10-Q 1 g79369e10vq.txt ACCREDO HEALTH, INCORPORATED 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 SEPTEMBER 30, 2002 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. EMPLOYER INCORPORATION 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) 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/ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes 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.
CLASS OUTSTANDING AT NOVEMBER 1, 2002 COMMON STOCK, $0.01 PAR VALUE................ 31,578,906 NON-VOTING COMMON STOCK, $0.01 PAR VALUE..... 0 ---------- TOTAL COMMON STOCK........................... 31,578,906 ==========
ACCREDO HEALTH, INCORPORATED INDEX Part I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Income (unaudited) For the three months ended September 30, 2001 and 2002 Condensed Consolidated Balance Sheets June 30, 2002 and September 30, 2002 (unaudited) Condensed Consolidated Statements of Cash Flows (unaudited) For the three months ended September 30, 2001 and 2002 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure About Market Risk Item 4. Controls and Procedures Part II - OTHER INFORMATION Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Note: Items 1, 2, 3 and 4 of Part II are omitted because they are not applicable. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. ACCREDO HEALTH, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (000'S OMITTED, EXCEPT SHARE DATA) (UNAUDITED)
Three Months Ended September 30, --------------------------- 2002 2001 --------- --------- Net patient revenue $ 312,535 $ 122,295 Other revenue 8,885 3,907 Equity in net income of joint ventures 345 446 --------- --------- Total revenues 321,765 126,648 Cost of sales 255,825 107,012 --------- --------- Gross profit 65,940 19,636 General & administrative 30,744 8,481 Bad debts 6,608 1,055 Depreciation and amortization 2,711 691 --------- --------- Income from operations 25,877 9,409 Interest income (expense), net (2,075) 514 Minority interest in consolidated subsidiary (484) (319) --------- --------- Income before income taxes 23,318 9,604 Provision for income taxes 9,348 3,727 --------- --------- Net income $ 13,970 $ 5,877 ========= ========= Cash dividends declared on common stock $ -- $ -- ========= ========= Net income per common share: Basic $ 0.44 $ 0.23 ========= ========= Diluted $ 0.43 $ 0.22 ========= ========= Weighted average shares outstanding: Basic 31,404,139 25,996,817 Diluted 32,206,432 26,848,897
See accompanying notes to condensed consolidated financial statements. ACCREDO HEALTH, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (000'S OMITTED, EXCEPT SHARE DATA)
(Unaudited) September 30, June 30, 2002 2002 ----------------------------- ASSETS Current assets: Cash and cash equivalents $ 10,886 $ 42,913 Patient accounts receivable, less allowance for doubtful accounts of $85,645 at September 30, 2002 and $81,758 at June 30, 2002 330,725 335,253 Due from affiliates 3,625 2,255 Other accounts receivable 20,788 22,555 Inventories 115,610 120,809 Prepaids and other current assets 3,644 3,470 Deferred income taxes 7,560 5,954 --------- --------- Total current assets 492,838 533,209 Property and equipment, net 28,227 23,796 Other assets: Joint venture investments 4,842 4,637 Goodwill, net 335,043 334,919 Other intangible assets, net 26,760 28,268 --------- --------- Total assets $ 887,710 $ 924,829 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 160,205 $ 185,047 Accrued expenses 24,547 31,369 Income taxes payable 8,142 1,701 Current portion of long-term debt 5,000 5,312 --------- --------- Total current liabilities 197,894 223,429 Long-term debt 194,375 224,688 Deferred income taxes 4,739 4,383 Minority interest in consolidated joint venture 1,459 1,275 Stockholders' equity: Undesignated Preferred Stock, 5,000,000 shares authorized, no shares issued - - Common Stock, $.01 par value; 50,000,000 shares authorized; 31,538,633 and 31,329,054 shares issued and outstanding at September 30, 2002 and June 30, 2002, respectively 315 313 Additional paid-in capital 417,752 413,161 Accumulated other comprehensive loss (374) -- Retained earnings 71,550 57,580 --------- --------- Total stockholders' equity 489,243 471,054 --------- --------- Total liabilities and stockholders' equity $ 887,710 $ 924,829 ========= =========
See accompanying notes to condensed consolidated financial statements. ACCREDO HEALTH, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (000'S OMITTED) (UNAUDITED)
