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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 OR / / 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 [X] No [  ] Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [  ]




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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 30, 2004COMMON STOCK, $0.01 PAR VALUE
    
    
    48,481,013TOTAL COMMON STOCK
    
    
    48,481,013
 2




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ACCREDO HEALTH, INCORPORATED
INDEX Part I    FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Statements of Income (Loss) (unaudited) For the three months and nine months ended March 31, 2003 (as restated) and 2004Condensed Consolidated Balance Sheets June 30, 2003 and March 31, 2004 (unaudited)Condensed Consolidated Statements of Cash Flows (unaudited) For the nine months ended March 31, 2003 (as restated) 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 6.Exhibits and Reports on Form 8-KNote: Items 1, 2, 3, 4 and 5 of Part II are omitted because they are not applicableEX-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
  3




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##### Table of Contents



PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS. ACCREDO HEALTH,
INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(000S OMITTED, EXCEPT SHARE DATA)
(UNAUDITED)
 Nine Months Ended March 31,
    
    Three Months Ended March 31,2004
    
    2003
    
    2004
    
    2003(as restated
    
    
    
    (as restatedsee Note 2)
    
    
    
    see Note 2)Net patient revenue

    
    $
    1,103,197
    
    
    $
    1,015,676
    
    
    $
    398,919
    
    
    $
    349,372Other revenue
    
    
    28,604
    
    
    
    27,259
    
    
    
    9,667
    
    
    
    8,336Equity in net income of joint ventures
    
    
    2,272
    
    
    
    1,345
    
    
    
    722
    
    
    
    405Total revenues
    
    
    1,134,073
    
    
    
    1,044,280
    
    
    
    409,308
    
    
    
    358,113Cost of sales
    
    
    894,338
    
    
    
    830,202
    
    
    
    325,517
    
    
    
    283,531Gross profit
    
    
    239,735
    
    
    
    214,078
    
    
    
    83,791
    
    
    
    74,582General & administrative
    
    
    103,166
    
    
    
    97,174
    
    
    
    34,178
    
    
    
    33,761Bad debts (note 2)
    
    
    23,731
    
    
    
    80,345
    
    
    
    9,303
    
    
    
    66,103Depreciation and amortization
    
    
    9,333
    
    
    
    7,548
    
    
    
    3,277
    
    
    
    2,715Income (loss) from operations
    
    
    103,505
    
    
    
    29,011
    
    
    
    37,033
    
    
    
    (27,997
    )Interest expense, net
    
    
    6,365
    
    
    
    7,194
    
    
    
    1,964
    
    
    
    2,384Minority interest in consolidated subsidiary
    
    
    1,741
    
    
    
    1,473
    
    
    
    688
    
    
    
    470Income (loss) before income taxes
    
    
    95,399
    
    
    
    20,344
    
    
    
    34,381
    
    
    
    (30,851
    )Provision for income tax expense (benefit)
    
    
    36,855
    
    
    
    8,048
    
    
    
    13,254
    
    
    
    (12,128
    )Net income (loss)
    
    $
    58,544
    
    
    $
    12,296
    
    
    $
    21,127
    
    
    $
    (18,723
    )Cash dividends declared on common stock
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Earnings (loss) per share:Basic
    
    $
    1.22
    
    
    $
    0.26
    
    
    $
    0.44
    
    
    $
    (0.39
    )Diluted
    
    $
    1.20
    
    
    $
    0.25
    
    
    $
    0.43
    
    
    $
    (0.39
    )Weighted average shares outstanding:Basic
    
    
    48,050,099
    
    
    
    47,419,325
    
    
    
    48,307,891
    
    
    
    47,698,820Diluted
    
    
    48,869,037
    
    
    
    48,488,663
    
    
    
    49,277,358
    
    
    
    48,541,507
 See accompanying notes to condensed consolidated financial
statements. 4




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ACCREDO HEALTH,
INCORPORATED 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(000S OMITTED, EXCEPT SHARE DATA)
 (Unaudited)March 31,
    
    June 30,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    44,635
    
    
    $
    48,006Patient accounts receivable, less allowance for
doubtful accounts of $106,594 at March 31, 2004
and $126,541 at June 30, 2003
    
    
    354,420
    
    
    
    307,982Due from affiliates
    
    
    5,226
    
    
    
    3,933Other accounts receivable
    
    
    18,654
    
    
    
    21,226Inventories
    
    
    139,536
    
    
    
    89,985Prepaids and other current assets
    
    
    3,717
    
    
    
    4,625Income taxes receivable
    
    
    2,236
    
    
    
    1,546Deferred income taxes
    
    
    16,697
    
    
    
    24,579Total current assets
    
    
    585,121
    
    
    
    501,882Property and equipment, net
    
    
    34,759
    
    
    
    31,681Other assets:Joint venture investments
    
    
    7,765
    
    
    
    5,908Goodwill, net
    
    
    382,804
    
    
    
    352,509Other intangible assets, net
    
    
    19,039
    
    
    
    22,803Total assets
    
    $
    1,029,488
    
    
    $
    914,783LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    220,803
    
    
    $
    169,664Accrued expenses
    
    
    20,951
    
    
    
    19,518Due to affiliates
    
    
    801
    
    
    
    576Current portion of long-term debt
    
    
    16,938
    
    
    
    16,250Total current liabilities
    
    
    259,493
    
    
    
