SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2004

OR

For the transition period from            to

Commission file number 000-25769

ACCREDO HEALTH, INCORPORATED

(Exact name of registrant as specified in its charter)

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)

NO CHANGE

(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 [   ]

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.

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ACCREDO HEALTH, INCORPORATED
INDEX

Note: Items 1, 2, 3, 4 and 5 of Part II are omitted because they are not applicable.

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

ACCREDO HEALTH, INCORPORATED

See accompanying notes to condensed consolidated financial statements.

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ACCREDO HEALTH, INCORPORATED

See accompanying notes to condensed consolidated financial statements.

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ACCREDO HEALTH, INCORPORATED

See accompanying notes to condensed consolidated financial statements.

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ACCREDO HEALTH, INCORPORATED

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-month period ended September 30, 2004, are not necessarily indicative of the results that may be expected for the fiscal year ended June 30, 2005.

     The balance sheet at June 30, 2004, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2004.

2. STOCKHOLDERS’ EQUITY

     During the quarter, employees and directors exercised stock options to acquire 274,828 shares of Accredo common stock at a weighted average exercise price of $10.32 per share.

3. PRO FORMA NET INCOME EFFECT OF COMPANY STOCK OPTION PLANS

     The Company accounts for its stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Pro forma information regarding net income is required by Statement of Financial Accounting Standards No. 123 (“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 quarters ended September 30:

     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.

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     For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information for the three-month periods ended September 30 is as follows (in thousands, except share data):

4. COMPREHENSIVE INCOME

     Comprehensive income includes changes in the fair value of certain derivative financial instruments that qualify for hedge accounting. Comprehensive income for all periods presented is as follows:

     The adjustments made in computing comprehensive income are reflected as a component of stockholders equity under the heading “accumulated other comprehensive income”.

5. ACQUISITIONS

     On July 21, 2004, the Company acquired all of the outstanding stock of HRA Holding Corporation and its wholly owned subsidiary, Hemophilia Resources of America, Inc (HRA). HRA specializes in providing pharmaceuticals, therapeutic supplies and disease management services for people with hemophilia and related bleeding disorders. The acquisition of HRA increased the Company’s market leading position in the distribution of hemophilia related products. The aggregate purchase price paid for this acquisition, inclusive of transaction costs and related expenses, was approximately $165.8 million and was funded by the Company’s increased credit facility. This transaction was accounted for using the purchase method of accounting. Total assets acquired and liabilities assumed were $24.0 million and $6.6 million, respectively. The excess of the purchase price, including acquisition costs of approximately $0.3 million, over the fair value of the net assets acquired of $17.4 million was allocated as follows: $145.1 million to goodwill and $2.5 million related to acquired patient relationships. The acquired patient relationship intangible is being amortized over five years. The Company also paid $0.8 million as consideration for an agreement with a selling shareholder not to compete with the Company for a period of ten years. The transition and integration of HRA business activities commenced during the September 2004 quarter and will continue throughout the remainder of fiscal 2005. The results of HRA have been included in the consolidated financial statements since July 21, 2004.

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     On July 1, 2004, the Company acquired all of the outstanding stock of Home Health Care Resources, Inc. (HHCR). HHCR specializes in providing pharmaceuticals, therapeutic supplies and disease management services for people with autoimmune disorders and hemophilia. The aggregate purchase price paid for this acquisition, inclusive of transaction costs and related expenses, was approximately $26.8 million. In addition, HHCR may be paid additional consideration amounting to $3 million related to an earn-out payment based on the achievement of certain financial results for the six months ended December 31, 2004. This transaction was accounted for using the purchase method of accounting. Total assets acquired and liabilities assumed were $4.3 million and $0.8 million, respectively. The excess of the purchase price over the fair value of the net assets acquired of $3.5 million was allocated as follows: $22.7 million to goodwill and $0.3 million related to acquired patient relationships. The acquired patient relationship intangible is being amortized over five years. The Company also paid $0.3 million as consideration for an agreement with the selling shareholders not to compete with the Company for a period of ten years. The results of HHCR have been included in the consolidated financial statements since July 1, 2004.