Three Months Ended September 30, 2002 2001 ------------------------------ OPERATING ACTIVITIES: Net income $ 13,970 $ 5,877 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,070 691 Provision for losses on accounts receivable 6,608 1,055 Deferred income tax benefit (1,250) (150) Compensation resulting from stock transactions -- 46 Tax benefit of disqualifying disposition of stock options 2,611 1,662 Minority interest in income of consolidated joint venture 484 319 Changes in operating assets and liabilities: Patient receivables and other (4,455) (5,608) Due from affiliates (1,369) 88 Inventories 5,199 (3,086) Prepaids and other current assets (174) (459) Accounts payable and accrued expenses (27,138) 2,626 Income taxes payable 6,441 1,400 ---------- ---------- Net cash provided by operating activities 3,997 4,461 INVESTING ACTIVITIES: Purchases of marketable securities -- (3,500) Purchases of property and equipment (6,177) (2,339) Business acquisitions and joint venture investments (700) -- Change in joint venture investments, net (505) (546) ---------- ---------- Net cash used in investing activities (7,382) (6,385) FINANCING ACTIVITIES: Decrease in long-term notes payable (30,625) -- Issuance of common stock 1,983 728 ---------- ---------- Net cash provided by (used in) financing activities (28,642) 728 ---------- ---------- Decrease in cash and cash equivalents (32,027) (1,196) Cash and cash equivalents at beginning of period 42,913 54,520 ---------- ---------- Cash and cash equivalents at end of period $ 10,886 $ 53,324 ========== ==========
See accompanying notes to condensed consolidated financial statements. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 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 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 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, 2002, are not necessarily indicative of the results that may be expected for the fiscal year ended June 30, 2003. The balance sheet at June 30, 2002 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 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, 2002. 2. STOCKHOLDERS' EQUITY During the quarter, employees exercised stock options to acquire 209,579 shares of Accredo common stock at a weighted average exercise price of $9.46 per share. 3. BUSINESS ACQUISITIONS - ASSETS TO BE SOLD As discussed in footnote 3 of the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended June 30, 2002, the purchase price allocation associated with the Company's acquisition of the Specialty Pharmaceutical Services Division ("SPS business") of Gentiva Health Services, Inc. is preliminary due to the plans to exit the acute pharmacy business, which could have an impact on the allocation. The Company plans to exit the acute pharmacy business acquired as part of the SPS business by December 2002. The Company's intentions are to retain the accounts receivable of the acute pharmacy business and dispose of the other assets of the business, which are immaterial. The Company has accounted for the acute pharmacy business in accordance with EITF 87-11, "Allocation of Purchase Price to Assets to be Sold." In accordance with EITF 87-11, the expected net proceeds from the sale of the acute division, the expected results of the acute operations during the period from acquisition to disposal and the expected interest expense during the holding period on the incremental debt incurred to finance the acute business have been recorded as an adjustment to the purchase price. Any difference between the actual and expected results will result in an adjustment to goodwill, unless the adjustment results from a post-acquisition event. The results of operations of the acute division, amounting to a $390,000 loss, net of tax benefit, during the three month period ended September 30, 2002, are excluded from the Company's results of operations in the accompanying financial statements. The amount of interest expense allocated to the acute pharmacy business was $241,000, net of tax benefit, during the three month period ended September 30, 2002. 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:
THREE MONTHS ENDED SEPTEMBER 30, -------------------- 2002 2001 ---- ---- Reported net income 13,970 5,877 Unrealized loss on interest rate swap contracts, net of tax benefit <374> -- ------ ----- Comprehensive income 13,596 5,877 ====== =====
The adjustments made in computing comprehensive income are reflected as a component of stockholders equity under the heading "accumulated other comprehensive loss". 5. SUBSEQUENT EVENT On November 4, 2002, the Company announced a three-for-two stock split in the form of a 50% stock dividend for shareholders of record on November 15, 2002. Shareholders will receive one additional share of common stock on December 2, 2002 for every two shares held on the record date. 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. There may be events in the future that we are not accurately able to predict or over which we have no control. The risk factors discussed below, as well as any cautionary language in this quarterly report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Examples of these risks, uncertainties and events include the availability of new drugs, our relationships with the manufacturers whose drugs we handle, integration of the SPS business acquired from Gentiva, competitive or regulatory factors affecting the drugs we handle or their manufacturers, the demand for our services, our ability to expand through joint ventures and acquisitions, our ability to maintain existing pricing arrangements with suppliers, the impact of government regulation, our need for additional capital, the seasonality of