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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2003

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-21447

AdvancePCS

(Exact name of registrant as specified in its charter)

750 West John Carpenter Freeway, Suite 1200, Irving, TX 75039

(Address of principal executive offices)

Registrant’s telephone number, including area code: (469) 524-4700

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Class A common stock, $0.01 par value

(Title of Class)

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  þ  No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes  þ  No  ¨

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Class A common stock on May 31, 2003 as reported on the Nasdaq National Market, was approximately $2,467,051,469.

As of May 31, 2003, registrant had (1) 78,171,246 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.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for registrant’s 2003 annual meeting of stockholders are incorporated by reference in Part III.

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AdvancePCS

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-K 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, or the Exchange Act, (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 under the caption “Risk Factors,” as well as the following:

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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PART I

The following description of our business should be read in conjunction with the information included elsewhere in this Form 10-K for the year ended March 31, 2003. This description contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from the results discussed in the forward-looking statements due to the factors set forth in “Risk Factors” and elsewhere in this Form 10-K. References in this Form 10-K to “we,” “our,” or “us,” refer to AdvancePCS.

OVERVIEW

Industry Background

Prescription drug costs in the United States are the fastest growing component of health care costs. The U.S. Centers for Medicare & Medicaid, or CMS, estimate that prescription drugs accounted for approximately 10.4% of U.S. health care expenditures in 2002, representing approximately a 14.3% increase in expenditures over 2001. CMS projects that the cost of prescription drugs will rise between 9% and 13% per year through 2012. We believe factors contributing to this historical and future trend of increasing prescription drug expenditures include:

Prescription benefit management companies, or PBMs, originally were formed to provide health plan sponsors with a more efficient and less costly means of managing their members’ prescription drug benefits, particularly the processing of pharmaceutical claims. Since their inception, PBMs have continually developed additional programs that provide opportunities for health plans to manage costs while improving quality of patient care. PBMs now process hundreds of millions of pharmaceutical claims per year using automated, real-time transaction processing systems. In addition to processing claims, PBMs monitor potentially harmful drug interactions, improve the safety and clinical effectiveness of pharmaceutical usage, improve administrative efficiencies of pharmaceutical dispensing, and reduce pharmaceutical expenditures for health plans. PBMs also have developed mail order pharmacy fulfillment for the convenience of health plan members and to reduce health plan costs through providing a more efficient distribution mechanism. By designing and implementing effective pharmacy benefit plans, formularies, and formulary support services, PBMs have the ability to influence the selection of pharmaceuticals used by health plan members. PBMs use this formulary influence and aggregated purchasing power to negotiate both rebates from pharmaceutical manufacturers and discounts from retail pharmacies to generate savings for health plan sponsors.

Medicare, the primary health insurer for more than 40 million Americans over the age of 65, does not currently offer an outpatient prescription drug benefit. Several legislative proposals are under consideration in Congress to provide Medicare recipients with outpatient drug benefits. The terms of the current proposals vary and there can be no assurance of actual implementation of such a benefit. Depending on the approval and final design of a Medicare drug benefit, PBMs could play a significant role in its administration.

Company Overview

We are a leading provider of health improvement services in the United States. Our customers include a broad range of health plan sponsors, such as BlueCross BlueShield plans and other managed care organizations, employer groups, third-party

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administrators of health plans, insurance companies, government agencies and labor union-based trusts. As the largest PBM based on number of lives covered, we currently serve more than 75 million health plan members and annually manage more than 540 million pharmacy claims, representing approximately $28 billion in prescription drug spending. Our large member base gives us significant leverage when negotiating rebates and discounts from pharmaceutical companies and retail pharmacies respectively.

As a PBM, we offer tools to our customers to assist in managing their prescription drug expenditures, including on-line claims adjudication, discounted retail networks, discounted mail pharmacy services, formulary development, rebate negotiation and management and other plan design and formulary support activities. In addition, we offer a wide range of other health improvement products and services, such as specialty pharmacy services, disease management and prescription discount cards for the uninsured and under-insured. Our mission is to improve the quality of care delivered to health plan members while helping health plan sponsors reduce overall costs. Our strategy as the largest provider of health improvement services is to increase the number of services offered to our customer base by internal development or acquisition, increase our core customer base and, most importantly, generate additional value for our clients and stockholders through the cross-selling of our products into our customer base.

Our revenues are derived principally from sales of prescription drugs to health plan members, either through one of our three mail pharmacies, our network of approximately 59,000 contractually affiliated retail pharmacies or one of our specialty pharmacies. We also provide clinical and other services as part of our overall health improvement service offerings.

In October 2000, we acquired PCS Holding Corporation, or PCS, a pharmacy benefit management company that was wholly owned by Rite Aid Corporation. We have successfully completed integrating PCS so that we operate as a single, combined company. In addition, we successfully integrated nine acquisitions in the past five years.

THE COMPANY

Our goal is to create programs that improve health outcomes for patients and that lower overall costs for our health plan sponsor customers. We offer a broad range of health improvement services to our customers. Our basic PBM services include claims adjudication, retail network development, mail pharmacy services, formulary development and management, rebate negotiation and management, and benefit plan design and consultation. Broader health improvement services include specialty pharmacy, disease management, discount cash cards, and web-based health improvement services. We offer these services to our customers on a fully integrated basis. However, we track these various services into three revenue categories: Data Services, Mail Services, and Clinical and Other Services.

Data Services

Retail Network Management. We develop and negotiate networks of retail pharmacies that agree to provide prescription drugs to individual members of our health plan sponsors at pre-negotiated discounts. In developing these networks, we provide our customers the ability to balance access and discounts for their members. Some of our networks are customized for specific customers and others we offer as pre-negotiated networks available to the plan. Overall, our networks incorporate approximately 59,000 retail pharmacies. The retail pharmacies in our networks are linked to us through our online, real-time claims processing systems that are designed to significantly reduce the pharmacies’ cost of processing prescriptions. On behalf of health plan sponsors, we aggregate all pharmacy benefit claims on a system-wide basis and facilitate payments to retail pharmacies.

Claims Adjudication. Through our data services operations, we processed more than 488 million prescription claims for health plan sponsors in fiscal year 2003. As part of this service, when a member of one of our health plan sponsors presents a prescription with a health plan identification card to a retail pharmacist in our network (or to a retail pharmacy under contract directly with our customer), within seconds, our online system provides the pharmacist with the following information:

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Discount Cash Card Services. According to the U.S. Census Bureau, in 2001 approximately 41 million Americans had no health insurance coverage. We estimate that approximately 16 million more Americans do not have outpatient prescription drug coverage included with their health insurance. Additionally, millions of Americans with outpatient drug coverage have inadequate benefits. We provide services to make prescription drugs more affordable for groups and individuals that have limited or no prescription drug insurance coverage. Through our discount cash card services, participants receive a discount on covered prescription drugs at the point of sale, thereby reducing their prescription drug costs. We are able to achieve our goal of providing prescription drugs to consumers at reduced prices by negotiating discounts from retail pharmacies and rebates on prescription drugs from pharmaceutical manufacturers based on our size and ability to influence market share. In order to maximize the cost savings to participants, we also provide messages to pharmacies participating in the programs to inform them of clinically appropriate alternative drugs that may have a lower out-of-pocket cost for the patient. In addition to cost savings, patients benefit by participating in our drug program by allowing us to capture the patients’ drug history and to identify and alert the dispensing pharmacist to any potential adverse drug consequences. More than 52,000 retail pharmacies nationwide participate in our discount cash card programs. In addition, these programs include a mail service option to provide additional savings to participants.

Mail Services

Mail Pharmacy Services. Our mail pharmacy operations are located in Fort Worth, Texas, Birmingham, Alabama and Wilkes-Barre, Pennsylvania. During fiscal year 2003, we filled approximately 15 million prescriptions through our mail pharmacies. Our Wilkes-Barre facility opened in January 2003 and will be capable of processing 500,000 prescriptions per week when developed to full capacity. With recent capacity growth, we see a significant opportunity to profitably expand penetration of our mail order business.

Mail service is ideal for maintenance medications because of the convenience of home delivery and improved patient compliance through methods such as refill reminders. We believe that our mail pharmacies reduce costs to health plan sponsors through volume purchasing efficiencies, automated and centralized dispensing technology, generic dispensing and higher rebates through greater formulary compliance. Our mail service operations are highly automated, featuring bar code and scanning technology to route and track orders, computerized dispensing of many medications and computer-generated mailing labels and invoices. To enhance accurate dispensing of prescriptions and the safety of health plan members, our mail service system is equipped with automated quality control features and a licensed pharmacist inspects each prescription.

The majority of our mail service prescriptions currently are submitted to us through the mail. We have and will continue to promote our web-based and voice recognition technology capabilities to enhance our member experience and further reduce the costs associated with receiving prescription refills.

Specialty Pharmacy Services. In June 2001, we established AdvancePCS SpecialtyRx to provide our customers with a single-sourced solution to their complex and growing specialty pharmacy needs. Specialty pharmacy services focus on pharmaceutical products that generally are biotechnological in nature and are usually given by injection. These services traditionally are used by small patient populations with chronic, often complex diseases requiring challenging regimens and a high level of clinical expertise. Costs for individual therapies average approximately $10,000 annually, but can exceed $1 million annually. Our goal is to improve overall health care for patients using these specialty pharmaceuticals, while helping to control the costs incurred by health plan sponsors to provide these therapies.

We dispense specialty pharmaceuticals from four facilities in Maryland, Florida, Texas and Georgia. We have specialty pharmacy services contracts with health plans and other payors representing approximately 19 million lives. We offer our customers a fully integrated pharmaceutical care management program designed to encourage appropriate drug utilization, competitive pricing and comprehensive integrated reporting for better cost management, and PBM based electronic claims processing for greater administrative ease.

We also provide customized services around complex and emerging biotechnology therapies and the significant patient management needs associated with those therapies through our wholly owned subsidiary, TheraCom. TheraCom has substantial experience providing distribution and related services to the biotechnology, medical device and diagnostics industries, including product coverage advocacy, insurance verification, reimbursement processing, pharmacist counseling, clinical and dosage monitoring, adherence counseling, coordination of injection training, in-home nursing and retail/wholesale distribution. TheraCom also provides Internet, direct marketing, advertising and product launch support services. For example, we have preferred distribution agreements with the manufacturers, among others, of the following products:

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Clinical and Other Services

Benefits Plan Design and Formulary Development. Our clinical services professionals work closely with health plan sponsors to design and administer pharmacy benefit plans that, through the use of formularies and other techniques, promote clinically appropriate drug usage while reducing drug costs. We advise our customers regarding a number of benefit plan design options that promote these goals, including prior authorizations, managed drug limitations and the incorporation of other financial incentives in the plan (e.g. reimbursement limitations on the drugs covered by the plan, co-payment structuring and deductibles).

We also advise our health plan customers in the development of their formulary, which is the list of drugs for which the plan provides coverage. In developing these formularies, our first priority is the clinical appropriateness and effectiveness of the listed drugs. Our formulary system is designed so that our clinical recommendations are not affected by purchasing arrangements with manufacturers. Our formulary development process begins with a panel of independent physicians and pharmacists who perform a rigorous clinical review of available drugs for inclusion in the formulary based on safety and efficacy. This panel does not consider any information regarding pricing or available discounts or rebates that may be available from the manufacturer.

We also have developed our Performance Drug List, or PDL, which is a subset of the AdvancePCS National Formulary and includes only those drugs that present the best economic and clinical values to our health plan customers and their members. The PDL is not a complete formulary, but is a prescribing guide to the best values within select therapeutic categories. The list undergoes rigorous annual clinical reviews, both internally and externally, to determine if it meets the vast majority of patient needs in the therapeutic categories represented. During the year, significant drug product events involving products (e.g. patent expirations) may require a change to the PDL. The PDL is an important element in our pharmaceutical care consultations. The PDL is not an endorsement of any particular class of drugs. However, the PDL states a clear preference so that member and the prescriber can be aware of the best economic value alternatives available.

Manufacturer Contracting. After a formulary is developed, our customers obtain rebates through the arrangements we have negotiated with manufacturers. Depending on the negotiations with the manufacturer, the rebates we collect on behalf of our customers may be based on overall volume, market share as compared to an overall therapeutic class, or other metrics. Volume-based discounts measure the amount of drug purchased by a plan, and adjust the rebate based on that level. Market share rebates measure the volume of sales of a particular product to a plan’s members against the demand for drugs in that product’s therapeutic class. Certain of these volume or market share rebates may be limited to those plans that include a particular product on its formulary. In general both volume-based and market share rebates are calculated as a percentage of the aggregate dollar value (based on the manufacturer’s published wholesale price) of a particular drug dispensed to members of those health plans that meet the criteria for receiving the rebate.

Formulary Support Services. We encourage formulary and PDL compliance through programs that operate at the patient, prescribing physician and pharmacist levels. We attempt to influence physician-prescribing patterns by analyzing physicians’ prescribing behavior relative to physician peer groups and notifying them when their practices differ from peer group norms and medical best practices. We provide face-to-face consultations between our clinical pharmacists and high-prescribing physicians in an effort to align prescribing practices in targeted categories and diseases that are in the best interests of health plan sponsors and members. We also provide our own educational materials to physicians, pharmacists and health plan sponsors. Through the retail pharmacies, we offer a voluntary therapeutic interchange program that encourages pharmacists to consult with patients and physicians regarding therapeutically equivalent, cost-effective drug alternatives. Our programs support cost effective, clinically appropriate drug management and help to ensure that members receive appropriate drug therapies.

Disease Management Programs. Through our disease management programs, we also assist health plans in managing the cost and treatment of specific chronic diseases by improving medical outcomes and lowering the cost of health care delivery. Our programs are designed to support quality initiatives and fulfill the third party accreditation requirements, such as those of the National Committee on Quality Assurance, or NCQA, of our health plan sponsors. These programs monitor the contracted population and intervene when individuals demonstrate symptoms of a specific disease or high-risk indications. Together, AdvancePCS and our subsidiary Accordant have earned Full Practitioner Oriented Accreditation from NCQA for 18 disease management programs. AdvancePCS has received this accreditation for its asthma, diabetes and coronary artery disease management programs and Accordant has received this accreditation for all 15 of its rare, chronic disease management programs, more than any other organization in the United States.

