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FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

For the quarterly period ended October 2, 2004

OR

For the transition period from              to             

Commission file number 000-23249

PRIORITY HEALTHCARE CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (407) 804-6700

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  ¨

As of October 28, 2004, the number of shares outstanding of each of the issuer’s classes of common stock were as follows:

Class A Common Stock – 6,611,745

Class B Common Stock – 36,933,971

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

PRIORITY HEALTHCARE CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS

(000’s omitted, except share data)

(unaudited)

See accompanying notes to consolidated financial statements.

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PRIORITY HEALTHCARE CORPORATION

CONSOLIDATED BALANCE SHEETS

(000’s omitted, except share data)

See accompanying notes to consolidated financial statements.

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PRIORITY HEALTHCARE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000’s omitted)

(unaudited)

See accompanying notes to consolidated financial statements.

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PRIORITY HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

For a summary of all of the Company’s accounting policies, see Note 1 of the consolidated financial statements contained in the Company’s Form 10-K for the fiscal year ended January 3, 2004. The only such items that have changed, which had no significant impact on results of operations or financial position, since the description in the Company’s Form 10-K for the fiscal year ended January 3, 2004 are as follows:

Revenue Recognition - Revenues are recognized when products are delivered to unaffiliated customers with appropriate provisions recorded for estimated discounts and contractual allowances. Discounts and contractual allowances are estimated based on historical collections from all unaffiliated customers. Any differences between the estimates and actual collections are reflected in operations in the year payment is received. Differences may result in the amount and timing of revenues for any period if actual performance varies from the estimates. Financing charge revenues are recognized when received.

Variable Interest Entities - In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”) (revised December 2003), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, which expands upon and strengthens existing accounting guidance concerning when a company should include in its financial statements the assets, liabilities and activities of another entity. A Variable Interest Entity (“VIE”) does not share economic risk and rewards through typical equity ownership arrangements; instead, contractual or other relationships re-distribute economic risks and rewards among equity holders and other parties. Once an entity is determined to be a VIE, the party with the controlling financial interest, the primary beneficiary, is required to consolidate it. FIN 46 also requires disclosures about VIEs that a company is not required to consolidate but in which it has a significant variable interest. The Company will apply the consolidation or disclosure requirements of this interpretation if it should own any interest deemed to be a variable interest entity. The three-month period ended October 2, 2004 was the first period FIN 46 had an impact on the Company. See Note 5.

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Options to purchase 3.1 million and 3.6 million shares with exercise prices greater than the average market prices of common stock during the three-month periods ended October 2, 2004 and September 27, 2003 were outstanding at October 2, 2004 and September 27, 2003, respectively. These options were excluded from the respective computations of diluted earnings per share because their effect would be anti-dilutive.

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The Company has elected to continue to measure compensation for stock options issued to its employees and outside directors pursuant to APB No. 25 under the intrinsic value method. All stock options are granted with an exercise price at or above fair market value at the date of grant. Accordingly, no compensation expense has been recognized in connection with the issuance of stock options. Had compensation cost been determined based upon the fair value of the stock options at grant date, consistent with the method under SFAS No. 123, the Company’s net earnings and earnings per share would have been reduced to the following pro forma amounts indicated:

On April 2, 2004, the Company acquired certain assets of Partners In Care Pharmacy, LLC (“Partners In Care”) for approximately $6.1 million in cash. The acquisition was financed by cash from operations. Partners In Care was an infertility specialty pharmacy. The transaction is expected to complement the Company’s existing infertility specialty pharmacy operations. The acquisition was accounted for using the purchase method of accounting in accordance with SFAS No. 141, Business Combinations. Under the purchase method of accounting, the total purchase price was allocated to the tangible and intangible assets acquired based upon their estimated fair values. The fair values assigned to the tangible and intangible assets acquired were based upon estimates and assumptions provided and compiled by management. The excess purchase price of $5.8 million was recorded as goodwill.

The following table summarizes the estimated fair values of the assets acquired at the date of acquisition (000’s omitted):

In addition, the former owners of Partners In Care are eligible to receive additional consideration based upon revenues received from new customers under a certain contract.