our operations and our ability to implement our strategies and objectives. Investors in our common stock 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. RESULTS OF OPERATIONS On June 13, 2002, we acquired the Specialty Pharmaceutical Services Division ("SPS business") of Gentiva Health Services, Inc. We acquired substantially all of the assets used in the SPS business including 100% of the outstanding stock in three of Gentiva's subsidiaries that were exclusively in the business conducted by the SPS business. The SPS business provides specialized contract pharmacy and related services relating to the treatment of patients with certain costly chronic diseases. In addition to the diseases previously served by us, the SPS business is also a leading provider of contract pharmacy and related services to patients with pulmonary arterial hypertension. The aggregate purchase price was $462.4 million (including $12.3 million of acquisition related costs) and consisted of $215.7 million of cash and 5,060,976 shares of common stock valued at $246.7 million. The results of the SPS business have been included in the consolidated financial statements since June 14, 2002. THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2001 Revenues. Total revenues increased 154% from $126.6 million to $321.8 million from the three months ended September 30, 2001 to the three months ended September 30, 2002. Net patient revenues increased 156% from $122.3 million to $312.5 million from the three months ended September 30, 2001 to the three months ended September 30, 2002. The increase is primarily due to the acquisitions of BioPartners in Care, Inc. in December 2001 and the Specialty Pharmaceutical Services division (SPS) of Gentiva Health Services, Inc. in June 2002. In addition, we experienced growth in our products for the treatments of multiple sclerosis, growth hormone disorders, Gaucher disease, hemophilia and autoimmune disorders and Pulmonary Arterial Hypertension as a result of volume growth with the addition of new patients and additional sales of product to existing patients. As a result of the acquisition of the SPS business, revenues related to Hemophilia and Pulmonary Arterial Hypertension significantly increased as a percentage of our revenue during the quarter ended September 30, 2002 as compared to the three months ended September 30, 2001. Due to the additional revenue primarily resulting from the SPS business, the percentage of revenue generated by our product lines for Multiple Sclerosis and Gaucher's disease significantly decreased from the percentage of our total revenue in the corresponding period ended September 30, 2001. The percentage of our total revenue generated from sales of products for growth hormone related disorders and respiratory syncytial virus also decreased for the three month period ended September 30, 2002 as compared to the three month period ended September 30, 2001. Sales of Synagis(R) for the treatment of respiratory syncytial virus are seasonal and the majority of our sales occur during the second and third quarters of our fiscal year. The percentage of revenue derived from the sale of Synagis in the second and third quarters of our 2003 fiscal year is expected to increase from the percentage of revenue in the first quarter. Cost of Services. Cost of services increased 139% from $107.0 million to $255.8 million from the three months ended September 30, 2001 to the three months ended September 30, 2002. As a percentage of revenues, cost of services decreased from 84.5% to 79.5% from the three months ended September 30, 2001 to the three months ended September 30, 2002, resulting in gross margins of 15.5% and 20.5% for the three months ended September 30, 2001 and 2002, respectively. Gross margins for the individual products have remained relatively stable; however, a change in product mix resulted in an increase in the composite gross margin in the three months ended September 30, 2002. The primary drivers for the improvement in gross margins were increased revenues from hemophilia factor, intravenous immunoglobulin ("IVIG") for the treatment of autoimmune disorders and Flolan(R) for the treatment of pulmonary arterial hypertension. These products have lower acquisition costs as a percentage of revenue than most of the other products we distribute. General and Administrative. General and administrative expenses increased from $8.5 million to $30.7 million, or 261.2%, from the three months ended September 30, 2001 to the three months ended September 30, 2002. The increase is primarily due to the acquisitions completed during fiscal 2002. In addition, we experienced increased salaries and benefits associated with the expansion of our reimbursement, sales and marketing, administrative and support staffs and the addition of office space and related furniture and fixtures to support revenue growth. As a percentage of revenues, general and administrative expenses increased from 6.7% to 9.6% from the three months ended September 30, 2001 to the three months ended September 30, 2002. The increase is due to