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Our disease management programs are executed by a dedicated team of clinicians and managed care professionals and typically have five principal elements:

Broader Disease Management. We have designed disease management programs for cardiovascular secondary risk reduction, asthma, diabetes, heart failure, depression and hypertension. We believe our disease management programs are supported by our ability to assess quality of life, quality of care and overall satisfaction with the disease management programs. We also assess the economic benefit of the programs to our health plan sponsors.

Accordant Health Services, Inc. In November 2002, we acquired Accordant Health Services, Inc., or Accordant, a disease management company that focuses on helping patients with fifteen complex, chronic and progressive diseases including: seizure disorders, Parkinson’s disease, sickle cell anemia, CIDP, ALS (Lou Gehrig’s disease), rheumatoid arthritis, lupus, polymyositis, hemophilia, dermatomyositis, multiple sclerosis, myasthenia gravis, cystic fibrosis, scleroderma and gaucher disease. The diseases managed by Accordant require significant costs for health plans (approximately $70 million per year per one million covered lives). In addition, these managed diseases are progressive diseases resulting in steadily increasing costs. Patients with these diseases also use significant amounts of specialty pharmaceuticals for proper treatment. We now are in the process of integrating the disease management programs offered by Accordant with our specialty pharmacy offerings.

Health plans engage Accordant to manage any number of these disease states for their members. First, Accordant analyzes a plan’s population using its proprietary system and identifies those members with the specified disease state. Then, through its proprietary, complex disease management intervention system, Accordant contacts and assists members in managing their disease with the goal of reducing costly hospitalizations and emergency room visits.

Outcomes Studies. We conduct studies for pharmaceutical manufacturers to further the understanding of the characteristics of diseases and to develop simple-to-use tools, such as questionnaires and decision trees, for diagnosing diseases. In addition, we develop measurements for monitoring patient medical outcomes and determine how to best influence the health status of individuals. We also evaluate the direct and indirect costs of health care, as well as conduct surveys to evaluate physician knowledge and behavior in order to develop individualized educational materials for each physician.

Clinical Trials. Through our clinical research operations, we assist pharmaceutical manufacturers in conducting clinical trials for both new drugs and new uses for existing drugs. Our current clinical trial initiatives are focused on Alzheimer’s disease and other neurological disorders, psychological conditions and pain relief.

Customers

We generate a significant portion of our revenues from contracts with health plan sponsors. BlueCross BlueShield Association Federal Employee Program accounted for 12%, 13% and 11% of our revenues for the years ended March 31, 2003, 2002 and 2001, respectively. HealthNet, formerly Foundation Health Systems, accounted for 14% of our revenues for the year ended March 31, 2001, yet accounted for less than 10% of our revenues in fiscal years 2003 and 2002. No other customer accounted for over 10% of our revenues in fiscal years 2003, 2002 or 2001.

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Historically, we have had strong customer relationships with BlueCross BlueShield companies and other managed care organizations. We have also focused on and developed expertise in serving self-insured employers, third-party administrators, insurance carriers, unions and government plans. We now have a diverse customer base and substantial market penetration among all major target customer groups.

Company Operations

Sales and Marketing. As of March 31, 2003, we had a staff of more than 710 customer account management and support staff. Our sales force is complemented by customer service representatives in more than 30 offices throughout the United States. We organize our sales force into teams focused on each customer segment. With this organization, our sales force is able to focus on the specific characteristics and needs of our current and prospective customers in each market segment.

The sales process for health plan sponsors usually lasts a minimum of six to nine months, but sometimes can extend for a year or longer. Often, we initiate the sales process with potential customers at our most senior levels. A staff of sales representatives uses a team approach to work with a number of senior level individuals within a health plan sponsor. In this manner, we are able to work with health plan sponsors at multiple levels within their organizations and our health plan sponsors have multiple contacts within our organization.

Customer Service. Once we have contracted with a health plan sponsor for our services, we commit to provide them with the highest level of support. For example, our benefits design group works with our health plan sponsors to design the pharmacy benefits that they will provide to the individuals in their plans. A multi-functional team led by a senior-level account manager coordinates our designated resources across our company to support each customer. The account management teams are organized by customer segment to enhance their understanding of the needs and complexities of our customers.

In addition, we commit to our health plan sponsors that the individuals enrolled in their plans will receive high quality member service. To fulfill this promise, we manage four advanced call centers staffed with over 1,200 member service representatives who are available to answer incoming calls 24 hours a day, seven days a week. In April 2002, we opened our fourth call center in Knoxville, Tennessee, which gives us coverage in all four time zones in the continental United States. During the year ended March 31, 2003, our call centers received on average approximately 360,000 calls per week.

Technology Enhanced Services. We believe that our web-based offerings are the most comprehensive in the industry. Through these offerings we intend to both increase member satisfaction within our PBM services and enhance our operating efficiency. We also aim to facilitate the member retention and growth goals of our health plan sponsors by providing such plans with leading e-health web site development services and access to our e-health portals.

Our online pharmacy services allow us to both reduce costs and improve service. When visiting our web sites, members of our health plan sponsors can place orders for prescriptions, check order status, locate network pharmacies and review formulary information, which saves processing and customer service costs. In addition, we continue to work with our health plan sponsors to develop interfaces that enable them to seamlessly link into our PBM services through their own web sites. For example, we offer health plan sponsors online access to plan performance and other management reports and industry trend information as well as the capability to exchange eligibility data online.

In response to customer demand for their own e-health solutions, we provide web development services for health plan sponsors, an e-health portal and an online drugstore. We develop e-health web portals for our customers by either co-branding our own e-health portal or creating a completely customized private-label web site on their behalf. Our corporate e-health portal, www.AdvancePCS.com, provides consumers a comprehensive source of health, wellness and medical information, including access to medical and drug encyclopedias, an extensive medical library, medication guides, diet and nutritional resources, information about diseases, pregnancy, child and elder care, current news articles about health care developments and related content.

Prescriber Connectivity. We are developing solutions to provide prescribers, principally physicians and their office staff, technology-based tools to automate prescribing and other day-to day activities. In 2001, we acquired the software code and other assets of iScribe. The iScribe solution has supplemented our efforts to develop mobile applications to deliver pharmacy benefit and prescribing information at the point of care. The iScribe system reduces the need for provider callbacks to pharmacies, provides protection against medication errors, simplifies the prescription renewal process, saves time and lowers costs for providers and health plans.

In February 2001, we began our investment in RxHub, a joint venture with Express Scripts and Medco Health Solutions, Inc. RxHub is building an electronic framework that will enable standardized communications through the prescription writing and delivery process and connect all parties in the delivery chain – physicians, pharmacies and PBMs. We believe that this

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connectivity will increase efficiency, reduce costs and improve patient safety. RxHub reported that in December 2002 over one million transactions were processed over its network.

Information Systems. Information technology systems are a critical part of our business. We maintain a number of separate, proprietary systems that are designed to efficiently support our specific departments, yet are compatible for electronic data interchange. Our information technology systems are highly scalable and run on a variety of platforms. We have an experienced systems staff of more than 650 employees. We maintain extensive preventative measures to protect against disaster, including redundancy in all aspects of processing, telecommunications and power sources.

As part of our integration efforts with PCS, we moved our Richardson, Texas data center into our Scottsdale, Arizona data center. Although we combined physical locations, we are continuing to maintain our separate data processing platforms in order to avoid customer disruptions associated with conversion. The Scottsdale, Arizona data center has received ISO 9002 certification from the International Organization for Standardization, the world’s foremost quality standards organization, and has also received an exceptional audit grade from registrars with the professional services firm, Deloitte & Touche LLP.

Suppliers. In April 2001, we entered into a three-year agreement with a wholesale distributor, Amerisource Bergen, to be our primary supplier of pharmaceuticals to our mail pharmacies. We believe our supplier arrangements are more than adequate and we maintain strong relationships with back-up wholesalers and suppliers. In addition, we believe alternative suppliers can be utilized without any disruptions. If a drug is not in our inventory, we can generally obtain it from either a primary or secondary supplier within one or two business days. We believe it would be relatively easy to switch from one supplier to another.

Acquisitions and Joint Ventures

During the last fiscal year, we completed two acquisitions. In February 2003, we acquired Priority Healthcare’s minority interest in AdvancePriority SpecialtyRx, the joint venture we had formed in 2001. AdvancePriority SpecialtyRx is now a wholly owned subsidiary and provides specialty pharmacy services to patients with specialized medical needs who require a higher level of pharmaceutical care, such as those who use injectable drugs or biotechnology products. We are relocating the operations from Lake Mary, Florida to our specialty pharmacy in Texas. In connection with this acquisition, we also entered into a services agreement with Priority Healthcare under which Priority Healthcare will continue to provide selected therapies to our patients.

In November 2002, we acquired Accordant, a disease management company that focuses on helping patients with 15 complex, chronic and progressive diseases including: seizure disorders, Parkinson’s, sickle cell anemia, CIDP, ALS (Lou Gehrig’s disease), rheumatoid arthritis, lupus, polymyositis, hemophilia, dermatomyositis, multiple sclerosis, myasthenia gravis, cystic fibrosis, scleroderma and gaucher disease. Accordant’s health plan customers engage Accordant to manage any number of these diseases for its members. Accordant assists members in managing their disease with the goal of reducing costly hospitalizations and emergency room visits. We now are in the process of integrating our specialty pharmacy offerings with the disease management programs offered by Accordant.

During the past five years, we have successfully completed and integrated the following ten acquisitions:

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Competition

We compete with a number of national companies, including national PBMs, some of which are owned by health plans, retail pharmacies or pharmaceutical manufacturers (Medco Health Solutions, Inc., a subsidiary of Merck & Co., Inc., a pharmaceutical manufacturer, Express Scripts, Inc., and Caremark Rx, Inc.), insurers and managed care organizations, such as CIGNA Corporation and WellPoint Health Networks, Inc. that offer prescription benefit plans using their own pharmacy benefit management facilities, as well as local and regional PBMs, mail order pharmacies and claims processors. These competitors may possess purchasing and other advantages over us that could allow them to price competing services more aggressively than we can because of their market position, affiliations and other aspects of their businesses.

We believe that the primary competitive factors in the PBM industry include:

Government Regulation

Various aspects of our business are governed by federal and state laws and regulations, and compliance is a significant operational requirement for us. We believe that we are in substantial compliance with all existing legal requirements material to the operation of our business. However, the application of complex standards to the detailed operation of our business always creates areas of uncertainty. Numerous health care laws and regulations have been proposed at the state and federal level, many of which could affect our business. We cannot predict what additional federal or state legislation or regulatory initiatives may be enacted in the future regarding health care or the business of PBMs, or how existing laws may be interpreted. It is possible that federal or state governments might impose additional restrictions or adopt interpretations of existing laws that could have a material adverse affect on our business, profitability or growth prospects.

Among the federal and state laws and regulations that affect aspects of our business are the following:

Regulation of Confidentiality of Patient Identifiable Information. Government regulation of the use of patient identifiable information has grown substantially over the past several years and is likely to increase further in the future. Compliance with the privacy rule issued under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, was required by April 14, 2003. This rule applies to both electronic and paper records and imposes extensive requirements on the way in which covered entities (health care providers, health plans, and health care information clearinghouses and their business associates) use and disclose protected information. The rule gives patients significant rights to understand and control how their protected health information is used and disclosed. Direct providers, such as pharmacies, may use patient information without specific authorization for treatment, payment and health care operations. As a condition to participation in our pharmacy networks, we require retail pharmacies to certify as to their compliance with these rules at least annually. For all other uses or disclosures of protected information, the privacy rule requires all covered entities to obtain a written patient authorization. In most cases, use or disclosure of protected health information must be limited to the minimum amount necessary to achieve the purpose of the use or disclosure. Sanctions for failing to comply with standards issued pursuant to

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HIPAA include criminal penalties and civil sanctions. We have completed all implementation activities required to comply with the privacy regulations issued to date.

In February 2003, regulations were issued pursuant to HIPAA that govern the security of individually identifiable health information in addition to the privacy regulations previously required. These rules became effective April 21, 2003 and initial compliance is required by April 20, 2005. These security regulations impose additional administrative burdens on health care providers, health plans and their business associates, relating to the storage, utilization and transmission of health information.

In addition to the federal HIPAA standards, many states have enacted laws dealing with the use and disclosure of health information. Implementation and adaptations of business practices to these laws will likely continue to impose a significant burden on the healthcare industry this year. The state and Federal laws may vary widely, some relating to only certain types of information, others to only certain uses yet and others to only certain types of entities.

Many programs that we offer our health plan customers are information-based, utilizing aggregated and anonymous data, as well as patient-specific information, depending upon the needs of the customer. Government restrictions on the use of patient identifiable information could adversely affect our ability to promote formulary compliance and to conduct health improvement programs and outcomes studies, as well as our business growth strategy based on these programs. Even without new legislation, or alterations to the final federal HIPAA regulations, individual health plan sponsors could prohibit us from including their patients’ medical information in our various databases of medical data. They could also prohibit us from offering services that involve the compilation of such information.

Anti-Kickback Laws. Subject to certain exceptions and safe harbors, federal law prohibits the payment, offer, receipt or solicitation of any remuneration that is knowingly and willfully intended to induce the referral of Medicare, Medicaid or other federal health care program beneficiaries for the purchase, lease, ordering or recommendation of the purchase, lease or ordering of items or services reimbursable under federal health care programs. Several states also have similar laws that apply anti-kickback prohibitions beyond services for which federal health care program payments may be made. Sanctions for violating these federal and state anti-kickback laws may include criminal and civil sanctions and exclusion from participation in federal health care programs.

The federal anti-kickback statute has been interpreted broadly by courts, by the U. S. Department of Health and Human Service Office of Inspector General, or OIG, and by administrative bodies. Because of the federal statute’s broad scope, federal regulations establish some “safe harbors” from liability. Safe harbors exist for, among other things, certain properly reported discounts received from vendors, certain investment interests, certain properly disclosed payments made by vendors to group purchasing organizations and certain managed care risk-sharing arrangements. A practice that does not fall within a safe harbor is not necessarily unlawful, but may be subject to scrutiny and challenge. Courts have ruled that a violation of the statute may occur even if only one of the purposes of a payment arrangement is to induce patient referrals or purchases. Among the practices that have been identified by the OIG as potentially improper under the statute are “product conversion programs” in which benefits are given by pharmaceutical manufacturers to pharmacists or physicians for changing a prescription, or recommending or requesting such a change, from one drug to another. These laws have been cited as a partial basis, along with the state consumer protection laws discussed below, for investigations and multi-state settlements relating to financial incentives provided by pharmaceutical manufacturers to physicians or pharmacists in connection with such programs.

