled pursuant to the merger agreement if such holder (i) fails to provide a taxpayer identification number (Social Security number, in the case of individuals, or employer identification number, in the case of other shareholders), certify that such number is correct, and otherwise comply with the backup withholding rules, (ii) has received notice from the Internal Revenue Service of a failure to report all interest and dividends required to be shown on the shareholder’s U.S. federal income tax returns, or (iii) is subject to backup withholding in certain other cases. Accordingly, each U.S. holder will be asked to complete and sign a Substitute Form W-9, which is to be included in the appropriate letter of transmittal for the shares of our common stock, in order to provide the information and certification necessary to avoid backup withholding or to otherwise establish an exemption from backup withholding tax, unless an exemption applies and is established in a manner satisfactory to the paying agent.

 

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability provided the required information is timely furnished to the Internal Revenue Service.

 

Shareholders considering the exercise of their appraisal rights should consult their own tax advisors concerning the application of U.S. federal income tax laws to their particular situations as well as any consequences of the exercise of such rights arising under the laws of any other taxing jurisdiction.

 

THE FOREGOING DISCUSSION OF CERTAIN MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES IS INCLUDED FOR GENERAL INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSTRUED AS, LEGAL OR TAX ADVICE TO ANY HOLDER OF SHARES OF OUR COMMON STOCK. WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO YOU (INCLUDING THE APPLICATION AND EFFECT OF ANY STATE, LOCAL OR FOREIGN INCOME AND OTHER TAX LAWS) OF THE RECEIPT OF CASH IN EXCHANGE FOR SHARES OF OUR COMMON STOCK PURSUANT TO THE MERGER.

 

Regulatory Approvals

 

The HSR Act and related rules provide that transactions such as the merger may not be completed until the parties submit a Notification and Report Form to the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission and certain waiting period requirements have been satisfied. On September 5, 2007, PolyMedica and Medco each filed its Notification and Report Form and the applicable waiting period expired at 11:59 p.m. on October 5, 2007.

 

Except as noted above with respect to the required filings under the HSR Act and the filing of articles of merger in Massachusetts at or before the effective time of the merger, we are not aware of any other material government or regulatory requirements or approvals required for the completion of the merger.

 

Past Contacts, Transactions or Negotiations

 

During the quarter ended September 30, 2006, PolyMedica entered into an agreement with Medco whereby Medco provides PolyMedica with pharmacy fulfillment services. The integration of Medco’s services pursuant to this agreement was substantially complete as of March 31, 2007. We expect the pharmacy fulfillment services to reduce our need to invest significant capital resources in dispensing certain medications. PolyMedica also agreed to work with Medco to develop ways to serve and improve outcomes for our respective diabetes patients. It is anticipated that these arrangements would be amended in the event the acquisition by Medco is effected.

 

Also during the quarter ended September 30, 2006, PolyMedica entered into an agreement with Medco whereby PolyMedica serves as a supplier of diabetes testing supplies to those Medco beneficiaries that are eligible to receive Medicare benefits. PolyMedica began providing services to Medco pursuant to this agreement on April 2, 2007.

 

Finally, PolyMedica has been a participating pharmacy within Medco’s prescription drug plans since October 31, 2006.

 

Litigation

 

On August 29, 2007, James F. Groen filed a purported class action complaint in the Massachusetts Superior Court, Civil Action No. 07-3352, against PolyMedica, our directors, Medco and Macq Corp. The complaint alleges that the directors breached their fiduciary duties and that PolyMedica, Medco and Macq Corp. aided and abetted the alleged breach of fiduciary duty. The complaint seeks, among other relief, class certification of the lawsuit, a declaration that the merger agreement is unlawful and unenforceable, an order enjoining the proposed transaction, compensatory damages to the putative class, and an award of attorneys’ and experts’ fees to the plaintiff. On September 27, 2007, Groen served a First Amended Purported Class Action Complaint, C.A. No. 07-3352. The amended complaint repeats the allegations of the original complaint and adds claims alleging that the individual defendants breached their fiduciary duties by disseminating allegedly misleading statements in the proxy statement regarding, among other things, the sale process and the analyses prepared by PolyMedica’s financial advisors, and that PolyMedica and the Medco defendants aided and abetted those breaches of duty.

 

Also, on September 10, 2007, Ronald Charles White filed a purported class action complaint in the Massachusetts Superior Court, Civil Action No. 07-03509, against PolyMedica and our directors. The complaint alleges that the directors breached their fiduciary duties to PolyMedica’s shareholders and that PolyMedica directly breached and/or aided and abetted the alleged breach of fiduciary duty. The complaint seeks, among other relief, class certification of the lawsuit, an order enjoining the proposed transaction, an order rescinding the merger in the event the transaction is consummated or awarding rescissory damages, and an award of attorneys’ and experts’ fees to the plaintiff.

 

Finally, on September 12, 2007, Steve Hill filed a purported class action complaint in the Massachusetts Superior Court, Civil Action No 07-3527, against PolyMedica, our directors, Medco and Macq Corp. The complaint alleges that the directors breached their fiduciary duties of care, good faith and loyalty, that the directors and PolyMedica breached their fiduciary duty of disclosure, and that all defendants aided and abetted the directors’ alleged breach of fiduciary duty. The complaint seeks, among other relief, class certification of the lawsuit, an order enjoining the proposed transaction under the present terms and requiring defendants to

make full and fair disclosure of the proposed transaction, an order rescinding the merger in the event the transaction is consummated, and an award of attorneys’ and experts’ fees to the plaintiff.

 

The parties to the above referenced purported class actions have preliminarily agreed to settle the actions. In accordance with that agreement, certain additional and amended disclosures have been included in this proxy statement. The proposed settlement of these actions is subject to, among other things, the execution of final documentation and court approval. Upon final approval of the settlement, the pending actions shall be dismissed with prejudice.

 

Anti-Takeover Considerations

 

We are subject to the provisions of Chapter 110C of the Massachusetts General Laws, entitled “Regulation of Take-Over Bids in the Acquisition of Corporations.” Under Chapter 110C, no offeror may make a “take-over bid” for the stock of a “target company” without publicly announcing the terms of the bid, filing certain information with the Secretary of the Commonwealth of Massachusetts and the target company and paying a fee to the Secretary of the Commonwealth. The Secretary of the Commonwealth may hold a hearing to determine if adequate disclosure has been made and if the take-over bid is fair. A “target company” is defined as any Massachusetts corporation, or any corporation with its principal place of business in Massachusetts, whose securities are or are to be the subject of a “take-over bid.” We qualify as a target company. A “take-over bid” is defined as any acquisition or offer to acquire stock of a target company where, after such acquisition, the offeror and its affiliates will be the beneficial owner directly or indirectly of more than 10% of a class of the target company’s stock. However, a “take-over bid” does not include any bid to which the target company’s Board of Directors consents, if the Board of Directors has recommended the acceptance of the bid and the terms thereof to the shareholders. For purposes of Chapter 110C, our Board of Directors specifically approved and consented to the merger and recommended the acceptance of the terms thereof to our shareholders. Therefore, the merger is not a “take-over bid” under Chapter 110C.

 

Chapter 110D of the Massachusetts General Laws, which is entitled “Regulation of Control Share Acquisitions,” provides, in general, that any shareholder who acquires 20% or more of the outstanding voting stock of a corporation subject to this statute may not vote that stock unless the shareholders of the corporation so authorize. However, Chapter 110D permits a corporation to provide in its articles of organization or by-laws that the provisions of the chapter shall not apply to control share acquisitions of such corporation. As permitted by Chapter 110D, the PolyMedica By-Laws expressly state that Chapter 110D shall not apply to control share acquisitions of PolyMedica, and therefore, the merger is exempt from the provisions of Chapter 110D.

 

We are also subject to the provisions of Chapter 110F of the Massachusetts General Laws, the so-called “Business Combination Statute.” Under Chapter 110F, a Massachusetts corporation with over 200 stockholders, such as us , may not engage in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless (i) the interested stockholder obtains the approval of the Board of Directors prior to becoming an interested stockholder, (ii) the interested stockholder acquires 90% of our outstanding voting stock (excluding shares held by certain of our affiliates) at the time it becomes an interested stockholder, or (iii) the business combination is approved by both the Board of Directors and at a meeting of the stockholders by the holders of at least two-thirds of our outstanding voting stock (excluding shares held by the interested stockholder). An “interested stockholder” is a person who, together with affiliates and associates, owns (or at any time within the prior three years did own) 5% or more of our outstanding voting stock. A “business combination” includes a merger, a stock or assets sale, and other transactions resulting in a financial benefit to the stockholder. Our Board of Directors approved the merger, exempting the merger from the provisions of Chapter 110F.

 

Form of the Merger

 

Subject to the terms and conditions of the merger agreement and in accordance with the MBCA, at the effective time of the merger, a wholly-owned subsidiary of Medco created solely for the purpose of engaging in the transactions contemplated by the merger agreement, referred to as Macq Corp., will merge with and into us. The separate corporate existence of Macq Corp. will cease, and we will continue as the surviving corporation and will become a wholly-owned subsidiary of Medco.

 

Effective Time of the Merger

 

The merger will become effective upon the filing of the articles of merger with the Secretary of the Commonwealth of Massachusetts or at such later time as is agreed upon by Medco, Macq Corp. and us. The closing of the merger will occur on a date specified by Medco, Macq Corp. and us, which shall be no later than the second business day after the conditions to effect the merger set forth in the merger agreement have been satisfied or waived unless otherwise agreed by Medco, Macq Corp. and us. Although we expect to complete the merger no later than the second business day after the special meeting of our shareholders, we cannot specify when, or assure you that, Medco, Macq Corp. and we will satisfy or waive all conditions to the merger.

 

Directors and Officers of the Surviving Corporation

 

The directors and officers of Macq Corp. immediately prior to the effective time of the merger will be the initial directors and officers of the surviving corporation. The directors and officers will serve in accordance with the bylaws of the surviving corporation until their respective successors are duly elected or appointed and qualified.

 

Articles of Organization and By-Laws of PolyMedica

 

At the effective time of the merger, our Articles of Organization and By-Laws will be amended and restated in their entirety to be substantially in the forms attached to the merger agreement.

 

Merger Consideration

 

At the effective time of the merger, each outstanding share of our common stock, other than shares owned by Medco or Macq Corp., will be converted into the right to receive $53.00 per share in cash, without interest. Shares of our common stock owned by Medco or Macq Corp. will be cancelled without any payment. Our shareholders will receive the merger consideration after exchanging their PolyMedica stock certificates in accordance with the instructions that will be sent with the letter of transmittal to be sent to our shareholders shortly after completion of the merger. The price of $53.00 per share was determined through arm’s-length bidding and negotiations between Medco and us.

 

Medco, the surviving corporation and the paying agent shall be entitled to deduct and withhold from the consideration otherwise payable to any holder of shares of our common stock such amounts that it is required to deduct and withhold with respect to making such payment under the Internal Revenue Code, or any other applicable state, local or foreign tax law.

 

Effect on Stock Options and Restricted Common Stock

 

At the effective time, all options outstanding immediately prior to the effective time that represent the right to acquire shares of our common stock granted under our stock plans will be cancelled and each holder of an option, whether or not vested, will be paid in full satisfaction of such option, a cash amount equal to the option consideration for each share of our common stock then subject to the option, including any such shares as to which the option has not vested. For purposes of the merger agreement, “option consideration” means, with respect to any share of our common stock issuable under a particular option, an amount equal to the excess, if any, of (i) $53.00 in cash, without interest and less any applicable withholding tax over (ii) the exercise price payable in respect of such share of our common stock issuable under such option.

 

Each share of our common stock outstanding immediately prior to the effective time, subject to vesting or other lapse restrictions granted under our stock plans will be converted as of the effective time into the right to receive $53.00 in cash, without interest and less any applicable withholding tax. For more information as it

relates to the stock options and shares of restricted common stock held by PolyMedica’s directors and executive officers, please see “The Merger — Interests of our Directors and Executive Officers in the Merger.”