The results of operations of Partners In Care prior to the date of acquisition were not material to the results of the Company for the periods presented in these financial statements. The results of operations after the acquisition date are included in the consolidated financial statements.

On June 14, 2004, the Company acquired all of the outstanding common shares of HealthBridge Reimbursement and Product Support, Inc. (“HealthBridge”) for approximately $9 million in cash. The acquisition was financed by cash from operations. HealthBridge is a service company specializing in drug launch and reimbursement support for the biotech and pharmaceutical industry. The transaction is expected to complement the Company’s existing specialty pharmacy and specialty distribution operations. The acquisition was accounted for using the

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purchase method of accounting in accordance with SFAS No. 141, Business Combinations. Under the purchase method of accounting, the total purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based upon their estimated fair values. The fair values assigned to the tangible assets acquired and liabilities assumed were based upon estimates and assumptions provided and compiled by management. The intangible assets consist primarily of trademarks and non-compete agreements. The fair values assigned to the trademarks ($210,000) and non-compete agreements ($140,000) were based upon an independent appraisal. The excess purchase price of $7.4 million was recorded as goodwill.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (000’s omitted):

In addition, the former owners of HealthBridge are eligible to receive additional consideration if HealthBridge achieves certain predetermined financial results during the 12-month periods ending May 31, 2005 and May 31, 2006. In the event that HealthBridge fails to achieve certain predetermined financial results for the 12-month period ending May 31, 2005, the former owners are obligated to repay consideration to the Company.

The results of operations of HealthBridge prior to the date of acquisition were not material to the results of the Company for the periods presented in these financial statements. The results of operations after the acquisition date are included in the consolidated financial statements.

On July 6, 2004, the Company acquired all of the outstanding common shares of Integrity Healthcare Services, Inc. (“Integrity”). The aggregate purchase price for the outstanding common shares of Integrity was approximately $33 million, comprised of approximately $27.6 million in cash (including $5 million that will be paid in July 2005), $5 million of Class B Common Stock and approximately $400,000 of direct acquisition costs. In addition, as part of the closing process, the Company paid approximately $12 million to repay Integrity’s line of credit balance in full. The acquisition was financed by the Company’s existing line of credit. Integrity is a specialty infusion pharmacy with 23 branches in 16 states located throughout the Midwest and Southeast states. The transaction is expected to expand the Company’s specialty pharmacy capabilities and geographic operating locations. The acquisition was accounted for using the purchase method of accounting in accordance with SFAS No. 141, Business Combinations. Under the purchase method of accounting, the total purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based upon their estimated fair values. The fair values assigned to the tangible assets acquired and liabilities assumed were based upon estimates and assumptions provided and compiled by management. The intangible assets consist primarily of trademarks, non-compete agreements and certificates of need. The fair values assigned to the trademarks ($1.7 million), non-compete agreements ($200,000) and the certificates of need ($570,000) were based upon an independent appraisal. The excess purchase price of $34.6 million was recorded as goodwill.

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The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (000’s omitted):

The results of operations of Integrity prior to the date of acquisition were not material to the results of the Company for the periods presented in these financial statements. The results of operations after the acquisition date are included in the consolidated financial statements.

The terms of the joint venture require the Company to build, develop and staff on behalf of the joint venture a stand-alone specialty pharmacy capable of handling certain specialty pharmacy needs of Aetna. The specialty pharmacy must be completed in accordance with a specified development schedule and within certain cost limitations. The Company also entered into a drug supply agreement with the joint venture and a specialty pharmacy back-up provider agreement with Aetna to provide specialty pharmacy services in instances where the joint venture is unable to do so.

Pursuant to its policy, the Company has determined that the joint venture should be consolidated under the provisions of FIN 46, Consolidation of Variable Interest Entities. Since its inception, the results of operations of the joint venture (which were not material) have been included in the Company’s financial statements.