On April 28, 2003, the OIG released its Compliance Program Guidance for Pharmaceutical Manufacturers, or HHS Guidance, aimed at advising pharmaceutical manufacturers on how to establish a compliance program that will ensure adherence to applicable laws and regulations. Included in the HHS Guidance is a discussion of certain areas of legal risk for pharmaceutical manufacturers that the government encourages manufacturers to consider in structuring their compliance programs. The HHS Guidance contains discussion of relationship between pharmaceutical manufactures and PBMs, including the negotiation of discounts rebates and administration fees, as well as formulary support activities. We believe that our business practices and our arrangements with pharmaceutical manufacturers are consistent with the HHS Guidance. We also maintain a compliance program designed to include the key compliance program elements described in the HHS Guidance. However, the OIG’s application of the principles underlying the anti-kickback statute is an ongoing process, and the government could challenge our program in the future. Moreover, if the industry perceives the HHS Guidance as leading to greater scrutiny of PBMs, pharmaceutical manufacturers and health plans, may seek to alter the ways in which they conduct business with AdvancePCS and other PBMs.

We believe that we are in substantial compliance with the legal requirements imposed by the anti-kickback laws and regulations, and we believe that there are material differences between the drug-switching programs about which the OIG has raised concerns and the programs we offer to our customers. Moreover, we believe that our business model for the

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negotiation and handling of rebates and administrative fees is consistent with the principals that the OIG set forth in the HHS Guidance. To date, the government has not, to our knowledge, commenced enforcement actions under the anti-kickback statutes against PBMs with regard to their negotiation of discounts, rebates and administrative fees from drug manufacturers in connection with drug purchasing and formulary management programs, or their contractual agreements with pharmacies that participate in their networks or their relationships with their health plan customers.

Since 1998, the United States Attorney’s Office for the Eastern District of Pennsylvania has been investigating whether rebates and other payments made by pharmaceutical manufacturers to PBMs, or payments made by PBMs to retail pharmacies or others, may violate the anti-kickback laws or other federal laws. To date, no specific allegations or settlements have been made public. As part of this investigation, in November of 1999, PCS received a subpoena from the OIG requesting records and data about PCS’s programs. This investigation remains on-going and we have supplied the OIG documents and made employees available for interviews. The United States Attorney’s Office also has contacted some of the pharmaceutical manufacturers with which we have agreements and has asked these manufacturers to provide copies of documents relating to their agreements with us. Investigations also are being conducted with respect to other PBMs by the United States Attorney’s Office in Boston, Massachusetts and by various state attorneys.

At this time, we are unable to predict whether the government will commence any action against us. We believe that our programs and those programs of PCS prior to the acquisition comply with the requirements imposed by the anti-kickback laws and other applicable laws and regulations. See “Item 3. Legal Proceedings” and “Risk Factors—Risks Related to Our Industry” for more information regarding the OIG investigation.

ERISA Regulation. We have agreements to provide PBM services to a number of self-funded corporate health plans. These plans are subject to the Employee Retirement Income Security Act of 1974, or ERISA, which regulates employee pension and health and welfare benefit plans. We believe that our activities are sufficiently limited that we do not assume any of the plan fiduciary responsibilities that would subject us to regulation under ERISA. Our agreements with our self-funded corporate plan customers state that we are not the fiduciary of the plan. However, the U.S. Department of Labor, which is the agency that enforces ERISA, could assert that the fiduciary obligations imposed by the statute apply to certain aspects of our operations. In past decisions, the United States Supreme Court and other federal courts have generally declined to extend fiduciary status to managed care organizations that contract with ERISA plans. However, future cases involving PBMs could be decided differently, and if we were deemed to be a fiduciary, we could potentially be subject to claims over benefit denials and claims for breaching fiduciary duties in connection with the services we provide to the plan. See “Item 3. Legal Proceedings” for a discussion of our current proceedings related to ERISA.

ERISA also prohibits a “party in interest” to a plan from engaging in certain types of transactions with the plan, including purchases, sales and loans, in the absence of an available exemption. Violations are subject to civil and possibly criminal liability. By providing services to these plans, we are subject to the restrictions on a party in interest. We believe that we are in compliance with these provisions of ERISA. However, we can provide no assurance that the government would not challenge our practices.

Consumer Protection Laws. Most states have consumer protection laws, which have been the basis for investigations and multi-state settlements relating to financial incentives provided by pharmaceutical manufacturers to retail pharmacies in connection with drug switching programs. In addition, most states have enacted consumer protection laws relating to a wide range of managed health care activities, including provider contracting, member appeals and access to services and supplies. We believe that our contractual relationships and business practices are compliant with consumer protection laws. See “Item 3. Legal Proceedings” for a discussion of current proceedings related to these laws.

Managed Care Reform. Legislation is being debated on both the federal and state level and has been enacted in several states, aimed primarily at improving the quality of care provided to individuals enrolled in managed care plans. Some of these initiatives would, among other things, require that health plan members have greater access to drugs not included on a plan’s formulary, give health plan members the right to sue their health plans for malpractice when they have been denied care and mandate the content of the appeals or grievance process when a health plan member is denied coverage. The scope of the managed care reform proposals under consideration by Congress and state legislatures, and enacted by states, to date vary greatly, and the extent to which future legislation may be enacted is uncertain. However, these initiatives could greatly impact the managed care and pharmaceutical industries and, therefore, could have a material impact on our business.

Direct Regulation of PBMs. Several states, have introduced legislation that would directly regulate PBMs, but to our knowledge, no state has passed such legislation. Several regulatory and quasi-regulatory bodies, such as the National Association of Insurance Commissioners, the National Association of Boards of Pharmacy and the National Committee on Quality Assurance, have considered or are considering proposals to regulate PBMs and proposals to increase the regulation of certain PBM activities, such as formulary and utilization management and downstream risk assumption. Any action by these

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bodies may influence states to adopt legislation or establish industry standards of practice that could significantly impact our business, both directly as a PBM and indirectly through the impact on the pharmacy benefit services we are able to deliver on behalf of our health plan sponsors.

Licensure Laws. Many states have licensure or registration laws governing certain types of ancillary health care organizations, including preferred provider organizations, third party administrators and companies that provide utilization review and related services. The scope of these laws differs significantly from state to state and the application of these laws to the activities of pharmacy benefit managers is often unclear. We have registered under these laws in those states in which we have concluded, after discussion with the appropriate state agency, that such registration is required. Moreover, we have structured our operations and procedures to comply with the regulatory standards for these regulated entities, where appropriate.

Network Access Legislation. A significant number of states have adopted some form of legislation affecting our ability to manage our retail pharmacy networks or to remove pharmacies from a network. These laws may require us, directly or through our health plan customers, to admit any retail pharmacy willing to meet the plan’s price and other terms for network participation; these laws are sometimes referred to as “any willing provider” or “freedom of choice” laws. To date, we have not been materially affected by these statutes.

Legislation Affecting Plan Design. A number of states have begun to actively regulate the management of prescription drug benefits. Texas, California, New York and New Jersey have taken the lead proposing legislation on a wide range of issues affecting the delivery of pharmacy benefits. Many other states have followed, although they often focus on particular aspects of our business or the operations of our health plan customers. Some states have begun to enact laws that regulate the development and use of formularies by insurers, HMOs and other third party payors. These laws have included requirements on the development, review and updating of formularies, the role and composition of pharmacy and therapeutics committees, the disclosure of formulary information to health plan members and a process for allowing members to obtain non-preferred drugs without additional cost-sharing where they are medically necessary and the formulary drugs are determined to be inappropriate. Some states have legislation that prohibits a health plan sponsor from implementing certain restrictive design features. For example, some states prohibit insurers, HMOs and other health plans from requiring members to use mail pharmacies. Other states mandate coverage of certain benefits or conditions. These types of legislation generally do not apply to us, but may apply to some of our customers such as HMOs and insurers. If similar legislation were to become widespread and broad in scope, it could have the effect of limiting the ability of PBMs to achieve economic benefits through health benefit management services.

In addition, the National Association of Insurance Commissioners has developed a model law on drug formularies, currently known as the Health Carrier Prescription Benefit Management Model Act that is expected to be adopted at its annual meeting in June of 2003. If ultimately enacted by the states throughout the country, it may require less flexibility for health plans and PBMs. Among other things, the model law would address the disclosure of formulary information to health plan members, members’ access to non-preferred drugs and availability of an appeals process for members to use when coverage of a non-preferred drug is denied by the health plan or its designee. Increasing regulation of formularies by states could significantly affect our ability to develop and administer formularies on behalf of our insurer, HMO and other health plan customers.

Legislation and Regulation Affecting Drug Prices. The federal Medicaid rebate statute provides that manufacturers must provide rebates to the program on all drugs purchased equivalent to the difference between the average price of the drugs and the best price at which the manufacturer sells the drugs to wholesalers. In addition, under the Federal Supply Schedule, the government seeks and obtains favorable pricing based on manufacturers’ commercial prices and sales practices. Some states have adopted legislation or regulations providing that a pharmacy participating in the state’s Medicaid program must give program patients the best price that the pharmacy makes available to any third party plan. These requirements are sometimes referred to as “most favored nation” payment systems. Other states have enacted “unitary pricing” legislation, which mandates that all wholesale purchasers of drugs within the state be given access to the same discounts and incentives. Any such legislation, if enacted in any state, may adversely affect our ability to negotiate discounts from network pharmacies or manufacturers. Some manufacturers may view these laws and policies as a disincentive to provide discounts to private purchasers, such as our customers, which could adversely affect our ability to control plan costs.

A number of states also have bills pending for broad drug price controls that would extend price controls beyond the Medicaid program. Many of these bills impose maximum drug prices based on the Federal Supply Schedule and require that manufacturers and/or pharmacies extend this pricing to one or more segments of the state’s population, such as to all Medicare beneficiaries. If enacted, these bills could adversely affect our mail order pharmacy’s reimbursement rates, or otherwise discourage the use of the full range of our services by current or future customers. A number of states have begun to seek supplemental rebates from drug manufacturers, beyond those required by the federal Medicaid statute. Some of those states may utilize the services of PBMs to negotiate and administer these supplemental rebate programs.

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A number of states introduced legislation to require state agencies that purchase prescription drugs to combine their purchasing activities under a single contract. If these programs are adopted, they could adversely impact our business if our agreements with individual state agencies are combined into one program. In addition, a number of states have introduced legislation supporting the use of non-profit PBMs to leverage their purchase volume for prescription drugs. To the extent that these programs are instituted successfully, they could adversely impact our business. The State of Maine adopted such a program, known as the Maine Rx program, through which the state would act as a bulk purchaser of drugs for its non-Medicaid population. The Maine Rx program has been challenged by several pharmaceutical manufacturers. On May 19, 2003, the United States Supreme Court rejected initial legal challenges to the Maine Rx program. While other legal steps remain, to the extent that this program is implemented, it could adversely impact our business in Maine and other states that may implement similar programs.

In 2000, Congress passed the Medicine Equity and Drug Safety Act of 2000, directing the FDA to promulgate regulations allowing pharmacists and drug wholesalers to reimport approved drugs, originally manufactured in the United States, back into the United States from other countries where the drugs were sold at a lower price. The purpose of the law was to enable United States citizens to purchase drugs at prices comparable to lower prices charged for such medicines in other countries. In December 2000, HHS notified the president that it would not seek the necessary funding to implement the law, since HHS believed it was too flawed as written to be effective. The Secretary of HHS in the Bush Administration has put his review of this policy on hold. New legislative proposals to permit reimportation have been introduced in Congress and a house Government Reform subcommittee has held hearings on the issue in 2003. Whether and how such a policy will ultimately be implemented through law or regulations is unclear. It may offer PBMs opportunities to reduce costs, but faces substantial opposition from the prescription drug industry. The ultimate effect of the legislation on our business is not known at this point.

Recently, the federal and state governments have increased their attention to how drug manufacturers develop pricing information, which in turn is used in setting payments under the Medicare and Medicaid programs. One element common to many payment formulas is Average Wholesale Price, or AWP. AWP is a standard pricing measure used throughout the pharmaceutical industry and by us as a basis for calculating drug prices under contracts with health plans, pharmacies and pharmaceutical manufacturers. Various federal and state Medicaid agencies and other enforcement officials are investigating the effects of the pharmaceuticals industry’s pricing practices, such as the method for calculating AWP.

Proposals have also been made to change the AWP standard and implement other pricing reform measures for federal programs. These proposed changes and other legislative or regulatory adjustments to the Medicare and Medicaid drug reimbursement programs, if implemented, could significantly affect our ability to negotiate discounts with pharmaceutical manufacturers. In addition, it may affect our relations with pharmacies and health plans. In some circumstances, they might also impact the reimbursement that our mail order pharmacy receives from managed care organizations that contract with government health programs to provide prescription drug benefits. Furthermore, private payors may choose to follow the federal and state governments’ example and adopt different drug pricing bases. This could affect our ability to negotiate with plans, manufacturers and pharmacies regarding discounts.

In March 2002, the Senate Finance Committee held a hearing on Medicare outpatient drug pricing, at which the OIG stated that its studies have consistently found that Medicare pays too much for prescription drugs. The CMS Administrator announced his intention to take action to change Medicare drug pricing policy. As an interim step, in December 2002 CMS announced that it was establishing a new “single drug pricer” to eliminate differences among fiscal intermediaries in payment amounts for certain Medicare-covered drugs (but not including drugs billed to durable medical equipment regional carriers, such as home infusion drugs, and certain other drugs). The new, unified rates went into effect January 1, 2003. Some members of Congress have also expressed an interest in changing the Medicare reimbursement formula as part of a pending Medicare prescription drug benefit legislation.

In January of 2001, Bayer Corporation, or Bayer, entered into a $14 million settlement with the Department of Justice regarding a qui tam suit that alleged that Bayer had artificially inflated the average wholesale price that it reported to government health care programs. In addition, Bayer agreed to report new pricing information, the “average sale price”, to government health care programs, which is calculated differently from the average wholesale price. In October of 2001, TAP Pharmaceuticals agreed to pay the government $875 million for a range of alleged misconduct, including inflation of AWP, and encouraging physicians to maximize their profits by exploiting the “spread” between acquisition costs and the AWP-based Medicare reimbursement. In 2002, a consolidated class action lawsuit against the large pharmaceutical manufacturers was filed in federal court in Massachusetts, asserting that they fraudulently manipulated the AWP, resulting in higher premiums and co-payments for consumers. In May of 2003, the court dismissed a portion of the suit, but the litigation will likely continue on specific issues.

