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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended December 31, 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 0-21447

AdvancePCS

750 West John Carpenter Freeway
Suite 1200
Irving, Texas 75039
(Address of principal executive offices)

(469) 524-4700
(Registrant’s Telephone Number, including area code)

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 [   ]

     As of February 7, 2003, the registrant had (1) 77,189,510 shares of Class A common stock, $.01 par value outstanding, (2) 12,913,334 shares of Class B-1 common stock, $.01 par value, outstanding and (3) 200 shares of Class B-2 common stock, $.01 par value, outstanding.

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AdvancePCS and Subsidiaries

Index to Quarterly Report on Form 10-Q

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PART I. FINANCIAL INFORMATION

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (forward-looking statements). We have based these forward-looking statements on our current expectations and projections about future events. These statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies or projections involving anticipated revenues, earnings, level of capital expenditures or other aspects of operating results and the underlying assumptions including internal growth as well as general economic and financial market conditions. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. These factors include, among other things, those matters set forth in our Form 10-K for the fiscal year ended March 31, 2002, as it may be amended from time to time, under the caption “Risk Factors,” as well as the following:

•		Risks associated with competition in our industry, including client retention, the ability to consummate contracts with new clients and pricing and margin pressures from competitors and client demands;
•		Risks related to our relationships with pharmaceutical manufacturers or a change in pricing, discounts or other practices of these manufacturers;
•		Risks related to compliance with governmental legislation and regulations, including compliance with any changes in the interpretations of existing laws and regulations and the passage of new legislation or regulations;
•		Risks related to our ability to develop, market and sell new products, services and technologies;
•		Risks associated with adverse results in litigation or other liability claims asserted against us, including professional liability claims in excess of our insurance coverage and challenges to our business practices;
•		Risks related to maintaining our pharmacy network affiliations;
•		Risks associated with managing and integrating future acquisitions;
•		Risks associated with maintaining and managing our growth;
•		Risks associated with the general changes in the health care industry, including increases in health care costs, changes in drug utilization and the introduction rates of new drugs;
•		Risks associated with our ability or inability to attract and retain qualified personnel;
•		Risk associated with general economic and business conditions, including exposure to clients’ credit risks; and
•		Risks associated with our debt obligations, including compliance with covenants contained in our credit agreements.

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Although we believe that our forward-looking statements are based upon reasonable assumptions, we can give no assurance that these forward-looking statements will be achieved. Given these uncertainties, prospective investors are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements speak only as of the date made. Except as required by law, we are under no duty to update any of the forward-looking statements after the date of this report to conform such statements to actual results.

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ITEM I. FINANCIAL STATEMENTS

AdvancePCS and Subsidiaries

Consolidated Balance Sheets
(Dollars in thousands, except share data)
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements

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AdvancePCS and Subsidiaries

Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements

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AdvancePCS and Subsidiaries

Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements

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AdvancePCS and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

1.     Background and Basis of Presentation

     AdvancePCS, a Delaware corporation, and its subsidiaries (the “Company” or “AdvancePCS”) provide a wide range of health improvement services designed to manage costs and improve the quality of care delivered to health plan members. Services include integrated mail service and retail pharmacy networks, clinical services, specialty pharmacy, disease management, clinical trials, outcomes research, information management, prescription drug services for the uninsured and online health information. The Company markets its services to managed care organizations, third-party health plan administrators, insurance companies, government agencies, employer groups and labor union-based trusts. In addition, the Company transacts business with pharmaceutical manufacturers as both suppliers and customers.

     The accompanying unaudited consolidated financial statements include the accounts of AdvancePCS and its majority owned subsidiaries and affiliates. Effective September 30, 2001 the Company acquired the remaining equity interests of Consumer Health Interactive, Inc. (CHI) which it did not previously own. The acquisition of the remaining 81% equity interest was accounted for using the purchase method of accounting and made CHI a wholly-owned consolidated subsidiary. Prior to the complete acquisition of CHI, the Company had accounted for its 19% interest in CHI on the cost basis. In accordance with Accounting Principals Board Opinion 18 (APB 18) all prior period financial statements have been restated to account for CHI as though the Company had accounted for its investment on the equity method. The impact of the restatement on the nine months ended December 31, 2001 was a reduction of net income in the amount of $227,000 (or diluted net income per share of $.002). The Company believes that the impact of the restatement did not have a material effect on its financial position or results of operations.

     On October 1, 2001, the Company announced a two-for-one split of its common stock, affected in the form of a stock dividend. The record date was October 23, 2001 and the date of payment was November 2, 2001. Financial and share information contained throughout this Form 10-Q have been retroactively adjusted to reflect the impact of the stock split.

     The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States for the interim financial information in the form prescribed by the Securities and Exchange Commission (the “SEC”) in 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 annual financial statements. In the opinion of the Company’s management, all adjustments, which include normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. In the opinion of the Company’s management, the disclosures contained in this Form 10-Q are adequate to make the information presented not misleading when read in conjunction with the Company’s Annual Report on Form 10-K for the year ended March 31, 2002. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year or for any future period. Certain prior year amounts have been reclassified to conform to the current year presentation.