 

Payment Procedures

 

Prior to the effective time of the merger, Medco will designate a bank or trust company reasonably acceptable to us to act as the paying agent under the merger agreement and Medco will deposit with the paying agent cash in an amount equal to the aggregate cash consideration payable in the merger. As soon as practicable following the effective time of the merger, but in no event later than five business days following the effective time, the paying agent will mail to each holder of record of our common stock a letter of transmittal and instructions for use in effecting the surrender of the stock certificate(s) representing shares of our common stock in exchange for cash. The letter of transmittal will specify that delivery will be effected, and risk of loss and title to the certificates representing shares of our common stock will pass, only upon actual delivery of the certificates to the paying agent. You should not return your stock certificate(s) with the enclosed proxy. Upon surrender to the paying agent of a stock certificate representing shares of our common stock, together with a duly completed and validly executed letter of transmittal and any other documents that may be reasonably required by the paying agent, you will be entitled to receive from the paying agent $53.00 in cash, without interest and less any applicable withholding taxes, for each share represented by the stock certificate, and the certificate surrendered will be cancelled.

 

From and after the effective time of the merger, until it is surrendered, each certificate that previously evidenced shares of our common stock will be deemed to represent only the right to receive $53.00 in cash per share represented by such certificate less any applicable withholding taxes. No interest will be paid or accrue on any merger consideration payable upon the surrender of the share certificates representing shares of our common stock.

 

In the event of a transfer of ownership of our common stock that is not registered in our records, the cash consideration for shares of our common stock may be paid to a person other than the person in whose name the surrendered certificate is registered if:

 

 

 

The surviving corporation may request the paying agent to deliver to it any funds undistributed to our shareholders at any time following the six-month anniversary of the effective time of the merger. Any holders of PolyMedica share certificates who have not surrendered such certificates in compliance with the above-described procedures may thereafter look only to either Medco or the surviving corporation for payment of the merger consideration to which they are entitled. Any merger consideration remaining unclaimed when it would otherwise escheat to or become property of any governmental authority will be forfeited to Medco.

 

If any PolyMedica share certificate has been lost, stolen or destroyed, upon the making of an affidavit by the owner of such certificate claiming such certificate has been lost, stolen or destroyed and, if required by the surviving corporation, the posting of a bond by such person in such reasonable amount as Medco may direct as indemnity against any claim that may be made with respect to that certificate, the paying agent will deliver to such person the merger consideration, without interest and less any applicable withholding taxes, with respect to the shares formerly represented by such lost, stolen or destroyed certificate.

 

Share certificates should not be surrendered by our shareholders before the effective time of the merger and should be sent only pursuant to instructions that will be sent with in the letter of transmittal to our shareholders promptly following the effective time of the merger. In all cases, the merger consideration will be

provided only in accordance with the procedures set forth in this proxy statement and such letters of transmittal.

 

The merger consideration paid to you upon exchange of your shares of our common stock will be paid in full satisfaction of all rights relating to the shares of our common stock.

 

Conditions to the Merger

 

The parties’ obligations to complete the merger are subject to the following conditions:

 

 

Medco’s and Macq Corp.’s obligations to complete the merger are also subject to the following conditions:

 

 

Our obligation to complete the merger is also subject to the following conditions:

 

 

Material Adverse Effect

 

The merger agreement defines material adverse effect as any change, circumstance, event, occurrence or effect that has occurred that, when taken together with all other adverse changes, circumstances, events, occurrences or effects that have occurred, is or is reasonably likely to be, materially adverse to the business, assets, liabilities, results of operations or financial condition of us and our subsidiaries taken as a whole, except to the extent resulting from (i) (A) the general economic conditions in the United States or any change in any United States federal or state statute, rule or regulation or any change in Medicare, Medicaid or other governmental healthcare reimbursement policy, or (B) the commencement, continuation or escalation of a war or a material act of terrorism; provided that with respect to clauses (i)(A) and (i)(B), such changes, circumstances, events, occurrences or effects do not adversely affect us and our subsidiaries in a meaningfully disproportionate manner as compared to other companies of similar size in such industries in which we and our subsidiaries operate; (ii) resulting from or attributable to any loss of, or adverse change in, the relationship of us with our customers, employees or suppliers that was proximately caused by the announcement of the merger agreement or the consummation of the merger agreement and the transactions contemplated by the merger agreement or (iii) any decline in the market price or change in trading volume of our capital stock or any failure to meet publicly announced revenue or earnings projections (it being understood that the underlying cause or causes of any such decline, change or failure may be deemed to constitute, in and of itself or themselves, a material adverse effect and may be taken into consideration when determining whether there has occurred a material adverse effect).

 

Indemnification and Insurance

 

The merger agreement provides that from and after the effective time of the merger Medco will cause the surviving corporation to, and the surviving corporation will (i) indemnify and hold harmless, each individual who at or prior to the effective time of the merger is or was a director or officer of us or any of our subsidiaries, whom we refer to as the indemnified persons, against all claims, liabilities, losses, damages, judgments, fines, penalties, costs and expenses in connection with any claim, suit, action, proceeding or investigation based on or arising out of (A) the fact that such indemnified person was a director or officer of us or any of our subsidiaries or (B) acts or omissions of such indemnified person in his or her capacity as a director, officer, employee or agent of us or any of our subsidiaries or taken at the request of us or our subsidiaries at or at any time prior to the effective time of the merger to the fullest extent permitted by the MBCA and (ii) assume all obligations of us and our subsidiaries to the indemnified persons as provided in the Articles of Organization, By-Laws, other organizational documents or certain indemnification agreements of us and our subsidiaries in respect of indemnification and exculpation from liabilities for acts or omissions occurring at or prior to the completion of the merger, which continue in full force and effect in accordance with their respective terms. Medco or the surviving corporation will have the right to assume the defense of indemnification related claims under the indemnification section of the merger agreement.

 

The merger agreement further provides that we will and, if we are unable to, Medco will use its reasonable best efforts to cause the surviving corporation to obtain and fully pay for “tail” insurance policies with a claims period of at least six years from and after the effective time of the merger. If the “tail” insurance is not obtained for the six-year period commencing immediately after the effective time of the merger, Medco will maintain in effect for a period of six years following the effective time of the merger our current directors’ and officers’ liability insurance covering acts or omissions occurring at or prior to the effective time of the merger for the benefit of the indemnified persons on terms, and in an amount, not less favorable to such individuals than those of our policy in effect as the date of the merger agreement. However, if during the six year period the aggregate premiums for such insurance exceed 300% of the current aggregate annual premium, then Medco will provide a directors’ and officers’ insurance policy for the indemnified persons with the best coverage then available at an annual premium of 300% of the current aggregate annual premium.