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In addition, in 2002, an action was filed in California against the nation’s four largest PBMs, including AdvancePCS, asserting that they took advantage of the difference between AWPs and acquisition costs to achieve profits for themselves, resulting in higher premiums and co-payments for consumers. This litigation is in preliminary stages, and the PBMs will defend the action. In light of the increased focus on calculation of AWP, AdvancePCS’s private plan customers may opt to rely on different data and demand similar calculations from manufacturers. To the extent that they do, our ability to negotiate rebates with manufacturers could be negatively impacted.

Medicare Prescription Drug Benefit. Medicare reimbursement and coverage of prescription drugs continues to be actively debated in Congress. Medicare currently offers a very limited outpatient prescription drug benefit. Several legislative proposals are under consideration in Congress to provide Medicare recipients with broader outpatient drug benefits administered in both a fee for service and Medicare + Choice type offering. It is possible that PBMs would be involved in administering the benefit through one or both of these options. The proposals also include implementing a Medicare sponsored drug discount card programs administered through PBMs and other vendors as a transitional program to the expanded Medicare drug coverage. Moreover, many states have established or are considering establishing or expanding state drug assistance programs that would increase access to drugs by those currently without coverage.

Recent developments in Congress appear to indicate that some form of Medicare prescription drug benefit is likely to be adopted. However, significant uncertainty remains as to the exact structure and delivery of a funded benefit, as well as whether or not a Medicare drug discount card program will be included. We cannot assess at this stage whether or how we may participate in any program, not how such programs, if enacted, will impact drug costs, our business or our profitability.

Regulation of Financial Risk Plans. The administration of fee-for-service prescription drug plans by PBMs generally is not subject to insurance regulation by the states. However, if a pharmacy benefit manager offers to provide prescription drug coverage on a capitated basis or otherwise accepts financial or insurance type risk in providing the benefit, laws in various states may regulate the plan. These laws may require that the party at risk establish reserves or otherwise demonstrate financial responsibility. Laws that may apply in such cases include laws governing the business of insurance, HMOs, limited prepaid health service plans, preferred provider organizations and organized delivery systems.

ERISA Preemption. Many of the state laws described above may be preempted in whole or in part by ERISA, which provides for comprehensive federal regulation of employee benefit plans. However, the scope of ERISA preemption is uncertain and is subject to conflicting court rulings, and we provide services to certain customers that are not subject to ERISA. Other state laws may be invalid in whole or in part as an unconstitutional attempt by a state to regulate interstate commerce, but the outcome of challenges to these laws on this basis is uncertain. Therefore, compliance with state laws and regulations is a significant operational requirement for us and increased state regulation could limit our flexibility to adopt alternative and novel fee arrangements with our customers.

FDA Regulation. The U.S. Food and Drug Administration, or FDA, generally has authority under the Federal Food, Drug and Cosmetic Act, or FDCA, to regulate drug promotional materials that are disseminated “by or on behalf” of a pharmaceutical manufacturer. In its 1998 Draft guidance for industry, the FDA purported to have the authority to hold pharmaceutical manufacturers responsible for the promotional activities of certain PBMs. In the fall of 1998, after receiving comments to the draft, the FDA withdrew the guidance and stated that it would reconsider the basis for its issuance. To date, the FDA has not taken any further action on the issue. However, there is no assurance that it will not re-examine the issue and seek to assert the authority to regulate the communications of such PBMs.

The FDA also regulates the conduct of clinical trials for drugs. In general, the sponsor of the drug product that is being studied, or the manufacturer that will have the right to market the drug product if it is approved by the FDA, has the responsibility to comply with the laws and regulations that apply to the conduct of the clinical trials. However, in providing services related to the conduct of clinical trials, we may assume some or all of the sponsor’s or clinical investigator’s obligations related to the study of the drug. We believe that we meet our regulatory responsibilities with regard to our involvement in clinical trials. However, the interpretation of the laws and regulations relating to the conduct of clinical trials is complex and sometimes subjective. We can provide no assurance that the FDA will not at some point consider our compliance efforts to be inadequate and initiate administrative enforcement actions against us.

Mail Pharmacy Regulation. Our mail pharmacy operation, including our online pharmacy, distributes drugs throughout the United States. Our fulfillment centers are presently located in Fort Worth, Texas, Birmingham, Alabama and Wilkes-Barre, Pennsylvania. We are licensed by the United States, Texas, Alabama and Pennsylvania authorities to do business as a pharmacy and to deliver controlled substances. Many of the states into which we deliver pharmaceuticals and controlled substances have laws and regulations that require out-of-state mail service pharmacies to register with that state’s board of pharmacy, or similar regulatory body, in order to mail drugs into the state. We have registered in every state that, to our knowledge, requires such registration. In addition, some states require out-of-state mail service pharmacies to have a

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pharmacist at the mail order location that is licensed in the state to which the drugs are shipped, as well as meeting other standards. To the extent that such laws or regulations are applicable to us, we believe that we are in compliance.

Other Statutes and Regulations Affecting our Mail Pharmacy Operations. CMS requires mail order pharmacies to provide toll-free numbers for patient counseling of Medicaid recipients residing out of state. Other than reimbursement for specialty pharmacy products, we do not currently receive reimbursement from any state Medicaid programs. Congressional directives to provide useful information on prescription drugs to consumers may involve participation by mail order pharmacies in disseminating such information. Federal statutes and regulations govern the labeling, packaging, advertising and adulteration of prescription drugs and the dispensing of controlled substances. The Federal Trade Commission requires mail order sellers of goods generally to engage in truthful advertising, to stock a reasonable supply of the product to be sold, to fill mail orders within thirty days and to provide customers with refunds when appropriate. The United States Postal Service has statutory authority to restrict the transmission of drugs and medicines through the mail to a degree that could have an adverse effect on our mail service operations. The United States Postal Service historically has exercised this statutory authority only with respect to controlled substances. Alternative means of delivery are available to us.

Regulation of Disease Management Programs. Our disease management programs are affected by many of the same types of state laws and regulations as our other activities. All states regulate the practice of medicine and nursing. Accordant employs approximately 100 nurses in its disease management operations. All of these nurses maintain nursing licenses in one or more states. As to our broader disease management services, we do not believe our programs constitute either the practice of medicine or the practice of nursing. However, there can be no assurance that a regulatory agency in one or more states may not assert a contrary position, and we are not aware of any controlling legal precedent for services of this kind.

Employees

On March 31, 2003, we had approximately 6,500 employees, including approximately 600 pharmacists and 15 doctors. None of our employees are represented by a labor union. In the opinion of management, we have good relationships with our employees.

Insurance

Our PBM operations, including the dispensing of pharmaceutical products by our mail service pharmacies, and the services rendered in connection with our health improvement services and our non-PBM operations, such as the products and services provided in connection with our clinical trial services, may subject us to litigation and liability for damages. We believe that our insurance protection is adequate for our present business operations, but there can be no assurance that we will be able to maintain our professional and general liability insurance coverage in the future or that such insurance coverage will be available on acceptable terms or be adequate to cover any or all potential product or professional liability claims. A successful product or professional liability claim in excess of our insurance coverage, or one for which an exclusion from coverage applies, could have a material adverse effect upon our financial position or results of operations.

Company Information

Address and Availability of Information. Our principal executive offices are located at 750 West John Carpenter Freeway, Suite 1200, Irving, Texas 75039. Our telephone number is (469) 524-4700 and our web site is www.advancepcs.com. We make available through our web-site, access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, all amendments to those reports (when applicable) and other filings with the SEC. In addition, the SEC maintains its web site, www.sec.gov that contains reports, proxy and information statements and other information regarding issuers filing electronically, including us.

Code of Ethics. We have adopted a code of ethics, the “AdvancePCS Guide for Business Conduct,” that applies to all of our directors and employees, including our Chief Executive Officer and senior financial and accounting officers. In addition to other matters, this Guide for Business Conduct establishes our standards designed to deter wrongdoing and to promote honest and ethical conduct, including ethical handling of actual or apparent conflicts of interest, compliance with applicable laws, rules and regulations and prompt internal reporting violations of the code. We also have a Business Practices and Compliance Department charged with the day-to-day responsibility to administer our entire ethics and compliance program, which includes our Guide for Business Conduct, HIPAA compliance, fair employment practices and other legal compliance programs. Our Chief Compliance Officer reports quarterly to the Audit Committee of the Board of Directors and our Compliance Committee, which is a committee comprised of our Chief Executive Officer and three other member of senior management, and reports annually to the entire Board of Directors. On or about August 1, 2003, a copy of the AdvancePCS Guide for Business Conduct will be available at www.advancepcs.com. We intend to post all amendments to this code of

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ethics and any waivers granted from the code to any director, the Chief Executive Officer or a senior finance or accounting officers at our web-site, www.advancepcs.com.

RISK FACTORS

Risks Related to Our Business

Competition in our industry is intense and could reduce or eliminate our profitability.

The PBM industry is very competitive. If we do not compete effectively, our business, profitability and growth prospects could suffer. Our competitors include profitable and well-established companies that have significant financial, marketing and other resources. Some of our competitors in the PBM business are owned by profitable and well-established pharmaceutical manufacturers or national retail pharmacy chains, which may give them purchasing power and other advantages over us by virtue of their ownership structure and enable them to succeed in taking away some of our customers. Further consolidation within the PBM industry, as well as the acquisition of any of our competitors by larger companies, may also lead to increased competition.

Our margins may decline as we attract and renew larger customers who typically have greater bargaining power than smaller customers and may require us to sell our services at decreased prices. We cannot be sure that we will continue to remain competitive, nor can we be sure that we will be able to successfully market our PBM services to customers at our current levels of profitability.

If we lose key health plan sponsors, our business, profitability and growth prospects could suffer.

We depend on a limited number of large health plan sponsors for a significant portion of our consolidated revenues. Five customers generated approximately 36.8% of the claims we processed in fiscal year 2003. Our business, profitability and growth prospects could suffer if we were to lose one or more of our significant health plan sponsors.

Our contracts with health plan sponsors typically provide for multi-year terms, with automatic 12-month renewals unless either party terminates the contract by giving written notice in accordance with the agreement. Many of our health plan sponsors put their contracts out for competitive bidding prior to expiration. We could lose health plan sponsors if they cancel their agreements with us, if we fail to win a competitive bid at the time of contract renewal, if the financial condition of any of our health plan sponsors deteriorates or if our health plan sponsors are acquired by, or acquire, companies with which we do not have contracts. Over the past several years, insurance companies, health maintenance organizations, or HMOs, and managed care companies have experienced significant consolidation. Our health plan sponsors have been and may continue to be, subject to consolidation pressures.

If we lose relationships with one or more key pharmaceutical manufacturers or if the payments we receive from pharmaceutical manufacturers decline, our business, profitability and growth prospects could suffer.

We have contractual relationships with numerous pharmaceutical manufacturers that pay us rebates on behalf of our health plan sponsors based on use of selected drugs by their members, as well as fees for other programs and services. We believe our business, profitability and growth prospects could suffer if:

Over the next few years, as patents expire covering many brand name drugs that currently have substantial market share, generic products will be introduced that may substantially reduce the market share of the brand name drugs. Historically, manufacturers of generic drugs have not offered formulary rebates on their drugs. Our profitability could be altered if the use of newly approved, brand name drugs added to formularies, which are on the lists of preferred prescription drugs covered by a health plan, does not offset any decline in use of brand name drugs whose patents expire.

If we lose pharmacy network affiliations, our business, profitability and growth prospects could suffer.

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Our contracts with retail pharmacies, which are non-exclusive, are generally terminable by either party on short notice. If one or more of the top pharmacy chains elects to terminate its relationship with us or if we are only able to continue our relationship on terms less favorable to us, our members’ access to retail pharmacies and our business and profitability could suffer. In addition, some large retail pharmacy chains either own or have strategic alliances with PBMs or could attempt to acquire or enter into these kinds of relationships with PBMs in the future. Ownership of, or alliances with, PBMs by retail pharmacy chains could have material adverse effects on our relationships with these retail pharmacy chains and on our business, profitability and growth prospects.

Failure to continue to develop or acquire new products, services and technologies could adversely affect our business, profitability and growth prospects.

We continually develop new products and services to assist our customers in managing their costs and improving the health of their members. If we are unsuccessful in continuing to develop innovative products and services, our ability to attract new customers and retain existing customers may suffer. If our product development strategies are not successful, our business, profitability and growth prospects could suffer. Historically, we have experienced increases in expenses when developing new products. We anticipate that we will need to expend significant resources to develop or acquire new products and services in the future, which may adversely impact our profitability.

If we are unable to manage potential problems and risks related to future acquisitions and alliances, our business, profitability and growth prospects could suffer.

Part of our growth strategy includes acquisitions and alliances involving complementary products, services, technologies and businesses. If we are unable to overcome the potential problems and inherent risks related to such future acquisitions and alliances, our business, profitability and growth prospects could suffer. Our ability to continue to expand successfully through acquisitions and alliances depends on many factors, including our ability to identify acquisition or alliance prospects and negotiate and close transactions. Even if we complete future acquisitions or alliances:

Many companies compete for acquisition and alliance opportunities in the PBM industry. Some of our competitors are companies that have significantly greater financial and management resources than we do. This may reduce the likelihood that we will be successful in completing acquisitions and alliances necessary to the future success of our business.

If our business continues to grow rapidly and we are unable to manage this growth, our business, profitability and growth prospects could suffer.

Our business has grown rapidly in the last nine years in part due to our acquisitions, with total revenues increasing from approximately $64.4 million in fiscal year 1995 to $14.1 billion in fiscal year 2003. If we continue to grow rapidly, we will need to hire additional senior and line management, increase our investment in employee recruitment, training and retention and expand our information processing and financing control systems. Our future operating results will depend in part on the ability of our officers and other key employees to continue to recruit, train, retain and effectively manage our employees as well as to improve our operations, customer support and financial control systems. Our future growth will also depend on our ability to access capital. If we are unable to finance continued growth, manage future expansion successfully or hire and retain the personnel needed to manage our business successfully, then our business, profitability and growth prospects could suffer.