2.     Accounting Pronouncements

Recently Adopted Accounting Pronouncements

     Effective April 1, 2002 the Company adopted SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, which supersedes SFAS 121. SFAS No. 144 requires that long-lived assets to be disposed of by sale, including those of discontinued operations, be measured at the lower of the carrying amount or fair value less cost to sell, whether reported in continuing operations or

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in discontinued operations. Under these rules, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet been incurred. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The adoption of SFAS 144 had no impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements

     In May 2002, the FASB issued SFAS 145 “Rescission of FAS Nos. 4, 44, and 64, Amendment of FASB 13, and Technical Corrections as of April 2002.” This Statement rescinds FASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, an amendment of that Statement No. 4, and FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” SFAS 145 restricts the classification of gains and losses from extinguishment of debt as extraordinary to only those transactions that are unusual and infrequent in nature as defined by APB Opinion 30 as extraordinary. The Company is required to adopt SFAS 145 by April 1, 2003. Upon adoption, gains and losses on certain future debt extinguishment, if any, will be recorded in pre-tax income. In addition, extraordinary losses of $1.5 million and $5.3 million, net of tax for the nine months ended December 31, 2002 and the year ended March 31, 2002, respectively, will be reclassified to income before extraordinary loss to conform to the requirements under SFAS 145.

     In July 2002, the FASB issued SFAS 146 “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. It nullifies the guidance of Emerging Issues Task Force (“EITF”) in EITF Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. SFAS 146 also establishes that fair value is the objective for the initial measurement of the liability. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002.

     In November 2002, the FASB issued FASB Interpretation (FIN) No. 45 “Guarantor’s Accounting and Disclosures Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 clarifies the requirements of FASB 5, “Accounting for Contingencies,” relating to a guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. The initial recognition and measurement provisions of FIN 45 are required to be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The Company has adopted the disclosure requirements, which are effective for interim periods ending after December 31, 2002.

     In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation- Transition and Disclosure — an amendment of FASB Statement No. 123.” This statement amends SFAS No. 123 “Accounting for Stock Based Compensation” to provide alternative methods of voluntarily transitioning to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure requirements of SFAS 123 to require disclosure of the method used to account for stock-based employee compensation and the effect of the method on reported results in both annual and interim financial statements. The disclosure provisions will be effective for the Company beginning with the Company’s year ended March 31, 2003. The Company has not yet completed the final evaluation of the alternatives presented by SFAS 148. However, during the quarter ending June 30, 2003, the Company expects to reach a determination of whether and, if so, when to change the Company’s existing accounting for stock-based compensation to the fair value method in accordance with the transition alternatives of SFAS 148.

3.     Net Income Per Share

     Basic net income per share is computed using the weighted average number of common shares (including both Class A common stock and Class B common stock) outstanding during the periods presented. Diluted net income per share is computed giving effect to all potentially dilutive common shares, assuming that such shares were outstanding during the periods presented. The weighted average diluted common

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shares outstanding were calculated under the “treasury stock” method in accordance with SFAS No. 128 “Earnings Per Share.”

     Below is a reconciliation of basic weighted average shares outstanding to diluted weighted average shares outstanding (in thousands). Options to purchase 2.7 million and 2.5 million shares of common stock were outstanding at December 31, 2002 but were excluded from the computation of diluted earnings per share for the three months and nine-month periods, respectively, because the options’ exercise prices were greater than the average market price of the Company’s common stock during the applicable period (“antidilutive”). Anitdilutive options to purchase shares of common stock for the three and nine-month periods ended December 31, 2001 were immaterial.

4.     Goodwill and Intangible Assets

     The Company adopted Financial Accounting Standards Board Statement No. (“SFAS”) 142 “Goodwill and Other Intangible Assets” effective April 1, 2001. SFAS 142 requires that goodwill no longer be amortized. Instead, all goodwill (including goodwill associated with acquisitions consummated prior to the adoption of SFAS 142) is to be evaluated for impairment annually or when events or circumstances occur indicating that goodwill might be impaired.

Goodwill Impairment Evaluation

     The goodwill impairment testing requires the Company to evaluate goodwill for impairment based on the fair value of its applicable identified reporting units. Examples of impairment indicators include a significant adverse change in legal factors, liquidity or the business climate; an adverse action or assessment by a regulator; unanticipated competition; loss of key personnel; or new circumstances that would cause an expectation that is more likely than not that the Company would sell or otherwise dispose of a reporting segment or a significant portion of a reporting segment.

     The Company completed its first annual impairment test at March 31, 2002, which did not result in an impairment charge. No events or changes in circumstances since that date have indicated that the carrying amounts may not be recoverable.

     The following is a summary of our goodwill activity for the dates indicated (amounts in thousands):

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     The following is a summary of intangible assets at the dates indicated (amounts in thousands):

     The weighted average amortization period for amortizable intangible assets is 27.6 years (28.0 years — customer base and 8.1 years — other).