    206,008Long-term debt
    
    
    166,605
    
    
    
    178,438Deferred income taxes
    
    
    21,022
    
    
    
    14,810Minority interest in consolidated joint venture
    
    
    3,160
    
    
    
    2,819Stockholders equity:Undesignated Preferred Stock, 5,000,000 shares
authorized, no shares issued
    
    
    
    
    
    
    Common Stock, $.01 par value; 100,000,000 shares authorized;
48,479,753 and 47,838,257 shares issued and outstanding
at March 31, 2004 and June 30, 2003, respectively
    
    
    485
    
    
    
    478Additional paid-in capital
    
    
    433,074
    
    
    
    425,183Accumulated other comprehensive loss
    
    
    (10
    )
    
    
    (68
    )Retained earnings
    
    
    145,659
    
    
    
    87,115Total stockholders equity
    
    
    579,208
    
    
    
    512,708Total liabilities and stockholders equity
    
    $
    1,029,488
    
    
    $
    914,783
 See accompanying notes to condensed consolidated financial
statements. 5




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ACCREDO HEALTH,
INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000S OMITTED)
(UNAUDITED)
 Nine Months EndedMarch 31,2004
    
    2003(as restated)OPERATING ACTIVITIES:Net income
    
    $
    58,544
    
    
    $
    12,296Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    12,018
    
    
    
    9,941Provision for losses on accounts receivable
    
    
    23,731
    
    
    
    80,345Deferred income tax benefit
    
    
    14,094
    
    
    
    (1,075
    )Tax benefit of disqualifying disposition of stock options
    
    
    1,808
    
    
    
    4,430Undistributed earnings of joint ventures
    
    
    (1,857
    )
    
    
    (696
    )Minority interest in income of consolidated joint venture
    
    
    1,741
    
    
    
    1,473Changes in operating assets and liabilities:Patient receivables and other
    
    
    (64,876
    )
    
    
    (51,676
    )Due from affiliates
    
    
    (1,068
    )
    
    
    (517
    )Inventories
    
    
    (48,290
    )
    
    
    7,381Prepaids and other current assets
    
    
    908
    
    
    
    1,170Accounts payable and accrued expenses
    
    
    52,613
    
    
    
    3,418Income taxes payable
    
    
    (160
    )
    
    
    (18,536
    )Net cash provided by operating activities
    
    
    49,206
    
    
    
    47,954INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (10,260
    )
    
    
    (12,662
    )Business acquisitions and joint venture investments
    
    
    (35,862
    )
    
    
    (21,275
    )Net cash used in investing activities
    
    
    (46,122
    )
    
    
    (33,937
    )FINANCING ACTIVITIES:Proceeds from issuance of long-term debt
    
    
    1,381
    
    
    
    Decrease in long-term debt
    
    
    (12,525
    )
    
    
    (31,250
    )Issuance of common stock
    
    
    6,089
    
    
    

    6,882Distributions to minority interest partner
    
    
    (1,400
    )
    
    
    (500
    )Net cash used in financing activities
    
    
    (6,455
    )
    
    
    (24,868
    )Decrease in cash and cash equivalents
    
    
    (3,371
    )
    
    
    (10,851
    )Cash and cash equivalents at beginning of period
    
    
    48,006
    
    
    
    42,913Cash and cash equivalents at end of period
    
    $
    44,635
    
    
    $
    32,062
 See accompanying notes to condensed consolidated financial
statements. 6




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2004  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, 2004, are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 2004. Certain amounts for the three and nine-month periods ended March 31,
2003 have been reclassified to conform to the presentation for the
three and nine-month periods ended March 31, 2004. These
reclassifications had no effect on net income or total revenues. The balance sheet at June 30, 2003 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, 2003.  2.
    
    RESTATEMENT Subsequent to the issuance of the Companys fiscal year 2003
quarterly financial statements, the Companys management determined
that previously issued interim financial statements should be
restated due to a change in the timing and recognition of revenue.
For revenue recognition purposes, prior to April 1, 2003, the Company
considered the delivery criteria to have been met when product was
shipped to its patients, and the Company had no further obligation
related to such product. The Company has now determined that the
delivery criteria are met when the product has been delivered to the
patient (which typically occurs one day after shipment), and the
Company has no further obligation related to such product. The
restatement (in thousands, except per share data) resulted in a
decrease in net patient revenue of $8,456 for the three months and
nine months ended March 31, 2003. The previously reported net loss
for the three months ended March 31, 2003 increased from $17,769 to
$18,723 and the previously reported net income for the nine months
ended March 31, 2003 decreased from $13,250 to $12,296. The
previously reported basic and diluted loss per common share was
increased by $.02 for the three months ended March 31, 2003 and the
previously reported basic and diluted earnings per common share was
decreased by $.02 for the nine months ended March 31, 2003. A summary of the significant effects of the restatement is as follows
(in thousands, except per share data): Condensed Consolidated Statement of Operations Data: Nine Months Ended March 31, 2003
    
    Three Months Ended March 31, 2003As previously
    
    
    
    
    
    As previouslyreported
    
    As restated
    
    reported
    
    As restatedTotal revenues
    
    $
    1,052,736
    
    
    $
    1,044,280
    
    
    $
    366,569
    
    
    $
    358,113Operating income (loss)
    
    
    29,481
    
    
    
    29,011
    
    
    
    (26,787
    )
    
    
    (27,997
    )Income (loss) before income tax
    
    
    21,887
    
    
    
    20,344
    
    
    
    (29,308
    )
    
    
    (30,851
    )Net income (loss)
    
    
    13,250
    
    
    
    12,296
    
    
    
    (17,769
    )
    
    
    (18,723
    )Net income (loss) per common
share:Basic
    
    $
    0.28
    
    
    $
    0.26
    
    
    $
    (0.37
    )
    
    $
    (0.39
    )Diluted
    
    $
    0.27
    
    
    $
    0.25
    
    
    $
    (0.37
    )
    
    $
    (0.39
    )
 7




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3.
    
    STOCKHOLDERS EQUITY During the quarter and nine months ended March 31, 2004,
employees and directors exercised stock options to acquire 311,924
and 601,460 shares of Accredo common stock, respectively. The
weighted average option exercise price was $13.27 per share for the
quarter and $8.88 per share for the nine-month period.  4.
    
    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 (Statement 123) and has been determined as if the Company had
accounted for its employee stock options under the fair value method
of Statement 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 March 31,
    
    Three Months Ended March 31,2004
    
    2003
    
    2004
    
    2003Weighted average risk-free
interest rate
    
    
    2.77
    %
    
    
    2.70
    %
    
    
    2.75
    %
    
    
    2.70
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility factor
    
    
    .70
    
    
    
    .64
    
    
    
    .70
    
    
    
    .64Weighted-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. 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 March 31,
    
    Three Months Ended March 31,2004
    
    2003
    
    2004
    
    2003Net income (loss), as reported
    
    $
    58,544
    
    
    $
    12,296
    
    
    $
    21,127
    
    
    $
    (18,723
    )Less stock-based employee
compensation cost, net of
related tax effects, applying
the fair value method to all
awards
    
    
    (8,718
    )
    
    
    (7,561
    )
    
    
    (3,063
    )
    
    
    (3,013
    )Pro forma net income (loss)
    
    $
    49,826
    
    
    $
    4,735
    
    
    $
    18,064
    
    
    $
    (21,736
    )Earnings (loss) per share:Basic  as reported
    
    $
    1.22
    
    
    $
    0.26
    
    
    $
    0.44
    
    
    $
    (0.39
    )Basic  pro forma
    
    $
    1.04
    
    
    $
    0.10
    
    
    $
    0.37
    
    
    $
    (0.46
    )Diluted  as reported
    
    $
    1.20
    
    
    $
    0.25
    
    
    $
    0.43
    
    
    $
    (0.39
    )Diluted  pro forma
    
    $
    1.04
    
    
    $
    0.10
    
    
    $
    0.37
    
    
    $
    (0.46
    )
 8




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5.
    
    COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) includes changes in the fair value of
certain derivative financial instruments that qualify for hedge
accounting. Comprehensive income (loss) for all periods presented is
as follows: Nine Months Ended March 31,
    
    Three Months Ended March 31,2004
    
    2003
    
    2004
    
    2003Reported net income (loss)
    
    $
    58,544
    
    
    $
    12,296
    
    
    $
    21,127
    
    
    $
    (18,723
    )Unrealized gain (loss) on interest rate
swap contracts, net of tax benefit
    
    
    58
    
    
    
    (240
    )
    
    
    (36
    )
    
    
    126Comprehensive income (loss)
    
    $
    58,602
    
    
    $
    12,056
    
    
    $
    21,091
    
    
    $
    (18,597
    )
 The adjustments made in computing comprehensive income (loss) are
reflected as a component of stockholders equity under the heading
accumulated other comprehensive loss.  6.
    
    CONTINGENCIES Commencing April 8, 2003, the Company and certain officers and
directors were named as defendants in several substantially similar
putative class action lawsuits filed in the United States District
Court for the Western District of Tennessee, Memphis Division. The
various complaints have been consolidated into a single action, but
the Court has not appointed a Lead Plaintiff. Once the Lead
Plaintiff is appointed, a Consolidated Complaint will be filed to
which the Defendants will respond. The lawsuits filed to date name
the Company, David D. Stevens, Joel Kimbrough, John R. Grow and
Thomas W. Bell, Jr. as Defendants. One of the lawsuits also named
the Companys former independent auditor, Ernst & Young LLP, as a
defendant. The lawsuits allege 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 lawsuits are without merit. 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 Company officers, directors and a former
director; 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 lawsuits. 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 believes that the claims
asserted in the derivative lawsuit are without merit and has filed a
Motion to Dismiss the Consolidated Derivative Complaint. Also, from time to time, the Company is involved in lawsuits, claims,
audits and investigations arising in the normal course of its
business. In the Companys opinion, in the aggregate these lawsuits,
claims, audits and investigations should not have a material adverse
effect on the Companys business, financial condition, or results of
operations. In addition, the business that the Company acquired from
Gentiva Health Services, Inc. has several lawsuits and claims related
to its historic operation by Gentiva, which are being controlled by
Gentiva and for which the Company is entitled to indemnification from
liability by Gentiva. 9




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7.
    
    ACQUISITION 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.  8.
    
    EARNINGS PER SHARE 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 26,000 and 2.5
million shares of common stock were outstanding at March 31, 2004 and
March 31, 2003, respectively, but were not included in the
computation of diluted earnings per share 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 March 31,
    
    Three Months Ended March 31,2004
    
    2003
    
    2004
    
    2003Weighted average
number of common
shares
outstanding used
as the
denominator in
the basic
earnings per
share
calculation
    
    
    48,050,099
    
    
    
    47,419,325
    
    
    
    48,307,891
    
    
    
    47,698,820Additional
shares assuming
exercise of
dilutive stock
options

    
    
    818,938
    
    
    
    1,069,338
    
    
    
    969,467
    
    
    
    842,687Weighted average
number of common
and equivalent
shares used as
the denominator
in the diluted
earnings per
share
calculation
    
    
    48,869,037
    
    
    
    48,488,663
    
    
    
    49,277,358
    
    
    
    48,541,507
 10




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##### Table of Contents



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, 2004;  
    
    our expectations regarding our payor mix for periods following March 31, 2004;  
    
    our expectations regarding the transfer of patients
pursuant to our strategic alliance with Medco Health Solutions,
Inc. following March 31, 2004;  
    
    our expectations regarding the scope and cost of our capital expenditures following March 31, 2004;  
    
    our sources and availability of funds to satisfy our working capital needs;  
    
    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. 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, 2003. 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:  11




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##### Table of Contents



Three Months
    
    Nine MonthsEnded March 31,
    
    Ended March 31,2004
    
    2003
    
    2004
    
    2003Hemophilia, Autoimmune Disorders and
PID
    
    
    33
    %
    
    
    35
    %
    
    
    35
    %
    
    
    37
    %Multiple Sclerosis
    
    
    13
    %
    
    
    13
    %
    
    
    14
    %
    
    
    15
    %Pulmonary Arterial Hypertension (PAH)
    
    
    15
    %
    
    
    13
    %
    
    
    16
    %
    

    
    13
    %Gaucher Disease
    
    
    7
    %
    
    
    9
    %
    
    
    9
    %
    
    
    10
    %Growth Hormone-Related Disorders
    
    
    7
    %
    
    
    6
    %
    
    
    8
    %
    
    
    7
    %Respiratory Syncytial Virus (RSV)
    
    
    14
    %
    
    
    11
    %
    
    
    9
    %
    
    
    6
    %
 In the June 2004 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, 2002
    
    June 30, 2003
    
    March 31, 2004Non-governmental
    
    
    79
    %
    
    
    73
    %
    
    
    72
    %Governmental:Medicaid
    
    
    19
    %
    
    
    20
    %
    
    
    21
    %Medicare
    
    
    2
    %
    
    
    7
    %
    
    
    7
    %
 The increase in Medicare reimbursement and the related decrease in
non-governmental reimbursement from fiscal year 2002 to fiscal year
2003 is due to the increase in revenues from hemophilia factor and
the PAH products, Flolan® and Remodulin®, as a result of the
acquisition of the SPS division. These are the only products we
distributed in fiscal years 2002 and 2003 for which we are reimbursed
directly by Medicare. We anticipate that our payor mix for the
remainder of our fiscal year 2004 will be similar to the payor mix
achieved in fiscal 2003 and the nine months ended March 31, 2004. STRATEGIC ALLIANCE On February 9, 2004, we signed a long-term agreement with Medco
Health Solutions, Inc. (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, multiple sclerosis,
growth hormone deficiency and Gauchers disease. We have historically
provided our drugs to some Medco members, however, we expect an
increase in the number of prescriptions for Medco members resulting
from the agreement. ACQUISITION On October 17, 2003, we acquired certain assets, including inventory
and accounts receivable, of Alpha Therapeutic Services, Inc. (ATS)
from Baxter Healthcare Corporation. ATS 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.
The results of the ATS operations have been included in the
consolidated financial statements since October 18, 2003. During the
March 2004 quarter, we completed the transition of the ATS patients
into our existing IVIG and hemophilia operations eliminating the
facility and related costs previously associated with ATS. 12




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##### Table of Contents



RESULTS OF OPERATIONS As discussed in Note 2 to the condensed consolidated financial
statements included under Item 1, we have restated our condensed
consolidated financial statements for the three and nine-month
periods ended March 31, 2003. The following managements discussion
and analysis gives effect to the restatement. Three Months Ended March 31, 2004 Compared to Three Months Ended
March 31, 2003 Revenues.Total revenues increased 14% from $358.1 million to $409.3
million from the three months ended March 31, 2003 to the three
months ended March 31, 2004. Net patient revenue increased 14% from
$349.4 million to $398.9 million from the three months ended March
31, 2003 to the three months ended March 31, 2004. During fiscal
2003, we began distributing certain wholesale products on a
consignment basis for the manufacturer and sold our infertility
business thus eliminating revenues from the sale of these products
from our business. Revenues from these products amounted to
approximately $23.0 million for the three months ended March 2003.
Excluding the $23.0 million from the three months ended March 31,
2003 results, our revenues increased 22% from the March 2003 quarter
to the March 2004 quarter. The increase is primarily due to volume
growth in our products for the treatments of RSV, PAH, growth hormone
disorders, hemophilia, autoimmune disorders and PID as a result of
the addition of new patients and additional sales of product to
existing patients. While we benefited from prior payor agreements
with Medco in the March quarter, we did not experience a transfer of
new patients pursuant to the new strategic alliance discussed above.
However, we do expect the transfer of patients to begin by the end of
our fourth quarter. We also benefited from the addition of new and
expanded contracts with managed care organizations. Cost of Sales.Cost of sales increased 15% from $283.5 million to
$325.5 million from the three months ended March 31, 2003 to the
three months ended March 31, 2004, which is commensurate with the
increase in our revenues discussed above. As a percentage of
revenues, cost of sales increased from 79.2% to 79.5% from the three
months ended March 31, 2003 to the three months ended March 31, 2004,
resulting in gross margins of 20.8% and 20.5% for the three months
ended March 31, 2003 and 2004, respectively. Gross margins for the
individual products have remained relatively stable. However, a
change in product mix resulted in a decrease in the composite gross
margin in the three months ended March 31, 2004. The primary change
in product mix was an increase in the percentage of total revenues of
Synagis® for the treatment of RSV from 11% in the three months
ended March 31, 2003 to 14% in the three months ended March 31, 2004.
Synagis® has a lower gross margin than the composite gross margin. General and Administrative.General and administrative expense
increased from $33.8 million to $34.2 million, or 1%, from the three
months ended March 31, 2003 to the three months ended March 31, 2004.
As a percentage of revenues, general and administrative expense
decreased from 9.4% to 8.4% from the three months ended March 31,
2003 to the three months ended March 31, 2004. Although there has
been a slight increase in general and administrative expense, the
expense as a percentage of revenues has decreased one percent due to
the 14% increase in total revenues from the three months ended March
31, 2003 to the three months ended March 31, 2004, which has resulted
in a leveraging of some of our general and administrative expenses. Bad Debts.Bad debts decreased from $66.1 million to $9.3 million
from the three months ended March 31, 2003 to the three months ended
March 31, 2004. As a percentage of revenues, bad debt expense was
2.3% for the three months ended March 31, 2004, which is in line with
our historical trends. During the March 2003 quarter, we analyzed
historical collection rates and other data used in estimating the
allowance for doubtful accounts. Our calculations indicated that the
accounts receivable reserve needed to be increased. As a result of
the new information obtained through the analysis, we recorded a
charge to bad debt expense and increased the allowance for doubtful
accounts resulting in total bad debt expense of $66.1 million for the
three months ended March 31, 2003. Depreciation and Amortization.Depreciation expense increased from
$1.6 million to $2.1 million from the three months ended March 31,
2003 to the three months ended March 31, 2004, 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.
Amortization expense increased from $1.1 million to $1.2 million from
the three months ended March 31, 2003 to the three months ended March
31, 2004 due to additional amortization related to the purchase of
the ATS assets. Interest Income/Expense, Net.Interest expense, net decreased from
$2.4 million to $2.0 million from the three months ended March 31,
2003 to the three months ended March 31, 2004 due to a decrease in
the amount of debt outstanding and lower interest rates. Income Tax Expense.Our effective tax rate decreased from 39.3% to
38.6% from the three months ended March 31, 2003 to the three months
ended March 31, 2004. The decrease in the effective tax rate for the
period is primarily due to a larger 13




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##### Table of Contents



percentage of our profits being
derived from locations that are not taxable 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, 2004 Compared to Nine Months Ended March
31, 2003 Revenues.Total revenues increased 9% from $1.044 billion to $1.134
billion from the nine months ended March 31, 2003 to the nine months
ended March 31, 2004. Net patient revenue increased 9% from $1.016
billion to $1.103 billion from the nine months ended March 31, 2003
to the nine months ended March 31, 2004. During fiscal 2003, we began
distributing certain wholesale products on a consignment basis for
the manufacturer and sold our infertility business thus eliminating
revenues from the sale of these products from our business. Revenues
from these products amounted to approximately $63.9 million for the
nine months ended March 31, 2003. Excluding the $63.9 million from
the nine months ended March 31, 2003 results, our revenues increased
16% from the March 2003 period to the March 2004 period. The increase
is primarily due to volume growth in our products for the treatments
of PAH, RSV, growth hormone disorders, hemophilia, autoimmune
disorders and PID as a result of the addition of new patients and
additional sales of product to existing patients. In addition, we
experienced growth in revenues from Avonex® due to product pricing
increases. We also benefited from the addition of new and expanded
contracts with managed care organizations. Cost of Sales.Cost of sales increased 8% from $830.2 million to
$894.3 million from the nine months ended March 31, 2003 to the nine
months ended March 31, 2004, which is commensurate with the increase
in our revenues discussed above. As a percentage of revenues, cost of
sales decreased from 79.5% to 78.9% from the nine months ended March
31, 2003 to the nine months ended March 31, 2004, resulting in gross
margins of 20.5% and 21.1% for the nine months ended March 31, 2003
and 2004, respectively. Gross margins for the individual products
have remained relatively stable. However, a change in product mix and
lower acquisition costs on some of the products we distribute
resulted in an increase in the composite gross margin in the nine
months ended March 31, 2004. The primary change in product mix was an
increase in the percentage of total revenues from products for the
treatment of pulmonary arterial hypertension, which has a higher
gross margin percentage than many of the other products we
distribute. General and Administrative.General and administrative expense
increased from $97.2 million to $103.2 million, or 6%, from the nine
months ended March 31, 2003 to the nine months ended March 31, 2004.
As a percentage of revenues, general and administrative expense
decreased from 9.3% to 9.1% from the nine months ended March 31, 2003
to the nine months ended March 31, 2004. The increase in expense is
primarily due to the increase in audit fees as a result of the change
to Deloitte & Touche LLP for the fiscal 2003 audit, increased
salaries and benefits associated with the expansion of our support
staffs to support the revenue growth and increased insurance
premiums. Although there has been a slight increase in general and
administrative expense, the expense as a percentage of revenues has
decreased 0.2% due to the 9% increase in total revenues from the nine
months ended March 31, 2003 to the nine months ended March 31, 2004,
which has resulted in a leveraging of some of our general and
administrative expenses. Bad Debts.Bad debts decreased from $80.3 million to $23.7 million
from the nine months ended March 31, 2003 to the nine months ended
March 31, 2004. As a percentage of revenues, bad debt expense was
2.1% for the nine months ended March 31, 2004, which is in line with
our historical trends. During the March 2003 quarter, we analyzed
historical collection rates and other data used in estimating the
allowance for doubtful accounts. Our calculations indicated that the
accounts receivable reserve needed to be increased. As a result of
the new information obtained through the analysis, we recorded a
charge to bad debt expense and increased the allowance for doubtful
accounts resulting in total bad debt expense of $80.3 million for the
nine months ended March 31, 2003. Depreciation and Amortization.Depreciation expense increased from
$4.1 million to $5.8 million from the nine months ended March 31,
2003 to the nine months ended March 31, 2004, 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.
Amortization expense increased from $3.4 million to $3.5 million from
the nine months ended March 31, 2003 to the nine months ended March
31, 2004 due to additional amortization related to the purchase of
the ATS assets. Interest Income/Expense, Net.Interest expense, net decreased from
$7.2 million to $6.4 million from the nine months ended March 31,
2003 to the nine months ended March 31, 2004 due to a decrease in the
amount of debt outstanding and lower interest rates. Income Tax Expense.Our effective tax rate decreased from 39.6% to
38.6% from the nine months ended March 31, 2003 to the nine months
ended March 31, 2004. The decrease in the effective tax rate for the
period is primarily due to a larger
percentage of our profits being derived from locations that are not
taxable in certain states. The difference between the recognized
effective tax rate and the statutory rate is primarily attributed to
state income taxes. 14




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2004, working capital was $325.6 million, cash and
cash equivalents were $44.6 million and the current ratio was 2.3 to
1.0. Net cash provided by operating activities was $49.2 million for the
nine months ended March 31, 2004. During the nine months ended March
31, 2004, accounts receivable increased $41.1 million, inventories
increased $48.3 million and accounts payable, accrued expenses and
income taxes payable increased $52.4 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. Net cash used in investing activities was $46.1 million for the nine
months ended March 31, 2004. Cash used in investing activities
consisted primarily of $35.7 million for the purchase of the ATS
assets and $10.2 million for purchases of property and equipment. Net cash used in financing activities was $6.5 million for the nine
months ended March 31, 2004, which consisted of $12.5 million in debt
repayments, $1.4 million of distributions to our minority interest
partner less $6.1 million from the net proceeds of stock option
exercises and $1.3 million from the proceeds of long-term borrowings. Historically, we have funded our operations and continued internal
growth through cash provided by operations. We anticipate that our
capital expenditures for the fiscal year ending June 30, 2004 will
consist primarily of additional computer hardware, enhancements to
our fully integrated pharmacy and reimbursement software system and
costs to build out and furnish additional space needed to meet the
needs of our growth. We expect the cost of our capital expenditures
in fiscal year 2004 to be approximately $14.0 million, exclusive of
any acquisitions of businesses. We expect to fund the remaining expenditures
through cash provided by operating activities and/or borrowings under
the revolving credit facility with our bank. During 2002, we amended our $60 million revolving credit facility
with Bank of America, N.A. and other participating banks
(collectively the Lenders) to increase the size of the credit
facility to $325 million. The credit facility consists of a $125
million revolving commitment due 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 (Tranche B Term Loan) due in
periodic principal payments through March 2009. The amount available
to borrow under this credit facility is based upon certain ratios
calculated as of the end of each quarter. Based upon the asset
coverage ratio as of March 31, 2004, the total amount available to
borrow is approximately $308 million. As of March 31, 2004, the total
amount outstanding under the credit facility was $182.5 million,
which included $60.0 million under the Tranche A Term Loan and $122.5
million under the Tranche B Term Loan. Amounts outstanding under the credit agreement bear interest at
varying rates based upon the London Inter-bank Offered Rate (LIBOR)
or the prime rate of interest (as selected by us), plus a variable
margin rate based upon our leverage ratio as defined by the credit
agreement. Our obligations under the credit agreement 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
subsidiaries in which we own an 80% or more interest. 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 agreement 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 agreement 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 agreement also contains customary events of
default, including events relating to changes in control of our
company. The credit agreement required us to enter into a one-year interest
rate swap agreement within 60 days of June 13, 2002, to protect
against fluctuations in interest rates. The credit agreement required
the interest rate swap to provide coverage in an amount equal to at
least 50% of the outstanding principal amount of the loans. On July
17, 2002, we entered into an interest rate swap agreement effectively
converting for a period of one year $120 million of floating-rate
borrowings to fixed-rate borrowings with a fixed rate of 2.175%, plus
the applicable margin rate as determined by the credit agreement. 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. 15