6. CONTINGENCIES

     The Company, David D. Stevens and Joel R. Kimbrough are named as defendants in a putative class action lawsuit filed in the United States District Court for the Western District of Tennessee, Memphis Division. A Consolidated Amended Complaint was filed on September 15, 2004. Defendants filed a Motion to Dismiss the Consolidated Amended Complaint on November 1, 2004. The lawsuit alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10(b)(5) promulgated thereunder, and Section 20 of the Securities Exchange Act of 1934. The putative class representatives seek to represent a class of individuals and entities that purchased Company stock during the period June 16, 2002 through April 7, 2003 and who supposedly suffered damages from the alleged violations of the securities laws. The Company believes that the claims asserted in the putative class action 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 certain current and former Company officers and directors (David D. Stevens, John R. Grow, Kyle J. Callahan, Kevin L. Roberg, Kenneth R. Masterson, Kenneth J. Melkus, Dick R. Gourley, Nancy-Ann Deparle, Joel R. Kimbrough, Thomas W. Bell, Jr., and Patrick J. Welsh) as defendants. The derivative lawsuit alleges that the defendants breached fiduciary duties owed to the Company by engaging in the same alleged conduct that is the basis of the putative class action 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 has filed a motion to dismiss the Consolidated Derivative Complaint and the parties are awaiting the Court’s ruling on this motion. The Company believes that the claims asserted in the derivative lawsuit are without merit.

     The Company and the Company’s 80% owned joint venture in California provided contract pharmacy and related billing services to a local California pharmacy currently under audit by the California Department of Health Services concerning its MediCal billing for clotting factor supplied to the pharmacy by the Company or the Company’s joint venture. Although the joint venture is not currently involved with the audits, the contract pharmacy relationship is implicated and the pharmacy is seeking indemnification from the joint venture. Pending completion of the audit, the state agency has temporarily withheld MediCal payments from the pharmacy and has alleged, among other things, overbilling and false claims. Although the Company believes these allegations are without merit and expects the pharmacy and the joint venture to vigorously defend against these allegations through judicial proceedings if necessary, the Company also expects the California state agency to pursue a refund of some or all of the payments made by MediCal to the pharmacy. If state or federal false claim statutes are implicated, the pharmacy could also be assessed fines and penalties. At this time, the Company does not believe that it will incur any such fines or penalties. Due to the uncertainty about the issues involved in this matter, based on the facts and circumstances known to date, the Company believes some amount of monetary loss is reasonably possible in the range of zero to $20 million, absent any finding of false claims and incurrence of related fines and penalties.

     The Company and the Company’s 80% owned joint venture in California also provided contract pharmacy and related billing services to a second local California pharmacy. The California Department of Health Services is also auditing this pharmacy. The Company has recently received a letter from the Department asking for information in connection with the audit. The Company anticipates that this audit will involve issues that are the same as or similar to those involved in the audit described in the preceding paragraph. The Company is in the process of gathering information responsive to the Department’s letter and cannot determine at this time whether it will incur any liability associated with this audit.

     Also, from time to time, the Company is involved in lawsuits, claims, audits, and investigations arising in the normal course of 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 historical operations by

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Gentiva, which are being controlled by Gentiva and for which the Company is entitled to indemnification from liability by Gentiva.

7. 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. A reconciliation of the basic and diluted weighted average shares outstanding is as follows at September 30:

8. SUBSEQUENT EVENT

     In an announcement dated October 29, 2004, CMS retroactively adjusted the reimbursement rate for Remodulin® in a manner that increases the Company’s reimbursement for Remodulin® sales January 1, 2004 and thereafter. Since January 1, 2004, the Company recorded revenues associated with sales of certain Remodulin ® vial sizes at Medicare’s reduced level of reimbursement. As a result of the retroactive price adjustment from CMS, the Company recorded the cumulative effect of this adjustment in the quarter ended September 30, 2004. This adjustment resulted in additional net patient revenue of approximately $3.6 million during the quarter ended September 30, 2004. Of the $3.6 million in cumulative additional net patient revenue recorded in the September 2004 quarter, approximately $2.3 million related to Remodulin® dispensed during the six month period ended June 30, 2004.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

FORWARD LOOKING STATEMENTS

     Some of the information in this quarterly report contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “estimate” and “continue” or similar words. You should read statements that contain these words carefully for the following reasons:

•		the statements discuss our future expectations;
•		the statements contain projections of our future earnings or of our financial condition; and
•		the statements state other “forward-looking” information.