     Amortization expense of amortizable intangible assets was $3.2 million and $2.8 million for the three months ended December 31, 2002 and 2001, respectively, and $8.6 million and $8.1 million for the nine months ended December 31, 2002 and 2001, respectively. The future estimated amount of amortization expense of amortizable intangible assets is summarized below (in thousands):

     Upon adoption of FAS 142, the Company determined that the $105.3 million in trade names, acquired with the acquisition of PCS, had an indefinite useful life. Current circumstances and conditions continue to support that determination.

5.     Debt Transactions

     Long-term debt consists of the following (in thousands):

     In March 2001, the Company issued $200 million of Senior Notes (Senior Notes). In the second quarter of fiscal year 2003, the Company repurchased a portion of the Senior Notes with a face value of approximately $12.2 million in open market transactions. The Senior Notes contain covenants that are typical for this type of debt including, among others, fixed charge ratio, payment of dividends and sales of

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assets. There are no restrictions on the ability of the guarantors to pay dividends, make loans or advances to the parent.

     The Senior Notes are guaranteed by all of the Company’s existing and future domestic subsidiaries (Guarantors), other than receivables subsidiaries, as defined in the Senior Notes indenture, and certain other subsidiaries not otherwise required to be guarantors under the terms of the indenture. After issuance of the Senior Notes, the Company created subsidiaries that are not required to guarantee the Senior Notes. All of the subsidiaries that have guaranteed the Senior Notes are 100% owned, directly or indirectly by AdvancePCS. Each of the Guarantors jointly and severally, unconditionally guarantees that the principal, and interest, as well as, penalties, fees, indemnifications, reimbursements and damages, if any, payable under the Senior Notes will be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise.

     On September 30, 2002 the Company amended its Senior Secured Credit Facility to increase the size of its revolver from $175 million to $275 million. No amounts were outstanding under the revolving facility at December 31, 2002.

     In December 2001, the Company securitized certain of its accounts receivable pursuant to a $150 million facility (the “Asset Securitization Facility”). The Company used the proceeds to repay $150 million of its Term B note that had a balance outstanding of approximately $300 million at that time. In June of 2002, the Company increased its Asset Securitization Facility to $300 million. The Company used the proceeds to pay the remaining $150 million of its Term B note. The Asset Securitization Facility is included in the Company’s debt balance as of December 31, 2002 and March 31, 2002 and will continue to be reflected “on-balance sheet.”

     In connection with the repayment of the Term B note in June 2002, the Company recorded an extraordinary loss associated with the early retirement of debt. The loss was attributable to a non-cash charge of $2.4 million ($1.5 million net of tax) to write-off previously capitalized deferred financing fees related to the Term B note financing agreements. For the nine months ended December 31, 2001, in connection with bank debt repayments made in the second and third quarters of fiscal year 2002 and the securitization, the Company recorded an extraordinary loss associated with the early retirement of debt. The loss was attributable to a non-cash charge to write-off a portion of the deferred financing fees related to the secured bank agreement in the amount of $8.8 million ($5.3 million net of tax).

     Effective April 1, 2001, the Company adopted SFAS 133 “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS 137 and SFAS 138. In order to hedge variable rate interest payments made in conjunction with its debt the Company entered into an interest rate protection agreement that has fixed the LIBOR rate as of November 7, 2000 at 6.60% for $400 million. The notional was reduced by $100 million in October 2001 and 2002. As of October 2002, the notional amount was $200 million. The swap will expire in October 2003. The Company is accounting for this interest rate swap as a cash flow hedge in accordance with SFAS 133. The fair value of the swap, an obligation of $8.1 million at December 31, 2002 and $14.5 million at March 31, 2002, was based upon quoted market prices. The related gains or losses on this agreement are deferred in stockholders’ equity as a component of other comprehensive income. The amount of changes in other comprehensive income, net of taxes of $2.5 million, and the net amount reclassified into earnings (interest expense) during the nine-month period ended December 31, 2002 were $3.9 million and $9.9 million, respectively.

6.     Condensed Consolidating Financial Information

     In March 2001, the Company issued $200 million of Senior Notes, which were unconditionally guaranteed, jointly and severally, by all of its existing and future domestic subsidiaries, other than subsidiaries treated as unrestricted subsidiaries or receivables subsidiaries, each as defined in the Senior Notes indenture, or subsidiaries not otherwise required to guarantee the Senior Notes under the terms of the Indenture. Subsequent to the issuance of the Senior Notes, the Company has created subsidiaries that are not required to guarantee the

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Senior Notes. Each subsidiary guarantor is directly or indirectly 100% owned by AdvancePCS. Presented below are Condensed Consolidating Balance Sheets as of December 31, 2002 and March 31, 2002, the Condensed Consolidating Statements of Operations for the three and nine months ended December 31, 2002 and 2001 and the Condensed Consolidating Statements of Cash Flows for the nine months ended December 31, 2002 and 2001 of AdvancePCS (Parent and Issuer), the guarantor subsidiaries (Guarantor Subsidiaries) on a combined basis and the subsidiaries which are not guarantors (Non-guarantor Subsidiaries) on a combined basis (in thousands):

Condensed Consolidating Balance Sheets:

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Condensed Consolidating Statement of Operations: