The annual ritual of throwing out the old calendar and hanging up the new one had to be especially rewarding for the management team at Motley Fool Hidden Gems recommendation PolyMedica (NASDAQ:PLMD). With a long government investigation put to rest and a new management team settling in, the health-care services provider can finally begin to move forward again.

Revenue for the fiscal third quarter grew about 7%, and net income (stripping out charges) rose by a slightly higher amount. While the respiratory-care business was down sharply, the pharmacy business and the company's core diabetes-supply business were both strong.

Operating cash flow for the quarter was negative; the company paid out a $35 million settlement to the government and postponed a significant amount of billings for reverification. Given that PolyMedica is committed to showing a "culture of compliance" in the wake of its government settlement, this was likely a prudent move if there were any doubts at all about the orders.

The next 18 months or so look to be a period of transition for PolyMedica. Given the sharp cuts in reimbursement for respiratory care, management has decided to essentially wind down that business. The diabetes business is also subject to cuts, though the amounts are far less extreme -- on the order of 3%.

The end result will be that fiscal 2005 earnings (ending in March) will be basically flat with fiscal 2004, and the company is forecasting that fiscal 2006 will post similarly flattish growth.

Fools should also note that PolyMedica takes a harder line with its accounting than many companies are. Instead of expensing all the costs of advertising, the company does capitalize direct-response advertising and amortizes it off the balance sheet over time. I won't argue for or against the merits of this approach, but it is a somewhat aggressive accounting practice, and prospective owners should make sure that they are comfortable with it.

Though the next year and a half or so will be challenging, brighter days may indeed lie ahead for PolyMedica. The company has a very real opportunity to expand into the commercial insurance market -- a move that would significantly expand its potential customer base. What's more, the company has effectively no debt, and there's every reason to believe that management will consider future acquisitions to augment growth.

That said, valuation now appears a bit rich for a company that won't really be growing much for the next year or two. Of course, the right acquisition could inject some growth and change the picture significantly. While the next year or two will try investors' patience, those who can hang on might be quite satisfied with the company that emerges on the other side of these challenges.

Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.