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##### Table of Contents



On May 5, 2003, we amended the credit agreement to exclude the
charges, as defined in the amendment to the credit agreement, taken
in the March 2003 quarter in connection with the additional accounts
receivable reserves of the SPS division from the calculation of
Consolidated EBITDA, as defined in the credit agreement, and to
reduce the Consolidated Net Worth requirement, as defined in the
credit agreement, to allow for a reduction in the minimum net worth
requirement equal to the net loss incurred in the March 2003 quarter.
The amendment also included a 25 basis point increase in interest
rates per the credit agreement for a period of twelve months
beginning May 15, 2003. On November 18, 2003, we amended our credit agreement lowering the
margin on the Tranche B Term Loan to 2.25% for LIBOR based loans and
..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 to obtain the amendment. 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. We believe that our cash from operations, cash available under the
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 requirements and growth
plans for at least the next 12 months. 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, 2003, filed with the SEC on
September 29, 2003. 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. 16




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##### Table of Contents



RISK FACTORS You should carefully consider the risks and uncertainties we
describe below before investing in Accredo. 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. 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 33% of our revenue in the quarter was derived from
the sale of IVIG and hemophilia product. The majority of our IVIG
and hemophilia product was purchased from Baxter Healthcare
Corporation. We also derive a substantial percentage of our revenue
and profitability from our relationships with Biogen, Genzyme,
GlaxoSmithKline and MedImmune. Our revenue derived from these
relationships represented approximately 42% of our revenue for the
quarter. Our agreements with these suppliers are short-term and
cancelable by either party without cause on 30 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
changed market conditions or required service levels. Any termination
or adverse adjustment 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 20 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 quarter, with the drugs for hemophilia, autoimmune
disorders and PID constituting approximately 33% of our revenue for
the period:  
    
    Hemophilia, Autoimmune Disorders, PID and Hereditary Emphysema  
    
    Pulmonary Arterial Hypertension  
    
    Multiple Sclerosis  
    
    Lysosomal Storage Disorders such as Gaucher Disease (also known as Enzyme Deficiencies)  
    
    Growth Hormone-Related Disorders  
    
    Respiratory Syncytial Virus 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; 17




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##### Table of Contents




    
    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 covering a number of high revenue patients;  
    
    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;  
    
    pharmacy benefit management companies (PBM);  
    
    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  
    
    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 deciding to pursue its
own distribution and services and not outsource 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, pharmacy benefit managers 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, and consolidation in the
industry could affect our ability to serve patients. Caremark Rx, Inc. and AdvancePCS recently 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 Health Solutions, Inc. where we became
the preferred retail and home delivery pharmacy provider to Medcos
members for our specialty pharmacy products. We expect that there
will be further consolidation among specialty pharmacy providers. As
pharmacy benefits managers acquire specialty pharmacy capability, it
is likely that they will attempt to cancel their relationships with
entities that compete with the PBM specialty pharmacy operations, and
to cause the PBM patients to obtain their drugs from the PBMs
specialty pharmacy. Our business could be harmed by changes in Medicare or Medicaid. Changes in the Medicare, Medicaid or similar government programs
or the amounts paid by those programs for our services may adversely
affect our earnings. Such programs are highly regulated and subject
to frequent and substantial changes and cost containment measures. In
recent years, changes in these programs have limited and reduced
reimbursement to providers. The Medicare Prescription Drug,
Improvement and Modernization Act of 2003, recently enacted into law, 18




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provides for Medicare rate reductions that were effective January 1,
2004. Hemophilia products were excluded from the
rate change of AWP less 5% to AWP less 15%. It is not clear as
to the impact of the Act, if any, on hemophilia product reimbursement
in fiscal 2005 and 2006. We understand that it is CMSs intention
that the ASP plus 6% reimbursement formula will affect Hemophilia
products during these periods. Regulations implementing the Act have
not been finalized at this time. We expect that these developments
could ultimately reduce prices and margins on some of the drugs that
we distribute. In order to deal with budget shortfalls, some states are
attempting to create state administered prescription drug discount
plans, limit the number of prescriptions per person that are covered,
raising Medicaid co-pays and deductibles, proposing more restrictive
formularies and proposing reductions in pharmacy reimbursement rates.
For example, Californias Medicaid program, MediCal, recently adopted
a plan that will shift away from use of the discounted AWP, instead
using Average Selling Price plus 20% for hemophilia products.
California has not yet determined exactly how it will calculate
Average Selling Price. The State of California adopted a 5%
reimbursement rate reduction paid to providers of the states MediCal
program, which was scheduled to take effect on January 1, 2004. On
December 23, 2003, the United States District Court for the Eastern
District of California issued an injunction enjoining the State from
implementing this reduction. The length of the injunction and the
ultimate outcome of this litigation are uncertain at this time. Any
reduction 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 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. Changes in average wholesale prices could reduce our pricing and
margins. Many government payors, including Medicare and Medicaid, pay us
directly or indirectly at a percentage off the 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. In February 2000, First DataBank published a Market Price Survey
of 437 drugs, which was significantly lower than the historic AWP for
a number of the hemophilia products and IVIG products that we sell. A
number of state Medicaid agencies have revised their payment
methodology as a result of the Market Price Survey. The recently enacted Medicare Prescription Drug, Improvement and
Modernization Act of 2003, changes the way the federal government
pays for certain Part B drugs. Regulations implementing the Act have
not been finalized at this time. We expect that these developments
could ultimately reduce prices and margins on some of the drugs that
we distribute. Various federal and state government agencies have been
investigating whether the reported AWP of many drugs, including some
that we sell, is an appropriate or accurate measure of the market
price of the drugs. There are also several whistleblower lawsuits
pending against various drug manufacturers that have been reported in
the business press. These government investigations and lawsuits
involve allegations that manufacturers reported artificially inflated
AWP prices of various drugs to First DataBank. We cannot predict the eventual results of these law changes,
government proposals, investigations, lawsuits or the changes made by
First DataBank. 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, 2001, 2002 and 2003 and
the nine months ended March 31, 2004, we derived approximately 81%,
79%, 73% and 72% respectively of our gross patient revenue from
non-governmental payors (including self-pay), which included 4%, 3%,
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 7% of our total revenues from Aetna in the fiscal year
ended June 30, 2003. 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.
The loss of a payor relationship, for example, our relationship with
Aetna, Inc. and affiliates (which is terminable on 90 days notice),
or an adverse change in the financial condition of a payor like
Aetna, could 19