Specifically, this report contains, among others, forward-looking statements about:

•		our expectations regarding our product mix for periods following September 30, 2004;
•		our expectations regarding our payor mix for periods following September 30, 2004;
•		our expectations regarding the transfer of patients to us pursuant to our strategic alliance with Medco Health Solutions, Inc. following September 30, 2004;
•		our expectations regarding the scope and cost of our capital expenditures following September 30, 2004;
•		our sources and availability of funds to satisfy our working capital needs;
•		the implementation or interpretation of current or future regulations and legislation relating to the industry in which we operate;
•		our critical accounting policies; and
•		our expectations regarding the percentage of our revenues attributable to federal and state programs.

     The forward-looking statements contained in this report reflect our current views about future events, are based on assumptions, and are subject to known and unknown risks and uncertainties. Many important factors could cause our actual results or achievements to differ materially from any future results or achievements expressed in or implied by our forward-looking statements. Many of the factors that will determine future events or achievements are beyond our ability to control or predict. Important factors that could cause actual results or achievements to differ materially from the results or achievements reflected in our forward-looking statements include, among other things, the factors discussed in Part I, Item 2 of this report under the sub-heading “Risk Factors.”

     You should read this report, the information incorporated by reference into this report and the documents filed as exhibits to this report completely and with the understanding that our actual future results or achievements may be materially different from what we currently expect or anticipate. You should be aware that the occurrence of any of the events described in the risk factors discussed elsewhere in this quarterly report and other events that we have not predicted or assessed could have a material adverse effect on our earnings, financial condition and business. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.

     The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is signed. Except as required by law, we assume no responsibility for updating any forward-looking statements.

     We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

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OVERVIEW

     For an understanding of the significant factors that influenced our results, the following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this report. This management’s discussion and analysis should also be read in conjunction with the management’s discussion and analysis and consolidated financial statements included in our Form 10-K for the fiscal year ended June 30, 2004.

     We provide specialty retail pharmacy services for the treatment of patients with costly, chronic diseases. We derive revenues primarily from the retail sale of drugs to patients. We focus almost exclusively on a limited number of complex and expensive drugs that serve small patient populations. The following table presents the percentage of our total revenues generated from sales with respect to the diseases that we primarily serve:

     We anticipate that our revenue mix for the second and third quarters of our fiscal year 2005 will change as a result of revenues from the seasonal drug Synagis® for the treatment of RSV. In addition, we anticipate an increase in revenues associated with multiple sclerosis and growth hormone-related disorders in our fiscal year ended June 30, 2005, as compared to our fiscal year ended June 30, 2004, due to our expanded relationship with Medco Health Solutions, Inc. (Medco).

     Reimbursement for the products we sell comes from governmental payors, Medicare and Medicaid, and non-governmental payors. The following table presents the percentage of our total revenues reimbursed by these payors:

     We anticipate that our payor mix for the remainder of our fiscal year 2005 will be similar to the payor mix achieved in fiscal 2004 and the three months ended September 30, 2004. The increase in the percentage of revenues from Medicare in the three months ended September 30, 2004, resulted from the retroactive rate increase for Remodulin® that was recorded on a cumulative basis during that period.

ACQUISITIONS

     On July 21, 2004, we acquired all of the outstanding stock of HRA Holding Corporation and its wholly owned subsidiary, Hemophilia Resources of America, Inc (HRA). HRA specializes in providing pharmaceuticals, therapeutic supplies and disease management services for people with hemophilia and related bleeding disorders. The acquisition of HRA increased our market leading position in the distribution of hemophilia related products. The aggregate purchase price paid for this acquisition, inclusive of transaction costs and related expenses, was approximately $165.8 million and was funded by the Company’s increased credit facility. This transaction was accounted for using the purchase method of accounting. Total assets acquired and liabilities assumed were $24.0 million and $6.6 million, respectively. The excess of the purchase price, including acquisition costs of approximately $0.3 million, over the fair value of the net assets acquired of $17.4 million was allocated as follows: $145.1 million to goodwill and $2.5 million related to acquired patient relationships. The acquired patient relationship intangible is being amortized over five years. The Company also paid $0.8 million as consideration for an agreement with a selling shareholder not to compete with the Company for a period of ten years. The transition and integration of HRA business activities commenced during the September 2004 quarter and will continue throughout the remainder of fiscal 2005. The results of HRA have been included in the consolidated financial statements since July 21, 2004.