If we lose key employees on whom we depend, in particular our chairman, president and chief executive officer, David D. Halbert, our business could suffer.

We believe that our continued success will depend to a significant extent upon retaining the services of our senior management. Our business could be materially and adversely affected if we lose the services of Mr. David D. Halbert, our chairman of the board, president and chief executive officer, or other persons in senior management, because we would lose the strategic direction and experience that these officers contribute, as well as the benefits of their relationships with

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customers, pharmaceutical manufacturers and stockholders. Except as limited by their employment agreements, any of our senior management could seek other employment at any time. We do not currently have “key-person” life insurance policies on any of our employees. We did, however, purchase certain life insurance policies that are used to fund our obligations under our Deferred Compensation Plan. If we cannot recruit, train, retain and effectively manage key employees, our business, profitability and growth prospects could suffer.

Our debt covenants and obligations could limit management discretion and harm our business, financial condition and results of operations.

Our credit facility and certain agreements governing our debt contain a number of covenants that limit the discretion of our management with respect to certain business matters. Our credit facility covenants, among other things, restrict our ability to:

The indenture governing our senior notes contains similar restrictive covenants. In addition, under our credit facility, we are required to satisfy a minimum fixed charge coverage ratio, a maximum total leverage ratio and a minimum interest coverage ratio. A breach of any agreements governing our debt would permit the acceleration of the related debt, which could harm our business, profitability and growth prospects. These restrictions may place us at a disadvantage compared to our competitors that have fewer restrictive covenants and are not required to operate under such restrictions.

If our cash flow and capital resources are insufficient to fund our debt obligations, we may be forced to sell assets, seek additional equity or debt capital or restructure our debt. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on acceptable terms. Any failure to meet our debt obligations could harm our business, profitability and growth prospects.

If we become subject to liability claims that are not covered by our insurance policies, we may be liable for damages and other expenses that could have a material adverse effect on our business, profitability and growth prospects.

A successful product or professional liability claim in excess of our insurance coverage where we are required to pay damages, incur defense costs or face negative publicity could have a material adverse effect on our liquidity, our reputation in the industry and our ability to attract and retain customers. While we intend to maintain professional and general liability insurance coverage at all times, we cannot provide assurances that we will be able to maintain insurance in the future, that insurance will be available on acceptable terms or that insurance will be adequate to cover any or all potential product or professional liability claims.

Various aspects of our business may subject us to litigation and liability for damages. For example, our clinical trials services involve the risk of liability for personal injury from unforeseen adverse side effects or improper administration of a new drug. Other aspects of our business that may subject us to liability include:

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Some investors own a significant amount of our stock and may exert influence over corporate transactions and other matters.

As a result of our acquisition of PCS, Joseph Littlejohn & Levy Fund III, L.P. and certain other investors, collectively referred to as JLL, received shares of Series A preferred stock. The Series A preferred stock was convertible into Class B common stock. The Class B common stock is convertible into Class A common stock on a one-for-one basis. JLL has converted all of its shares of Series A preferred stock into our Class B common stock. As a holder of Class B common stock JLL is entitled to designate two of our directors and we cannot take certain actions without their consent. Assuming conversion of all its shares of Class B common stock into Class A common stock, JLL would beneficially own approximately 14.2% of Class A common stock. Accordingly, JLL may be able to substantially influence the outcome of stockholder votes and otherwise have influence over our business. The interests of JLL may differ from interests of other stockholders.

Risks could arise due to Arthur Andersen LLP being our past auditors

Arthur Andersen LLP audited our financial statements included in this report for the year ended March 31, 2001. We can provide no effective remedy against Arthur Andersen LLP in connection with a material misstatement or omission in those financial statements.

Arthur Andersen LLP consented to the inclusion of their report in the annual reports and registration statements we filed prior to January 31, 2002. Should we seek to access the public capital markets, Securities and Exchange Commission, or the SEC, rules will require us to include or incorporate by reference in any prospectus three years of audited financial statements. Until our audited financial statements for the fiscal year ending March 31, 2004 become available, the SEC’s current rules would require us to present audited financial statements for one or more fiscal years audited by Arthur Andersen LLP. Prior to that time, if for any reason the SEC ceases accepting financial statements audited by Arthur Andersen LLP, we would be unable to access the public capital markets unless PricewaterhouseCoopers LLP, our current independent accounting firm, or another independent accounting firm, is able to audit the financial statements originally audited by Arthur Andersen LLP. Arthur Andersen LLP is no longer in a position to consent to the inclusion or incorporation by reference in any prospectus of their report on our audited financial statements for the year ended March 31, 2001, and investors in any subsequent offerings for which we use their audit report will not be entitled to recovery against them under Section 11 of the Securities Act of 1933 for any material misstatements or omissions in those financial statements. Consequently, our financing costs may increase or we may miss attractive market opportunities if our annual financial statements for 2001 audited by Arthur Andersen LLP should cease to satisfy the SEC’s requirements or those statements are used in a prospectus but investors are not entitled to recovery against our auditors for material misstatements or omissions in them.

Our ability to access the capital markets and engage in certain transactions is impeded because of on-going discussions with the Securities and Exchange Commission.

We are in discussions with the Staff of the SEC concerning whether and to what extent we need to provide for certain past periods, under Rule 3-10(f) of Regulation S-X, a footnote containing certain condensed consolidating audited and/or unaudited financial information in separate columns for AdvancePCS and its guarantor and non-guarantor subsidiaries with respect to our public debt. The Staff of the SEC has advised us that until this issue is resolved, the Staff will not declare effective any registration statements or post-effective amendments to registration statements. We are also restricted from making offerings under effective registration statements or under Rules 505 and 506 of Regulation D of the Securities Act of 1933 to any purchases that are not accredited investors under Rule 501(a) of Regulation D. We are not restricted from issuing securities upon the exercise of outstanding warrants or options or pursuant to employee benefit plans. Additionally, the restriction does not apply to transactions involving secondary offering or sales of securities under Rule 144. This could impede our ability to access capital markets and to engage in certain transactions. There can be no assurance as to the outcome of the Company’s discussions with the SEC.

Our ability to access the capital markets and engage in certain transactions is impeded because of on-going discussions with the Securities and Exchange Commission.

We are in discussions with the Staff of the SEC to determine the extent to which earlier periods may need to be augmented with audited and/or unaudited disaggregated footnote information under Rule 3-10(f) of Regulation S-X. The Staff of the SEC has advised us that until this issue is resolved, the Staff will not declare effective any registration statements or post-effective amendments to registration statements. We are also restricted from making offerings under effective registration statements or under Rules 505 and 506 of Regulation D of the Securities Act of 1933 to any purchases that are not accredited investors under Rule 501(a) of Regulation D. (We are not restricted from issuing securities upon the exercise of outstanding warrants or options or pursuant to employee benefit plans. Additionally, the restriction does not apply to transactions involving secondary offering or sales of securities under Rule 144.) This could impede our ability to access capital markets and to engage in certain transactions. There can be no assurance as to the outcome of our discussions with the SEC.

Risks Related to Our Industry

There are several ongoing investigations of PBMs being conducted by federal and state agencies under federal and state anti-kickback and false claims statutes. Prior to our acquisition of PCS, PCS received a subpoena from the Department of Health and Human Services OIG in connection with an industry-wide investigation. The OIG has since sought information about AdvancePCS as well. Although there have been no cases filed against us, we could be subject to scrutiny, investigation or challenge under federal or state anti-kickback and false claims, or other laws, which could cause our business, profitability and growth prospects to suffer.

Federal anti-kickback laws generally prohibit the receipt or solicitation of payment in return for purchasing or ordering, or arranging for or recommending the purchasing or ordering of, items and services reimbursable by federal health care programs. Some states have similar laws that apply across all payors. To date, these laws have not been applied to prohibit the types of business arrangements we have with pharmaceutical manufacturers, health plan sponsors or retail pharmacies. However, courts and enforcement authorities that administer the anti-kickback laws have historically interpreted these laws broadly. Currently investigations involving the industry and other PBMs are being conducted by the federal and state attorney’s offices.

In November 1999, PCS received a subpoena issued by the OIG requesting the production of certain documents regarding PCS’ programs and how they operate. We understand that this subpoena was issued in connection with an industry-wide investigation. The investigation was instigated and is being pursued by the United States Attorney’s Office for the Eastern District of Pennsylvania, which indicated an intention to review PBMs’ programs in light of anti-kickback and other laws and regulations. Specifically, the focus of the investigation appears to be PBMs’ relationships with pharmaceutical manufacturers and retail pharmacies; PBMs’ programs relating to drug formulary compliance, including rebate and other payments made by pharmaceutical manufacturers to PBMs; and payments made by PBMs to retail pharmacies in connection with therapeutic intervention activity. The United States Attorney’s Office also contacted some of the pharmaceutical manufacturers with

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which we have agreements and asked these manufacturers to provide copies of documents relating to their agreements with us. The United States Attorney General also issued CIDs, seeking to compel the depositions of eight of our current and former employees. In September 2002, the District Court entered an order holding in abeyance, pending good faith efforts to reach a mutual resolution of the outstanding discovery issues, both our disputes with the OIG regarding the scope and enforcement of the subpoena and the issuance of the CIDs. Since entry of that order, AdvancePCS has provided documents responsive to the subpoena, as well as to supplemental requests made by the government and facilitated interviews in lieu of the CIDs. The government recently requested the production of additional documents and interviews, including information relating to the activities of the former Advance Paradigm and the activities of AdvancePCS subsequent to the PCS acquisition, as well as additional information regarding our arrangements with retail pharmacies. We are cooperating with the government and we have produced some additional documents and intend to continue to work with the OIG to facilitate the production of further documents and arrange further interviews.

It is not possible to predict the outcome of this investigation, or any other investigation being conducted by other agencies or against other PBMs, or whether the government will commence any action challenging any of our programs and practices. We believe that our programs, including those prior to the acquisition, are in compliance with the requirements of the anti-kickback and false claims statutes and other applicable laws and regulations. Nevertheless, as a result of this investigation, we could be subject to scrutiny, further investigation or challenge under federal or state anti-kickback and false claims statutes or other laws and regulations which could cause our business, profitability and growth prospects to suffer materially.

If legislative or regulatory initiatives restrict our ability to use patient identifiable medical information, our clinical programs and our business growth strategy based on these services could suffer.

Through our health improvement programs, we help our health plan sponsor customers identify individuals who will most benefit from our programs. Governmental restrictions on the use of patient identifiable information may adversely affect our ability to conduct health improvement programs and medical outcome studies and could adversely affect our growth strategy based on these programs. Laws and regulations have been enacted on the Federal and state levels, to restrict the use and disclosure of patient identifiable medical information. Additional legislation could be enacted in the future that severely restricts or prohibits our use of patient identifiable information, which could harm our business, profitability and growth prospects.

The privacy regulations, due to their complex and controversial nature, may be subject to court challenge, as well as further legislative and regulatory actions that could alter their effect. Moreover, HIPAA implementation is in its early phases and the healthcare industry is just beginning to adapt its practices to these requirements. We cannot at this time predict with specificity what impact the HIPAA privacy or security rules may have on us. However, they will likely increase our burden of regulatory compliance with respect to our health improvement programs and other information-based products and may reduce the amount of information we may use if patients do not consent to such use. Even without new legislation and regardless of the final federal HIPAA regulations, individual health plans could prohibit us from including their patient’s medical information in our various medical databases. They could also prohibit us from offering services that involve the compilation of such information. There can be no assurance that the restrictions and duties imposed by the HIPAA privacy and security rules will not materially impact our ability to offer new and existing products and services, such as certain health improvement programs and other clinical programs to our customers, thereby reducing our profitability and growth prospects.

If we are ever deemed to be a fiduciary of a health benefit plan governed by ERISA, we could be subject to claims for benefit denials and liability for breach of fiduciary duty.

We have agreements to provide PBM services to a number of self-funded corporate health plans. These plans are subject to the ERISA, which regulates employee pension and health and welfare benefit plans. We believe that our activities are sufficiently limited that we do not assume any of the plan fiduciary responsibilities that would subject us to regulation under ERISA. Our agreements with our self-funded corporate plan customers state that we are not the fiduciary of the plan. However, the U.S. Department of Labor, which is the agency that enforces ERISA, could assert that the fiduciary obligations imposed by the statute apply to certain aspects of our operations. If we were deemed to be a fiduciary, we could potentially be subject to claims relating to benefit denials and claims for breaching fiduciary duties in connection with the services we provide to the plan.

We are a party to several lawsuits alleging that we act as an ERISA fiduciary and that we have breached certain fiduciary obligations under ERISA. We do not believe that we act as an ERISA fiduciary or assume the ERISA fiduciary responsibilities as alleged in the complaints. We also believe that, in any event, our business practices are in compliance with ERISA. The lawsuits each seek unspecified monetary damages and injunctive relief. Although the ultimate outcome is uncertain, an adverse determination could potentially cause changes to our business practices with respect to formularies,

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preferred drug listings, rebates, and intervention programs, potentially reducing our profitability and growth prospects. We have denied all allegations of wrongdoing and we are vigorously defending these suits.

ERISA also prohibits a “party in interest” to a plan from engaging in certain types of transactions with the plan, including purchases, sales and loans, absent an available exemption. Violations are subject to civil and criminal liability. By providing services to these plans, we are subject to the restrictions on a party in interest. We believe that we are in compliance with these provisions of ERISA. However, there is no guarantee that the government would not challenge our practices.

If there are changes in federal or state financing and regulation of the health care industry, our customers may delay or reduce the purchase of our services.

During the past several years, the United States health care industry has been subject to an increase in governmental regulation and legislation, on both the federal and state level. Efforts to control health care costs, including prescription drug costs, are underway at the federal and state governmental levels. Congress is considering proposals to change Medicare drug coverage and reimbursement policies and many states are considering proposals to provide or expand drug assistance programs. Some states have begun to seek supplemental Medicaid rebates from drug manufacturers, beyond those required by the federal Medicaid statute. Both Congress and the states are expected to consider legislation to increase governmental regulation of managed care plans. Some of these initiatives would, among other things, require that health plan members have greater access to drugs not included on a plan’s formulary and give health plan members the right to sue their health plans for malpractice when they have been denied care. The scope of the managed care reform proposals under consideration by Congress and state legislatures and enacted by certain states to date vary greatly and the extent to which future legislation may be enacted is uncertain. We cannot predict what effect, if any; pending proposals if enacted might have on our business, profitability and growth prospects. However, these initiatives could greatly impact the managed care and pharmaceutical industries and, therefore, could have a material adverse impact on our business, profitability and growth prospects.