 

Termination of the Merger Agreement

 

The merger agreement provides that, at any time prior to the consummation of the merger, either before or after the requisite approval of our shareholders has been obtained, the merger agreement may be terminated:

 

 

 

 

 

 

 

 

Expenses and Termination Fee

 

 

 

 

No Solicitation of Competing Proposals

 

Under the merger agreement, we and our representatives may not, except as described in the next paragraph, (i) solicit, initiate, cause, encourage, or knowingly take any other action to facilitate, the making of any inquiry, proposal or offer from any party (other than Medco and its subsidiaries), directly or indirectly, whether in one transaction or a series of transactions, relating to any (A) direct or indirect acquisition of assets of us and our subsidiaries (including securities of subsidiaries, but excluding sales of assets in the ordinary course of business) equal to 20% or more of our consolidated assets or to which 20% or more of our revenues or earnings on a consolidated basis are attributable, (B) direct or indirect acquisition of 20% or more of our outstanding common stock, (C) tender offer or exchange offer that if consummated would result in any party beneficially owning 20% or more of our outstanding common stock or (D) merger, consolidation, share exchange, business combination, joint venture, recapitalization, liquidation, dissolution, reorganization or similar transaction involving us, in each case, other than the transactions to be effected pursuant to the merger agreement, that may reasonably be expected to lead to a takeover, which we collectively refer to as a takeover proposal, or (ii) engage in, continue or otherwise participate in any discussions or negotiations regarding or furnish to any person any non-public information in connection with, any takeover proposal or any inquiry, offer or proposal that may reasonably be expected to lead to a takeover proposal.

 

Notwithstanding the foregoing, however, at any time prior to obtaining approval of the merger from our shareholders, we may, in response to an unsolicited takeover proposal: (i) furnish information with respect to us and our subsidiaries to the person making a bona fide takeover proposal providing for the acquisition of more than 50% of the consolidated assets or total voting power of our equity securities and (ii) participate in discussions or negotiations with the person making such a takeover proposal. Prior to providing any such information or participating in any such discussions or negotiations, however, our Board of Directors, after consultation with its independent financial advisors, must determine in good faith that (x) such takeover proposal constitutes or is reasonably likely to result in a “superior proposal” and (y) that failure to take such action would result in a reasonable probability that our Board of Directors would breach its fiduciary duties

under applicable law. For purposes of the merger agreement, a “superior proposal” means an unsolicited, bona fide written proposal or offer to acquire more than 50% of our equity securities or all or substantially all of our assets and our subsidiaries on a consolidated basis, made by a third party, and which is otherwise on terms and conditions which our Board of Directors determines in good faith (after consultation with outside legal counsel and a financial advisor of national reputation and in light of all relevant circumstances), to be more favorable to our shareholders, from a financial point of view, than the merger with Medco.

 

If prior to obtaining the approval of the merger from our shareholders, our Board of Directors makes a determination that (i) it has received a superior proposal (and it remains a superior proposal after Medco has had an opportunity to increase its price) and (ii) failure to take such action would result in a reasonable probability that our Board of Directors would breach its fiduciary duties under applicable law, our Board of Directors may cause us to enter into an agreement with respect to such superior proposal and concurrently pay the termination fee discussed above.

 

Except as described in the two immediately preceding paragraphs, our Board of Directors may not (i)(A) withhold, withdraw, qualify or modify, or propose publicly to withhold, withdraw, qualify or modify, in a manner adverse to Medco or Macq Corp., the unanimous recommendation of our Board of Directors that our shareholders adopt the merger agreement or (B) approve or recommend or propose publicly to approve or recommend, any transaction involving a takeover proposal or (ii) approve, authorize, permit or cause us or any of our subsidiaries to enter into any letter of intent, memorandum of understanding, agreement in principle or merger, acquisition or similar agreement with respect to any takeover proposal.

 

Representations and Warranties

 

The merger agreement contains representations and warranties that we, Medco and Macq Corp. made to, and solely for the benefit of, each other. The representations and warranties expire at the effective time of the merger. The assertions embodied in those representations and warranties are qualified by information in confidential disclosure schedules that the parties exchanged in connection with signing the merger agreement. While we do not believe that the disclosure schedules contain non-public information that the securities laws require to be publicly disclosed, the disclosure schedules do contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the merger agreement. Accordingly, you should not rely on the representations and warranties as characterizations of the actual state of facts, because (i) they were only made as of the date of the merger agreement or a prior specified date, (ii) in some cases they are subject to a material adverse effect standard or other materiality and knowledge qualifiers and (iii) they are modified in important part by the underlying disclosure schedules. These disclosure schedules contain information that has been included in our prior public disclosures, as well as non-public information. Moreover, information concerning the subject matter of the representations and warranties may have changed since the date of the merger agreement, which subsequent information may or may not be fully reflected in our public disclosures.

 

Our representations and warranties relate to, among other things:

 

 

 

In addition, the merger agreement contains representations and warranties made by Medco and Macq Corp. to us as to, among other things, their organization and standing, corporate power and authority, governmental approvals, information supplied to us for inclusion in this proxy statement, ownership and operation of Macq Corp., the availability of capital resources to consummate the merger and the absence of undisclosed broker’s or similar fees.

 

The representations and warranties in the merger agreement are complicated and not easily summarized. You are urged to read carefully and in their entirety the sections of the merger agreement entitled “Representations and Warranties of PolyMedica” and “Representations and Warranties of Medco and Macq Corp.” in Annex A attached to this proxy statement.

 

Covenants Under the Merger Agreement

 

The merger agreement contains certain covenants that we, Medco and Macq Corp. made to, and solely for the benefit of, each other. Certain of the covenants embodied in the merger agreement are qualified by information in confidential disclosure schedules that the parties exchanged in connection with the execution of the merger agreement. The disclosure schedules contain information that has been included in our general prior public disclosures, as well as additional non-public information.

Conduct of Our Business.   We have agreed in the merger agreement that, until the effective time of the merger, unless Medco otherwise consents, we will use our reasonable best efforts to, and we will cause our subsidiaries to use their reasonable best efforts to:

 

 

In addition, we have agreed that, subject to certain exceptions, until the effective time of the merger, neither we nor any of our subsidiaries will:

 

 

 

Other Covenants.   The merger agreement contains a number of mutual covenants, which subject to certain exceptions, obligate us and Medco to:

 

 

 

The merger agreement also contains covenants requiring us, subject to certain exceptions, to:

 

 

 

Medco agreed, subject to certain exceptions, in the merger agreement to, and to cause the surviving corporation of the merger to:

 

efforts to cause an insurance company to waive (if a replacement plan is insured) under any such replacement plan all limitations as to pre-existing and at-work conditions, if any, with respect to any participation and coverage requirements applicable to each of our employees who was a participant in a PolyMedica medical plan on December 31, 2007 and (B) provide a credit for 2008 under any replacement plan to each of our employees for any co-payments, deductibles and out-of-pocket expenses paid by such employee under a PolyMedica medical plan during the plan year for a PolyMedica medical plan which ends on December 31, 2007 unless there were more than 12 calendar months in such plan year;

 

 

For a discussion of the additional covenants relating to our directors, officers and employees, directors’ and officers’ indemnification and insurance arrangements and our solicitation of other acquisition proposals, see “The Merger — Interests of Our Directors and Executive Officers in the Merger,” “Indemnification and Insurance,” and “No Solicitation of Competing Proposals” on pages 28, 40 and 43, respectively.

 

The covenants in the merger agreement are complicated and not easily summarized. You are urged to read carefully and in its entirety the section of the merger agreement entitled “Additional Covenants and Agreements” in Annex A attached to this proxy statement.

 

Amendment and Waiver

 

The parties may amend the merger agreement at any time before the effective time of the merger. However, after shareholder approval has been obtained, the parties may not amend the merger agreement without obtaining further approval by our shareholders if, by law, such amendment would require further approval of our shareholders. The merger agreement also provides that, at any time prior to the effective time of the merger, each party may extend the time for the performance of any obligations or other acts of any other party, waive any inaccuracies in the representations and warranties in the merger agreement of any other party or waive compliance by any other party with any of the agreements contained in the merger agreement or, except as otherwise provided in the merger agreement, such party’s conditions.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

 

The following tables set forth the beneficial ownership of PolyMedica’s Common Stock as of September 10, 2007:

 

 

The number of shares beneficially owned by each 5% shareholder, director or executive officer is determined under rules of the Securities and Exchange Commission (“SEC”), and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power and also any shares which the individual or entity has the right to acquire within 60 days after September 10, 2007 through the exercise of stock options, and any reference in the footnotes to this table to shares subject to stock options refers only to stock options that are so exercisable. For purposes of computing the percentage of outstanding shares of common stock held by each person or entity, any shares which that person or entity has the right to acquire within 60 days after September 10, 2007, are deemed to be outstanding with respect to such person but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, each person or entity has sole investment and voting power (or shares such power with his or her spouse) with respect to the shares set forth in the following tables. The inclusion in the tables below of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of those shares. As of September 10, 2007, there were 23,437,817 shares of Common Stock issued and outstanding.

 

 

 

 

 

 

 

 

 

 

 

ANNEX A

 

EXECUTION VERSION

 

 

AGREEMENT AND PLAN OF MERGER
Dated as of August 27, 2007
among
MEDCO HEALTH SOLUTIONS, INC.,
MACQ CORP.
and
POLYMEDICA CORPORATION

 

TABLE OF CONTENTS

 

AGREEMENT AND PLAN OF MERGER

 

This AGREEMENT AND PLAN OF MERGER, dated as of August 27, 2007 (this “ Agreement ”), is among MEDCO HEALTH SOLUTIONS, INC., a Delaware corporation (“ Parent ”), MACQ CORP., a Massachusetts corporation and a wholly owned Subsidiary of Parent (“ Merger Sub ”), and POLYMEDICA CORPORATION, a Massachusetts corporation (the “ Company ”). Certain terms used in this Agreement are used as defined in Section 8.11.

 

WHEREAS, the Board of Directors of each of the Company and Merger Sub has approved and declared advisable, and in the best interests of the Company and Merger Sub, as applicable, and the Board of Directors of Parent has approved, this Agreement and the merger of Merger Sub with and into the Company (the “ Merger ”) upon the terms and subject to the conditions set forth in this Agreement.

 

WHEREAS, prior to or contemporaneously with the execution and delivery of this Agreement, certain executives of the Company have executed and delivered to Parent certain letter agreements confirming that they will remain employed by the Company following the Closing contemplated by this Agreement.

 

NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained in this Agreement, and intending to be legally bound hereby, Parent, Merger Sub and the Company hereby agree as follows:

 

ARTICLE I

 

The Merger

 

Section  1.1   The Merger .   Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the Massachusetts Business Corporation Act (the “ MBCA ”), at the Effective Time Merger Sub shall be merged with and into the Company, and the separate corporate existence of Merger Sub shall thereupon cease, and the Company shall be the surviving corporation in the Merger (the “ Surviving Corporation ”).

 

Section  1.2   Closing .   The closing of the Merger (the “ Closing ”) shall take place at 10:00 a.m. (New York time) on a date to be specified by the parties, which date shall be no later than the second business day after satisfaction or waiver of the conditions set forth in Article VI (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of those conditions at such time), at the offices of Weil, Gotshal & Manges LLP, 100 Federal Street, 34th Floor, Boston, Massachusetts 02110, unless another time, date or place is agreed to in writing by the parties hereto. The date on which the Closing actually occurs hereinafter is referred to as the “ Closing Date ”.

 

Section  1.3   Effective Time .   Subject to the provisions of this Agreement, as soon as practicable on the Closing Date the parties shall file with the Secretary of the Commonwealth of Massachusetts articles of merger, executed in accordance with, and in such form as is required by, the relevant provisions of the MBCA (the “ Articles of Merger ”). The Merger shall become effective upon the filing of the Articles of Merger or at such later time and date as is agreed to by the parties hereto (the time and date at which the Merger becomes effective is herein referred to as the “ Effective Time ”).