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     On July 1, 2004, the Company acquired all of the outstanding stock of Home Health Care Resources, Inc. (HHCR). HHCR specializes in providing pharmaceuticals, therapeutic supplies and disease management services for people with autoimmune disorders and hemophilia. The aggregate purchase price paid for this acquisition, inclusive of transaction costs and related expenses, was approximately $26.8 million. In addition, HHCR may be paid additional consideration amounting to $3 million related to an earn-out payment based on the achievement of certain financial results for the six months ended December 31, 2004. This transaction was accounted for using the purchase method of accounting. Total assets acquired and liabilities assumed were $4.3 million and $0.8 million, respectively. The excess of the purchase price over the fair value of the net assets acquired of $3.5 million was allocated as follows: $22.7 million to goodwill and $0.3 million related to acquired patient relationships. The acquired patient relationship intangible is being amortized over five years. The Company also paid $0.3 million as consideration for an agreement with the selling shareholders not to compete with the Company for a period of ten years. The results of HHCR have been included in the consolidated financial statements since July 1, 2004.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003

     Revenues. Total revenues increased 25% from $335.0 million to $419.7 million from the three months ended September 30, 2003 to the three months ended September 30, 2004. Net patient revenues increased 26% from $326.0 million to $410.5 million from the three months ended September 30, 2003 to the three months ended September 30, 2004. The increase is primarily due to volume growth in our products for the treatment of hemophilia, multiple sclerosis, growth hormone disorders, pulmonary arterial hypertension and autoimmune disorders. This growth resulted from the addition of new patients and additional sales of product to existing patients, our expanded relationship with Medco and the acquisitions that occurred during the September 2004 quarter. The initial transfer of patients from Medco began in May 2004 and was substantially complete as of September 30, 2004. In addition, the Company experienced significant revenue growth quarter over quarter from its new product lines that launched at various times since April 2003. We also benefited from the addition of new and expanded contracts with managed care organizations.

     In an announcement dated October 29, 2004 CMS retroactively adjusted the reimbursement rate for Remodulin® in a manner that increases the Company’s reimbursement for Remodulin® sales January 1, 2004 and thereafter. Since January 1, 2004, we recorded revenues associated with certain vial concentration sizes of Remodulin® at Medicare’s reduced level of reimbursement. As a result of the retroactive price adjustment from CMS and in accordance with generally accepted accounting principles, we recorded the cumulative effect of this adjustment in the quarter ended September 30, 2004. This adjustment resulted in additional net patient revenue of approximately $3.6 million during the quarter ended September 30, 2004. Of the $3.6 million in cumulative additional net patient revenue recorded in the September 2004 quarter, approximately $2.3 million related to Remodulin® dispensed during the six month period ended June 30, 2004.

     Cost of Services. Cost of services increased 32% from $258.9 million to $342.5 million from the three months ended September 30, 2003 to the three months ended September 30, 2004. As a percentage of revenues, cost of services increased from 77.3% to 81.6% from the three months ended September 30, 2003 to the three months ended September 30, 2004, resulting in gross margins of 22.7% and 18.4% for the three months ended September 30, 2003 and 2004, respectively. The decrease in gross profit margins resulted from the expected decrease in government and commercial payor reimbursement levels, primarily in the PAH and IVIG product lines. In addition, the full-quarter impact of the reduced reimbursement levels for hemophilia products from MediCal was experienced in the September 2004 quarter. The MediCal changes were effective June 1, 2004. The Company’s margin profile also changed in the September 2004 quarter as a result of a change in product mix, resulting in part from the expanded relationship from Medco. The primary change in product mix was an increase in the percentage of total revenues from products for the treatment of multiple sclerosis and growth hormone deficiencies, and a decrease in the percentage of total revenues from products for the treatment of hemophilia, Gaucher’s disease and autoimmune disorders.

