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SECURITIES AND EXCHANGE COMMISSION  Washington, D.C. 20549
 FORM 10-Q (Mark One) þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from            to Commission file number   000-25769 ACCREDO HEALTH, INCORPORATED (Exact name of registrant as specified in its charter) DELAWARE
    
    62-1642871(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 1640 CENTURY CENTER PKWY, SUITE 101, MEMPHIS, TN 38134 (Address of principal executive offices)            (Zip Code) (901) 385-3688 (Registrants telephone number, including area code) (Former name, former address and former fiscal year,
if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes þ No o APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. CLASS
    
    OUTSTANDING AT April 29, 2005COMMON STOCK, $0.01 PAR VALUE
    
    
    49,551,609TOTAL COMMON STOCK
    
    

    49,551,609




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ACCREDO HEALTH, INCORPORATED
INDEX Part I  -  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Statements of Income (unaudited) For the three months and nine months ended March 31, 2005 and 2004Condensed Consolidated Balance Sheets March 31, 2005 (unaudited) and June 30, 2004Condensed Consolidated Statements of Cash Flows (unaudited) For the nine months ended March 31, 2005 and 2004Notes to Condensed Consolidated Financial Statements (unaudited)Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosure About Market RiskItem 4. Controls and ProceduresPart II  -  OTHER INFORMATIONItem 5. Other InformationItem 6. Exhibits and Reports on Form 8-KEX-31.1  SECTION 302 CERTIFICATION OF THE CEOEX-31.2  SECTION 302 CERTIFICATION OF THE CFOEX-32.1  SECTION 906 CERTIFICATION OF THE CEOEX-32.2  SECTION 906 CERTIFICATION OF THE CFO
  Note: Items 1, 2, 3 and 4 of Part II are omitted because they are not applicable 2




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PART I - FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS. ACCREDO HEALTH, INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (000S OMITTED, EXCEPT SHARE DATA)
 (UNAUDITED)
 Nine Months Ended March 31,
    
    
    Three Months Ended March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net patient revenue
    
    $
    1,411,120
    
    
    $
    1,103,197
    
    
    $
    507,914
    
    
    $
    398,919Other revenue
    
    
    27,815
    
    
    
    28,604
    
    
    
    8,574
    
    
    
    9,667Equity in net income of joint ventures
    
    
    1,805
    
    
    
    2,272
    
    
    
    572
    
    
    
    722Total revenues
    
    
    1,440,740
    
    
    
    1,134,073
    
    
    
    517,060
    
    
    
    409,308Cost of sales
    
    
    1,189,843
    
    
    
    894,338
    
    
    
    432,994
    
    
    
    325,517Gross profit
    
    
    250,897
    
    
    
    239,735
    
    
    
    84,066
    
    

    
    83,791General & administrative
    
    
    114,420
    
    
    
    103,166
    
    
    
    36,370
    
    
    
    34,178Bad debts
    
    
    18,997
    
    
    
    23,731
    
    
    
    6,593
    
    
    
    9,303Depreciation and amortization
    
    
    11,850
    
    
    
    9,333
    
    
    
    4,017
    
    
    
    3,277Income from operations
    
    
    105,630
    
    
    
    103,505
    
    
    
    37,086
    
    
    
    37,033Interest expense, net
    
    
    14,681
    
    
    
    6,365
    
    
    
    3,819
    
    
    
    1,964Minority interest in consolidated subsidiary
    
    
    510
    
    
    
    1,741
    
    
    
    133
    
    
    
    688Income before income taxes
    
    
    90,439
    
    
    
    95,399
    
    
    
    33,134
    
    
    
    34,381Provision for income taxes
    
    
    35,015
    
    
    
    36,855
    
    
    
    12,959
    
    
    
    13,254Net income
    
    $
    55,424
    
    
    $
    58,544
    
    
    $
    20,175
    
    
    $
    21,127Cash dividends declared on common stock
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Earnings per share:Basic
    
    $
    1.13
    
    
    $
    1.22
    
    
    $
    0.41
    
    
    $
    0.44Diluted
    
    $
    1.12
    
    
    $
    1.20
    
    
    $
    0.40
    
    
    $
    0.43Weighted average shares outstanding:Basic
    
    
    48,891,593
    
    
    
    48,050,099
    
    
    
    49,130,520
    
    
    
    48,307,891Diluted
    
    
    49,488,066
    
    
    
    48,869,037
    
    
    
    50,186,424
    
    
    
    49,277,358
 See accompanying notes to condensed consolidated financial statements. 3




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ACCREDO HEALTH, INCORPORATED 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (000S OMITTED, EXCEPT SHARE DATA)
 (Unaudited)March 31,
    
    
    June 30,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    78,204
    
    
    $
    42,743Patient accounts receivable, less allowance for
doubtful accounts of $80,336 at March 31, 2005
and $81,051 at June 30, 2004
    
    
    402,196
    
    
    
    325,642Due from affiliates
    
    
    2,399
    
    
    
    4,191Other accounts receivable
    
    
    34,841
    
    
    
    28,584Inventories
    
    
    153,107
    
    
    
    128,323Prepaids and other current assets
    
    
    5,111
    
    
    
    5,084Income taxes receivable
    
    
    5,300
    
    
    
    382Deferred income taxes
    
    
    13,397
    
    
    
    14,129Total current assets
    
    
    694,555
    
    
    
    549,078Property and equipment, net
    
    
    45,422
    
    
    
    41,283Other assets:Joint venture investments
    
    
    7,692
    
    
    
    7,713Goodwill, net
    
    
    553,959
    
    
    
    382,628Other intangible assets, net
    
    
    18,361
    
    
    
    17,480Total assets
    
    $
    1,319,989
    
    
    $
    998,182LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    227,338
    
    
    $
    164,780Accrued expenses
    
    
    22,007
    
    
    
    22,625Due to affiliates
    
    
    1,761
    
    
    
    654Current portion of long-term debt
    
    
    4,583
    
    
    
    4,445Total current liabilities
    
    
    255,689
    
    
    
    192,504Long-term debt
    
    
    344,064
    
    
    
    174,866Deferred income taxes
    
    
    31,199
    
    
    
    25,112Minority interest in consolidated joint venture
    
    
    2,767
    
    
    
    3,757Stockholders equity:Undesignated Preferred Stock, 5,000,000 shares
authorized, no shares issued
    
    
    
    
    
    
    Common Stock, $.01 par value; 100,000,000 shares authorized;
49,536,775 and 48,603,341 shares issued and outstanding
at March 31, 2005 and June 30, 2004, respectively
    
    
    495
    
    
    
    486Additional paid-in capital
    
    
    464,923
    
    
    
    436,021Accumulated other comprehensive income
    
    
    
    
    
    
    8Retained earnings
    
    
    220,852
    
    
    
    165,428Total stockholders equity
    
    
    686,270
    
    
    
    601,943Total liabilities and stockholders equity
    
    $
    1,319,989
    
    
    $
    998,182
 See accompanying notes to condensed consolidated financial statements. 4




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ACCREDO HEALTH, INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (000S OMITTED)
 (UNAUDITED)
 Nine Months EndedMarch 31,2005
    
    
    2004OPERATING ACTIVITIES:Net income
    
    $
    55,424
    
    
    $
    58,544Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    14,132
    
    
    
    12,018Provision for losses on accounts receivable
    
    
    18,997
    
    
    
    23,731Deferred income tax expense
    
    
    6,836
    
    
    
    14,094Tax benefit of exercise of stock options
    
    
    7,950
    
    
    
    1,808Excess distributed (undistributed) earnings of joint ventures
    
    
    22
    
    
    
    (1,857
    )Minority interest in income of consolidated joint venture
    
    
    510
    
    
    
    1,741Write-off of unamortized debt issuance costs
    
    
    4,422
    
    
    
    Loss on sale of property and equipment
    
    
    288
    
    
    
    Changes in operating assets and liabilities:Patient receivables and other
    
    
    (86,211
    )
    
    
    (64,876
    )Due from affiliates
    
    
    2,899
    
    
    
    (1,068
    )Inventories
    
    
    (15,115
    )
    
    
    (48,290
    )Prepaids and other current assets
    
    
    228
    
    
    
    908Income taxes receivable
    
    
    (2,706
    )
    
    
    (160
    )Accounts payable and accrued expenses
    
    
    49,083
    
    
    
    52,613Net cash provided by operating activities
    
    
    56,759
    
    
    
    49,206INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (13,744
    )
    
    
    (10,260
    )Proceeds from sale of property and equipment
    
    
    62
    
    
    
    Additions to other assets
    
    
    (927
    )
    
    
    Business
acquisitions, net of cash acquired
    
    
    (190,506
    )
    
    
    (35,862
    )Net cash used in investing activities
    
    
    (205,115
    )
    
    
    (46,122
    )FINANCING ACTIVITIES:Proceeds from issuance of long-term debt
    
    
    376,450
    
    
    
    1,381Principal payments on long-term debt
    
    
    (207,114
    )
    
    
    (12,525
    )Payment of debt issuance costs
    
    
    (4,980
    )
    
    
    Issuance of common stock
    
    
    20,961
    
    
    
    6,089Distributions to minority interest partners
    
    
    (1,500
    )
    
    
    (1,400
    )Net cash provided by (used in) financing activities
    
    
    183,817
    
    
    
    (6,455
    )Increase (decrease) in cash and cash equivalents
    
    
    35,461
    
    
    
    (3,371
    )Cash and cash equivalents at beginning of period
    
    
    42,743
    
    
    
    48,006Cash and cash equivalents at end of period
    
    $
    78,204
    
    
    $
    44,635
 See accompanying notes to condensed consolidated financial statements. 5




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2005  1.
    BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the instructions to form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted in the
United States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary to present fairly the condensed consolidated financial position, results of
operations and cash flows of Accredo Health, Incorporated (the Company or Accredo)
have been included. Operating results for the three and nine-month periods ended March
31, 2005, are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2005. The balance sheet at June 30, 2004 has been derived from the audited financial
statements at that date but does not include all of the information and footnotes
required by accounting principles generally accepted in the United States of America
for complete financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Companys Annual Report on
Form 10-K for the fiscal year ended June 30, 2004.  2.
    STOCKHOLDERS EQUITY During the quarter and nine months ended March 31, 2005, employees and directors
exercised stock options to acquire 598,523 and 898,423 shares of Accredo common stock,
respectively. The weighted average option exercise price was $28.26 per share for the
quarter and $22.41 per share for the nine-month period. Employees of the Company also acquired 35,011 shares of Accredo common stock
pursuant to the provisions of the Companys Employee Stock Purchase Plan at a price of
approximately $23.56 per share. Shares acquired under the plan were purchased on
December 31, 2004 from employee funds accumulated via payroll deductions from July
through December 2004.  3.
    PRO FORMA NET INCOME EFFECT OF COMPANY STOCK OPTION PLANS The Company accounts for its stock-based employee compensation plans under
the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under those plans
had an exercise price equal to the market value of the underlying common stock on the
date of grant. Pro forma information regarding net income is required by Statement of
Financial Accounting Standards No. 123 (SFAS 123) and has been determined as if the
Company had accounted for its employee stock options under the fair value method of
SFAS 123. Significant assumptions used by the Company in the Black-Scholes
option-pricing model computations are as follows for the three-month and nine-month
periods ended March 31: Nine Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Weighted average risk-free
interest rate
    
    
    3.28
    
    
    
    2.77
    %
    
    
    3.43
    
    
    
    2.75
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility factor
    
    
    .60
    
    
    
    .70
    
    
    
    .60
    
    
    
    .70Weighted-avg. expected life
    
    4.0 yrs
    
    4.0 yrs
    
    4.0 yrs
    
    4.0 yrsEstimated turnover
    
    
    8
    %
    
    
    8
    %
    
    
    8
    %
    
    
    8
    %
 The Black-Scholes option model was developed for use in estimating the fair value
of traded options, which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Companys employee stock
options have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the fair
value estimate, in managements opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock options. 6




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For purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options vesting period. The Companys pro forma
information for the three-month and nine-month periods ended March 31 is as follows
(in thousands, except share data): Nine Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    55,424
    
    
    $
    58,544
    
    
    $
    20,175
    
    
    $
    21,127Less stock-based employee
compensation cost, net of
related tax effects, applying
the fair value method to all
awards
    
    
    (10,241
    )
    
    
    (8,718
    )
    
    
    (4,163
    )
    