 

Section  1.4   Effects of the Merger .   The Merger shall have the effects set forth herein and in applicable provisions of the MBCA. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the properties, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation.

 

Section  1.5   Articles of Organization and By-laws of the Surviving Corporation .   The articles of organization of the Company shall be amended and restated in their entirety at the Effective Time to be substantially in the form attached hereto as Exhibit A. At the Effective Time, the by-laws of the Company shall be amended in their entirety at the Effective Time to be substantially in the form attached hereto as Exhibit B.

Section  1.6   Directors and Officers of the Surviving Corporation .

 

(a) Each of the parties hereto shall take all necessary action to cause the directors of Merger Sub immediately prior to the Effective Time to be the directors of the Surviving Corporation immediately following the Effective Time, until their respective successors are duly elected or appointed and qualified or their earlier death, resignation or removal in accordance with the articles of organization and by-laws of the Surviving Corporation.

 

(b) Each of the parties hereto shall take all necessary action to cause the officers of Merger Sub immediately prior to the Effective Time to be the officers of the Surviving Corporation until their respective successors are duly appointed and qualified or their earlier death, resignation or removal in accordance with the articles of organization and by-laws of the Surviving Corporation.

 

ARTICLE II

 

Effect of the Merger on the Capital Stock of the Constituent Corporations;

Exchange of Certificates; Company Stock Options

 

Section  2.1   Effect on Capital Stock .   At the Effective Time, by virtue of the Merger and without any action on the part of Merger Sub, the Company or the holders of any shares of common stock, par value $0.01 per share, of the Company (“ Company Common Stock ”) or any shares of capital stock of Merger Sub:

 

(a)  Capital Stock of Merger Sub .   Each share of capital stock of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into and become one validly issued, fully paid and nonassessable share of common stock, par value $0.01 per share, of the Surviving Corporation.

 

(b)  Parent-Owned Stock .   Any shares of Company Common Stock owned by Parent or Merger Sub shall be automatically canceled and shall cease to exist and no consideration shall be delivered in exchange therefor.

 

(c)  Conversion of Company Common Stock .   Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (other than shares to be canceled in accordance with Section 2.1(b) and Dissenting Shares) shall be converted into the right to receive $53.00 in cash, without interest (the “ Merger Consideration ”). As of the Effective Time, all such shares of Company Common Stock shall no longer be outstanding and shall automatically be canceled and shall cease to exist, and each holder of a certificate (or evidence of shares in book-entry form) which immediately prior to the Effective Time represented any such shares of Company Common Stock (each, a “ Certificate ”) shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration to be paid in consideration therefor upon surrender of such Certificate in accordance with Section 2.2(b), without interest.

 

Section  2.2   Exchange of Certificates .

 

(a)  Paying Agent .   Prior to the Effective Time, Parent shall designate Equiserve Trust Company or another bank or trust company reasonably acceptable to the Company to act as agent for the holders of shares of Company Common Stock in connection with the Merger (the “ Paying Agent ”) to receive, on terms reasonably acceptable to the Company, for the benefit of holders of shares of Company Common Stock, the aggregate Merger Consideration to which holders of shares of Company Common Stock shall become entitled pursuant to Section 2.1(c). Parent shall deposit, or cause to be deposited, such aggregate Merger Consideration with the Paying Agent at or prior to the Effective Time. The Paying Agent shall invest such aggregate Merger Consideration in any of (i) direct obligations of the United States of America, (ii) obligations for which the full faith and credit of the United States of America is pledged to provide for the payment of principal and interest, (iii) commercial paper rated the highest quality by either Moody’s Investors Service, Inc. or Standard and Poor’s Ratings Services or (iv) money market funds investing solely in a combination of the foregoing. Any net profit resulting from, or income or interest produced by, such investments, shall be payable to Parent.

(b)  Payment Procedures .   Promptly after the Effective Time (but in no event more than five business days thereafter), the Surviving Corporation shall cause the Paying Agent to mail to each holder of record of Company Common Stock (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Paying Agent, and which shall be in such form and shall have such other customary provisions (including customary provisions with respect to delivery of an “agent’s message” with respect to shares held in book-entry form) as Parent may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for payment of the Merger Consideration. Upon surrender of a Certificate for cancellation to the Paying Agent, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions (and such other customary documents as may reasonably be required by the Paying Agent), the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration, without interest, for each share of Company Common Stock formerly represented by such Certificate, and the Certificate so surrendered shall forthwith be canceled. No interest will be paid or accrued on any amount payable upon due surrender of the Certificates. If payment of the Merger Consideration is to be made to a Person other than the Person in whose name the surrendered Certificate is registered, it shall be a condition of payment that (x) the Certificate so surrendered shall be properly endorsed or shall otherwise be in proper form for transfer and be accompanied by all documents required to evidence such transfer and (y) the Person requesting such payment shall have paid any transfer and other Taxes required by reason of the payment of the Merger Consideration to a Person other than the registered holder of such Certificate surrendered or shall have established to the reasonable satisfaction of the Surviving Corporation that such Taxes either have been paid or are not applicable. Until surrendered as contemplated by this Section 2.2, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive the Merger Consideration as contemplated by this Article II, without interest.

 

(c)  Transfer Books; No Further Ownership Rights in Company Stock .   The Merger Consideration paid in respect of shares of Company Common Stock upon the surrender for exchange of Certificates in accordance with the terms of this Article II shall be deemed to have been paid in full satisfaction of all rights pertaining to the shares of Company Common Stock previously represented by such Certificates, and at the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Company Common Stock that were outstanding immediately prior to the Effective Time. From and after the Effective Time, the holders of Certificates that evidenced ownership of shares of Company Common Stock outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such shares of Company Common Stock, except as otherwise provided for herein or by applicable Law. Subject to the last sentence of Section 2.2(e), if, at any time after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article II.

 

(d)  Lost, Stolen or Destroyed Certificates .   If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the posting by such Person of a bond, in such reasonable amount as Parent may direct, as indemnity against any claim that may be made against it with respect to such Certificate, the Paying Agent will pay, in exchange for such lost, stolen or destroyed Certificate, the applicable Merger Consideration to be paid in respect of the shares of Company Common Stock formerly represented by such Certificate, as contemplated by this Article II.