     General and Administrative. General and administrative expenses increased from $34.6 million to $36.0 million, or 4%, from the three months ended September 30, 2003 to the three months ended September 30, 2004. As a percentage of revenues, general and administrative expenses decreased from 10.3% to 8.6% from the three months ended September 30, 2003 to the three months ended September 30, 2004. The increase on an absolute value basis is primarily due to start up costs related to the upcoming Synagis® season and increases in other general and administrative items such as rent, marketing and information technology costs. In addition, we experienced increased salaries and benefits and related costs associated with the expansion of our reimbursement, sales and marketing, administrative and support staffs. These increases were partially offset by decreases in professional fees (principally audit fees) and insurance costs.

     Bad Debts. Bad debts decreased from $7.2 million to $5.6 million from the three months ended September 30, 2003 to the three months ended September 30, 2004. As a percentage of revenues, bad debt expense was 2.1% for three months

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ended September 30, 2003 and 1.3% for the three months ended September 30, 2004. The decrease is primarily related to an increase in the mix of products that were reimbursed by third-party payors pursuant to prescription drug benefits as compared to major medical benefits in the September 2004 quarter as compared to the September 2003 quarter. In addition, all of the claims associated with the expanded relationship with Medco are pre-adjudicated by Medco. Therefore, the revenue stream associated with these claims has little, if any, bad debt expense associated with it.

     Depreciation and Amortization. Depreciation expense increased from $1.8 million to $2.6 million from the three months ended September 30, 2003 to the three months ended September 30, 2004. This increase resulted from the purchase of property and equipment, and principally included information technology assets associated with improving our infrastructure and sustaining our revenue growth. In addition, the increase resulted from additional leasehold improvements related to expanded space needs associated with our revenue growth. Amortization expense was $1.1 million in the three months ended September 30, 2003 and $1.2 million in the three months ended September 30, 2004. The increase is primarily attributable to the amortization of certain intangible assets associated with the acquisition of HRA in the September 2004 quarter.

     Interest Income/Expense, Net. Interest expense, net increased from $2.3 million to $7.3 million from the three months ended September 30, 2003 to the three months ended September 30, 2004. Current quarter interest expense (net) includes the write-off of approximately $4.4 million in unamortized debt issuance costs associated with the replacement and expansion of our senior credit facility. Upon the closing of the expanded facility (now at $550 million capacity), the Company increased its borrowings to $375.0 million. The borrowings were primarily used to fund the acquisition of HRA that occurred during the September 2004 quarter. Amounts borrowed under the previous senior credit facility were approximately $178.4 million at June 30, 2004. Interest rates on outstanding borrowings were 3.36% as of September 30, 2004, as compared to a weighted average rate of 3.70% as of September 30, 2003.

     Income Tax Expense. Our effective tax rate decreased from 38.9% to 38.2% from the three months ended September 30, 2003 to the three months ended September 30, 2004. The decrease in the effective tax rate for the period is primarily due to a larger percentage of our income being derived from subsidiaries 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.

LIQUIDITY AND CAPITAL RESOURCES

     As of September 30, 2004, working capital was $398.7 million, cash and cash equivalents were $81.6 million and the current ratio was 2.8 to 1.0.

     Net cash provided by operating activities was $37.3 million for the three months ended September 30, 2004. During the three months ended September 30, 2004, accounts receivable increased $2.3 million, inventories increased $7.6 million and accounts payable, accrued expenses and income taxes payable increased $22.1 million. These changes are due primarily to our revenue growth and the timing of the collection of receivables (including a favorable impact resulting from the expanded Medco relationship), inventory purchases and payments of accounts payable, accrued expenses, and tax obligations.

     Net cash used in investing activities was $191.1 million for the three months ended September 30, 2004. Cash used in investing activities consisted primarily of the acquisitions of HRA and HHCR during the September 2004 quarter. In addition, we purchased $3.9 million of property and equipment during the three months ended September 30, 2004.

     Net cash provided by financing activities was $192.6 million for the three months ended September 30, 2004. This consisted of $375.0 million in proceeds from the Term B portion of the Company’s expanded senior credit facility which closed during the September 2004 quarter. Principal repayments on the Company’s previous senior credit facility and other borrowings were $179.5 million. In addition, we paid approximately $5.1 million in debt issuance costs associated with our new credit facility. For the three months ended September 30, 2004, net proceeds from stock option exercises amounted to $2.8 million and distributions to our minority interest partner were $0.6 million.