In addition, several legislative proposals are under consideration in Congress to provide Medicare recipients with expanded outpatient drug benefits through the use of PBMs. While we believe that a Medicare prescription drug benefit could provide us with new business opportunities, the structure of such a program could also have a material adverse impact on our business, profitability and growth prospects.

Several states, have introduced legislation that would directly regulate PBMs, but to our knowledge, no state has passed such legislation. Several regulatory and quasi-regulatory bodies, such as the National Association of Insurance Commissioners, the National Association of Boards of Pharmacy and the National Committee on Quality Assurance, have considered or are considering proposals to regulate PBMs and proposals to increase the regulation of certain PBM activities, such as formulary and utilization management and downstream risk assumption. Any action by these bodies may influence states to adopt legislation or establish industry standards of practice that could significantly impact our business, both directly as a PBM and indirectly through the impact on the pharmacy benefit services we are able to deliver on behalf of our health plan sponsors.

There is great attention being paid to the pricing of prescription drug products and how they are reimbursed by government programs. Pharmaceutical manufacturers have settled lawsuits brought by Federal and state governments asserting that they inappropriately calculated drug prices used by Federal healthcare programs. In addition, a number of class action lawsuits have been filed against various pharmaceutical manufacturers. These cases generally allege that for certain drugs, the manufacturers inflated the average wholesale prices upon which some federal health care programs based reimbursement to physicians and pharmacists, resulting in higher premiums and co-payments for consumers. In 2002, most of these cases were consolidated for pretrial proceedings in one federal court in Massachusetts. In May of 2003, the court dismissed a portion of the suit, but the litigation will likely continue on specific issues. In addition, in 2003, an action was filed in California against the nation’s four largest PBMs, including AdvancePCS, asserting that they took advantage of the difference between drugs’ AWP and actual acquisition costs to achieve profits for themselves, resulting in higher premiums and co-payments for consumers. As discussed in more detail in Item 3. “Legal Proceedings,” the litigation is in preliminary stages, and the PBMs will defend the action.

Legislative and regulatory proposals have been put forward that would alter the calculation of drug prices for federal programs and likely reduce expenditures. For instance, in December 2002 the Centers for Medicare & Medicaid Services, or CMS, announced that it was establishing a new “single drug pricer” to eliminate differences among fiscal intermediaries in payment amounts for certain Medicare-covered drugs (but not including drugs billed to durable medical equipment regional carriers, such as home infusion drugs, and certain other drugs). The new, unified rates went into effect January 1, 2003. In addition, on May 15, 2003, the U.S. Senate approved an amendment that would limit reimbursement for drugs currently covered by Medicare. The House of Representatives has not voted on a similar payment change during the current Congress, although it could do so if and when it takes up Medicare legislation later this year. Other pending proposals may increase governmental involvement in health care and health benefit management services and otherwise change the way our

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customers do business. Health care organizations may react to these proposals and the uncertainty surrounding them by cutting back or delaying the purchase of our health improvement services and manufacturers may react by reducing rebates or reducing supplies of certain products, which would materially harm our business, profitability and growth prospects.

If government laws or regulations relating to the financial relationships between PBMs and pharmaceutical manufacturers are interpreted and enforced in a manner adverse to our PBM and health improvement programs, we may be subject to enforcement actions and our business operations could be materially limited.

In January 1998, the FDA issued a Draft Guidance for Industry regarding the regulation of activities of PBMs that are directly or indirectly controlled by pharmaceutical manufacturers. The agency withdrew the Draft Guidance in the fall of 1998 and to date, has not taken any further action. Although it appears that the FDA has changed its position regarding regulation of communications by PBMs, there is no assurance that it will not re-examine the issue and seek to assert the authority to regulate the communications of such PBMs.

On April 28, 2003, the U.S. Department of Health and Human Services OIG released its Compliance Program Guidance for Pharmaceutical Manufacturers (HHS Guidance) aimed at advising pharmaceutical manufacturers on how to establish a compliance program that will ensure adherence to applicable laws and regulations. Included in the HHS Guidance is a discussion of certain areas of legal risk for pharmaceutical manufacturers that the government encourages manufacturers to consider in structuring their compliance programs. The HHS Guidance contains discussion of relationship between pharmaceutical manufactures and PBMs, including the negotiation of discounts, rebates and administration fees, as well as formulary support activities. We believe that our business practices and our arrangements with pharmaceutical manufacturers satisfy the intent of the HHS Guidance. We also maintain a compliance program designed to include the key compliance program elements described in the HHS Guidance. However, the OIG’s application of the principles underlying the anti-kickback statute is an ongoing process, and the government could challenge our program in the future. Moreover, if the industry perceives the HHS Guidance as leading to greater scrutiny of PBMs, pharmaceutical manufacturers and health plans may seek to alter the ways in which they conduct business with AdvancePCS and other PBMs.

Proposals to provide Medicare recipients outpatient drug benefits through the use of PBMs could make the prescription drug benefits we offer less valuable to seniors, reduce the total market for PBM services or require us to adopt a new business model for Medicare business.

The current federal Medicare program provides comprehensive medical benefits for individuals age 65 or over, but currently covers only a few outpatient prescription drugs. Various proposed changes to the Medicare program under consideration in Congress would result in at least partial coverage for prescription drugs and some contemplate the use of PBMs in providing those benefits. While recent developments in Congress appear to indicate that some form of Medicare drug benefit is likely to be adopted, significant uncertainty remains as to the exact structure and how a funded benefit will be delivered. We cannot assess at this stage whether or how we may participate in any program nor how such a program, if enacted, will impact our costs, our business or our profitability. However, if we do participate in such a program, depending upon its design, our business could be adversely affected, especially if such a program requires us to adopt a different business model for the program.

Some of our customers sell medical policies to seniors that provide a prescription drug benefit that we administer. Other clients provide prescription drug benefits to their retirees. Depending upon the Medicare benefit plan that is ultimately adopted, a Medicare prescription drug benefit could make these policies or plans less valuable to seniors and reduce the total market for PBM services. The adverse effects of these legislative proposals may outweigh any opportunities for new business generated by the new benefit.

If government laws or regulations are enacted, interpreted or enforced in a manner adverse to our clinical research programs, we may be subject to administrative enforcement actions, as well as civil and criminal liability.

We assist pharmaceutical manufacturers in conducting clinical trials for new drugs, or for new uses for existing drugs. The conduct of clinical trials is regulated by the FDA under the authority of the Federal Food, Drug and Cosmetic Act and the related regulations. Oversight of clinical trials has received increasing scrutiny in recent years. Because the interpretation and enforcement of these laws and regulations relating to the conduct of clinical trials is uncertain, the FDA may consider our compliance efforts to be inadequate and initiate administrative enforcement actions against us, as well as civil and criminal liability. If we fail to successfully defend against an administrative enforcement action, it could result in an administrative order suspending, restricting or eliminating our ability to participate in the clinical trial process.

As a consequence of the severe penalties we and our employees potentially could face, we must devote significant operational and managerial resources to comply with these laws and regulations. Although we believe that we substantially

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comply with all existing statutes and regulations material to the operation of our business, regulatory authorities may disagree and initiate enforcement or other actions against us. In addition, we cannot predict the impact of future legislation and regulatory changes on our business or provide assurances that we will be able to obtain or maintain the regulatory approvals required to operate our business.

Our existing facilities consist of approximately 1.3 million square feet, of which we own 150,400 square feet and lease the remainder. The monthly lease payments were approximately $1.6 million in the month of March 2003. The following table sets forth information with respect to our principal facilities.

In addition, we have several other facilities throughout the United States that we use for sales offices, clinics, data services and other corporate purposes. We believe our facilities are adequate to meet our requirements for the foreseeable future.

In November 1999, PCS Health Systems, Inc., or PCS, a subsidiary of PCS Holding Corporation, which was acquired by us in October 2000, received a subpoena from the Department of Health and Human Services OIG requesting that PCS produce documents in connection with an industry-wide investigation. The investigation is ongoing and being pursued under the direction of the United States Attorney’s Office for the Eastern District of Pennsylvania. Based on public statements from that office, the investigation appears to involve a review of the practices of pharmacy benefit management companies, or PBMs, under federal anti-kickback statutes and other laws and regulations. Specifically, the focus of the investigation appears to be PBMs’ relationships with pharmaceutical manufacturers and retail pharmacies and PBMs’ programs relating to drug formulary compliance, including rebate and other payments made by pharmaceutical manufacturers to PBMs, and payments made by PBMs to retail pharmacies in connection with therapeutic intervention activity. We provided documents responsive to the subpoena. The United States Attorney’s Office also contacted some of the pharmaceutical manufacturers with which we have agreements and has asked them to provide copies of documents relating to their agreements with us. The United States Attorney General also issued Civil Investigative Demands, or CIDs, seeking to compel the depositions of eight of our current and former employees.

On September 17, 2002, the United States District Court for the Eastern District of Pennsylvania entered an order holding in abeyance, pending the good faith efforts to reach a mutual resolution of the outstanding discovery issues, both our dispute with the OIG regarding the scope and enforcement of the subpoena for documents and employee e-mail as well as the issuance of the CIDs. Since entry of that order we have reached agreement with the United States Attorney’s office regarding the scope of its document requests and facilitated interviews of certain employees in lieu of the CIDs. The government recently requested the production of additional documents and interviews, including information relating to the activities of the former Advance Paradigm and the activities of AdvancePCS subsequent to the PCS acquisition, as well as additional information regarding our arrangements with retail pharmacies. We continue to cooperate with the OIG. We already have produced certain requested materials and we intend to continue to work with the OIG to facilitate the production of further documents and arrange the requested interviews.

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It is not possible to predict the outcome of this investigation or whether the government will commence any action challenging any of our programs and practices. We believe that our programs, including those prior to the PCS acquisition, are in compliance with the requirements of the anti-kickback and false claims statutes and other applicable laws and regulations. Moreover, other than those actions filed in connection with the enforcement of the subpoena, neither the OIG nor United States Attorney has filed any actions or claims against us nor have they indicated their intention to do so. Nevertheless, as a result of this investigation, we could be subject to scrutiny, further investigation or challenge under federal or state anti-kickback and false claims statutes or other laws and regulations which could cause our business, profitability and growth prospects to suffer materially.

In March 1998, a class action lawsuit captioned Mulder v. PCS Health Systems, Inc., case number 98-1003, was filed in the United States District Court of the District of New Jersey. This action alleges that PCS is a fiduciary, as that term is defined in the Employee Retirement Income Security Act, or ERISA, and that we have breached our fiduciary obligations under ERISA in connection with our development and implementation of formularies, preferred drug listings and intervention programs for our sponsors of ERISA health plans. In particular, plaintiffs allege that our therapeutic interchange programs and negotiation of formulary rebates and discounts from pharmaceutical manufacturers violate fiduciary obligations. The plaintiffs are seeking injunctive relief and monetary damages in an unspecified amount. We believe that we do not assume any of the plan fiduciary responsibilities that would subject us to regulation under ERISA as alleged in the complaint. Although the ultimate outcome is uncertain, an adverse determination could potentially cause us to change our business practices with respect to formularies, preferred drug listings, intervention programs, and rebates, potentially reducing our profitability and growth prospects. A class of plaintiffs has not yet been certified and we have opposed such certification. We have denied all allegations of wrongdoing and are vigorously defending this suit.

We are also a party to the following lawsuits, each filed by the same counsel for different plaintiffs in the United States District Court in Arizona, that allege that we act as an ERISA fiduciary and that we have breached certain fiduciary obligations under ERISA.

As to all the Arizona ERISA cases, we believe that we do not act as an ERISA fiduciary or assume the ERISA fiduciary responsibilities as alleged in the complaints. We believe that, in any event, our business practices are in compliance with ERISA. The ERISA lawsuits seek unspecified monetary damages and injunctive relief.

We were served as a defendant in two California state court cases in 2003, one of which was brought by the same plaintiff’s counsel that represents the plaintiffs in the Arizona ERISA cases. One was filed on or about March 17, 2003 in Los Angeles County Superior Court (American Federation of State, County & Municipal Employees (“AFSCME”) v. AdvancePCS, et al., case number BC292227) against us and other leading PBMs. The other was filed on or about March 26, 2003 in Alameda County Superior Court against us and several other defendants (Irwin v. AdvancePCS, et al., case number RG03088693) and is styled as a class action brought on behalf of a class of all public employees that participate in non-ERISA prescription drug benefit plans; however, a class has not been certified and we will oppose such certification. These two California cases allegedly involve non-ERISA plans and make the same general allegations of wrongdoing as made in the Arizona ERISA actions but are brought under California’s Unfair Competition Law rather than ERISA. Since the two California actions are related, we will seek to have them coordinated.

Although the ultimate outcome in these Arizona ERISA and California non-ERISA cases is uncertain, an adverse determination could potentially cause us to change our business practices with respect to formularies, preferred drug listings,

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rebates, and intervention programs, potentially reducing our profitability and growth prospects. We have denied all allegations of wrongdoing and are vigorously defending these suits.

On December 17, 2001, AARP and United Healthcare Insurance Co., or United, filed a multi-count complaint against us in federal court in Minneapolis, Minnesota in a matter captioned United Healthcare Insurance Co. and AARP v. AdvancePCS, Civ. No. 01-CV-2320 (D. Minn.). AARP and United have asserted claims against us for violation of Minnesota’s deceptive trade practices act, tortious interference with prospective economic advantage and unjust enrichment. Specifically, AARP and United claim that we created confusion among certain AARP members and pharmacists through the launch of our prescription drug discount program. AARP and United requested preliminary and permanent injunctive relief. We moved to dismiss the complaint. Without holding an evidentiary hearing, the district court granted AARP and United’s request for preliminary injunctive relief. We appealed the district court’s order and on November 1, 2002, the Eighth Circuit Federal Court of Appeals affirmed the district court’s order. In addition to the injunctive relief requested, AARP and United have asserted monetary damages of $24 million, including attorneys’ fees and costs. In April 2003, AARP and United amended their complaint to include a punitive damages allegation. We have denied AARP and United’s allegations, moved to dismiss the complaint and are vigorously defending this matter. In addition, in May 2003 we amended our answer to include a cross-complaint against both AARP and United for monetary damages arising out of asserted inappropriate activities by AARP and United that interfered with the operation of our prescription drug discount program. Discovery in connection with these claims is ongoing.