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The following is a reconciliation of the beginning and ending liability balances showing separately the changes during the three-month periods ended July 3, 2004 and October 2, 2004 attributable to costs incurred and charged to expense and costs paid:

The Company is also subject to ordinary and routine lawsuits and governmental inspections, investigations and proceedings incidental to its business, none of which is expected to be material to the Company’s results of operations, financial condition or cash flows.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Certain statements included in this quarterly report, which are not historical facts, are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our expectations or beliefs and involve certain risks and uncertainties including, but not limited to, changes in interest rates, competitive pressures, changes in customer mix, changes in third party reimbursement rates, financial stability of major customers, changes in government regulations or the interpretation of these regulations, changes in supplier relationships, growth opportunities, cost savings, revenue enhancements, synergies and other benefits anticipated from acquisition transactions, difficulties related to integrating acquired businesses, the accounting and tax treatment of acquisitions, and asserted and unasserted claims, which could cause actual results to differ from those in the forward-looking statements. The forward-looking statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date herein.

Overview

We were formed in June 1994 to succeed to the business operations of companies previously acquired by Bindley Western Industries, Inc. (“BWI”). From our formation through our initial public offering, or IPO, on October 24, 1997, we operated as a wholly owned subsidiary of BWI, and procured a number of services from, and engaged in a number of financial and other transactions with, BWI. After the IPO, we continued to be controlled by BWI, but operated on a stand-alone basis. On December 31, 1998, BWI distributed to the holders of BWI common stock on December 15, 1998 all of the shares of our Class A Common Stock owned by BWI, making Priority Healthcare Corporation a stand-alone public company.

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Priority is a national specialty pharmacy and distributor that provides biopharmaceuticals, complex therapies and related disease treatment programs and services to individuals with chronic diseases. Priority fills individual patient prescriptions, primarily for self-administered biopharmaceuticals. These patient-specific prescriptions are filled at 32 licensed pharmacies in 17 states and are primarily shipped directly to the patient overnight in specialized packages. We also provide disease treatment programs for hepatitis, cancer, infertility, hemophilia, human growth hormone deficiency, rheumatoid arthritis, Crohn’s disease, infertility, pulmonary hypertension, pain management, multiple sclerosis, sinusitis, age-related macular degeneration and others.

We also sell over 5,000 SKUs of specialty pharmaceuticals and medical supplies to office-based physicians in oncology and other specialty markets and to outpatient renal care centers. Priority offers value-added services to meet the specific needs of these markets by shipping refrigerated pharmaceuticals overnight in special packaging to maintain appropriate temperatures, offering automated order entry services and offering customized distribution for group accounts. From distribution centers in Sparks, Nevada and Grove City, Ohio, we service over 5,000 customers in all 50 states, including office-based oncologists, renal dialysis clinics, ambulatory surgery centers and primary care physicians.

Our objective is to continue to grow rapidly and enhance our market position as a leading healthcare company by capitalizing on our business strengths and pursuing the following strategy: (i) continue to focus on further penetrating the core specialty distribution and pharmacy market; (ii) develop new manufacturer relationships that provide access to new products and services; (iii) continue to develop group purchasing organization and payor networks; (iv) enter new specialty markets; and (v) pursue acquisitions to complement existing product offerings and further penetrate markets.

Over the past three years, we have continued to grow as we have executed on our growth strategy. Due to the nature of healthcare and the pharmaceutical industry, there is constant pressure on profit margins. Competition has resulted in some margin reduction on our products. However, as we have done in the past, we expect to be able to partially offset this impact through the continuing benefits of scale, as well as cost containment measures.

Critical Accounting Policies

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates. For a summary of all of our accounting policies, see Note 1 of the consolidated financial statements contained in our Form 10-K for the fiscal year ended January 3, 2004. For the items in our financial statements that we believe are the most dependent on the applications of significant estimates and judgments see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” contained in our Form 10-K for the fiscal year ended January 3, 2004. The only such items that have changed, which had no significant impact on results of operations or financial position, since the description in our Form 10-K for the fiscal year ended January 3, 2004 are as follows:

Revenue Recognition - Revenues are recognized when products are delivered to unaffiliated customers with appropriate provisions recorded for estimated discounts and contractual allowances. Discounts and contractual allowances are estimated based on historical collections from all unaffiliated customers. Any differences between our estimates and actual collections are reflected in operations in the year payment is received. Differences may result in the amount and timing of our revenues for any period if actual performance varies from our estimates. Financing charge revenues are recognized when received.

Variable Interest Entities - In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”) (revised December 2003), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, which expands upon and strengthens existing accounting guidance concerning

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when a company should include in its financial statements the assets, liabilities and activities of another entity. A Variable Interest Entity (“VIE”) does not share economic risk and rewards through typical equity ownership arrangements; instead, contractual or other relationships re-distribute economic risks and rewards among equity holders and other parties. Once an entity is determined to be a VIE, the party with the controlling financial interest, the primary beneficiary, is required to consolidate it. FIN 46 also requires disclosures about VIEs that a company is not required to consolidate but in which it has a significant variable interest. We will apply the consolidation or disclosure requirements of this interpretation if we should own any interest deemed to be a variable interest entity. The three-month period ended October 2, 2004 was the first period FIN 46 had an impact.

Results of Operations

The following table sets forth for the periods indicated, the percentages of net sales represented by the respective financial items:

Net sales increased to $1.28 billion in the first nine months of 2004 from $1.06 billion in the first nine months of 2003, an increase of 20%. Net sales increased to $440.2 million in the three months ended October 2, 2004, from $362.9 million in the three months ended September 27, 2003, an increase of 21%. The growth primarily reflected the addition of new customers, new product introductions, additional sales to existing customers, the acquisitions of HealthBridge and Integrity and inflationary price increases. The additional net sales attributed to the acquisitions of HealthBridge and Integrity in the first nine months of 2004 represented approximately 2% of the total net sales in the first nine months of 2004. The additional net sales attributed to the acquisitions of HealthBridge and Integrity in the three months ended October 2, 2004 represented approximately 5% of the total net sales in the three months ended October 2, 2004.

Gross profit increased to $140.7 million in the first nine months of 2004 from $117.4 million in the first nine months of 2003, an increase of 20%. Gross profit as a percentage of net sales stayed the same in the first nine months of 2004 at 11.0% compared to the first nine months of 2003. Gross profit increased to $51.8 million in the three months ended October 2, 2004, from $39.4 million in the three months ended September 27, 2003, an increase of 32%. Gross profit as a percentage of net sales increased in the three months ended October 2, 2004,

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to 11.8% from 10.9% in the three months ended September 27, 2003. The increases in gross profit reflected increased sales. The increase in gross profit as a percentage of net sales in the three months ended October 2, 2004 compared to the three months ended September 27, 2003 was primarily attributable to the acquisitions of HealthBridge and Integrity which sell higher margin products. The reason gross profit as a percentage of net sales stayed the same in the first nine months of 2004 compared to the first nine months of 2003 is because the increase from selling higher margin HealthBridge and Integrity products was netted with the contraction on gross profit related to oncology distribution products and the change in sales mix, as lower margin products experienced increased sales. Competition continues to exert pressure on margins.

Selling, general and administrative (“SGA”) expense increased to $74.8 million in the first nine months of 2004 from $56.5 million in the first nine months of 2003, an increase of 32%. SGA expense as a percentage of net sales increased in the first nine months of 2004 to 5.8% from 5.3% in the first nine months of 2003. SGA expense increased to $29.3 million in the three months ended October 2, 2004, from $19.0 million in the three months ended September 27, 2003, an increase of 54%. SGA expense as a percentage of net sales increased in the three months ended October 2, 2004 to 6.6% from 5.2% in the three months ended September 27, 2003. The increases in SGA expense reflected the growth in our business, costs related to new business relationships with drug manufacturers, increased costs attributable to providing more clinically oriented services, costs related to our Sarbanes-Oxley Section 404 internal control project, incremental costs of running multiple information systems as we prepare to bring the remaining modules of our new enterprise wide information technology system live, and premium increases for health, property and liability insurance. $8.5 million of the increase comparing the three months ended October 2, 2004 to the three months ended September 27, 2003 related to acquisitions and new joint ventures. The increase in SGA expense as a percentage of net sales resulted from costs related to new business relationships with drug manufacturers, increased costs attributable to providing more clinically oriented services, costs related to our Sarbanes-Oxley Section 404 internal control project, incremental costs of running multiple information systems as we prepare to bring the remaining modules of our new enterprise wide information technology system live, premium increases for health, property and liability insurance, and costs related to acquisitions and new joint ventures. Management continually monitors SGA expense and remains focused on controlling these increases through improved technology and efficient asset management.

The restructuring charge of $1.3 million in the nine-month period ended October 2, 2004 related to facility consolidation and certain employee and lease termination costs. The Company consolidated its Carpinteria, CA location into its Monrovia, CA location and eliminated certain employee positions, which included some at the Lake Mary, FL location.

Depreciation and amortization (“D&A”) increased to $4.6 million in the first nine months of 2004 from $3.1 million in the first nine months of 2003, an increase of 46%. D&A increased to $1.8 million in the three months ended October 2, 2004, from $1.1 million in the three months ended September 27, 2003, an increase of 58%. The increases in D&A were primarily the result of depreciation on newly acquired computer hardware and software, furniture and equipment, transportation equipment, telephone equipment and leasehold improvements and amortization of intangible assets related to the acquisitions of HealthBridge and Integrity.

Interest income decreased to $508,000 in the first nine months of 2004 from $1.1 million in the first nine months of 2003, a decrease of 52%. Interest income decreased to $139,000 in the three months ended October 2, 2004 from $246,000 in the three months ended September 27, 2003, a decrease of 43%. In the first nine months of 2004 we earned 0.95% on an average invested balance of $71.2 million. In the first nine months of 2003 we earned 1.77% on an average invested balance of $79.6 million. In the three months ended October 2, 2004 we earned 0.85% on an average invested balance of $65.0 million. In the three months ended September 27, 2003 we earned 1.25% on an average invested balance of $78.8 million. The decreases in interest income were due to the lower average invested balances and the lower interest rates earned. In the three-month and nine-month periods ended October 2, 2004 and September 27, 2003, the interest income was primarily related to investing cash and funds received from operations in overnight repurchase agreements with major financial institutions and in marketable securities.

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Interest expense was $635,000 in the first nine months of 2004. Interest expense was $439,000 in the three months ended October 2, 2004. In the first nine months of 2004 we paid an average rate of 2.54%, plus amortization of the line of credit origination costs, on an average line of credit balance of $16.0 million. In the three months ended October 2, 2004 we paid an average rate of 2.52%, plus amortization of the line of credit origination costs, on an average line of credit balance of $37.5 million. In the three-month and nine-month periods ended October 2, 2004, the interest expense was primarily related to our line of credit.

The provision for income taxes in the three-month and nine-month periods ended October 2, 2004 represented 38.0% and 37.8%, respectively, of earnings before income taxes. The provision for income taxes in the three-month and nine-month periods ended September 27, 2003 represented 37.5% of earnings before income taxes.

Liquidity - Capital Resources.

Our principal capital requirements have been to fund working capital needs to support internal growth, for acquisitions and for capital expenditures. Our principal working capital needs are for inventory and accounts receivable. Management controls inventory levels in order to minimize carrying costs and maximize purchasing opportunities. We sell inventory to our customers on various payment terms. This requires significant working capital to finance inventory purchases and entails accounts receivable exposure in the event any of our major customers encounter financial difficulties. Although we monitor closely the creditworthiness of our customers, there can be no assurance that we will not incur some collection loss on accounts receivable in the future.

On October 2, 2004, we had cash and cash equivalents of $70.6 million, marketable securities of $8.6 million and working capital of $215.8 million. On February 27, 2004, we entered into an agreement with Suntrust Bank, as administrative agent, for an unsecured three year revolving credit facility for up to $150 million. We intend to use the available proceeds to fund acquisitions, repurchase shares of our Class B Common Stock, provide for working capital and capital expenditures, and for other general corporate purposes. The revolving credit facility requires us, among other things, to maintain a minimum consolidated net worth, a minimum interest coverage ratio and limits our leverage ratio. We were in compliance with these covenants as of October 2, 2004. On October 2, 2004, the principal amount outstanding under this facility was $45.0 million. We believe that the cash and cash equivalents, marketable securities, working capital, revolving credit facility and cash from operations will be sufficient to meet our working capital needs for at least one year.