     Historically, we have funded our operations and continued internal growth through cash provided by operations. Capital expenditures amounted to $19.7 million in fiscal year 2004 and $16.0 million in fiscal year 2003. We anticipate that our capital expenditures for the fiscal year ending June 30, 2005 will consist primarily of additional computer hardware, including installation of a second data center, enhancements to our fully integrated pharmacy and reimbursement software system and costs to build out and furnish additional space needed to meet our anticipated growth. We expect the cost of our capital expenditures in fiscal year 2005 to be approximately $20.0 million, exclusive of any acquisitions of businesses. We expect to fund these expenditures through cash provided by operating activities and/or borrowings under the revolving credit facility with our bank.

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     As of June 30, 2004, our $325 million revolving credit facility with Bank of America, N.A. and other participating banks (collectively the “Lenders”) consisted of a $125 million revolving commitment expiring June 2007, a $75 million term loan (Tranche A Term Loan) due in periodic principal payments through March 2007, and a $125 million term loan (Prior Tranche B Term Loan) due in periodic principal payments through March 2009. On November 18, 2003, we amended our credit facility to lower the margin on the Prior Tranche B Term Loan to 2.25% for London Inter-Bank Offered Rate (LIBOR) based loans and 0.75% for prime rate based loans effectively reducing the margin by 50 basis points through May 2004 and 25 basis points for the remaining term of the loan. We paid Bank of America, N.A. $175,000 in administrative fees to obtain the amendment. During the quarter ended September 30, 2004, we replaced our credit facility to increase the size of the credit facility to $550 million, consisting of a $175 million revolving commitment expiring July 2009 and a $375 million term loan (Tranche B Term Loan) due in periodic principal payments through June 2011.

     Amounts outstanding under the credit facility bear interest at varying rates based upon a LIBOR or prime rate of interest (as selected by us), plus a variable margin rate based upon our leverage ratio as defined by the credit agreement. The combination of a variable rate margin and LIBOR base rate resulted in an effective borrowing rate of 3.39% and 3.36% at June 30, 2004, and September 30, 2004, respectively. Our obligations under the credit facility are secured by a lien on substantially all of our assets, including a pledge of all of the common stock or partnership interest of each of our domestic subsidiaries. The Lenders’ security interest in a portion of our inventory is subordinate to the liens on that inventory under the terms of a security agreement between one of our vendors and us. The same vendor has a security interest in certain accounts receivable, which is subordinate to the rights of the Lenders.

     The credit facility documentation contains financial covenants, including requirements to maintain certain ratios with respect to leverage, fixed charge coverage, net worth and asset coverage, each as defined in the credit agreement. The credit facility documentation also includes customary affirmative and negative covenants, including covenants relating to transactions with affiliates, uses of proceeds, restrictions on subsidiaries, limitations on indebtedness, limitations on mergers, acquisitions and asset dispositions, limitations on investments, limitations on payment of dividends and stock repurchases, and other distributions. The credit facility documentation also contains customary events of default, including events relating to changes in control of the Company.

     On June 4, 2003, we entered into an interest rate swap agreement effectively converting for a period of one year beginning July 21, 2003, $120 million of floating-rate borrowings to fixed-rate borrowings with a fixed rate of 1.14%, plus the applicable margin rate as determined by the credit agreement. The interest rate swap agreement expired on July 21, 2004.

     On February 6, 2003, the Securities and Exchange Commission (SEC) declared effective our shelf registration statement on Form S-3 providing for the offer, from time to time, of various securities, up to an aggregate of $500 million. The shelf registration statement may enable us to more efficiently raise funds from the offering of securities covered by the shelf registration statement, subject to market conditions and our capital needs.

     Our liquidity needs currently arise primarily from working capital requirements, capital expenditures, commitments related to financing obtained through the issuance of long-term debt and inventory purchase obligations. We believe that our cash from operations, cash available under the recently increased revolving credit facility and the proceeds from any offering of debt or equity securities allowed by the shelf registration statement will be sufficient to meet our internal operating and working capital requirements and growth plans for at least the next 12 months.

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Commitments and Contractual Obligations

     The following table sets forth a summary of our contractual cash obligations as of September 30, 2004. Excluding long-term debt, this table does not include amounts already recorded on our balance sheet.