In addition, we are a defendant in lawsuits from time to time arising in the ordinary course of business, the outcome of which we believe will not have a material adverse effect on our business, profitability and growth prospects.

No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2003.

PART II

Our Class A common stock has been traded on the Nasdaq National Market under the symbol ADVP since our initial public offering on October 8, 1996. The following table sets forth the range of quarterly high and low sales prices per share of our Class A common stock as quoted on the Nasdaq National Market. On October 1, 2001, we announced a two-for-one stock split, affected in the form of a stock dividend of our common stock. Financial information and stock prices contained throughout the Form 10-K have been adjusted to reflect the impact of the stock split.

On March 31, 2003, there were approximately 23,000 beneficial owners, based on our most recent mailing to stockholders, of our Class A common stock represented by 136 holders of record.

We have never paid any cash dividends on our Class A common stock and do not expect to pay cash dividends in the

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foreseeable future. In the past we have paid cash dividends on our preferred stock. We intend to retain future earnings to finance the ongoing operations and growth of our business.

There is no established public trading market for our Class B-1 common stock or our Class B-2 common stock. On March 31, 2003, there was one holder of our Class B-1 common stock, JLL, and one holder of our Class B-2 common stock, Rite Aid.

The number of shares of common stock subject to outstanding options and remaining available for grant pursuant to our stock based compensation plans as of March 31, 2003, is reflected in the table below. All of our stock based compensation plans have been approved by our stockholders.

Equity Compensation Plan Information (amounts, other than dollars, in thousands)

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The following financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this filing. Certain reclassifications have been made to prior period statements to conform them to the March 31, 2003 classifications.

The results of operations of PCS for the period commencing October 2, 2000, the date of our acquisition of PCS, are reflected in the financial statements of AdvancePCS after that date.

AdvancePCS

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EXPLANATORY NOTE

Beginning in the fiscal year ended March 31, 2003, the Company has included in its Quarterly Reports on Form 10-Q (including its Form 10-Q/A for the quarter end June 30, 2002 filed today) and in this Annual Report on Form 10-K a footnote containing certain condensed consolidating financial information in separate columns for the Company and its guarantor and non-guarantor subsidiaries with respect to the Company’s public debt, as contemplated by Rule 3-10(f) of Regulation S-X (see Footnote 8 to the Financial Statements).

The Staff of the Securities and Exchange Commission (the “SEC”) has advised the Company that it believes such footnote should have been provided in the Company’s financial statements filed with the SEC for earlier periods. The Staff of the SEC has also advised the Company that the information provided in Footnote 8 to the Financial Statements in this Annual Report on Form 10-K for the fiscal year ended March 31, 2001 should be audited rather than unaudited as presented (Arthur Andersen LLP was the Company’s auditors for the fiscal year ended March 31, 2001). Such footnote information disaggregates financial information previously provided on a consolidated basis into separate columns for the Company and its guarantor and non-guarantor subsidiaries. The information provided in the footnote has no impact on the consolidated finanical information of the Company.

The Company is in discussions with the Staff of the SEC to determine the extent to which earlier periods may need to be augmented with similar audited and/or unaudited disaggregated footnote information. The Company believes that the disclosure of this footnote information would not provide any additional material information to the Company’s stockholders and noteholders. There can be no assurance as to the outcome of the Company’s discussions with the Staff.

See Footnote 8 of the Financial Statements in this Annual Report on Form 10-K for the condensed consolidating financial information for the Company and its guarantor and non-guarantor subsidiaries with respect to the Company’s public debt; the liquidity discussion contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and Risk Factors.

The Sarbanes-Oxley Act of 2002 requires the CFOs and CEOs of public companies to make certain certifications relating to the financial statements included in SEC filings. Such certifications are not included in this Annual Report on Form 10-K but will be filed once this issue has been resolved with the Staff of the SEC.

Overview

We are a leading provider of health improvement services in the United States. Our customers include a broad range of health plan sponsors, such as BlueCross BlueShield plans and other managed care organizations, employer groups, third-party administrators of health plans, insurance companies, government agencies and labor union-based trusts. As the largest PBM based on number of lives covered, we currently serve more than 75 million health plan members and annually manage more than 540 million pharmacy claims, representing approximately $28 billion in prescription drug spending. Our large member base gives us significant leverage when negotiating rebates and discounts from pharmaceutical companies and retail pharmacies.

As a PBM, we offer tools to our customers to assist in managing their prescription drug expenditures, including on-line claims adjudication, discounted retail networks, discounted mail pharmacy services, formulary development, rebate negotiation and management and other plan design and formulary support activities. In addition, we offer a wide range of other health improvement products and services, such as specialty pharmacy services, disease management and prescription discount cards for the uninsured and under-insured. Our mission is to improve the quality of care delivered to health plan members while helping health plan sponsors reduce overall costs. Our strategy as the largest provider of health improvement services is to increase the breadth of services offered to our customer base, increase our core customer base and, most importantly, generate additional value through the cross-selling of our products into our customer base.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires that management establish accounting policies and make estimates that affect both the amounts and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain. While judgments and estimates made by us are based on historical experience and other assumptions that we believe are appropriate and reasonable under current circumstances, actual resolution of these matters may differ from recorded estimated amounts, resulting in charges or credits that could materially affect future financial statements. The following are accounting policies and use of estimates applied in the preparation of our financial statements as well as the residual accounting risk inherent for these areas that should be considered. Residual accounting risk is defined as the inherent risk that remains after the application of our policies and processes and is generally outside of our control.

Revenue Recognition

Our revenues are derived principally from sales of prescription drugs to members of our customers, either through our mail and specialty service pharmacies (Mail Services) or our networks of contractually affiliated retail pharmacies (Data Services). We also provide clinical and other services as part of our overall health improvement service offerings.

We adopted Emerging Issues Task Force (EITF) released Issue No. 02-16, “Accounting by a Reseller for Cash Consideration Received from a Vendor” (EITF 02-16) in the fourth quarter of fiscal 2003 by retroactively reclassifying all prior years to conform with the presentation for fiscal 2003. When we provide formulary management services to a customer in conjunction with claims processing, we record rebates and administrative fees received from pharmaceutical manufacturers as a reduction of cost of revenues and the portion of the rebate payable to customers is treated as a reduction of revenue. As a result of the adoption, fiscal years 2003, 2002 and 2001 revenues have been reduced by $1.4 billion, $933.2 million and $533.9 million, respectively, representing the gross amounts of rebates and administrative fees received from pharmaceutical manufacturers. Cost of revenues have been reduced by the same amounts (See “Recently Adopted Accounting Pronouncements”).

Data Services

We evaluate our plan sponsor customer contracts using the indicators of EITF No. 99-19 “Reporting Gross Revenue as a Principal vs. Net as an Agent” (EITF 99-19) to determine whether we act as a principal or an agent in the fulfillment of prescriptions through the retail pharmacy network.

Revenues are recorded gross when we adjudicate claims for plan sponsor customers that have contractually agreed to use our contracted pharmacy network. We act as principal under EITF 99-19 when adjudicating claims for plan sponsors through our contracted pharmacy network for the following reasons:

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When adjudicated claims are recorded gross, the plan sponsor’s aggregate pharmacy benefit claim payment to us is recorded as revenue and our payment to the pharmacy provider is recorded as cost of revenue in our consolidated statement of operations. In contrast, when we adjudicate prescriptions at pharmacies that are under contract directly with our plan sponsor customer and there are no financial risks to us, we record only our claims processing fees as revenues and do not include prescription costs in revenues or cost of revenues (“net” reporting). If we had reported all of our data services revenues using net reporting, revenues and cost of revenues would have decreased by $11.0 billion, $10.0 billion and $5.4 billion for the fiscal years ended March 31, 2003, 2002 and 2001, respectively.

We do not have responsibility to collect co-payments to be made by members to the retail pharmacy. Accordingly, we do not record member co-payments collected in the retail pharmacy as either revenue or cost of sales. As has been widely reported the SEC is in the process of reviewing the topic of co-payments and whether co-payments should or should not be included as a component of revenues and cost of sales in the PBM and other related industries including insurance companies. If the SEC should ultimately decide that co-payments should be included in revenues and cost of sales it would result in an increase in reported revenue and a corresponding increase in cost of revenues. Thus, our consolidated results of operations, including gross profit and net income, and the consolidated balance sheets and consolidated statements of cash flows would not be affected.

Certain implementation and other fees paid to customers upon the initiation of a contractual agreement are considered an integral part of overall contract pricing and are capitalized and amortized as a reduction of revenue on a straight-line basis over the life of the contract.

Mail Services

We contract directly with plan sponsor customers to provide prescription drugs to their members. We are contractually committed to specific turn around times, which is the time it takes to ship the prescription after receiving the written order. We also assume the credit and inventory risk and collect co-payments from members. Therefore, for prescriptions dispensed through our own mail service pharmacies, we recognize the total amounts paid by both the customer and the member (in the form of a co-payment) as revenue. Revenues from the dispensing of pharmaceuticals from our mail service pharmacies are recognized when each prescription is shipped.

Clinical and Other Services

When we earn rebates and administrative fees in conjunction with formulary management services (formulary development and manufacturer contracting) for customers, but do not process the underlying claims (rebate utility), we record rebates and administrative fees received from pharmaceutical manufacturers, net of the portion payable to customers, in revenue. In contrast, when we provide formulary management services and process the claims, we record rebates and administrative fees received as a reduction of cost of revenues and the portion deliverable to the customer as a reduction of revenue.

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We recognize rebates and administrative fees receivable from pharmaceutical manufacturers and the corresponding amounts payable to customers when the prescriptions covered under the contractual agreements with the manufacturers are dispensed. We estimate the amount of rebates to be delivered to customers based on historical rates of rebates received as well as estimates of current rebates receivable from pharmaceutical manufacturers. These estimates are adjusted to actual when amounts are received from manufacturers and the portion deliverable to the customer is disbursed.

We also earn other revenue from pharmaceutical manufacturers for services such as formulary support services, outcomes studies and clinical trials. These services are negotiated separately with each pharmaceutical manufacturer and specify the services we are to perform and the revenues and fees we are to earn based on the delivery or completion of the services. We also earn revenues from our customers (primarily managed care organizations) for disease management services provided by Accordant, our wholly owned subsidiary acquired in November 2002. Accordant focuses on helping patients with complex, chronic and progressive diseases. The revenues of Accordant have been included in Clinical and Other Services revenue since the date of acquisition.

Cost of Revenues

Cost of revenues includes prescription drug costs, labor, call center operations, information technology and other costs associated with the sale and/or dispensing of prescription drugs and providing clinical and other services.

Rebates collected from pharmaceutical manufacturers on behalf of our health plan sponsor customers are recognized as a reduction of cost of revenues in accordance with EITF No. 02-16.

Accounts Receivable

Accounts receivable balances represent customer trade receivables generated from our Data and Mail Services health improvement services. Also included in accounts receivable are receivables from vendors for our Clinical and Other Services whereby we recognize rebates and administrative fees receivable from pharmaceutical manufacturers. Based on our revenue recognition policies, certain claims at the end of the period are unbilled. Revenue and unbilled receivables for those claims are estimated each period based on the amount to be paid to the pharmacies and historical gross margin. Estimates are adjusted to actual at the time of billing. In addition, revenue and unbilled receivables for rebates are calculated quarterly based on an estimate of rebatable prescriptions and rebate per prescription. These estimates are adjusted to actual when the number of rebatable prescriptions and rebate per prescription have been determined and the billings to the pharmaceutical manufacturers have been completed. As of March 31, 2003 and 2002, unbilled receivables were $883.5 million and $686.2 million, respectively. Corresponding amounts payable to retail pharmacies (for claims) or to plan sponsor customers (for rebates) are recorded at the time the unbilled receivables are recorded. Unbilled receivables to plan sponsor customers are typically billed within 15 days and unbilled receivables to manufacturers are typically billed within 90 days, based on the respective contractual billing schedules.

To reduce the potential for credit risk, we evaluate the collectibility of customer balances based on a combination of factors but do not generally require significant collateral. We regularly analyze significant customer balances, and, when it becomes evident a specific customer will be unable to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position, a specific allowance for doubtful account is recorded to reduce the related receivable to the amount that is believed reasonably collectible. We also record allowances for doubtful accounts for all other customers based on a variety of factors including the length of time the receivables are past due, the financial health of the customer and historical experiences. If circumstances related to specific customers change, our estimates of the recoverability of receivables could be further adjusted.

Asset Impairment

Long-lived assets and intangible assets are tested for recoverability whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. Examples of such events could include a significant adverse change in the extent or manner in which the asset is used, a change in its physical condition, or new circumstances that would cause an expectation that it is more likely than not we would sell or otherwise dispose of a long-lived asset significantly before the end of its previously estimated useful life.

The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. That assessment shall be based on the carrying amount of the asset at the date it is tested for recoverability. An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.

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We evaluate goodwill for impairment based on a two-step process. The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is necessary to measure the amount of impairment loss, if any. The second step compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to that excess. The results of our fiscal 2003 testing resulted in no impairment charges.

We determine the fair value of reporting units by using a discounted cash flow model based on future operations. Goodwill is tested annually during the fourth quarter of each fiscal year and when events or circumstances occur indicating possible impairment.

The current discount rate applied to future cash flows in determining the fair value of reporting units is 13.8%. A significant increase in the discount rate may adversely impact the fair value of reporting units that would result in a non-cash charge to earnings.

Rebate Guarantees

Agreements with certain health plan sponsor customers contain provisions that require us to obtain a minimum rebate per claim from pharmaceutical manufacturers in order to generate additional savings for health plan sponsor customers. Failure to achieve the minimum rebate per claim results in an obligation by us to the health plan sponsor customer. The obligation is equivalent to the difference between the actual rebate per claim obtained and the minimum stated in the health plan sponsor customer agreement, which is then multiplied by the number of claims processed in a specified period. We continually monitor the health plan sponsor customers’ rebate per claim and recognize a liability when it appears unlikely the average rebate per claim will meet or exceed the stated minimum.