Net cash provided by operating activities. Our operations generated $25.4 million in cash during the first nine months of 2004. Receivables, net of acquisitions, increased $53.3 million during the first nine months of 2004, primarily to support the increase in sales and due to the extension of credit terms to meet competitive conditions. Finished goods inventory, net of acquisitions, decreased $12.0 million during the first nine months of 2004 partly due to our concerted effort to closely monitor inventory and maintain it at an optimal level and partly due to our taking advantage of purchasing opportunities during the fourth quarter of 2003 for certain inventory items that were sold during the first nine months of 2004. The $8.9 million increase in accounts payable, net of acquisitions, was attributable to the timing of purchases and payments and credit terms negotiated with vendors. Other current assets and liabilities, net of acquisitions, increased cash by $12.4 million primarily due to an increase in income taxes payable, accrued expenses and a restructuring charge accrual. We anticipate that our operations may require cash to fund our growth.

Net cash used by investing activities. During the first nine months of 2004, we sold $6.7 million of marketable securities. Capital expenditures during the first nine months of 2004 totaled $11.2 million. Primarily these purchases were for our new enterprise wide information technology system, computer hardware and software, telecommunications equipment, furniture and equipment and leasehold improvements. We expect that capital expenditures during the last three months of 2004 will be approximately $3 to $6 million and during 2005 will be approximately $21 to $25 million. The 2005 capital expenditures include items related to the new joint venture with Aetna. See the $23 million Aetna contribution to the new joint venture in financing activities below. We anticipate that the other expenditures will relate primarily to our new enterprise wide information technology system, computer hardware and software, telecommunications equipment, furniture and equipment and leasehold improvements. During the first nine months of 2004, other assets increased $15 million due to increasing our deposit with our wholesaler. During the first nine months of 2004, investments increased $1.1

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million due to making additional investments in Burrill Life Sciences Capital Fund, L.P. During the first nine months of 2004, we paid $50.1 million for the acquisition of certain assets of Partners In Care, the acquisition of the stock of HealthBridge, the acquisition of the stock of Integrity and the 2001 acquisition of InfuRx because InfuRx achieved certain predetermined financial results during the year ended January 3, 2004.

Net cash used by financing activities. During the first nine months of 2004, we received proceeds of $872,000 from stock option exercises and $253,000 from the employee stock purchase plan. Also during the first nine months of 2004, we purchased treasury stock for $1.2 million, borrowed $45.3 million on our line of credit and received $23.0 million from Aetna for their contribution to the new joint venture.

Off-Balance Sheet Arrangements and Contractual Obligations

There have been no material changes to off-balance sheet arrangements described in our Form 10-K for the fiscal year ended January 3, 2004. Also, there have been no material changes outside the ordinary course of business in our contractual obligations described in our Form 10-K for the fiscal year ended January 3, 2004, except that on October 2, 2004, the principal and interest outstanding on our revolving credit facility was $45.3 million, as described above.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Our primary exposure to market risk consists of a decline in the market value of our investments in marketable debt securities as a result of potential changes in interest rates. Market risk was estimated as the potential decrease in fair value resulting from a hypothetical 10% increase in interest rates on securities included in our portfolio, and given the short term maturities of all of our investments in interest-sensitive securities, this hypothetical fair value was not materially different from the period end carrying value.

Item 4. Controls and Procedures.

We maintain a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures as of October 2, 2004 pursuant to Rule 13a-15(b) of the Exchange Act. Based on that evaluation, our President and Chief Executive Officer and our Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended October 2, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

The following information is furnished as to securities of the Company sold during the three-month period ended October 2, 2004 that were not registered under the Securities Act of 1933, as amended (the “Securities Act”):

On July 6, 2004, the Company issued 221,358 shares of Class B Common Stock to the former owners of Integrity Healthcare Services, Inc., in connection with its acquisition. This transaction was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof.

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Issuer Purchases of Equity Securities

On October 27, 2004, the Company’s Board of Directors approved the purchase of up to 2,000,000 shares of the Company’s outstanding shares of Class B Common Stock. This new stock repurchase program will expire on October 31, 2005.

Item 6. Exhibits.

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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.

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