the product mix changes discussed above. Our higher margin products, which were a larger percentage of our total revenues in the September 2002 quarter, have higher reimbursement, sales and other administrative support expenses than many of the other product lines we distribute. Bad Debts. Bad debts increased from $1.1 million to $6.6 million from the three months ended September 30, 2001 to the three months ended September 30, 2002. As a percentage of revenues, bad debt expense increased from .8% to 2.1% from the three months ended September 30, 2001 to the three months ended September 30, 2002. The increase in bad debts as a percentage of revenues is primarily due to the acquisition of the SPS business, which resulted in an increase in the percentage of our revenues that were reimbursed by major medical benefit plans versus prescription card benefits. The majority of the reimbursements provided by major medical benefit plans are subject to much higher co-payment and deductible amounts resulting in higher bad debt. Depreciation and Amortization. Depreciation expense increased from $.5 million to $1.2 million from the three months ended September 30, 2001 to the three months ended September 30, 2002, as a result of the acquisitions completed in fiscal 2002, purchases of property and equipment associated with our revenue growth and the expansion of our leasehold facility improvements. Amortization expense increased from $.2 million to $1.5 million from the three months ended September 30, 2001 to the three months ended September 30, 2002, due to the acquisitions completed in fiscal 2002. Interest Income/Expense, Net. Interest income was $.5 million for the three months ended September 30, 2001 and interest expense was $2.1 million for the three months ended September 30, 2002. The change, amounting to $2.6 million, is due to the $230 million of debt incurred in June 2002 to finance the cash portion of the acquisition of the SPS business and the related acquisition costs. Income Tax Expense. Our effective tax rate increased from 38.8% to 40.1% from the three months ended September 30, 2001 to the three months ended September 30, 2002. This increase is due to our expanded business operations in states with higher income tax rates. As a result of our SPS acquisition and the resulting increase in operating locations, a significant part of our business operations are now subject to tax in states with higher income tax rates than our previous operations, resulting in a higher effective state income tax rate. The difference between the recognized effective tax rate and the statutory federal rate of 35% is primarily attributable to state income taxes. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2002, working capital was $294.9 million, cash and cash equivalents were $10.9 million and the current ratio was 2.5 to 1.0. Net cash provided by operating activities was $4.0 million for the three months ended September 30, 2002. During the three months ended September 30, 2002, accounts receivable decreased $2.2 million, inventories decreased $5.2 million and accounts payable and accrued expenses increased $20.7 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 $7.4 million for the three months ended September 30, 2002. Cash used in investing activities consisted of $6.2 million for purchases of property and equipment, $.7 million for business acquisition costs and $.5 million of undistributed earnings from our joint ventures. Net cash used in financing activities was $28.6 million for the three months ended September 30, 2002, which consisted of $30.6 million in debt repayments less $2.0 million from the net proceeds of stock option exercises. 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, 2003 will consist primarily of additional computer hardware, a fully integrated pharmacy and reimbursement software system and costs to build out and furnish additional space needed to meet our growth. We expect the cost of our capital expenditures in fiscal year 2003 to be approximately $17.0 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. In addition, in connection with our acquisition of BioPartners in Care, Inc., we may be obligated to make up to $16 million in earn-out payments during the next twelve months. During 2002, we amended and restated our $60 million revolving credit facility with Bank of America, N.A. and other participating banks 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. As of September 30, 2002, the total amount outstanding under the credit facility was $199.4 million, which included $75 million under the Tranche A Term Loan and $124.4 million under the Tranche B Term Loan. Amounts outstanding under the credit agreement bear interest at varying rates based upon a London Inter-Bank Offered Rate (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. 