 

(e)  Termination of Fund .   At any time following the six-month anniversary of the Closing Date, the Surviving Corporation shall be entitled to require the Paying Agent to deliver to it any funds (including any interest received with respect thereto) that had been made available to the Paying Agent and which have not been disbursed to holders of Certificates, and thereafter such holders shall be entitled to look only to Parent or the Surviving Corporation (subject to abandoned property, escheat or other similar Laws) as general creditors thereof with respect to the payment of any Merger Consideration that may be payable upon surrender of any Certificates held by such holders, as determined pursuant to this Agreement, without any interest thereon. Any amounts remaining unclaimed by such holders at such time at which such amounts would otherwise escheat to

or become property of any Governmental Authority shall become, to the extent permitted by applicable Law, the property of Parent, free and clear of all claims or interest of any Person previously entitled thereto.

 

(f)  No Liability .   Notwithstanding any provision of this Agreement to the contrary, none of the parties hereto, the Surviving Corporation or the Paying Agent shall be liable to any Person for Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.

 

(g)  Withholding Taxes .   Parent, the Surviving Corporation and the Paying Agent shall be entitled to deduct and withhold from the consideration otherwise payable to a holder of shares of Company Common Stock pursuant to this Agreement such amounts as may be required to be deducted and withheld with respect to the making of such payment under the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder (the “ Code ”), or under any provision of state, local or foreign Tax Law. The withholding party shall timely remit such withheld amounts to the appropriate taxing authority, and such amounts shall be treated for all purposes of this Agreement as having been paid to the Person in respect of which such deduction and withholding was made. If any withholding obligation may be avoided by such holder providing information or documentation to Parent, the Surviving Corporation or the Paying Agent, such information shall be requested prior to any such withholding.

 

Section  2.3   Appraisal/Dissenters’ Rights .   Notwithstanding anything in this Agreement to the contrary, shares of Company Common Stock that are issued and outstanding immediately prior to the Effective Time and which are held by a shareholder who did not vote in favor of the Merger (or consent thereto in writing) and who is entitled to demand and properly demands appraisal of such shares (the “ Dissenting Shares ”) pursuant to, and who complies in all respects with, the provisions of Part 13 of the MBCA (the ‘ ‘Dissenting Shareholders ”), shall not be converted into or be exchangeable for the right to receive the Merger Consideration, but instead such holder shall be entitled to payment of the fair value of such shares in accordance with the provisions of Part 13 of the MBCA (and at the Effective Time, such Dissenting Shares shall no longer be outstanding and shall automatically be canceled and shall cease to exist, and such holder shall cease to have any rights with respect thereto, except the right to receive the fair value of such Dissenting Shares in accordance with the provisions of Part 13 of the MBCA), unless and until such holder shall have failed to perfect or shall have effectively withdrawn or lost rights to appraisal under the MBCA. If any Dissenting Shareholder shall have failed to perfect or shall have effectively withdrawn or lost such right, such holder’s shares of Company Common Stock shall thereupon be treated as if they had been converted into and become exchangeable for the right to receive, as of the Effective Time, the Merger Consideration for each such share of Company Common Stock, in accordance with Section 2.1, without any interest thereon. The Company shall give Parent (i) prompt notice of any written demands for appraisal of any shares of Company Common Stock, attempted withdrawals of such demands and any other instruments served pursuant to the MBCA and received by the Company relating to shareholders’ rights of appraisal, and (ii) the opportunity to participate in and direct all negotiations and proceedings with respect to demands for appraisal under the MBCA.

 

Section  2.4   Company Stock Options and Restricted Shares .

 

(a) The Company shall provide that, at the Effective Time, all options outstanding immediately prior to the Effective Time that represent the right to acquire shares of Company Common Stock (each, an “ Option ”) granted under any plan listed in Section 2.4 of the Company Disclosure Schedule (a “ Company Stock Plan ”) shall be cancelled and each holder of an Option, whether or not vested, shall be paid in full satisfaction of such Option, a cash amount equal to the Option Consideration for each share of Company Common Stock then subject to the Option, including any such shares as to which the Option has not vested. For purposes of this Agreement, “ Option Consideration ” means, with respect to any share of Company Common Stock issuable under a particular Option, an amount equal to the excess, if any, of (i) the Merger Consideration per share of Company Common Stock over (ii) the exercise price payable in respect of such share of Company Common Stock issuable under such Option. The cash payments to be made to holders of Options pursuant to this Section 2.4(a) shall be made by the Surviving Corporation as soon as reasonably practicable after the Closing Date.

 

(b) The Company shall provide that each share of Company Common Stock granted subject to vesting or other lapse restrictions pursuant to any Company Stock Plan (the “ Company Restricted Common Stock ”)

which is outstanding immediately prior to the Effective Time shall vest and become free of such restrictions as of the Effective Time and at the Effective Time the holder thereof shall, subject to this Article II, be entitled to receive the Merger Consideration with respect to each such Company Restricted Common Stock.

 

(c)  Withholding Taxes .   Parent, the Surviving Corporation and the Paying Agent shall be entitled to deduct and withhold from the consideration otherwise payable to a holder of any Option or any shares of Company Restricted Common Stock pursuant to this Agreement such amounts as may be required to be deducted and withheld with respect to the making of such payment under the Code or under any provision of state, local or foreign Tax Law. The withholding party shall timely remit such withheld amounts to the appropriate taxing authority, and such amounts shall be treated for all purposes of this Agreement as having been paid to the Person in respect of which such deduction and withholding was made. If any withholding obligation may be avoided by such holder providing information or documentation to Parent, the Surviving Corporation or the Paying Agent, such information shall be requested prior to any such withholding.

 

(d) At or prior to the Effective Time, the Company, the Board of Directors and the compensation committee, as applicable, shall adopt any resolutions and take any actions which are necessary to effectuate the provisions of Section 2.4(a) and 2.4(b). The Company shall take all actions necessary to ensure that from and after the Effective Time neither Parent nor the Surviving Corporation will be required to deliver shares of Company Common Stock or other capital stock of the Company to any Person pursuant to or in settlement of Company Options or Company Restricted Common Stock after the Effective Time.