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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. We incurred additional debt to acquire the SPS business of Gentiva
Health Services, Inc. which 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 significant portion of our cash flow from operations
will be dedicated to the payment of principal 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. 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. Further, 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. 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
cancelled, 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, 2001, 2002 and 2003, we derived approximately 4% 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 most recent quarter. 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 years ended June 30, 2001 and 2002, 17%
of our income before income taxes for the fiscal year ended June 30,
2003 and 8% of our income before income taxes in the most recent
quarter. 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. As a result, some of our joint ventures may be
restructured. 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: 20




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
    
    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 PHS pricing for
drugs we handle, our business could be harmed. The federal pricing program of the Public Health Service,
commonly known as PHS, allows hospitals and hemophilia treatment
centers to obtain discounts on hemophilia products. While we are able
to access PHS pricing 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
such favorable pricing 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. 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. 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:  
    
    lower prices paid by Medicare or Medicaid for the
drugs that we sell, including lower prices resulting from
recent state and federal legislation and revisions in the
method of establishing AWP;  
    
    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;  
    
    inaccuracies in our estimates of the costs of ongoing programs; the timing and integration of our acquisitions; 21




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
    
    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  
    
    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 such as the shortage in products for treatment of
Hereditary Emphysema. Some of the products that we distribute, such
as some of our hemophilia products, IVIG and some other blood-related
products, 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. 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, our business could be harmed. If some of the drugs that we provide lose their orphan drug status,
we could face more competition. 22




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Our business could also 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, or approval of new drugs
notwithstanding orphan drug status, 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. Almost all 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;  
    
    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. 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. 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, 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 in a charge to our earnings. As of March
31, 2004, we had goodwill, net of accumulated amortization, of
approximately $383 million, or 37% of total assets and 66% 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 23




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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 several shareholder class action lawsuits 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. We may need additional capital to finance our growth and capital
requirements, which could prevent us from fully pursuing our growth
strategy. 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. Our industry is subject to extensive government regulation and
noncompliance by us 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, 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. The finding of a violation
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 24




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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. A violation of the Stark Law 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 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.  
    
    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. 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 estimates by analysts; and  
    
    changes in operating results from quarter to quarter. 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 25




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adopted a Stockholder Protection Rights Plan, sometimes referred
to as a poison pill, which would substantially dilute the interest
sought by an acquirer. 26




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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 use derivative financial instruments to manage some of our
exposure to rising interest rates on our variable-rate debt,
primarily by entering into variable-to-fixed interest rate swaps. We
have fixed the interest rate through July 21, 2003 on $120.0 million
of our variable-rate debt through the use of a variable-to-fixed
interest rate swap. As a result, we will not benefit from any
decrease in interest rates nor will we be subjected to any detriment
from rising interest rates on this portion of our debt during the
period of the swap agreement. Accordingly, a 100 basis point decrease
in interest rates along the entire yield curve would not increase
pre-tax income by $300,000 for a quarter as would be expected without
this financial instrument. However, a 100 basis point increase in
interest rates along the entire yield curve would also not decrease
pre-tax income by $300,000 for the same period as a result of using
this derivative financial instrument. For the remaining portion of our variable-rate debt, we have not
hedged against our interest rate risk exposure. As a result, we will
benefit from decreasing interest rates, but rising interest rates on
this portion of 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 $160,000 during a
quarter. However, a 100 basis point increase in interest rates would
result in a decrease in pre-tax income of approximately $160,000 for
the same period. Actual changes in rates may differ from the hypothetical assumptions
used in computing the exposures in the examples cited above. 
 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, 2004 that have
materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting. 27




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PART II  OTHER INFORMATION 
 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 February 2, 2004 to furnish as an
exhibit, the press release reporting our financial results for the
quarter ended December 31, 2003. We filed a report on Form 8-K on February 10, 2004 to furnish as an
exhibit, the press release by Medco Health Solutions, Inc. announcing
a 10-year strategic alliance under which Accredo Health. Inc. will
become the preferred retail and home delivery pharmacy provider to
Medco Health members for the specialty product lines that Accredo
currently dispenses to treat patients with long-term chronic
diseases. 28




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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 10, 2004
    
    /s/ David D. StevensDavid D. StevensChairman of the Board andChief Executive OfficerMay 10, 2004
    
    /s/ Joel R. KimbroughJoel R. KimbroughSenior Vice President, ChiefFinancial Officer and Treasurer
 29




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##### Table of Contents



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. 30