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 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 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. On July 17, 2002, we entered into an interest rate swap to protect against fluctuations in interest rates. The agreement effectively converts 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. While we anticipate that our cash from operations, along with the short-term use of the revolving credit facility will be sufficient to meet our internal operating requirements and growth plans for at least the next 12 months, we expect that additional funds may be required in the future to successfully continue our growth beyond such period. We may be required to raise additional funds through sales of equity or debt securities or seek additional financing from financial institutions. There can be no assurance, however, that financing will be available on terms that are favorable to us or, if obtained, will be sufficient for our needs. The following table sets forth a summary of our contractual cash obligations as of September 30, 2002. The long-term debt is reflected on our balance sheet, while the lease commitments are disclosed as future obligations under accounting principles generally accepted in the United States. Payments due for the year ending June 30 (in thousands):
2003 (1) 2004 2005 2006 2007 Thereafter ---------------------------------------------------------------------------- Long-term debt: Revolving credit facility $ - $ - $ - $ - $ - $ - Tranche A term loan 3,750 15,000 16,875 22,500 16,875 - Tranche B term loan 937 1,250 1,250 1,250 15,781 103,907 Operating leases 5,374 5,914 4,692 2,166 587 - ---------------------------------------------------------------------------- Total $ 10,061 $ 22,164 $ 22,817 $ 25,916 $ 33,243 $ 103,907 ============================================================================
(1) Cash obligations for the remainder of fiscal year ending June 30, 2003. CRITICAL ACCOUNTING POLICIES AND 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, 2002, filed with the Securities and Exchange Commission on September 30, 2002. The three 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 allowance for doubtful accounts, allowance for contractual discounts and medical claims reserve. In addition, Note 1 to our audited financial statements contained within our most recent Annual Report on Form 10-K, contains a summary of our significant accounting policies. RISK FACTORS You should carefully consider the risks and uncertainties we describe below before investing in Accredo. The risks and uncertainties described below are not the 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. We derive a substantial percentage of our revenue and profitability from the sale of hemophilia product and intravenous immunoglobin (IVIG) that we primarily purchase from Baxter Healthcare Corporation, Bayer Corporation and Wyeth Pharmaceuticals. Approximately 40% of our revenue in the quarter ended September 30, 2002 was derived from the sale of IVIG and hemophilia product. During the quarter ended September 30, 2002 and the fiscal year ended June 30, 2002, the majority of our 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, MedImmune and GlaxoSmithKline. Our revenue derived from these relationships was in excess of 36% of our revenue for the quarter ended September 30, 2002. Our agreements with these suppliers are short-term and cancelable by either party without cause on 30 to 90 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 products. 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 account for over 85% of our revenues with the drugs for hemophilia and autoimmune disorders constituting approximately 40% of our revenue for the quarter ended September 30, 2002: - Hemophilia and Autoimmune Disorders - Multiple Sclerosis - Pulmonary Arterial Hypertension - Gaucher Disease - 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; - the expiration or challenge of a drug patent; - competing treatment from a new drug or a new use of an existing drug or orphan drug status; - 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; - 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; 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. 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. According to a Kaiser Family Foundation report released on September 19, 2002, 45 states reported they took actions to decrease Medicaid spending on 2002, and 41 reported they would take additional actions to decrease Medicaid spending in 2003. As a result of the acquisition of the SPS business, we expect the percentage of our revenues attributable to federal and state programs to increase. In September 2002, the Bush administration proposed deep reductions in Medicare payments for a wide range of drugs provided as outpatient services by Hospitals. Among the drugs included in this proposal are Avonex(R), Remicade(R) and hemophilia products. We are not directly affected by this proposal as Medicare only reimburses for Avonex(R) and Remicade(R) dispensed in a hospital or physician clinic. However, if this proposal is adopted, we cannot predict whether state Medicaid programs would adopt similar pricing. 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. 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 and 2002 and the quarter ended September 30, 2002, we derived approximately 81%, 79% and 72% respectively of our gross patient revenue from non-governmental payors (including self-pay), which included 4%, 3% 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. 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 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 and interest on the debt and will not be available for other purposes; - Our debt covenants will require us to meet financial tests, and may impose other limitations that may limit our flexibility in planning for and reacting to changes in our business, including possible acquisition opportunities; - Our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate and other purposes may be limited; - Failure to meet our debt covenants could result in foreclosure by our lenders; - 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. THE FAILURE TO INTEGRATE SUCCESSFULLY THE SPS BUSINESS ACQUIRED FROM GENTIVA MAY PREVENT US FROM ACHIEVING THE ANTICIPATED POTENTIAL BENEFITS OF THE ACQUISITION AND MAY ADVERSELY AFFECT OUR BUSINESS. We face significant challenges in consolidating functions, integrating the procedures, operations and product lines of the SPS business in a timely and efficient manner, and retaining key personnel of the SPS business. The integration of the SPS business is complex and requires substantial attention from management. The diversion of management attention and any difficulties encountered in the transition and integration process could have a material adverse effect on our revenues, level of expenses and operating results. 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 respiratory syncytial virus. For the fiscal years ended June 30, 2001 and 2002 and the quarter ended September 30, 2002, we derived approximately 4%, 4% and 1%, respectively, of our income before income taxes from equity in the net income of unconsolidated joint ventures. Since April 2000, we have owned 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 and 8% of our income before income taxes for the quarter ended September 30, 2002. In addition to joint venture relationships, we also provide pharmacy management services to several medical centers. Our agreements with medical centers have terms of between one and five years, and may be cancelled by either party without cause upon notice of between one and twelve months. Adverse changes in our relationships with those medical centers could be caused, for example, by: - changes caused by consolidation within the hospital industry; - changes caused by regulatory uncertainties inherent in the structure of the relationships; or - restrictive changes to regulatory requirements. Any termination or adverse change of these relationships could have a material adverse effect on our business, financial condition and results of operations. IF ADDITIONAL PROVIDERS OBTAIN ACCESS TO FAVORABLE 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 clotting factor. 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 Gentiva is not able to fulfill its indemnification obligations under the terms of our asset purchase agreement. The purchase price we paid to Gentiva for the SPS business was distributed directly to the shareholders of Gentiva, and should any significant payment be required, Gentiva may not have sufficient funds and may not be able to obtain the funds to satisfy its potential indemnification obligation to us. 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 revisions in the method of establishing average wholesale price ("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; - 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 respiratory syncytial virus; - physician prescribing patterns; - general political and economic conditions; - interest rate fluxuations; 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 Food and Drug Administration ("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. Some of the products that we distribute, such as IVIG and 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. For example, an industry wide recombinant factor VIII product shortage existed for some time, as a result of the manufacturers being unable to increase production to meet rising global demand, and has only recently returned to normal levels. In addition, the SPS business has historically reported that its revenue growth was negatively impacted by some product shortages of recombinant coagulation therapy, which is used in the treatment of hemophilia, as well as by Bayer Corporation's decision in 1999 to begin directly distributing Prolastin(R), an intravenous therapy used in the treatment of the hereditary disorder Alpha 1 Antirypsin Deficiency. These drugs affected by product shortages accounted for approximately 14% of the revenues of the SPS business (including the acute business) for the year ended December 31, 2001. 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. 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 "orphan drug" status applicable to drugs related to the seven core disease states that we handle expires (or expired) as follows: - Flolan(R) expired September 2002 (primary pulmonary hypertension) and expires April 2007 (secondary pulmonary hypertension due to intrinsic pulmonary vascular disease); - AVONEX(R) expires May 2003; - Nutropin(R) Depot expires July 2007; - Tracleer(TM) expires November 2008; - Remodulin(R) expires May 2009. However, despite orphan drug status, there are competing products on the market for Avonex and human growth hormone products, including Nutropin(R) Depot. Tracleer(TM), Remodulin(R) and Flolan(R) also compete in the treatments of pulmonary arterial hypertension. 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. For example, despite the orphan drug status of AVONEX(R), the FDA recently approved a competitive drug called Rebif(R), which we do not currently expect to handle. RECENT INVESTIGATIONS INTO REPORTING OF 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 average wholesale price (or 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 clotting factor and IVIG products that we sell. 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. A number of state Medicaid agencies have revised their payment methodology as a result of the Market Price Survey. The Centers for Medicare and Medicaid Services ("CMMS") had also announced that Medicare intermediaries should calculate the amount that they pay for certain drugs by using the lower prices on the First DataBank Market Price Survey. However, the proposal to include clotting factor in the lower Medicare pricing was withdrawn. Instead, CMMS has announced that it will seek legislation that would establish payments to cover the administrative costs of suppliers of clotting factor as a supplement to lower AWP pricing for factor. On September 21, 2001, the United States House Subcommittees on Health and Oversight & Investigations held hearings to examine how Medicare reimburses providers for the cost of drugs. In conjunction with that hearing, the U.S. General Accounting Office issued its Draft Report recommending that Medicare establish payment levels for part-B prescription drugs and their delivery and administration that are more closely related to their costs, and that payments for drugs be set at levels that reflect actual market transaction prices and the likely acquisition costs to providers. We cannot predict the eventual results of the government investigations, lawsuits and 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. 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 principally all of our products are shipped by a single carrier, FedEx. 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. OUR BUSINESS COULD BE HARMED IF PAYORS DECREASE OR DELAY THEIR PAYMENTS TO US. 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. If we are unable to collect from payors or if payors fail to pay us in a timely manner, it could have a material adverse effect on our business and financial condition. 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 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 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 September 30, 2002, we had goodwill, net of accumulated amortization, of approximately $335 million, or 37.7% of total assets and 68% of stockholders' equity. Since our growth strategy may involve the acquisition of other companies, we may record additional goodwill in the future. The possible write-off of this goodwill could negatively impact our future earnings. We will also be required to allocate a portion of the purchase price of any acquisition to the value of non-competition agreements, patient base and contracts that are acquired. The amount allocated to these items could be amortized over a fairly short period. As a result, our earnings and the market price of our common stock could be negatively impacted. WE RELY ON A FEW KEY EMPLOYEES WHOSE ABSENCE OR LOSS COULD ADVERSELY AFFECT OUR BUSINESS. We depend on a few key executives, and the loss of their services could cause a material adverse effect to our company. We do not maintain "key person" life insurance policies on any of those executives. As a result, we are not insured against the losses resulting from the death of our key executives. Further, we must be able to attract and retain other qualified, essential employees for our technical operating and professional staff, such as pharmacists and nurses. If we are unable to attract and retain these essential employees, our business could be harmed. WE 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 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 clients 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 of 1996, or 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 recently issued regulations implementing the Administrative Simplification provision of HIPAA concerning the maintenance and transmission and security of electronic health information, particularly individually identifiable information. The new regulations, when effective, will require the development and implementation of security and transaction standards for all electronic health information and impose significant use and disclosure obligations on entities that send or receive individually identifiable electronic health information. 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. - 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. 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 earnings 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 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. 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 we will also be harmed by rising interest rates on this portion of our debt. 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 $200,000 during a quarter. However, a 100 basis point increase in interest rates would result in a decrease in pre-tax income of $200,000 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 (a) Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) within 90 days prior to the filing of this report and concluded, as of the date that evaluation was completed, that our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. (b) Changes in Internal Controls There have been no significant changes in our internal controls or in other factors that could significantly affect these controls since the date last evaluated. PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION On November 4, 2002, the Company announced a three-for-two stock split in the form of a 50% stock dividend for shareholders of record on November 15, 2002. Shareholders will receive one additional share of common stock on December 2, 2002 for every two shares held on the record date. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits Exhibit 3.1 Certificate of Amendment of the Certificate of Incorporation of Accredo Health, Incorporated Exhibit 10.1 Stock Option Agreement of David D. Stevens dated September 3, 2002 Exhibit 10.2 Stock Option Agreement of John R. Grow dated September 3, 2002 Exhibit 10.3 Stock Option Agreement of Joel R. Kimbrough dated September 3, 2002 Exhibit 10.4 Stock Option Agreement of Kyle J. Callahan dated September 3, 2002 Exhibit 10.5 Stock Option Agreement of Barbara H Biehner dated June 24, 2002 Exhibit 10.6 Stock Option Agreement of Barbara H. Biehner dated September 3, 2002 Exhibit 10.7 Employment Agreement effective as of September 1, 2001 between Accredo Health, Incorporated and David D. Stevens Exhibit 10.8 Employment Agreement effective as of September 1, 2002 between Accredo Health, Incorporated and John R. Grow Exhibit 10.9 Employment Agreement effective as of September 1, 2001 between Accredo Health, Incorporated and Joel R. Kimbrough Exhibit 10.10 Employment Agreement effective as of September 1, 2002 between Accredo Health, Incorporated and Kyle J. Callahan
(b) Reports on Form 8-K None Signature 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. November 14, 2002 Accredo Health, Incorporated BY: /s/ David D. Stevens ------------------------------- David D. Stevens Chairman of the Board and Chief Executive Officer /s/ Joel R. Kimbrough ------------------------------- Joel R. Kimbrough Senior Vice President, Chief Financial Officer and Treasurer CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, David D. Stevens, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Accredo Health, Incorporated ("the registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ David D. Stevens ----------------------- David D. Stevens Chief Executive Officer CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Joel R. Kimbrough, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Accredo Health, Incorporated ("the registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: d) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; e) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and f) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: c) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and d) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Joel R. Kimbrough ---------------------- Joel R. Kimbrough Chief Financial Officer Exhibit Index
Exhibit Number Description of Exhibits ------ ----------------------- 3.1 Certificate of Amendment of the Certificate of Incorporation of Accredo Health, Incorporated 10.1 Stock Option Agreement of David D. Stevens dated September 3, 2002 10.2 Stock Option Agreement of John R. Grow dated September 3, 2002 10.3 Stock Option Agreement of Joel R. Kimbrough dated September 3, 2002 10.4 Stock Option Agreement of Kyle J. Callahan dated September 3, 2002 10.5 Stock Option Agreement of Barbara H Biehner dated June 24, 2002 10.6 Stock Option Agreement of Barbara H. Biehner dated September 3, 2002 10.7 Employment Agreement effective as of September 1, 2001 between Accredo Health, Incorporated and David D. Stevens 10.8 Employment Agreement effective as of September 1, 2002 between AccredoHealth, Incorporated and John R. Grow 10.9 Employment Agreement effective as of September 1, 2001 between Accredo Health, Incorporated and Joel R. Kimbrough 10.10 Employment Agreement effective as of September 1, 2002 between Accredo Health, Incorporated and Kyle J. Callahan