SEC gives nod to PolyMedica
OK's odd method of accounting; shares rise 15%
The Securities and Exchange Commission has approved an unusual accounting method used by PolyMedica Corp., the Woburn maker of diabetes-test kits said yesterday, sending its shares up 15 percent.
The announcement eased fears that PolyMedica would have to restate its earnings because of the way it recorded advertising costs over several years rather than as they occurred.
The company used a 1993 accounting rule to record marketing costs as an asset on its balance sheet. Under more traditional accounting standards, such as those used by a retailer or a car manufacturer, advertising spending is subtracted from revenue.
PolyMedica argued it operates like an insurance company because customers sign up immediately upon viewing an ad. The company is well known for the blood-glucose test kits it sells via television ads under its Liberty brand name.
The company said the SEC has decided that "PolyMedica should continue to capitalize its direct response advertising costs related to the acquisition of new customers, rather than expensing such costs as incurred." SEC spokesman John Heine declined to comment.
PolyMedica shares fell after the company disclosed July 1 that it was in talks with the SEC and faced shareholder lawsuits over the accounting issue. One plaintiff's attorney said yesterday the suits may end, but PolyMedica still faces investigations by the Justice Department into possible healthcare fraud, improper revenue recognition, and obstruction of justice. The company says it is cooperating with those investigations.
In federal filings, PolyMedica had reported financial results using both its unusual accounting model and a more traditional one. Yesterday, the company's lead director and interim chief executive, Samuel L. Shanaman, said it will cease using the more traditional method in compliance with the SEC decision. He said that the company would have preferred to use the more common figures to satisfy investors but that the SEC has ruled its current accounting is best under generally accepted accounting principles, or GAAP.
Shanaman said the accounting is appropriate because his company has few ongoing costs of developing new products, since the test kits remain essentially unchanged for years. "The recurring costs these other businesses will have to generate revenue, we don't have," he said.
Shares in PolyMedica rose $7 to close at $54 in trading yesterday on the Nasdaq Stock Market. Arnold Ursaner, president of CJS Securities in New York, said the finding removed some arguments that short-sellers had for betting against the stock.
"It's one of the issues the shorts have harped on, that their accounting isn't conservative. We would say the treatment they've used isn't the most conservative they could use, but it is consistent with GAAP," he said.
The rise in the company's share price yesterday might have been the result of buying by mutual funds that barred themselves from investing in companies facing SEC scrutiny, he added.
Manuel P. Asensio of Asensio & Co., a short-selling firm in New York, said he continues to bet against PolyMedica's shares because of the other investigations.
Fred Isquith, a New York lawyer who was among those who had filed class-action suits against the company, said in a telephone interview that he hadn't studied the announcement but that it might end the legal action. "If it proves out, then we're not going to pursue something that's without merit."
Ross Kerber can be reached at firstname.lastname@example.org.
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