 

Section  2.5   Treatment of the Warrants .   The Warrants shall be treated as set forth in Section 5.14.

 

Section  2.6   Adjustments .   Notwithstanding any provision of this Article II to the contrary, if between the date of this Agreement and the Effective Time the outstanding shares of Company Common Stock shall have been changed into a different number of shares or a different class by reason of the occurrence or record date of any stock dividend, subdivision, reclassification, recapitalization, split, combination, exchange of shares or similar transaction, the Merger Consideration shall be appropriately adjusted to reflect such stock dividend, subdivision, reclassification, recapitalization, split, combination, exchange of shares or similar transaction.

 

ARTICLE III

 

Representations and Warranties of the Company

 

Except as disclosed in (a) the disclosure schedule delivered by the Company to Parent (the “ Company Disclosure Schedule ”) prior to the execution of this Agreement (with specific reference to the section of this Agreement to which the information stated in such disclosure relates; provided that (i) disclosure in any section of such Company Disclosure Schedule shall be deemed to be disclosed with respect to any other section of this Agreement only to the extent that it is reasonably apparent on the face of the Company Disclosure Schedule that such disclosure is applicable to such other section notwithstanding the omission of a reference or cross reference thereto and (ii) the mere inclusion of an item in such Company Disclosure Schedule as an exception to a representation or warranty shall not be deemed an admission that such item represents a material exception or material fact, event or circumstance or that such item has had, would have or would reasonably be expected to have a Material Adverse Effect) or (b) in the Company SEC Documents filed on or after June 13, 2005 and prior to the date of this Agreement, but excluding (x) any risk factor disclosure contained in any such Company SEC Documents under the heading “Risk Factors” or “Cautionary Note Regarding Forward-Looking Statements” or similar heading and (y) all exhibits and schedules thereto and documents incorporated by reference therein, the Company hereby represents and warrants, on behalf of itself and each of its Subsidiaries, on a joint and several basis, to Parent and Merger Sub as follows:

 

Section  3.1   Organization, Standing and Corporate Power .

 

(a) The Company is a corporation duly organized, validly existing and in good standing under the Laws of the Commonwealth of Massachusetts and has all requisite corporate power and authority necessary to own, lease and operate all of its properties and assets and to carry on its business as it is now being conducted. The Company is duly licensed or qualified to do business and is in good standing (or equivalent status) in each

jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed, qualified or in good standing (or equivalent status) does not have, or would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company. For purposes of this Agreement, “ Material Adverse Effect ” means any change, circumstance, event, occurrence or effect that has occurred that, when taken together with all other adverse changes, circumstances, events, occurrences or effects that have occurred, is or is reasonably likely to be, materially adverse to the business, assets, liabilities, results of operations or financial condition of the Company and its Subsidiaries taken as a whole, except to the extent resulting from (i) (A) the general economic conditions in the United States or any change in any United States federal or state statute, rule or regulation or any change in Medicare, Medicaid or other governmental healthcare reimbursement policy, or (B) the commencement, continuation or escalation of a war or a material act of terrorism; provided that with respect to clauses (i)(A) and (i)(B), such changes, circumstances, events, occurrences or effects do not adversely affect the Company and its Subsidiaries in a meaningfully disproportionate manner as compared to other companies of similar size in such industries in which the Company and its Subsidiaries operate; (ii) resulting from or attributable to any loss of, or adverse change in, the relationship of the Company with its customers, employees or suppliers that was proximately caused by the announcement of this Agreement or the consummation of the Transactions or (iii) any decline in the market price or change in trading volume of the capital stock of the Company or any failure to meet publicly announced revenue or earnings projections (it being understood that the underlying cause or causes of any such decline, change or failure may be deemed to constitute, in and of itself or themselves, a Material Adverse Effect and may be taken into consideration when determining whether there has occurred a Material Adverse Effect).

 

(b) Each of the Company’s Subsidiaries is duly organized, validly existing and in good standing under the Laws of the jurisdiction of its organization. The name and jurisdiction of organization of each Subsidiary is set forth on Section 3.1(b) of the Company Disclosure Schedule. All the outstanding shares of capital stock of, or other equity interests in, each such Subsidiary are owned directly or indirectly by the Company free and clear of all liens, pledges, security interests and transfer restrictions, except for such transfer restrictions of general applicability as may be provided under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the “ Securities Act ”), and other applicable securities Laws. Each of the Company’s Subsidiaries has all requisite corporate power and authority necessary to own, lease and operate all of its properties and assets and to carry on its businesses as they are now being conducted. Each of the Company’s Subsidiaries is duly licensed or qualified to do business in, and is in good standing (or equivalent status) in, each jurisdiction in which the nature of the business conducted by such Subsidiary, or the character or location of the properties and assets owned or leased by such Subsidiary, makes such licensing or qualification necessary, except where the failure to be so licensed, qualified or in good standing (or equivalent status) does not have, or would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

(c) The Company has made available to Parent complete and correct copies of the articles of organization and by-laws of the Company and the organizational documents of each of its Subsidiaries, as amended to the date of this Agreement (the “ Company Charter Documents ”).

 

Section  3.2   Capitalization .

 

(a) The authorized capital stock of the Company consists of fifty million (50,000,000) shares of Company Common Stock and three million one hundred twelve thousand one hundred sixty-four (3,112,164) shares of preferred stock, par value $0.01 per share (“ Company Preferred Stock ”). At the close of business on August 24, 2007 (the “ Reference Date ”) (except for the 4,530,586 shares of Company Common Stock referred to in clause (ii) below, which is true as of March 31, 2007), (i) 23,464,250 shares of Company Common Stock were issued and outstanding (of which 503,480 shares were Company Restricted Stock), (ii) 4,530,586 shares of Company Common Stock were reserved for issuance under the Company Stock Plans (of which 2,842,303 shares of Company Common Stock were subject to outstanding Options granted under the Company Stock Plans) and 11,798,426 shares of Company Common Stock were reserved for issuance upon conversion of the Notes and Warrants and (iii) no shares of Company Preferred Stock were issued or outstanding. Since