    
    (3,063
    )Pro forma net income
    
    $
    45,183
    
    
    $
    49,826
    
    
    $
    16,012
    
    
    $
    18,064Earnings per share:Basic  as reported
    
    $
    1.13
    
    
    $
    1.22
    
    
    $
    0.41
    
    
    $
    0.44Basic  pro forma
    
    $
    0.92
    
    
    $
    1.04
    
    
    $
    0.33
    
    
    $
    0.37Diluted  as reported
    
    $
    1.12
    
    
    $
    1.20
    
    
    $
    0.40
    
    
    $
    0.43Diluted  pro forma
    
    $
    0.92
    
    
    $
    1.04
    
    
    $
    0.32
    
    
    $
    0.37
 The Financial Accounting Standards Board issued Statement No. 123 (revised 2004),
Share-Based Payment, on December 16, 2004. SFAS 123R requires all entities to
recognize compensation expense in an amount equal to the fair value of share based
payments. The standard is effective for awards granted, modified, or settled after
the first reporting year beginning after June 15, 2005. The Company will adopt SFAS
123R using the modified prospective method in the fiscal year beginning July 1, 2005.  4.
    COMPREHENSIVE INCOME Comprehensive income includes changes in the fair value of certain derivative
financial instruments that qualify for hedge accounting. Comprehensive income for all
periods presented is as follows: Nine Months Ended March 31,
    
    
    Three Months Ended March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Reported net income
    
    $
    55,424
    
    
    $
    58,544
    
    
    $
    20,175
    
    
    $
    21,127Unrealized gain (loss) on interest rate
swap contracts, net of tax benefit
    
    
    (8
    )
    
    
    58
    
    
    
    
    
    
    
    (36
    )Comprehensive income
    
    $
    55,416
    
    
    $
    58,602
    
    
    $
    20,175
    
    
    $
    21,091
 The adjustments made in computing comprehensive income are reflected as a
component of stockholders equity under the heading accumulated other comprehensive
income.  5.
    CONTINGENCIES The Company, David D. Stevens and Joel R. Kimbrough are named as defendants in a
putative class action lawsuit filed in the United States District Court for the
Western District of Tennessee, Memphis Division. A Consolidated Amended Complaint was
filed on September 15, 2004. The lawsuit alleges violations of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10(b)(5) promulgated thereunder, and Section
20 of the Securities Exchange Act of 1934. The putative class representatives seek to
represent a class of individuals and entities that purchased Company stock during the
period June 16, 2002 through April 7, 2003 and who supposedly suffered damages from
the alleged violations of the securities laws. The Company believes that the claims
asserted in the putative class action lawsuit are without merit. The Company
maintains insurance for losses arising from the types of allegations made in this
litigation. The Company has expended defense costs to date substantially equal to the
amount of the Companys retention under its insurance coverage. The Company believes
that it is not reasonably possible that it will suffer any material out-of-pocket
monetary loss in this lawsuit. Therefore, no loss provision has been accrued in the
consolidated financial statements related to this matter as of March 31, 2005. 7




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In addition, two purported derivative lawsuits were filed in the Circuit Court of
Shelby County, Tennessee for the Thirtieth Judicial District at Memphis. These actions
were consolidated and a Consolidated Derivative Complaint was filed on July 28, 2003.
The derivative action names certain current and former Company officers and directors
(David D. Stevens, John R. Grow, Kyle J. Callahan, Kevin L. Roberg, Kenneth R.
Masterson, Kenneth J. Melkus, Dick R. Gourley, Nancy-Ann DeParle, Joel R. Kimbrough,
Thomas W. Bell, Jr., and Patrick J. Welsh) as defendants. The derivative lawsuit
alleges that the defendants breached fiduciary duties owed to the Company by engaging
in the same alleged conduct that is the basis of the putative class action lawsuit. On
behalf of the Company, the derivative complaint seeks compensatory damages from the
defendants and the disgorgement of profits, benefits and other compensation received
by the defendants. The Company has filed a motion to dismiss the Consolidated
Derivative Complaint and the parties are awaiting the Courts ruling on this motion. As a result of the pending acquisition of the Company by Medco Health Solutions,
Inc. (Medco) (see below Proposed Transaction with Medco), on February 23, 2005, the
derivative plaintiffs in the Consolidated Derivative Complaint filed a motion seeking
leave to amend the Consolidated Derivative Complaint to add Medco and certain
additional Accredo directors as defendants. The proposed amendment seeks injunctive
relief to enjoin the Medco acquisition of Accredo on the grounds that the named
Accredo directors and officers allegedly seek to use the acquisition
to squeeze out Accredos current stockholders for an unfair price and to insulate themselves from
liability for alleged wrongdoing associated with Accredos June 2002 acquisition of
the SPS Division of Gentiva Health Services, Inc. The Company believes that the
claims asserted in the derivative lawsuit are without merit. The Company maintains
insurance for losses arising from the types of allegations made in this litigation.
The Company has expended defense costs to date substantially equal to the amount of
the Companys retention under its insurance coverage. The Company believes that it is
not reasonably possible that it will suffer any material out-of-pocket monetary loss
in this lawsuit. Therefore, no loss provision has been accrued in the consolidated
financial statements related to this matter as of March 31, 2005. The Company and the Companys 80% owned joint venture in California provided
contract pharmacy and related billing services to a local California pharmacy that was
recently audited by the California Department of Health Services (Department)
concerning its MediCal billing for clotting factor supplied to the pharmacy by the
Company or the Companys joint venture. The audit is for the period January 2, 2001 to
March 5, 2003 with dates of payment from March 26, 2001 to April 21, 2003. Although
the joint venture is not currently involved with the audits, the contract pharmacy
relationship is implicated and the pharmacy is seeking indemnification from the joint
venture. Since the initiation of the audit, the state agency has temporarily withheld
MediCal payments from the pharmacy and has alleged, among other things, overbilling
and false claims. In December 2004, the Department notified the pharmacy that it had
completed its audit and assessed the pharmacy approximately $13.5 million in alleged
overbilling and overpayment received by the pharmacy from MediCal. Over 80% of the
assessment was for claims allegedly submitted in excess of acquisition cost. The
remaining portion of the assessment cited overpayments for lack of documentation and
false claims. The Department stated in its letter that the pharmacy received
reimbursement for services that were falsely represented as provided by the pharmacy.
The pharmacy has appealed the assessment, and a trial date has been set for August 3,
2005. The Company believes the assessment is without merit and expects the pharmacy
and the joint venture to vigorously defend against these allegations through judicial
proceedings. Since false claim statutes are implicated, the pharmacy could also be
assessed fines and penalties. Due to the uncertainty about the issues involved in this
matter, based on the facts and circumstances known to date, the Company believes some
amount of monetary loss is reasonably possible in the range of zero to $20 million. The Company and the Companys 80% owned joint venture in California also provided
contract pharmacy and related billing services to a second local California pharmacy.
The California Department of Health Services is also auditing this pharmacy. The
Company has recently received a letter from the Department asking for information in
connection with the audit. The Company anticipates that this audit will involve issues
that are the same as or similar to those involved in the audit described in the
preceding paragraph. The Company is in the process of gathering information responsive
to the Departments letter and cannot determine at this time whether it will incur any
liability associated with this audit. Also, from time to time, the Company is involved in lawsuits, claims, audits and
investigations arising in the normal course of its business. In addition, the business
that the Company acquired from Gentiva Health Services, Inc. is involved in several
lawsuits and claims related to its historic operation by Gentiva, which are being
controlled by Gentiva and for which Gentiva has agreed to indemnify the Company. The
Company believes that it is not reasonably possible that it would suffer any material
monetary loss in these lawsuits, claims, audits and investigations. Therefore, no
loss provision has been accrued in the consolidated financial statements related to
these matters as of March 31, 2005.  6.
    ACQUISITIONS On October 17, 2003, the Company acquired certain assets, including inventory and
accounts receivable, of Alpha Therapeutic Services, Inc. (ATS) from Baxter Healthcare
Corporation. ATS, located in the City of Industry, California, 8




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provides pharmaceutical care for certain chronic, long-term patient populations
including those requiring IVIG and blood related disorders such as hemophilia. As a
result of the acquisition, we have increased our market share in these products. The
aggregate purchase price paid was $35.7 million. Total assets acquired were $4.2
million. The excess of the total purchase price over the fair value of the assets
acquired was allocated as follows: $30.8 million to goodwill and $0.7 million to
acquired patient relationships. The acquired patient relationship intangible is being
amortized over five years. The results of the ATS operations have been included in the
consolidated financial statements since October 18, 2003. On July 21, 2004, the Company acquired all of the outstanding stock of HRA
Holding Corporation and its wholly owned subsidiary, Hemophilia Resources of America,
Inc. (HRA). HRA specializes in providing pharmaceuticals, therapeutic supplies and
disease management services for people with hemophilia and related bleeding disorders.
The acquisition of HRA increased the Companys market leading position in the
distribution of hemophilia related products. The aggregate purchase price paid for
this acquisition, inclusive of transaction costs and related expenses, was
approximately $166.5 million and was funded by the Companys increased credit
facility. This transaction was accounted for using the purchase method of accounting.
Total assets acquired and liabilities assumed were $24.0 million and $6.9 million,
respectively. The excess of the purchase price, including acquisition costs of
approximately $0.3 million, over the fair value of the net assets acquired of $17.1
million was allocated as follows: $146.1 million to goodwill and $2.5 million related
to acquired patient relationships. The acquired patient relationship intangible is
being amortized over five years. Final resolution of the working capital adjustment,
as defined in the merger agreement, resulted in the payment of $0.7 million of
additional consideration in April 2005. In addition, we recorded a $1.0 million
deferred tax liability associated with the non-deductible future amortization of the
acquired patient relationships. These amounts were accrued as of March 31, 2005, and
are included as adjustments to the liabilities assumed amount described above. The
Company also paid $0.8 million as consideration for an agreement with a selling
shareholder not to compete with the Company for a period of ten years. The transition
and integration of HRA business activities commenced during the September 2004 quarter
and will continue throughout the remainder of fiscal 2005. The results of HRA have
been included in the consolidated financial statements since July 21, 2004. On July 1, 2004, the Company acquired all of the outstanding stock of Home Health
Care Resources, Inc. (HHCR). HHCR specializes in providing pharmaceuticals,
therapeutic supplies and disease management services for people with autoimmune
disorders and hemophilia. The aggregate purchase price paid for this acquisition,
inclusive of transaction costs and related expenses, was approximately $29.8 million.
This amount includes additional consideration paid in March 2005 amounting to $3
million related to an earn-out payment based on the achievement of certain financial
results for the six months ended December 31, 2004. This transaction was accounted for
using the purchase method of accounting. Total assets acquired and liabilities assumed
were $4.3 million and $0.8 million, respectively. The excess of the purchase price,
including the earn-out payment, over the fair value of the net assets acquired of $3.5
million was allocated as follows: $25.7 million to goodwill and $0.3 million related
to acquired patient relationships. The acquired patient relationship intangible is
being amortized over five years. The Company also paid $0.3 million as consideration
for an agreement with the selling shareholders not to compete with the Company for a
period of ten years. The results of HHCR have been included in the consolidated
financial statements since July 1, 2004.  7.
    PROPOSED TRANSACTION WITH MEDCO On February 23, 2005, the Company and Medco announced the signing of a definitive
agreement whereby Medco would acquire all of the outstanding stock of Accredo. Total
consideration is approximately $2.2 billion in cash and Medco common stock. The
transaction has been approved by the boards of directors of both companies and is
subject to the approval of Accredo shareholders and other customary closing
conditions. Medco intends to manage Accredo as an independent business. Under terms
of the definitive agreement, each Accredo share outstanding will be exchanged for
$22.00 in cash and 0.49107 shares of the Companys common stock, subject to adjustment
based on the value of Medcos common stock in certain situations as provided in the
agreement. Medco expects to fund the cash portion of the consideration through a
combination of cash on hand, bank borrowings and its accounts receivable financing
facility. The transaction is expected to close in mid-2005. On February 23, 2005, the derivative plaintiffs in the derivative lawsuit filed
in Shelby County, Tennessee against certain Accredo directors and officers filed a
motion seeking leave to amend the Consolidated Derivative Complaint to add Medco and
certain additional Accredo directors as defendants. The proposed amendment seeks
injunctive relief to enjoin the Medco acquisition of Accredo on the grounds that the
named Accredo directors and officers allegedly seek to use the acquisition to squeeze
out Accredos current stockholders for an unfair price and to insulate themselves from
liability for alleged wrongdoing associated with Accredos June 2002 acquisition of
the SPS Division of Gentiva Health Services, Inc. See Contingencies footnote above.  8.
    EARNINGS PER SHARE 9




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The Company presents earnings per share in accordance with SFAS No. 128, Earnings
Per Share. All per share amounts have been calculated using the weighted average
number of shares outstanding during each period. Diluted earnings per share are
adjusted for the impact of common stock equivalents using the treasury stock method
when the effect is dilutive. Options to purchase approximately 198,000 and 26,000
shares of common stock were outstanding at March 31, 2005 and March 31, 2004,
respectively, but were not included in the computation of diluted earnings per share
for the three months ended March 31 because the options exercise prices were greater
than the average market price of common shares and, therefore, the effect would be
antidilutive. A reconciliation of the basic and diluted weighted average shares
outstanding is as follows at March 31: Nine Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Weighted average
number of common
shares
outstanding used
as the
denominator in
the basic
earnings per
share
calculation
    
    
    48,891,593
    
    
    
    48,050,099
    
    
    
    49,130,520
    
    
    
    48,307,891Additional
shares assuming
exercise of
dilutive stock
options
    
    
    596,473
    
    
    
    818,938
    
    
    
    1,055,904
    
    
    
    969,467Weighted average
number of common
and equivalent
shares used as
the denominator
in the diluted
earnings per
share
calculation
    
    
    49,488,066
    
    
    
    48,869,037
    
    
    
    50,186,424
    
    
    
    49,277,358
 10




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FORWARD LOOKING STATEMENTS Some of the information in this quarterly report contains forward-looking
statements that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as may, will, expect, anticipate,
believe, intend, estimate and continue or similar words. You should read
statements that contain these words carefully for the following reasons:  
    the statements discuss our future expectations;
    the statements contain projections of our future earnings or of our financial condition; and
    the statements state other forward-looking information.Specifically, this report contains, among others, forward-looking statements about:
    our expectations regarding our product mix for periods following March 31, 2005;
    our expectations regarding our payor mix for periods following March 31, 2005;
    our expectations regarding the movement of patients pursuant to our strategic
alliance with Medco Health Solutions, Inc. (Medco) following March 31, 2005;
    our expectations regarding the proposed acquisition of the Company by Medco;
    our expectations regarding the scope and cost of our capital expenditures following March 31, 2005;
    our sources and availability of funds to satisfy our working capital needs;
    the implementation or interpretation of current or future regulations and
legislation relating to the industry in which we operate;
    our critical accounting policies; and
    our expectations regarding the percentage of our revenues attributable to federal and state programs. The forward-looking statements contained in this report reflect our current views
about future events, are based on assumptions and are subject to known and unknown
risks and uncertainties. Many important factors could cause our actual results or
achievements to differ materially from any future results or achievements expressed in
or implied by our forward-looking statements. Many of the factors that will determine
future events or achievements are beyond our ability to control or predict. Important
factors that could cause actual results or achievements to differ materially from the
results or achievements reflected in our forward-looking statements include, among
other things, the factors discussed in Part I, Item 2 of this report under the
sub-heading Risk Factors. You should read this report, the information incorporated by reference into this
report and the documents filed as exhibits to this report completely and with the
understanding that our actual future results or achievements may be materially
different from what we currently expect or anticipate. You should be aware that the
occurrence of any of the events described in the risk factors discussed elsewhere in
this quarterly report and other events that we have not predicted or assessed could
have a material adverse effect on our earnings, financial condition and business. In
such case, the trading price of our common stock could decline, and you may lose all
or part of your investment. The forward-looking statements contained in this report reflect our views and
assumptions only as of the date this report is signed. Except as required by law, we
assume no responsibility for updating any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.
In addition, with respect to all of our forward-looking statements, we claim the
protection of the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995. 11




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OVERVIEW For an understanding of the significant factors that influenced our results, the
following discussion should be read in conjunction with our unaudited consolidated
financial statements and related notes appearing elsewhere in this report. This
managements discussion and analysis should also be read in conjunction with the
managements discussion and analysis and consolidated financial statements included in
our Form 10-K for the fiscal year ended June 30, 2004. We provide specialty retail pharmacy services for the treatment of patients with
costly, chronic diseases. We derive revenues primarily from the retail sale of drugs
to patients. We focus almost exclusively on a limited number of complex and expensive
drugs that serve small patient populations. The following table presents the
percentage of our total revenues generated from sales with respect to the diseases
that we primarily serve: Three Months
    
    
    Nine Months EndedEnded March 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Hemophilia, Autoimmune Disorders, Primary
Immunodeficiency Disease (PID) and
Alpha-
1 Antitrypsin Deficiency
    
    
    35
    %
    
    
    33
    %
    
    
    36
    %
    
    
    35
    %Multiple Sclerosis
    
    
    13
    %
    
    
    13
    %
    
    
    15
    %
    
    
    14
    %Pulmonary Arterial Hypertension (PAH)
    
    
    15
    %
    
    
    15
    %
    
    
    15
    %
    
    
    16
    %Gaucher Disease
    
    
    5
    %
    
    
    7
    %
    
    
    6
    %
    
    
    9
    %Growth Hormone-Related Disorders
    
    
    9
    %
    
    
    7
    %
    
    
    9
    %
    
    
    8
    %Respiratory Syncytial Virus (RSV)
    
    
    13
    %
    
    
    14
    %
    
    
    8
    %
    
    
    9
    %Other Diseases and Services
    
    
    10
    %
    
    
    11
    %
    
    
    11
    %
    
    
    9
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 In the June 2005 quarter, we anticipate that revenues for the treatment of RSV
will represent a much smaller percentage of our overall revenues with an offsetting
increase in the percentage of our revenues from the other diseases listed above.
Synagis®, for the treatment of RSV, is primarily dispensed in the December and March
quarters. Reimbursement for the products we sell comes from governmental payors, Medicare
and Medicaid, and from non-governmental payors. The following table presents the
percentage of our total revenues reimbursed by these payors: Year Ended
    
    
    Year Ended
    
    
    Nine Months EndedJune 30, 2003
    
    
    June 30, 2004
    
    
    March 31, 2005Non-governmental
    
    
    73
    %
    
    
    72
    %
    
    
    72
    %Governmental:Medicaid
    
    
    20
    %
    
    
    21
    %
    
    
    21
    %Medicare
    
    
    7
    %
    
    
    7
    %
    
    
    7
    %
 Blood clotting factor for the treatment of hemophilia and the PAH products,
Flolan® and Remodulin®, are the primary products we distributed in fiscal years 2003,
2004, and year to date March 31, 2005, for which we were reimbursed directly by
Medicare. We anticipate that our payor mix for the remainder of our fiscal year 2005
will be similar to the payor mix achieved in fiscal 2004 and the nine months ended
March 31, 2005. STRATEGIC ALLIANCE On February 9, 2004, we signed a long-term agreement with Medco to become the
preferred retail and home delivery pharmacy provider to Medco members for our
specialty product lines that we currently dispense to treat patients with long-term,
chronic diseases. The agreement includes drugs to treat hemophilia, pulmonary arterial
hypertension, RSV, immune deficiency disorders, multiple sclerosis, growth hormone
deficiency and Gauchers disease. We have historically provided our drugs to some
Medco members; however, this agreement has significantly increased the number of
prescriptions dispensed for Medco members. On February 23, 2005, the Company and Medco announced the signing of a definitive
agreement whereby Medco would acquire all of the outstanding stock of Accredo. See
discussion in Proposed Transaction with Medco section below. ACQUISITIONS 12




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On October 17, 2003, the Company acquired certain assets, including inventory and
accounts receivable, of Alpha Therapeutic Services, Inc. (ATS) from Baxter Healthcare
Corporation. ATS, located in the City of Industry, California, provides pharmaceutical
care for certain chronic, long-term patient populations including those requiring IVIG
and blood related disorders such as hemophilia. As a result of the acquisition, we
have increased our market share in these products. The aggregate purchase price paid
was $35.7 million. Total assets acquired were $4.2 million. The excess of the total
purchase price over the fair value of the assets acquired was allocated as follows:
$30.8 million to goodwill and $0.7 million to acquired patient relationships. The
acquired patient relationship intangible is being amortized over five years. The
results of the ATS operations have been included in the consolidated financial
statements since October 18, 2003. On July 21, 2004, the Company acquired all of the outstanding stock of HRA
Holding Corporation and its wholly owned subsidiary, Hemophilia Resources of America,
Inc. (HRA). HRA specializes in providing pharmaceuticals, therapeutic supplies and
disease management services for people with hemophilia and related bleeding disorders.
The acquisition of HRA increased the Companys market leading position in the
distribution of hemophilia related products. The aggregate purchase price paid for
this acquisition, inclusive of transaction costs and related expenses, was
approximately $166.5 million and was funded by the Companys increased credit
facility. This transaction was accounted for using the purchase method of accounting.
Total assets acquired and liabilities assumed were $24.0 million and $6.9 million,
respectively. The excess of the purchase price, including acquisition costs of
approximately $0.3 million, over the fair value of the net assets acquired of $17.1
million was allocated as follows: $146.1 million to goodwill and $2.5 million related
to acquired patient relationships. The acquired patient relationship intangible is
being amortized over five years. Final resolution of the working capital adjustment,
as defined in the merger agreement, resulted in the payment of $0.7 million of
additional consideration in April 2005. In addition, we recorded a $1.0 million
deferred tax liability associated with the non-deductible future amortization of the
acquired patient relationships. These amounts were accrued as of March 31, 2005, and
are included as adjustments to the liabilities assumed amount described above. The
Company also paid $0.8 million as consideration for an agreement with a selling
shareholder not to compete with the Company for a period of ten years. The transition
and integration of HRA business activities commenced during the September 2004 quarter
and will continue throughout the remainder of fiscal 2005. The results of HRA have
been included in the consolidated financial statements since July 21, 2004. On July 1, 2004, the Company acquired all of the outstanding stock of Home Health
Care Resources, Inc. (HHCR). HHCR specializes in providing pharmaceuticals,
therapeutic supplies and disease management services for people with autoimmune
disorders and hemophilia. The aggregate purchase price paid for this acquisition,
inclusive of transaction costs and related expenses, was approximately $29.8 million.
This amount includes additional consideration paid in March 2005 amounting to $3
million related to an earn-out payment based on the achievement of certain financial
results for the six months ended December 31, 2004. This transaction was accounted for
using the purchase method of accounting. Total assets acquired and liabilities assumed
were $4.3 million and $0.8 million, respectively. The excess of the purchase price,
including the earn-out payment, over the fair value of the net assets acquired of $3.5
million was allocated as follows: $25.7 million to goodwill and $0.3 million related
to acquired patient relationships. The acquired patient relationship intangible is
being amortized over five years. The Company also paid $0.3 million as consideration
for an agreement with the selling shareholders not to compete with the Company for a
period of ten years. The results of HHCR have been included in the consolidated
financial statements since July 1, 2004. PROPOSED TRANSACTION WITH MEDCO On February 23, 2005, the Company and Medco announced the signing of a definitive
agreement whereby Medco would acquire all of the outstanding stock of Accredo. Total
consideration is approximately $2.2 billion in cash and Medco common stock. The
transaction has been approved by the boards of directors of both companies and is
subject to the approval of Accredo shareholders and other customary closing
conditions. Medco intends to manage Accredo as an independent business. Under terms
of the definitive agreement, each Accredo share outstanding will be exchanged for
$22.00 in cash and 0.49107 shares of the Companys common stock, subject to adjustment
based on the value of Medcos common stock in certain situations as provided in the
agreement. Medco expects to fund the cash portion of the consideration through a
combination of cash on hand, bank borrowings and its accounts receivable financing
facility. The transaction is expected to close in mid-2005. On February 23, 2005, the derivative plaintiffs in the derivative lawsuit filed
in Shelby County, Tennessee against certain Accredo directors and officers filed a
motion seeking leave to amend the Consolidated Derivative Complaint to add Medco and
certain additional Accredo directors as defendants. The proposed amendment seeks
injunctive relief to enjoin the Medco acquisition of Accredo on the grounds that the
named Accredo directors and officers allegedly seek to use the acquisition to squeeze
out Accredos current stockholders for an unfair price and to insulate themselves from
liability for alleged wrongdoing associated with Accredos June 2002 acquisition of
the SPS Division of Gentiva Health Services, Inc. The Company believes the claims
asserted in the derivative lawsuit are without merit. 13




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RESULTS OF OPERATIONS Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004 Revenues.Total revenues increased 26% from $409.3 million to $517.1 million from
the three months ended March 31, 2004 to the three months ended March 31, 2005. Net
patient revenue increased 27% from $398.9 million to $507.9 million from the three
months ended March 31, 2004 to the three months ended March 31, 2005. The increase is
primarily due to volume growth in our products for the treatments of hemophilia,
growth hormone disorders, multiple sclerosis, immune deficiency disorders and RSV as a
result of the addition of new patients and additional sales of product to existing
patients. Sales volume increases in growth hormone and our product for the treatment
of multiple sclerosis are primarily driven by our expanded relationship with Medco.
Since the strategic alliance with Medco did not begin until May 2004, we did not have
any revenue in the March 2004 quarter associated with the expanded relationship. We
also benefited from the addition of new and expanded contracts with other managed care
organizations, and from market share gains in certain product lines. The increase in
the hemophilia and immune deficiency product lines is driven in part by the
acquisitions of HRA and HHCR, which were purchased in July 2004. In addition,
revenues from our seven new products launched since January 1, 2003, increased
approximately $17.3 million in the current quarter as compared to the same period last
year. Cost of Sales.Cost of sales increased 33% from $325.5 million to $433 million
from the three months ended March 31, 2004 to the three months ended March 31, 2005.
The 33% growth in costs of sales exceeded the 26% revenue growth discussed above. As
a percentage of revenues, cost of sales increased from 79.5% to 83.7% from the three
months ended March 31, 2004 to the three months ended March 31, 2005, resulting in
gross margins of 20.5% and 16.3% for the three months ended March 31, 2004 and 2005,
respectively. The decline is primarily a result of reductions in reimbursement levels
from government and commercial payors in the three months ended March 31, 2005 as
compared to the same period last year. These reductions principally relate to our
hemophilia (specifically products reimbursed by MediCal beginning June 1, 2004, and
Medicare beginning January 1, 2005), PAH (specifically products reimbursed by
Medicare), and IVIG product lines. Furthermore, the decrease is a result of product
mix changes. We derived a larger percentage of our revenues from lower margin
products in the 2005 period when compared to the same period last year, including
changes resulting from our expanded relationship with Medco and the increasing volume
of our seven new products launched since 2003. General and Administrative.General and administrative expense increased from
$34.2 million to $36.4 million, or 6%, from the three months ended March 31, 2004 to
the three months ended March 31, 2005. As a percentage of revenues, general and
administrative expense decreased from 8.4% to 7.0% from the three months ended March
31, 2004 to the three months ended March 31, 2005. The decrease as a percentage of
revenue is primarily due to the significant revenue growth in the current period as
compared to the same period last year and changes in product mix, both driven in part
from our expanded relationship with Medco. The increase on an absolute dollar basis
is primarily due to approximately $1.4 million in transaction costs associated with
the proposed acquisition by Medco in the current quarter that were not present in the
same quarter last year. These transaction costs primarily consisted of legal,
investment banking, and other professional fees. Non-transaction related professional
fees also increased as a result of Sarbanes-Oxley compliance costs and costs
associated with various legal matters. Information technology expenses associated
with certain hardware and software maintenance contracts and licenses also increased
as a result of revenue growth in the current quarter as compared to the same quarter
last year. Bad Debts.Bad debts decreased from $9.3 million to $6.6 million from the three
months ended March 31, 2004 to the three months ended March 31, 2005. As a percentage
of revenues, bad debt expense decreased from 2.3% to 1.3% from the three months ended
March 31, 2004 to the three months ended March 31, 2005. This decrease is primarily
due to a decrease in the percentage of our revenues that were reimbursed by major
medical benefit plans versus prescription card benefits, and the impact of changes in
product mix, including the incremental Medco revenues in the three months ended March
31, 2005, that did not exist in the same period last year. The change in revenue mix
discussed above directly impacts the percentage of revenue reimbursed by prescription
card benefits versus major medical benefit plans. The majority of the reimbursement
provided by major medical benefit plans are subject to much higher co-payment and
deductible amounts versus the typical $20 to $30 co-pay generally required by
prescription card benefit plans. The revenue stream associated with the expanded
Medco business is pre-adjudicated by Medco and has virtually no bad debt costs
associated with it. Depreciation and Amortization.Depreciation expense increased from $2.1 million
to $2.8 million from the three months ended March 31, 2004 to the three months ended
March 31, 2005, as a result of purchases of property and equipment associated with our
revenue growth including additional computer hardware and enhancements to our fully
integrated pharmacy and reimbursement software system, and build-outs of additional
space. Amortization expense was $1.2 million for the three months ended March 31, 2004
and the three months ended March 31, 2005. These amounts primarily relate to the
amortization of certain other identifiable intangible assets (principally patient
relationships and non-compete agreements) associated with the companies we acquired. 14




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##### Table of Contents



Interest Income/Expense, Net.Interest expense, net increased from $2.0 million
to $3.8 million from the three months ended March 31, 2004 to the three months ended
March 31, 2005 due to increased borrowings and higher interest rates. Upon the
closing of our expanded credit facility in July 2004 (now at $550 million capacity),
we initially increased our borrowings to $375.0 million. The borrowings were
primarily used to fund the acquisition of HRA that also occurred in July 2004.
Amounts borrowed under the previous Senior Credit facility were approximately $182.5
million at March 31, 2004, with a weighted average interest rate of 3.38%. Amounts
borrowed under the expanded Senior Credit facility were $347.2 million at March 31,
2005, with a weighted average interest rate of 4.60%. Income Tax Expense.Our effective tax rate increased from 38.6% to 39.1% from the
three months ended March 31, 2004 to the three months ended March 31, 2005. The
increase in the effective tax rate for the period is primarily due to a larger
percentage of our profits being derived from income that is taxable at higher rates in
certain states. The difference between the recognized effective tax rate and the
statutory rate is primarily attributed to state income taxes. Nine Months Ended March 31, 2005 Compared to Nine Months Ended March 31, 2004 Revenues.Total revenues increased 27% from $1.134 billion to $1.441 billion from
the nine months ended March 31, 2004 to the nine months ended March 31, 2005. Net
patient revenue increased 28% from $1.103 billion to $1.411 billion from the nine
months ended March 31, 2004 to the nine months ended March 31, 2005. The increase is
primarily due to volume growth in our products for the treatments of hemophilia,
multiple sclerosis, growth hormone disorders, PAH, RSV and immune
deficiency disorders as a
result of the addition of new patients and additional sales of product to existing
patients. In addition, the increase in revenues from hemophilia products and our
products for the treatment of immune deficiency disorders is driven in part by of the
acquisitions of HRA and HHCR, which were purchased in July 2004. We also benefited
from the addition of new and expanded contracts with managed care organizations and
pharmacy benefit management companies (PBMs), including our expanded relationship with
Medco. We also achieved market share gains in certain product lines. Since the
strategic alliance with Medco did not begin until May 2004, we did not have any
revenue in the nine-months ended March 31, 2004, associated with the expanded
relationship. We experienced improved collection rates in fiscal 2005 on certain
product lines that resulted in the reduction of contractual adjustments in the amount
of $4.8 million for the nine months ended March 31, 2005. In addition, revenues from
our seven new products launched since January 1, 2003, increased approximately $53.3
million in the current period as compared to the same period last year. Cost of Sales.Cost of sales increased 33% from $894.3 million to $1.19 billion
from the nine months ended March 31, 2004 to the nine months ended March 31, 2005.
The 33% growth in costs of sales exceeded the 27% revenue growth discussed above. As
a percentage of revenues, cost of sales increased from 78.9% to 82.6% from the nine
months ended March 31, 2004 to the nine months ended March 31, 2005, resulting in
gross margins of 21.1% and 17.4% for the nine months ended March 31, 2004 and 2005,
respectively. The decline is primarily a result of reductions in reimbursement levels
from government and commercial payors in the nine months ended March 31, 2005, as
compared to the same period last year. These reductions principally relate to our
hemophilia (specifically products reimbursed by MediCal beginning June 1, 2004, and
Medicare beginning January 1, 2005), PAH (specifically products reimbursed by
Medicare), and IVIG product lines. Furthermore, the decrease is a result of product
mix changes. We derived a larger percentage of our revenues from lower margin
products in the 2004 period when compared to the same period last year, including
changes resulting from our expanded relationship with Medco. The primary change in
product mix was an increase in the percentage of total revenues from products for the
treatment of multiple sclerosis and growth hormone deficiency. General and Administrative.General and administrative expense increased from
$103.2 million to $114.4 million, or 11%, from the nine months ended March 31, 2004 to
the nine months ended March 31, 2005. As a percentage of revenues, general and
administrative expense decreased from 9.1% to 7.9% from the nine months ended March
31, 2004 to the nine months ended March 31, 2005. The decrease as a percentage of
revenue is primarily due to the significant revenue growth in the current period as
compared to the same period last year and changes in product mix, both driven in part
from our expanded relationship with Medco. The increase on an absolute dollar basis
is primarily due to increased salaries and fringe benefits associated with the
expansion of our staff to support our revenue growth, including increases in group
health insurance costs. Rent and information technology expenses increased with the
expansion of our office space. We also incurred approximately $1.4 million in
transaction related costs associated with the proposed acquisition by Medco. These
transaction costs primarily consisted of legal, investment banking, and other
professional fees. Finally, these increases were partially offset by reductions in
directors and officers insurance costs for the nine months ended March 31, 2005, as
compared to the same period last year. Bad Debts.Bad debts decreased from $23.7 million to $19.0 million from the nine
months ended March 31, 2004 to the nine months ended March 31, 2005. As a percentage
of revenues, bad debt expense decreased from 2.1% to 1.3% from the nine months ended
March 31, 2004 to the nine months ended March 31, 2005. This decrease is primarily
due to a decrease in the percentage of our revenues that were reimbursed by major
medical benefit plans versus prescription card 15




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##### Table of Contents



benefits, and the impact of changes in product mix, including the incremental
Medco revenues in the nine months ended March 31, 2005, that did not exist in the same
period last year. The change in revenue mix discussed above directly impacts the
percentage of revenue reimbursed by prescription card benefits versus major medical
benefit plans. The majority of the reimbursement provided by major medical benefit
plans are subject to much higher co-payment and deductible amounts versus the typical
$20 to $30 co-pay generally required by prescription card benefit plans. The revenue
stream associated with the expanded Medco business is pre-adjudicated by Medco and has
virtually no bad debt costs associated with it. Depreciation and Amortization.Depreciation expense increased from $5.8 million
to $8.1 million from the nine months ended March 31, 2004 to the nine months ended
March 31, 2005, as a result of purchases of property and equipment associated with our
revenue growth including additional computer hardware and enhancements to our fully
integrated pharmacy and reimbursement software system, and build-outs of additional
space. Amortization expense increased from $3.5 million to $3.8 million from the nine
months ended March 31, 2004 to the nine months ended March 31, 2005. This increase is
due to amortization of certain other identifiable intangible assets
(principally patient relationships and non-compete agreements) associated with the acquisitions of
HRA and HHCR that were completed in July 2004. Interest Income/Expense, Net.Interest expense, net increased from $6.4 million
to $14.7 million from the nine months ended March 31, 2004 to the nine months ended
March 31, 2005. Interest expense (net) in the current period includes the write-off
of approximately $4.4 million in unamortized debt issuance costs associated with the
replacement and expansion of our Senior Credit facility. The write-off was recorded
in the September 2004 quarter. Upon the closing of the expanded credit facility (now
at $550 million capacity), we initially increased our borrowings to $375.0 million.
The borrowings were primarily used to refinance the existing facility and to fund the
acquisition of HRA that also occurred during the September 2004 quarter. Excluding
the write-off of unamortized debt issuance costs, interest expense (net) would have
been $10.3 million for the nine months ended March 31, 2005, as compared to $6.4
million for the nine months ended March 31, 2004. This increase is attributable to
increased borrowings under the expanded facility and higher interest rates during the
current period as compared to the same period last year. Amounts borrowed under the
previous Senior Credit facility were approximately $182.5 million at March 31, 2004,
with a weighted average interest rate of 3.38%. Amounts borrowed under the expanded
Senior Credit facility were $347.2 million at March 31, 2005, with a weighted average
interest rate of 4.60%. Income Tax Expense.Our effective tax rate increased from 38.6% to 38.7% from the
nine months ended March 31, 2004 to the nine months ended March 31, 2005. The increase
in the effective tax rate for the period is primarily due to a larger percentage of
our profits being derived from income that is taxable at higher rates in certain
states. The difference between the recognized effective tax rate and the statutory
rate is primarily attributed to state income taxes. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2005, working capital was $438.9 million, cash and cash
equivalents were $78.2 million and the current ratio was 2.7 to 1.0. Net cash provided by operating activities was $56.8 million for the nine months
ended March 31, 2005. During the nine months ended March 31, 2005, accounts receivable
increased $86.2 million, inventories increased $ 15.1 million and accounts payable,
accrued expenses and income taxes receivable increased $ 46.4 million. These changes
are due primarily to our revenue growth and the timing of the collection of
receivables, inventory purchases and payments of accounts payable. The growth in
accounts receivable from June 30, 2004, to March 31, 2005, was lower than the
sequential revenue growth, as evidenced by an eleven day reduction in days sales
outstanding. This is driven in part by the effect of our expanded PBM relationships,
as well as improved billing and collection processes. The rise in inventory is driven
primarily by managements intent to increase quantities on hand of certain IVIG
products in anticipation of potential product shortages. The increase is also due to
certain inventory purchasing commitments. Net cash used in investing activities was $205.1 million for the nine months
ended March 31, 2005. Cash used in investing activities consisted primarily of $190.5
million for the purchase of HRA and HHCR and $13.7 million for purchase of property
and equipment. Cash used for the addition of other assets was approximately $0.9
million. Proceeds from the sale of property and equipment were approximately $0.1
million. Net cash provided by financing activities was $183.8 million for the nine months
ended March 31, 2005. This amount consisted of $376.5 million of proceeds from the
issuance of long-term debt and $21.0 million from the issuance of common stock, less
$207.1 million in debt repayments, $5.0 million for the payment of debt issuance costs,
and $1.5 million of distributions to our minority interest partners. Historically, we have funded our operations and continued internal growth through
cash provided by operations. Capital expenditures amounted to $19.7 million in fiscal
year 2004 and $16.0 million in fiscal year 2003. We anticipate that 16




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our capital expenditures for the fiscal year ending June 30, 2005 will consist
primarily of additional computer hardware, including installation of a second data
center, enhancements to our fully integrated pharmacy and reimbursement software
system and costs to build out and furnish additional space needed to meet our
anticipated growth. We expect the cost of our capital expenditures in fiscal year 2005
to be approximately $20.0 million, exclusive of any acquisitions of businesses. We
expect to fund these expenditures through cash provided by operating activities and/or
borrowings under the revolving credit facility with our bank. As of June 30, 2004, our $325 million revolving credit facility with Bank of
America, N.A. and other participating banks (collectively the Lenders) consisted of
a $125 million revolving commitment expiring June 2007, a $75 million term loan
(Tranche A Term Loan) due in periodic principal payments through March 2007, and a
$125 million term loan (Prior Tranche B Term Loan) due in periodic principal payments
through March 2009. On November 18, 2003, we amended our credit facility to lower the
margin on the Prior Tranche B Term Loan to 2.25% for London Inter-Bank Offered Rate
(LIBOR) based loans and 0.75% for prime rate based loans effectively reducing the
margin by 50 basis points through May 2004 and 25 basis points for the remaining term
of the loan. We paid Bank of America, N.A. $175,000 in administrative fees related to
this amendment. During the quarter ended September 30, 2004, we replaced our credit
facility to increase the size of the credit facility to $550 million, consisting of a
$175 million revolving commitment expiring July 2009 and a $375 million term loan
(Tranche B Term Loan) due in periodic principal payments through June 2011. Amounts outstanding under the credit facility bear interest at varying rates
based upon a LIBOR or prime rate of interest (as selected by us), plus a variable
margin rate based upon our leverage ratio as defined by the credit agreement. The
combination of a variable rate margin and LIBOR base rate resulted in an effective
borrowing rate of 3.39% and 4.60% at June 30, 2004, and March 31, 2005, respectively.
Our obligations under the credit facility are secured by a lien on substantially all
of our assets, including a pledge of all of the common stock or partnership interest
of each of our domestic subsidiaries. The Lenders security interest in a portion of
our inventory is subordinate to the liens on that inventory under the terms of a
security agreement between one of our vendors and us. The same vendor has a security
interest in certain accounts receivable, which is subordinate to the rights of the
Lenders. The credit facility documentation contains financial covenants, including
requirements to maintain certain ratios with respect to leverage, fixed charge
coverage, net worth and asset coverage, each as defined in the credit agreement. The
credit facility documentation also includes customary affirmative and negative
covenants, including covenants relating to transactions with affiliates, uses of
proceeds, restrictions on subsidiaries, limitations on indebtedness, limitations on
mergers, acquisitions and asset dispositions, limitations on investments, limitations
on payment of dividends and stock repurchases, and other distributions. The credit
facility documentation also contains customary events of default, including events
relating to changes in control of the Company. On June 4, 2003, we entered into an interest rate swap agreement effectively
converting for a period of one year beginning July 21, 2003, $120 million of
floating-rate borrowings to fixed-rate borrowings with a fixed rate of 1.14%, plus the
applicable margin rate as determined by the credit agreement. The interest rate swap
agreement expired on July 21, 2004. On February 6, 2003, the Securities and Exchange Commission (SEC) declared
effective our shelf registration statement on Form S-3 providing for the offer, from
time to time, of various securities, up to an aggregate of $500 million. The shelf
registration statement may enable us to more efficiently raise funds from the offering
of securities covered by the shelf registration statement, subject to market
conditions and our capital needs. Our liquidity needs currently arise primarily from working capital requirements,
capital expenditures, commitments related to financing obtained through the issuance
of long-term debt and inventory purchase obligations. We believe that our cash from
operations, cash available under the increased revolving credit facility and the
proceeds from any offering of debt or equity securities allowed by the shelf
registration statement will be sufficient to meet our internal operating and working
capital requirements and growth plans for at least the next 12 months. 17




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Commitments and Contractual Obligations The following table sets forth a summary of our contractual cash obligations as
of March 31, 2005. With the exception of long-term debt, this table does not reflect
amounts already recorded on our balance sheet. Payments Due Under Contractual Obligations by Fiscal Year2005 (1)
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    Total(in thousands)Long-Term Debt
    
    $
    1,114
    
    
    $
    4,407
    
    
    $
    4,248
    
    
    $
    3,878
    
    
    $
    3,750
    
    
    $
    331,250
    
    
    $
    348,647Interest on
Long-Term
Debt
    
    
    4,008
    
    
    
    15,898
    
    
    
    15,704
    
    
    
    15,518
    
    
    
    15,345
    
    
    
    16,136
    
    
    
    82,609Operating Leases
    
    
    1,916
    
    
    
    5,967
    
    
    
    4,472
    
    
    
    2,915
    
    
    
    2,149
    
    
    
    1,142
    
    
    
    18,561Purchase Obligations
    
    
    95,696
    
    
    
    170,922
    
    
    
    28,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    295,118Capital Leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Long-Term
Liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    102,734
    
    
    $
    197,194
    
    
    $
    52,924
    
    
    $
    22,311
    
    
    $
    21,244
    
    
    $
    348,528
    
    
    $
    744,935
   (1)
    
    Cash obligations for the remainder of fiscal 2005. The long-term debt obligations in the table reflect the maturities pursuant to
revised and expanded credit facility amendments that occurred during the quarter ended
September 30, 2004. Interest on long-term debt was calculated based on the quarterly
repayment terms defined in the credit agreement and at the interest rate in effect as
of March 31, 2005 (4.60%). Actual interest costs could vary significantly from these
estimates based on interest rate fluctuations, voluntary accelerated principal
payments, and other factors. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. In preparing
our financial statements, we are required to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. We evaluate our
estimates and judgments on an ongoing basis. We base our estimates and judgments on
historical experience and on various other factors that we believe to be reasonable
under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from
other sources. Our actual results may differ from these estimates, and different
assumptions or conditions may yield different estimates. Information regarding our Critical Accounting Policies and Estimates can be
found in our Annual Report on Form 10-K for our most recent fiscal year ended June 30,
2004. The four critical accounting policies that we believe are either the most
judgmental, or involve the selection or application of alternative accounting
policies, and are material to our financial statements are those relating to revenue
recognition, allowance for doubtful accounts, allowance for contractual discounts and
medical claims reserve. In addition, Note 1 to the financial statements in our Annual
Report contains a summary of our significant accounting policies. 18




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##### Table of Contents



RISK FACTORS You should carefully consider the risks and uncertainties we describe below
before investing in Accredo Health, Incorporated. The risks and uncertainties
described below arenotthe only risks and uncertainties that could develop. Other
risks and uncertainties that we have not predicted or evaluated could also affect our
company. If any of the following risks occur, our earnings, financial condition or
business could be materially harmed, and the trading price of our common stock could
decline, resulting in the loss of all or part of your investment. As described below,
on February 23, 2005, the Company and Medco announced the signing of an agreement
whereby Medco would acquire all of the outstanding stock of Accredo. If this
transaction is consummated (which is expected to occur in mid-2005), not all of the
Risk Factors described below will continue to apply to Accredo. The pending transaction with Medco, if not consummated, could result in a significant
drop in our stock price. In addition, our future specialty pharmacy offering may not
be competitive in the marketplace and our net revenues and profitability may be
negatively impacted. On February 23, 2005, the Company and Medco announced the signing of a definitive
agreement whereby Medco would acquire all of the outstanding stock of Accredo. The
closing of the acquisition is subject to customary conditions, including (i) approval
of the holders of Accredo common stock, (ii) absence of any law or order prohibiting
the closing, and (iii) expiration or termination of the Hart-Scott-Rodino waiting
period (which expired on April 7, 2005) and certain other regulatory approvals. In
addition, each partys obligation to consummate the acquisition is subject to certain
other conditions, including (i) subject to certain exceptions, the accuracy of the
representations and warranties of the other party, (ii) material compliance of the
other party with its covenants and (iii) the delivery of customary opinions from
counsel to us and counsel to Medco that the acquisition will qualify as a tax-free
reorganization for federal income tax purposes. Our stock price rose dramatically following the announcement of the signing of
the definitive agreement with Medco, and based on the exchange ratio set out in the
merger agreement, our stock price has tracked the price of Medco stock. If our
agreement with Medco is not consummated, it could result in a significant drop in our
stock price. In addition, our future ability to provide a competitive specialty
pharmacy offering to our clients would be harmed and our net revenues and
profitability may be negatively impacted. We are highly dependent on our relationships with a limited number of
biopharmaceutical suppliers and the loss of any of these relationships could
significantly impact our ability to sustain or grow our revenues. Approximately 36% of our revenue for the nine months ended March 31, 2005 was
derived from the sale of IVIG, Alpha-1 antitrypsin deficiency and blood clotting
factor product. The majority of our IVIG and blood clotting factor products were
purchased from Baxter Healthcare Corporation. We also derive a substantial percentage
of our revenue and profitability from our relationships with Biogen Idec, Inc.,
Genzyme Corporation, GlaxoSmithKline, Inc. and MedImmune, Inc. Our revenue derived
from these relationships represented approximately 35% of our revenue during the nine
months ended March 31, 2005. Our agreements with these suppliers are short-term and cancelable by either party
without cause on 60 to 365 days prior notice. These agreements also generally limit
our ability to handle competing drugs during and, in some cases, after the term of the
agreement, but allow the supplier to distribute through channels other than us.
Further, these agreements provide that pricing and other terms of these relationships
be periodically adjusted for changing market conditions or required service levels.
Any termination or modification to any of these relationships could have a material
adverse effect on a significant portion of our business, financial condition and
results of operations. Our ability to grow could be limited if we do not expand our existing base of drugs or
if we lose patients. We primarily sell 22 product lines. We focus almost exclusively on a limited
number of complex and expensive drugs that serve small patient populations. The drugs
that we sell with respect to the following core disease markets accounted for
approximately 89% of our revenues for the nine months ended March 31, 2005, with the
drugs for hemophilia, autoimmune disorders and PID constituting approximately 36% of
our revenue for the same period:  §
    Hemophilia, Autoimmune Disorders and PID;§
    Pulmonary Arterial Hypertension;§
    Multiple Sclerosis; 19




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§
    Gaucher Disease;§
    Growth Hormone-Related Disorders; and§
    Respiratory Syncytial Virus, or RSV. Due to the small patient populations that use the drugs we handle, our future
growth is highly dependent on expanding our base of drugs. Further, a loss of patient
base or reduction in demand for any reason of the drugs we currently handle could have
a material adverse effect on a significant portion of our business, financial
condition and results of operations. Our business would be harmed if demand for our products and services is reduced. Reduced demand for our products and services could be caused by a number of
circumstances, including:  §
    patient shifts to treatment regimens other than those we offer;§
    new treatments or methods of delivery of existing drugs that do not
require our specialty products and services;§
    a recall of a drug;§
    adverse reactions caused by a drug;§
    the expiration or challenge of a drug patent;§
    competing treatment from a new drug or a new use of an existing drug;§
    the loss of a managed care or other payor relationship;§
    the expansion of product-only service models;§
    changes in sites of service;§
    the cure of a disease we service; or§
    the death of a high-revenue patient. There is substantial competition in our industry, and we may not be able to
compete successfully. The specialty pharmacy industry is highly competitive and is continuing to become
more competitive. Most of the drugs, supplies and services that we provide are also
available from our competitors. Our current and potential competitors include:  §
    other specialty pharmacy distributors;§
    specialty pharmacy divisions of wholesale drug distributors;§
    payors or pharmacy benefit management companies (PBMs);§
    hospital-based pharmacies;§
    retail pharmacies;§
    home infusion therapy companies;§
    manufacturers that sell their products both to distributors and directly to users;§
    comprehensive hemophilia treatment centers;§
    patient support groups and payors entering the specialty pharmacy
distribution business; and 20




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##### Table of Contents



§
    other alternative site health care providers. Many of our competitors have substantially greater resources and more
established operations and infrastructure than we have. We are particularly at risk
from any of our suppliers or payors deciding to pursue their own distribution and
services instead of outsourcing these needs to companies like us. A significant factor
in effective competition will be our ability to maintain and expand relationships with
managed care companies, PBMs and other payors who can effectively determine the
pharmacy source for their enrollees. Entry by PBMs into the specialty pharmacy market, our strategic alliance with Medco
Health Solutions, changes in Medcos business and consolidation in the industry could
affect our ability to serve patients. Caremark Rx, Inc. and AdvancePCS combined to form the nations second largest
pharmacy benefit manager, processing drug claims for about 95 million individuals with
about 600 million prescriptions filled per year. Express Scripts, Inc., which provides
PBM services to over 50 million members, acquired Curascripts on January 30, 2004. All
of these firms are our customers and competitors. On February 9, 2004, we entered into
a 10-year strategic alliance with Medco where we became the preferred retail and home
delivery pharmacy provider to Medcos members for our specialty pharmacy products.
Because of the amount of revenue that we generate from our relationship with Medco, we
could be adversely impacted if Medco is not able to retain the customer base that we
service or is not able to attract new customers and expand their customer base. On
February 23, 2005, the Company and Medco announced the signing of a definitive
agreement whereby Medco would acquire all of the outstanding stock of Accredo (see
separate Risk Factor above describing risks associated with the proposed transaction). As a result of our relationship with Medco, other PBMs may be reluctant to do
business with us. As PBMs acquire specialty pharmacy capability, it is likely that
they will attempt to cancel their relationships with entities, including us, that
compete with the PBM specialty pharmacy operations, and to cause the PBM patients to
obtain their drugs from the PBMs own specialty pharmacy. We also expect there will be
further consolidation among specialty pharmacy providers, such as the recent merger of
Chronimed and MIM Corporation. Such events could materially and adversely affect our
financial condition and results of operations. Our business could be harmed by changes in Medicare or Medicaid. Changes in Medicare, Medicaid or similar government health benefit programs or
the amounts paid by those programs for our services may adversely affect our earnings.
Such programs are highly regulated and subject to substantial changes and cost
containment measures. In recent years, changes in these programs have modified
payments to providers both positively and negatively. The Medicare Prescription Drug,
Improvement and Modernization Act of 2003, or MMA, is having a significant impact on
the U.S. drug delivery system and, correspondingly, on our business. The MMA expands
drug benefits for Medicare beneficiaries. The MMA changes drug pricing methodologies
resulting in both increases and decreases in drug payments. The MMA changes Medicares
payment methodology over the next three years from a system based on average wholesale
price, or AWP, to one based on average sales price, or ASP, and provided for Medicare
rate reductions that were effective January 1, 2004. In November 2004, the
reimbursement levels for Remodulin® were retroactively increased from the rates
initially established under the MMA. The amount of Medicare reimbursement that we
receive for blood clotting factor was changed effective January 1, 2005 to an ASP
methodology. We expect that the effect of the MMA will be to reduce prices and margins
on some of the drugs that we distribute. Future changes and clarifications to MMA may
also impact our business. At least one Medicaid program has adopted, and we expect other Medicaid programs,
some states and some commercial payors, to adopt those aspects of the MMA that either
result in or appear to result in price reductions for drugs covered by such programs.
Adoption of ASP as the measure for determining reimbursement by state Medicaid
programs for the drugs we sell could materially reduce our revenue and gross margins. In order to deal with budget shortfalls, some states are attempting to create
state administered prescription drug discount plans, to limit the number of
prescriptions per person that are covered, to raise Medicaid co-pays and deductibles,
and are proposing more restrictive formularies and reductions in pharmacy
reimbursement rates. For example, Californias Medicaid program, MediCal, recently
adopted a plan that shifted away from use of acquisition cost plus 1% and instead uses
ASP plus 20% for blood clotting factor products. This reduction and any further
reductions in the reimbursement from MediCal could adversely impact revenues and
profitability from the sale of drugs by us or by our two partnerships in California to
patients covered by MediCal. Any reductions in amounts reimbursable by other
government programs for our services or changes in regulations governing such
reimbursements could materially and adversely affect our business, financial condition
and results of operations. 21




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Changes in average wholesale prices could reduce our pricing and margins. Many government payors, including Medicare and Medicaid, have paid, or continue
to pay, us directly or indirectly at a percentage off a drugs AWP. We have also
contracted with a number of private payors to sell drugs at AWP or at a percentage off
AWP. AWP for most drugs is compiled and published by several private companies,
including First DataBank, Inc. Several states have filed lawsuits against
pharmaceutical manufacturers for allegedly inflating reported AWP for prescription
drugs. In addition, class action lawsuits have been brought by consumers against
pharmaceutical manufacturers alleging overstatement of AWP. We are not responsible for
such calculations, reports or payments; however, there can be no assurance that our
ability to negotiate discounts from drug manufacturers will not be materially
adversely affected by such investigations or lawsuits, in the future. The Federal Government has also entered into settlement agreements with several
drug manufacturers relating to the calculation and reporting of AWP pursuant to which
the drug manufacturers, among other things, have agreed to report new pricing
information, the average sales price, to government healthcare programs. The average
sales price is calculated differently than AWP. The recently enacted MMA changes the way the federal government pays for certain
Part B drugs. While the majority of our revenue is reimbursed by private payors, as
CMS implements the ASP methodology of reimbursement, it may affect our current AWP
based reimbursement structure with our private payors. If private payors adopt the ASP
methodology, it could have a material effect on reimbursement rates that we are able
to negotiate with these payors. While we cannot predict the eventual results of these law changes, government
proposals, investigations, or lawsuits, the effect of the MMA has been and will be to
reduce prices and margins on some of the drugs that we distribute. If government
payors or private payors revise their pricing based on new methods of calculating the
AWP for drugs we handle or implement reimbursement methodology based on some value
other than AWP, this could have a material adverse effect on our business, financial
condition and results of operation, including reducing the pricing and margins on
certain of our products. Our business will suffer if we lose relationships with payors. We are highly dependent on reimbursement from non-governmental payors. For the
fiscal years ended June 30, 2002, 2003 and 2004, and the nine months ended March 31,
2005, we derived approximately 79%, 73%, 72% and 72% respectively of our gross patient
revenue from non-governmental payors (including self-pay), which included 3%, 1%, 1%
and 1%, respectively for those periods, from sales to private physician practices
whose ultimate payor is typically Medicare. Many payors seek to limit the number of providers that supply drugs to their
enrollees. For example, we were selected by Aetna, Inc. as one of three providers of
injectable medications. We received approximately 10% of our total revenues from Aetna
in the fiscal year ended June 30, 2004, and approximately 10% in the nine months ended
March 31, 2005. As previously announced by Aetna, they have begun to transfer patients
and therapies from us to a new joint venture between Aetna and one of our competitors.
Our relationship with Medco was responsible for approximately 15% of our total revenue
in the nine months ended March 31, 2005. This revenue was generated from patients that
we serviced on a retail basis prior to our expanded relationship with Medco that
commenced in February 2004 and also from patients that were referred to us through the
expanded relationship. From time to time, payors with whom we have relationships
require that we and our competitors bid to keep their business, and there can be no
assurance that we will be retained or that our margins will not be adversely affected
when that happens. Further, significant consolidation has occurred among
non-government payors, and we expect there will be further consolidation in the
future. If payors with whom we have relationships are part of this consolidation, our
relationships with those payors could be terminated. The loss of a payor relationship,
such as the loss of our relationship with Aetna, Inc. and affiliates, or an adverse
change in the financial condition of a payor, could result in the loss of a
significant number of patients and have a material adverse effect on our business,
financial condition and results of operations. Our business could be harmed if payors decrease or delay their payments to us or seek
to recoup payments already made. Our profitability depends on payment from governmental and non-governmental
payors, and we could be materially and adversely affected by cost containment trends
in the health care industry or by financial difficulties suffered by non-governmental
payors. Cost containment measures affect pricing, purchasing and usage patterns in
health care. Payors also influence decisions regarding the use of a particular drug
treatment and focus on product cost in light of how the product may impact the overall
cost of treatment. Recently, a number of payors have contracted with specialty drug
management services or network managers that focus on controlling the cost of
specialty drugs. These entities, similar to PBMs, are retained by payors to help
control the drugs that are provided to patients and to minimize the cost of these
drugs where appropriate. Certain employers and other private payors have also joined
group purchasing arrangements in an effort to control costs. 22




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##### Table of Contents



Some payors, including large managed care organizations and some private
physician practices, have recently experienced financial trouble. The timing of
payments and our ability to collect from payors also affects our revenue and
profitability. Payors also have contractual rights to audit our books and records to
determine if they have overpaid us. We had a contractual relationship through a joint
venture with two pharmacies currently involved in ongoing reimbursement audits by the
California agency that administers MediCal. If the audits find that the pharmacies
received overpayments from MediCal, we could be required, under the terms of our prior
contractual relationship, to reimburse the pharmacies for all or a portion of any
amounts recouped by the State of California. Subject to the outcome of the audits, we
could be required to make a significant payment in order to satisfy our alleged
contractual obligations. If we are unable to collect from payors or if payors fail to
pay us in a timely manner, or if payors seek to recoup payments already made to us, it
could have a material adverse effect on our business and financial condition. If any of our relationships with medical centers are disrupted or canceled, our
business could be harmed. We have joint venture relationships with four medical centers that provide
services primarily related to hemophilia, growth hormone-related disorders and RSV.
For the fiscal years ended June 30, 2002, 2003 and 2004, we derived approximately 4%,
4% and 2%, respectively, of our income before income taxes from equity in the net
income of unconsolidated joint ventures. We derived approximately 2% of our income
before income taxes from equity in the net income of unconsolidated joint ventures
during the nine months ended March 31, 2005. We own 80% of one of our joint ventures with Childrens Home Care, Inc. and the
financial results of this joint venture are included in our consolidated financial
results. This consolidated joint venture represented approximately 10% of our income
before income taxes for the fiscal year ended June 30, 2002, 17% of our income before
income taxes for the fiscal year ended June 30, 2003, 7% of our income before income
taxes in the fiscal year ended June 30, 2004, and 2% of our income before income taxes
for the nine months ended March 31, 2005. During 2003, the OIG issued a Special Advisory Bulletin focused on complex
contractual joint ventures that could potentially violate the anti-kickback statute.
In this bulletin, the OIG discussed the characteristics that potentially indicate a
prohibited arrangement. Some of these characteristics are present in our existing
joint ventures. As a result, our joint venture relationships have been modified or are
in the process of being restructured. Further, the Department of Health and Human Services, or DHHS, published a set of
safe harbor regulations and continues to publish clarifications to the safe harbors
under the federal anti-kickback statute. Arrangements that fully comply with a safe
harbor are deemed not to violate the anti-kickback statute. We have several business
arrangements (for example, our joint venture and management arrangements with medical
centers, service arrangements with physicians and product pricing arrangements with
suppliers) that do not satisfy all of the requirements necessary to fall within the
safe harbors. Failure to satisfy a safe harbor does not mean that an arrangement is
necessarily illegal. We believe our business arrangements comply with the
anti-kickback statute, the Health Insurance Portability and Accountability Act, or
HIPPA, the federal Stark Law and similar state laws. However, if we are found to
violate any of these laws, we could suffer penalties, fines or possible exclusion,
which could adversely affect our revenues and earnings. In addition to joint venture relationships, we also provide pharmacy management
services to several medical centers. Our agreements with medical centers have terms of
between one and five years, and may be cancelled by either party without cause upon
notice of between one and twelve months. Adverse changes in our relationships with
those medical centers could be caused, for example, by:  §
    changes caused by consolidation within the hospital industry;§
    changes caused by regulatory uncertainties inherent in the structure
of the relationships; or§
    restrictive changes to regulatory requirements. Any termination or adverse change of these relationships could have a
material adverse effect on our business, financial condition and results of
operations. If additional providers obtain access to favorable pricing from the Health Resources
and Services Administration, Office of Pharmacy Affairs drug discount program (the
PHS program) for drugs we handle, our business could be harmed. The federal pricing program of the Public Health Service, commonly known as PHS,
allows qualified hospitals and hemophilia treatment centers to obtain discounts on
blood clotting factor products. While we are able to access PHS pricing 23




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through our contracts to provide contract pharmacy services to hemophilia treatment
centers, we are not eligible to participate directly in these programs. Increased
competition from hospitals and hemophilia treatment centers that have the right to
participate directly in these discount programs may reduce our profit margins. Our acquisition and joint venture strategy may not be successful, which could cause
our business and future growth prospects to suffer. As part of our growth strategy, we continue to evaluate acquisition and joint
venture opportunities, but we cannot predict or provide assurance that we will
complete any future acquisitions or joint ventures. Acquisitions and joint ventures
involve many risks, including:  §
    difficulty in identifying suitable candidates and negotiating and
consummating acquisitions on attractive terms;§
    difficulty in assimilating the new operations;§
    increased transaction costs;§
    diversion of our managements attention from existing operations;§
    dilutive issuances of equity securities that may negatively impact the market price of our stock;§
    increased debt; and§
    increased amortization expense related to intangible assets that would decrease our earnings. We could also be exposed to unknown or contingent liabilities resulting from
the pre-acquisition operations of the entities we acquire, such as liability for
failure to comply with health care or reimbursement laws, including an obligation to
recoup reimbursement payments previously received by the companies we acquire. We also
face exposure if any seller of an entity which we acquire, is not able to fulfill its
indemnification obligations under the terms of the purchase agreement. We may suffer
impairment of assets or have to bear a liability for which we are entitled to
indemnification but are unable to collect. Our debt incurred from recent acquisitions may limit our future financial flexibility. The current level of our debt will have several important effects on our future
operations, including, among others:  §
    A portion of our cash flow will be dedicated to the payment of principal
and interest on the debt and will not be available for other purposes;§
    Our debt covenants will require us to meet financial tests, and may
impose other limitations that may limit our flexibility in planning for and
reacting to changes in our business, including possible acquisition
opportunities;§
    Our ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate and other purposes may
be limited;§
    Failure to meet our debt covenants could result in foreclosure by our
lenders or an increase in the interest rate or administrative fees associated
with our debt;§
    We may be at a competitive disadvantage to similar companies that have
less debt; and§
    Our vulnerability to adverse economic and industry conditions may
increase, including, but not limited to, rising interest rates. Fluctuations in our quarterly financial results may cause our stock price to
decline. Our results of operations may fluctuate on a quarterly basis, which could
adversely affect the market price of our common stock. Our results may fluctuate as a
result of: 24




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§
    lower prices paid by Medicare or Medicaid for the drugs that we sell,
including lower prices resulting from the MMA and other state and federal
legislation and revisions in pricing methods, or the method of establishing
AWP or ASP;§
    below-expected sales or delayed launch of a new drug;§
    price and term adjustments with our drug suppliers;§
    increases in our operating expenses in anticipation of the launch of a new drug;§
    product shortages or an oversupply of product;§
    inaccuracies in our estimates of the costs of ongoing programs;§
    the timing and integration of our acquisitions;§
    making an acquisition that is dilutive to earnings;§
    changes in our estimates used to prepare our financial statements;§
    effectiveness of our sales force;§
    changes in governmental regulations;§
    the annual renewal of deductibles and co-payment requirements that
affect patient ordering patterns;§
    our provision of drugs to treat seasonal illnesses, such as RSV;§
    physician prescribing patterns;§
    general political and economic conditions;§
    interest rate fluctuations; and§
    adverse experience in collection of accounts receivable. Our business would be harmed if the biopharmaceutical industry reduces research,
development and production of the types of drugs that are compatible with the services
we provide. Our business is highly dependent on continued research, development,
manufacturing and marketing expenditures of biopharmaceutical companies, and the
ability of those companies to develop, supply and generate demand for drugs that are
compatible with the services we provide. Our business would be materially and
adversely affected if those companies stopped outsourcing the services we provide or
failed to support existing drugs or develop new drugs. Our business could also be
harmed if the biopharmaceutical industry undergoes any of the following developments:  §
    supply shortages;§
    adverse drug reactions;§
    drug recalls;§
    increased competition among biopharmaceutical companies;§
    an inability of drug companies to finance product development because
of capital shortages;§
    a decline in product research, development or marketing;§
    a reduction in the retail price of drugs from governmental or private
market initiatives;§
    changes in the FDA approval process; or 25




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§
    governmental or private initiatives that would alter how drug
manufacturers, health care providers or pharmacies promote or sell products
and services. Our business could be harmed if the supply of any of the products that we
distribute becomes scarce. The biopharmaceutical industry is susceptible to product shortages. Some of the
products that we distribute, such as some of our hemophilia products, IVIG and
products for the treatment of Alpha-1 antitrypsin deficiency, are collected and
processed from human donors. Accordingly, the supply of these products is highly
dependent on human donors and their availability has been constrained from time to
time. Our suppliers of IVIG have announced initiatives that could result in decreases
in the future supply of IVIG, which, in addition to other factors, may cause the
pricing of IVIG to rise. There was also an industry wide recombinant factor VIII
product shortage that existed for some time, as a result of the manufacturers being
unable to increase production to meet rising global demand. Supply of this drug has
only recently returned to normal levels. If these products, or any of the other drugs
that we distribute, are in short supply for long periods of time and we are unable to
acquire an amount of the drug sufficient to service our patients, our business could
be harmed. Our industry is subject to extensive government regulation and noncompliance by us,
physicians who prescribe our products and services or our suppliers could harm our
business. The marketing, sale and purchase of drugs and medical supplies is extensively
regulated by federal and state governments, and if we fail or are accused of failing
to comply with laws and regulations, we could suffer a material adverse effect on our
business, financial condition and results of operations. Our business could also be
materially and adversely affected if the suppliers or others we work with are accused
of violating laws or regulations. The applicable regulatory framework is complex, and
the laws are very broad in scope. Many of these laws remain open to interpretation,
and have not been addressed by substantive court decisions. The health care laws and regulations that especially apply to our activities
include:  §
    The federal Anti-Kickback Law prohibits the offer or solicitation of
compensation in return for the referral of patients covered by almost all
governmental programs and billing for services rendered pursuant to such
referrals, or the arrangement or recommendation of the purchase of any item,
facility or service covered by those programs. The Health Insurance
Portability and Accountability Act (HIPAA) created new violations for
fraudulent activity applicable to both public and private health care benefit
programs and prohibits inducements to Medicare or Medicaid eligible patients.
The potential sanctions for violations of these laws range from significant
fines, to exclusion from participation in the Medicare and Medicaid programs,
to criminal sanctions. Although some safe harbor regulations attempt to
clarify when an arrangement will not violate the Anti-Kickback Law, our
business arrangements and the services we provide may not fit within these
safe harbors. Failure to satisfy a safe harbor requires analysis of whether
the parties intended to violate the Anti-Kickback Law. Allegations,
investigations, or findings of a violation of the Anti-Kickback Law or similar
state laws could have a material adverse effect on our business.§
    The Department of Health and Human Services (DHHS) has issued
regulations implementing the Administrative Simplification provisions of HIPAA
concerning the maintenance of privacy and security of individually
identifiable health information. These new regulations require the development
and implementation of measures to maintain the privacy and security of health
information and require that certain health claims transactions be conducted
in accordance with uniform standards. These regulations govern health care
providers, health plans and health clearinghouses. Failure to comply with
these regulations, or wrongful disclosure of confidential patient information
could result in the imposition of administrative or criminal sanctions,
including exclusion from the Medicare and state Medicaid programs. In
addition, if we choose to distribute drugs through new distribution channels
such as the Internet, we will have to comply with government regulations that
apply to those distribution channels, which could have a material adverse
effect on our business.§
    The Ethics in Patient Referrals Act of 1989, as amended, commonly
referred to as the Stark Law, prohibits physician referrals to entities with
which the physician or their immediate family members have a financial
relationship. Many states have adopted laws similar to the Stark law. A
violation of the Stark Law or similar state laws is punishable by civil
sanctions, including significant fines and exclusion from participation in
Medicare and Medicaid.§
    State laws prohibit the practice of medicine, pharmacy and nursing
without a license. To the extent that we assist patients and providers with
prescribed treatment programs, a state could consider our activities to
constitute the 26




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practice of medicine. If we are found to have violated those laws, we could face
civil and criminal penalties and be required to reduce, restructure, or even
cease our business in that state.§
    Pharmacies and pharmacists must obtain state licenses to operate and
dispense drugs. Pharmacies must also obtain licenses in some states to operate
and provide goods and services to residents of those states. Our entities that
provide nursing for our patients and our nurses must obtain licenses in
certain states to conduct our business. If we are unable to maintain our
licenses or if states place burdensome restrictions or limitations on
non-resident pharmacies or nurses, this could limit or affect our ability to
operate in some states which could adversely impact our business and results
of operations.§
    Federal and state investigations and enforcement actions continue to
focus on the health care industry, scrutinizing a wide range of items such as
joint venture arrangements, referral and billing practices, product discount
arrangements, home health care services, dissemination of confidential patient
information, clinical drug research trials and gifts for patients. Recently,
the OIG issued a Special Advisory Bulletin focused on complex contractual
joint ventures that could potentially violate the anti- kickback statute. In
this bulletin, the OIG discussed the characteristics that potentially indicate
a prohibited arrangement. Some of these characteristics are present in our
existing joint ventures. Accordingly, some of our existing joint ventures have
been restructured and others may be restructured in the future.§
    The False Claims Act encourages private individuals to file suits on
behalf of the government against health care providers such as us. Such suits
could result in significant financial sanctions or exclusion from
participation in the Medicare and Medicaid programs. If some of the drugs that we provide lose their orphan drug status, we could
face more competition. Our business could be adversely affected by the expiration or challenge to the
orphan drug status that has been granted by the FDA to some of the drugs that we
handle. When the FDA grants orphan drug status, it will not approve a second drug for
the same treatment for a period of seven years unless the new drug is chemically
different or clinically superior. Not all of the drugs that we sell which are related
to our core disease states have orphan drug status. The loss of orphan drug status,
the approval of new drugs notwithstanding orphan drug status or the development of
drugs that are superior to the drugs we sell could result in additional competitive
drugs entering the market, which could harm our business. We rely heavily on a single shipping provider, and our business would be harmed if our
rates are increased or our provider is unavailable. A significant portion of our revenues result from the sale of drugs we deliver to
our patients and a single carrier, FedEx, ships principally all of our products. We
depend heavily on these outsourced shipping services for efficient, cost effective
delivery of our product. The risks associated with this dependence include:  §
    any significant increase in shipping rates, including rate increases
resulting from higher fuel prices;§
    strikes or other service interruptions by our primary carrier, FedEx,
or by another carrier that could affect FedEx; or§
    spoilage of high cost drugs during shipment, since our drugs often
require special handling, such as refrigeration. Disruptions in commercial activities such as those following the September 2001
terrorist attacks on the U.S. or as a result of a natural disaster may adversely
impact our results of operations, our ability to raise capital or our future growth. Our operations have been and could again be harmed by terrorist attacks on the
U.S. For example, transportation systems and couriers that we rely upon to deliver our
drugs have been and could again be disrupted, thereby causing a decrease in our
revenues. In addition, we may experience a rise in operating costs, such as costs for
transportation, courier services, insurance and security. We also may experience
delays in payments from payors, which would harm our cash flow. The U.S. economy in
general may be adversely affected by terrorist attacks or by any related outbreak of
hostilities. Any such economic downturn could adversely impact our results of
operations, impair our cost of or ability to raise debt or equity capital or impede
our ability to continue growing our business. We have a centralized data center located in Memphis, Tennessee and we are in the
process of building a second data center in another city that we expect to be fully
operational in mid-2005. Until the second data center is fully operational, acts by
terrorists or a natural disaster that causes damage to the data center could cause us
to be unable to operate our business for a period of time. 27




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If we are unable to manage our growth effectively, our business will be harmed. Our rapid growth over the past several years has placed a strain on our
resources, and if we cannot effectively manage our growth, our business, financial
condition and results of operations could be materially and adversely affected. We
have experienced a large increase in the number of our employees, the size of our
programs and the scope of our operations. Our ability to manage this growth and be
successful in the future will depend partly on our ability to retain skilled
employees, which has become more difficult due to the national health care
professional shortage. Our ability to manage our growth is also dependent upon our
ability to enhance our management team and improve our management information and
financial control systems. We could be adversely affected by an impairment of the significant amount of goodwill
and other intangibles on our financial statements. Our formation and our acquisitions have resulted in the recording of a
significant amount of goodwill on our financial statements. The goodwill was recorded
because the fair value of the tangible net assets acquired was less than the purchase
price. There can be no assurance that we will realize the full value of this goodwill.
We evaluate on an on-going basis whether events and circumstances indicate that all or
some of the carrying value of goodwill is no longer recoverable, in which case we
would write off the unrecoverable goodwill as a charge to our earnings. As of March
31, 2005, we had goodwill, net of accumulated amortization, of approximately $554
million, or 42% of total assets and 81% of stockholders equity. Since our growth strategy may involve the acquisition of other companies, we may
record additional goodwill in the future. The possible write-off of this goodwill
could negatively impact our future earnings. We will also be required to allocate a
portion of the purchase price of any acquisition to the value of non-competition
agreements, patient base and contracts that are acquired. The amount allocated to
these items could be amortized over a fairly short period. As a result, our earnings
and the market price of our common stock could be negatively impacted. We rely on a few key employees whose absence or loss could adversely affect our
business. We depend on a few key executives, and the loss of their services could cause a
material adverse effect to our company. We do not maintain key person life insurance
policies on any of those executives. As a result, we are not insured against the
losses resulting from the death of our key executives. Further, we must be able to
attract and retain other qualified, essential employees for our technical operating
and professional staff, such as pharmacists and nurses. If we are unable to attract
and retain these essential employees, our business could be harmed. We have been named in a consolidated shareholder class action lawsuit and a
shareholders derivative lawsuit asserting claims under the securities laws. The uncertainty associated with these unresolved lawsuits could harm our business
and financial condition. The defense of these lawsuits also could result in litigation
fees and costs, as well as the diversion of resources. Negative developments with
respect to the lawsuits could cause our stock price to decline significantly. The
indemnification provisions contained in our Certificate of Incorporation and Bylaws
require us to indemnify our current and former officers and directors who are named as
defendants against the allegations contained in these suits. Even though we maintain
directors and officers insurance applicable to the lawsuits, there can be no guarantee
that the proceeds of such insurance will be available for defense fees and costs, or
payment of any settlement or judgment in the lawsuits or, if available, will be
sufficient to cover the fees and costs and any settlement or judgment imposed against
us. The ultimate cost and effect of these lawsuits on our financial condition,
results of operations, customer relations and management is unknown at this time. In addition to the securities litigation currently pending against us and our
officers and directors, we may also in the future be the target of similar litigation.
Additional securities litigation could result in substantial costs and divert our
attention and resources. The derivative plaintiffs in the stockholders derivative lawsuit asserting
claims under the securities laws have filed a motion to add Medco as a defendant and
enjoin consummation of the merger. Accredo believes that the claims asserted in the
derivative lawsuit are without merit and intends to continue to vigorously contest the
action, and Medco believes that the allegations sought to be asserted against it are
without merit and intends to vigorously contest the action in the event the leave to
amend is granted. We may need additional capital to finance our growth and capital requirements, which
could prevent us from fully pursuing our growth strategy. 28




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In order to implement our growth strategy, we will need substantial capital
resources and will incur, from time to time, short- and long-term indebtedness, the
terms of which will depend on market and other conditions. We cannot be certain that
existing or additional financing will be available to us on acceptable terms, if at
all. As a result, we could be unable to fully pursue our growth strategy. Further,
additional financing may involve the issuance of equity or debt securities that would
reduce the percentage ownership of our then current stockholders. The market price of our common stock may experience substantial fluctuations for
reasons over which we have little control. Our common stock is traded on the Nasdaq National Market System. The market price
of our common stock could fluctuate substantially based on a variety of factors,
including the following:  §
    future announcements concerning us, our competitors, the drug manufacturers
with whom we have relationships or the health care market;§
    changes in government regulations;§
    overall volatility of the stock market;§
    changes in the financial estimates we provide to the market;§
    changes in estimates by analysts;§
    changes in operating results from quarter to quarter; and§
    loss of key executives. 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. Some provisions of our charter documents and the Stockholder Protection Rights Plan
may have anti-takeover effects that could discourage a change in control, even if an
acquisition would be beneficial to our stockholders. Our certificate of incorporation, our bylaws and Delaware law contain provisions
that could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders. In addition, our Board of Directors has
adopted a Stockholder Protection Rights Plan, sometimes referred to as a poison pill,
which would substantially dilute the interest sought by an acquirer. In the event we are unable to satisfy regulatory requirements relating to internal
controls, or if these internal controls over financial reporting are not effective,
our business and our stock price could suffer. Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to do a
comprehensive and costly evaluation of their internal controls. As a result, during
our fiscal year ending June 30, 2005, we will be required to perform an evaluation of
our internal controls over financial reporting and have our auditor publicly attest to
such evaluation. We have prepared an internal plan of action for compliance, which
includes a timeline and scheduled activities with respect to preparation of such
evaluation. Our efforts to comply with Section 404 and related regulations regarding
our managements required assessment of internal control over financial reporting and
our independent auditors attestation of that assessment has required, and continues
to require, the commitment of significant financial and managerial resources. If we
fail to timely complete this evaluation, or if our auditors cannot timely attest to
our evaluation, we could be subject to regulatory scrutiny and a loss of public
confidence in our internal controls, which could have an adverse effect on our
business and our stock price. 29




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to the impact of financial market risk is significant. Our
primary financial market risk exposure consists of interest rate risk related to
interest that we are obligated to pay on our variable-rate debt. We sometimes use derivative financial instruments to manage our exposure to
rising interest rates on our variable-rate debt, primarily by entering into
variable-to-fixed interest rate swaps. We had fixed the interest rate through July 21,
2004 on $120 million of our variable-rate debt through the use of a variable-to-fixed
interest rate swap. As a result, we did not benefit from any decrease in interest
rates nor were we subjected to any detriment from rising interest rates on this
portion of our debt during the period of the swap agreement. We have not yet hedged against our interest rate risk exposure after July 21,
2004. As a result, we will benefit from decreasing interest rates, but rising interest
rates on our debt will also harm us. Accordingly, if we maintain our current level of
total debt, a 100 basis point decrease in interest rates along the entire yield curve
would result in an increase in pre-tax income of approximately $3.47 million over the
next twelve months. However, a 100 basis point increase in interest rates would result
in a decrease in pre-tax income of $3.47 million for the same period. 
 ITEM 4. CONTROLS AND PROCEDURES The Companys Chief Executive Officer and Chief Financial Officer evaluated
the effectiveness of the design and operation of the Companys disclosure controls and
procedures as of the end of the period covered by this report. The Companys Chief
Executive Officer and Chief Financial Officer concluded that as of the end of the
period covered by this report the Company maintains disclosure controls and procedures
that provide reasonable assurance that information required to be disclosed in the
Companys reports under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the SECs
rules and forms, and that such information is accumulated and communicated to the
Companys management, including its Chief Executive Officer and its Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure. There have been no changes in the Companys internal control over financial
reporting during the quarter ended March 31, 2005 that have materially affected, or
are reasonably likely to materially affect, the Companys internal control over
financial reporting. 30




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PART II - OTHER INFORMATION 
 ITEM 5. OTHER INFORMATION On February 23, 2005, the Company and Medco announced the signing of a
definitive agreement whereby Medco would acquire all of the outstanding stock of
Accredo. Total consideration is approximately $2.2 billion in cash and Medco common
stock. The transaction has been approved by the boards of directors of both companies
and is subject to the approval of Accredo shareholders and other customary closing
conditions. Medco intends to manage Accredo as an independent business. Under terms
of the definitive agreement, each Accredo share outstanding will be exchanged for
$22.00 in cash and 0.49107 shares of the Companys common stock, subject to adjustment
based on the value of Medcos common stock in certain situations as provided in the
agreement. Medco expects to fund the cash portion of the consideration through a
combination of cash on hand, bank borrowings and its accounts receivable financing
facility. The transaction is expected to close in mid-2005. On February 23, 2005, the derivative plaintiffs in the derivative lawsuit filed
in Shelby County, Tennessee against certain Accredo directors and officers filed a
motion seeking leave to amend the Consolidated Derivative Complaint to add Medco and
certain additional Accredo directors as defendants. The proposed amendment seeks
injunctive relief to enjoin the Medco acquisition of Accredo on the grounds that the
named Accredo directors and officers allegedly seek to use the acquisition to squeeze
out Accredos current stockholders for an unfair price and to insulate themselves from
liability for alleged wrongdoing associated with Accredos June 2002 acquisition of
the SPS Division of Gentiva Health Services, Inc. The Company believes the claims
asserted in the derivative lawsuit are without merit. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.  (a)
    Exhibits Exhibit 31.1
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 31.2
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002*Exhibit 32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*Exhibit 32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   *
    
    In accordance with Release No. 34-47986, this exhibit is hereby furnished to
the SEC as an accompanying document and is not deemed to be filed for purposes of
Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the
liabilities of that Section, nor shall it be deemed incorporated by reference into
any filing under the Securities Act of 1933.  (b)
    Reports on Form 8-K We filed a report on Form 8-K on January 31, 2005 to furnish as an exhibit,
the press release reporting our financial results for the quarter ended December 31,
2004. We filed a report on Form 8-K on February 23, 2005 to furnish as an exhibit, the
joint press release issued on February 23, 2005, by Accredo Health, Incorporated
(Accredo) and Medco Health Solutions, Inc. (Medco) announcing the execution of an
Agreement and Plan of Merger among Accredo, Medco and Raptor Merger Sub, Inc. We filed a report on Form 8-K on February 24, 2005 to provide details of entry
into a material definitive agreement and to furnish as an exhibit the agreement dated
February 22, 2005 whereby Accredo Health, Incorporated, a Delaware corporation
(Accredo), entered into a definitive Agreement and Plan of Merger (the Merger
Agreement) with Medco Health Solutions, Inc., a Delaware corporation (Medco), and
Raptor Merger Sub, Inc., a Delaware corporation and direct wholly-owned subsidiary of
Medco (Merger Sub). Upon the terms and subject to the conditions set forth in the
Merger Agreement, Accredo will merge with and into Merger Sub, with Merger Sub
continuing as the surviving corporation and a wholly-owned subsidiary of Medco. 31




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We filed a report on Form 8-K on February 28, 2005 to provide details of entry
into material definitive agreements with certain executive officers of the company.
On February 22, 2005, Accredo Health, Incorporated, a Delaware corporation (the
Company), entered into definitive employment agreements with certain executive
officers of the Company, the effectiveness of which are conditioned upon the closing
of the merger (the Merger) contemplated by the Agreement and Plan of Merger among
the Company, Medco Health Solutions, Inc. (Medco) and Raptor Merger Sub, Inc. This
Form 8-K also reported the motion to amend the Consolidated Derivative Complaint in
the derivative lawsuit filed in Shelby County, Tennessee. See also Part II Item 5 and
the Contingencies footnote in the condensed consolidated financial statements. 32




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Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized. Accredo Health, IncorporatedMay 6, 2005
    /s/ David D. StevensDavid D. StevensChairman of the Board and
Chief Executive Officer May 6, 2005
    /s/ Joel R. KimbroughJoel R. KimbroughSenior Vice President, Chief
Financial Officer and Treasurer 33




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Exhibit Index ExhibitNumber
    
    Description of Exhibits31.1
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002*32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002*32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
   *
    
    In accordance with Release No. 34-47986, this exhibit is hereby furnished to the SEC
as an accompanying document and is not deemed to be filed for purposes of Section 18
of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that
Section, nor shall it be deemed incorporated by reference into any filing under the
Securities Act of 1933. 34