If circumstances related to collectibility assumptions of pharmaceutical manufacturers rebates change, including changes in market conditions (e.g., drug patent expiration) or member quantity, that materially alter drug utilization patterns and adversely affect the pharmaceutical manufacturers rebates obtained, rebate guarantee obligations could increase, resulting in a charge to earnings.

Performance Guarantees

Agreements with certain health plan sponsor customers contain plan performance guarantees that require us to meet various operational standards, including items such as customer service wait time, abandoned customer service calls and mail pharmacy turn around time. Certain contracts require 100% guarantee in achieving various operational standards. Failure to achieve the operational standards results in penalty payments to the health plan sponsors by us. We continually monitor our operational performance against the standards outlined in health plan sponsor customer contracts. A loss is recorded as a liability. If we experience changes in events or circumstances that adversely impact operations, performance guarantee obligations could increase resulting in a charge to earnings.

Service Guarantees

Agreements with certain health plan sponsor customers contain guarantees relating to an efficient and effective transition into our services (implementations). Failure to achieve an efficient and effective transition on our part results in an obligation to health plan sponsor customers. Obligations are estimated based on the success of recently transitioned health plan sponsor customers. If we experience changes in events or circumstances that adversely impact the transition of new health plan sponsor customers to our products and services, a charge to earnings may result.

Employee Benefit Plans

Retirement plan benefits include both a defined contribution retirement plan and defined benefit pension plan. The defined benefit pension plan was acquired with the PCS acquisition and has been frozen to new participants since the acquisition date. In addition, employees may participate in an Employee Stock Purchase Plan.

Under the provisions of Statement of Financial Accounting Standards (SFAS) No. 87 “Employer’s Accounting for Pensions,” measurement of the obligations under the defined benefit pension plan are subject to a number of assumptions. These include the rate of return of plan assets, health care costs and compensation trend rates, and the rate at which the future obligations are discounted to value the liability at year-end.

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Changes in assumptions used to measure the obligation under the defined benefit pension plan could materially impact our future obligation. The assumed health care cost trend rates have a significant effect on the retiree health benefits amounts reported. If these trend rates were to be increased by one percentage point each future year, the March 31, 2003 accumulated post retirement benefit obligation would increase by $2.0 million and the aggregate of the service cost and interest components of the 2003 annual expense would increase by $544,000. A one percentage point decrease in these rates would decrease the March 31, 2003 accumulated post retirement benefit obligation by $1.6 million and the aggregate of the 2003 service cost and interest cost components of the 2003 annual expense would decrease by $435,000.

Other Loss Contingencies

Other loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position or results of operations. Estimating probable losses requires varying levels of analysis that often depend on judgments about potential actions by third parties such as arbitrators.

Acquisitions

In November 2002, we acquired 100% of the common stock of privately held Accordant, a disease management company that focuses on helping patients with complex, chronic and progressive diseases. The aggregate purchase price of $71.5 million, net of cash acquired, includes the final determination of the working capital adjustment and transaction costs. The results of Accordant have been included in the consolidated financial statements since the acquisition date. The agreement includes a provision for the payment of up to an additional $25 million, dependent upon Accordant achieving certain financial and operating targets in calendar year 2003. Any additional consideration will be paid during calendar year 2004 and treated as an adjustment to the purchase price. The final purchase price will be allocated based on appraisals, which are currently being finalized. The acquisition of Accordant was accounted for using the purchase method of accounting, in accordance with SFAS No. 141, “Business Combinations”.

In August 2001, we completed the acquisition of 100% of the equity of Dresing-Lierman, Inc. and its wholly owned subsidiary, TheraCom Inc. (collectively, TheraCom), a specialty pharmacy and distribution company located in Bethesda, Maryland. The aggregate purchase included the issuance of 1.3 million shares of Class A common stock, of which 384,006 shares were placed in escrow. Of these, 166,956 shares were held in escrow as additional consideration for the acquisition of TheraCom, the payment of which was conditioned upon TheraCom achieving specific future financial performance goals. The remaining 217,050 shares were held in escrow to satisfy any indemnification claims we may have arising out of the acquisition, including those related to the settlement of certain outstanding TheraCom litigation. In addition, we paid $10.6 million to eliminate TheraCom’s outstanding indebtedness. The acquisition was accounted for using the purchase method of accounting. The excess of the purchase price paid over the net identifiable assets and liabilities of TheraCom, $39.1 million, was recorded as goodwill. We also recognized $4.7 million in intangible customer contracts.

We determined that TheraCom achieved the specified performance goals and in January 2003, 166,956 shares were released to the former TheraCom stockholders from the additional consideration escrow. In January 2003, 34,188 shares were also withdrawn from the indemnification claims escrow and returned to us to satisfy our indemnification claim arising from the settlement of litigation between TheraCom and one of its former stockholders. Any shares returned to us are held in treasury.

In June 2001, we established a joint venture, AdvancePriority SpecialtyRx, with Priority Healthcare Corp., a national specialty pharmacy and distribution company. Priority Healthcare owned 49% of the venture and we owned 51%. Effective February 2003, we purchased Priority Healthcare’s 49% of the venture, making AdvancePriority SpecialtyRx a wholly owned subsidiary. The acquisition was accounted for using the purchase method of accounting, in accordance with SFAS 141, “Business Combinations”.

In October 2000, we completed the acquisition of PCS for an aggregate purchase price of approximately $1.0 billion, of which we paid Rite Aid, the seller, $675 million in cash and issued to Rite Aid $200 million in senior subordinated notes and $125 million in our convertible preferred stock. The cash portion of the purchase price was financed with the proceeds of an $825 million senior secured credit facility and $150 million in equity financing committed by Joseph, Littlejohn & Levy, Inc., or JLL. In connection with the equity financing, we issued to JLL 65,854 shares of Series A-1 preferred stock for an aggregate purchase price of $65.9 million, six shares of Series B convertible preferred stock and 8.4 million shares of our Class A common stock for an aggregate purchase price of $84.1 million. On December 8, 2000, the six shares of Series B

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convertible preferred stock and the 8.4 million shares of Class A common stock automatically converted into 8.4 million shares of Class B-1 common stock. In connection with the senior subordinated notes, we issued to Rite Aid warrants to purchase 1.6 million shares of Class A common stock. The senior subordinated notes were fully redeemed on March 13, 2001. The warrants terminated upon repayment of the senior subordinated notes. The acquisition of PCS was accounted for using the purchase method of accounting. The excess of the purchase price paid over the net identifiable assets and liabilities of PCS was recorded as goodwill.

In July 2000, we completed a merger with FFI. We issued seven million shares of our Class A common stock in exchange for all of the outstanding shares of FFI. The merger constituted a tax-free reorganization and has been accounted for as a pooling of interests. The historical financial results have been restated in accordance with Accounting Principals Board Opinion (APB) No. 16 “Business Combinations” (APB 16) to reflect the merger as though FFI had always been a part of AdvancePCS.

In January 2000, we acquired a 19% interest in CHI, an internet health portal development company, with an option to acquire the additional interest. Effective September 30, 2001 we acquired the remaining equity interests of CHI, which we did not previously own. The acquisition of the remaining interest was accounted for using the purchase method of accounting. The acquisition of the remaining 81% equity interest was completed with cash of $9.2 million, making CHI a wholly owned consolidated subsidiary. Prior to the complete acquisition of CHI, we had accounted for our 19% interest in CHI on the cost basis. In accordance with APB No. 18 “The Equity Method of Accounting for Investments in Common Stock” (APB 18), all prior period financial statements have been restated to account for CHI as though we had accounted for the investment on the equity method.

Sources of Revenue

Our revenues are derived principally from sales of prescription drugs to members of our customers, either through our mail and specialty service pharmacies (Mail Services) or our networks of contractually affiliated retail pharmacies (Data Services.) We also provide Clinical and Other Services as part of our overall health improvement service offerings.

When we provide formulary management services to a customer in conjunction with claims processing, we record rebates and administrative fees received from pharmaceutical manufacturers as a reduction of cost of revenues and the portion of the rebate payable to customers is treated as a reduction of revenue.

Our cost of revenues include drug ingredient costs, labor, call center operations, information technology and other costs associated with the sale and/or dispensing of prescription drugs and providing clinical and other services.

Data services

Through our data services operations we process prescription claims on behalf of our health plan sponsor customers. When a member of one of our health plan sponsors presents a prescription with a health plan identification card to a retail pharmacist in our network, the pharmacist accesses our online system to receive information regarding eligibility, patient history, health plan formulary listings and negotiated price. The member generally pays a co-payment to the retail pharmacy and the pharmacist fills the prescription. We do not record as revenue any co-payment due from the member to the retail pharmacy as we are not responsible for the collection of these co-payments. On behalf of our health plan sponsors, during each billing cycle, our systems electronically aggregate pharmacy benefit claims, which include prescription costs plus our claims processing fees. Once we receive payments from health plan sponsors, we remit the amounts owed to the retail pharmacies.

We have established a nationwide network of over 59,000 retail pharmacies, each of which generally pay an access fee to be included in our network. Our contracts with most of our health plan sponsors provide for member access to our retail pharmacy network. When we have an independent obligation to pay retail pharmacies for the cost of the prescription dispensed, we are acting as the “principal” in that transaction and record as revenue the aggregate pharmacy benefit claim payment from our plan sponsor customers (which includes ingredient cost, the dispensing fee paid to the pharmacist, and our claims adjudication fee); and the payments to our pharmacy providers for these prescriptions is recorded as cost of revenues. By contrast, some of our other plan sponsor customers have established their own pharmacy networks. When we adjudicate prescriptions under contracts with these customers and there is no financial risk to us, we record only our claims processing fees as revenues and do not include prescription costs in revenues or cost of revenues (“net” reporting).

As a result, our revenues are higher from plan sponsor customers that use our networks of contractually affiliated retail pharmacies instead of using retail pharmacies that are under contract directly with the plan sponsor customer. Similarly, while a customer who uses our network may contribute the same gross profit in terms of dollars as a customer that uses its

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own network, gross profit as a percentage of revenue will be significantly lower for the customer using our network because of the higher level of revenue we recognize.

Mail services

We derive mail services revenues from the sale of pharmaceuticals to members of our customers’ health plans from our mail pharmacies and specialty pharmacies. These revenues include the cost of the pharmaceuticals we bill our health plan sponsors, the co-pay we collect from members, plus a dispensing fee.

Clinical and other services

When we collect rebates and administrative fees in conjunction with formulary management services, but do not process the underlying claims (rebate utility), we record rebates and administrative fees received from pharmaceutical manufacturers, net of the portion delivered to customers, in revenue. We recognize rebates and administrative fees from pharmaceutical manufacturers and the corresponding amounts payable to customers when the prescriptions covered under the contractual agreements with the manufacturers are dispensed.

We also earn other revenue from pharmaceutical manufacturers for services such as formulary support services, outcome studies and clinical trials. These services are negotiated separately with each pharmaceutical manufacturer and specify the services we are to perform and the revenues and fees we are to earn based on the delivery or completion of the services. We also earn revenues from our customers (primarily managed care organizations) for disease management services provided by Accordant, our wholly owned subsidiary acquired in November 2002. Accordant focuses on helping patients with complex, chronic and progressive diseases. The revenues of Accordant have been included in Clinical and Other Services revenue since the date of acquisition.

Results of Operations—AdvancePCS

The following table sets forth certain consolidated historical financial data of AdvancePCS.

Fiscal Year 2003 Compared to Fiscal Year 2002

Revenues

During 2003 we adopted EITF 02-16. Under this pronouncement, any consideration received from a vendor is presumed to be a reduction of the prices of the vendor’s products and should, therefore, be characterized as a reduction of cost of revenues. This EITF applies to rebates and administrative fees received from pharmaceutical manufacturers related to customers for whom we process claims. Accordingly, our revenues for fiscal years 2003, 2002 and 2001 have been reduced by $1.4 billion, $933.2 million, and $533.9 million, respectively. Cost of revenues has been reduced by the same amounts.

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These amounts represent the gross amount of rebates and administrative fees received from pharmaceutical manufacturers. We have previously recorded rebates, net of the amount paid to our customers and administrative fees as components of our Clinical Services revenue. Our consolidated gross profit was not impacted as a result of adopting this EITF.

Data Services – Data services revenues for fiscal year 2003 increased by $1.1 billion, or 11%, compared to revenues for fiscal year 2002. Over 65% of the increase in revenues was attributable to an increase in the Average Wholesale Price index for drug ingredient costs, which is used to establish the price of a prescription at the point of sale. The increase in the Average Wholesale Price index was due to higher costs for newly introduced drugs, as well as, price increases for existing drugs. The remaining increase was due to a 7% increase in the number of pharmacy claims processed during the year offset by decreases in claims processing fees, primarily within with our discount cash card program. Claims processed increased from approximately 456 million in fiscal year 2002 to more than 488 million for fiscal year 2003.

Mail Services – Mail services revenues rose $802 million, or 53% during the year. Of this increase, approximately $585 million resulted from a 40% increase in the number of mail prescriptions dispensed which was driven by the addition of several customers whose members are high mail utilizers, and increased utilization of our mail services by existing members. The number of mail pharmacy prescriptions dispensed increased from 11.0 million in fiscal year 2002 to 15.4 million for fiscal year 2003. Also contributing to the increase was the growth of specialty pharmacy services revenue, which increased from $80.7 million in 2002 to $254.1 million in 2003. The increased volume of shipments of 231% and adjudicated specialty pharmacy claims of over 5,000% was the result of our launch into the specialty pharmacy business with the establishment of the joint venture, AdvancePriority SpecialtyRx, with Priority Healthcare in June 2001 and the acquisition of TheraCom in August 2001. The revenue increase attributable to the full year volume of shipments and claims in fiscal year 2003 was offset in part by the mix of pharmaceuticals shipped from TheraCom and lower pricing within the joint venture as compared to fiscal year 2002. The remaining increase in mail revenue was due to higher revenue per mail claim resulting from an increase in drug ingredient costs, which were offset in part by greater pricing discounts to our customers and a higher mix of generic prescriptions filled.

Clinical and Other Services – Clinical and Other Services revenue increased by 5% compared to fiscal 2002. Included in clinical and other services are revenues relating to the acquisition in November 2002 of Accordant, a disease management company focusing on patients with complex chronic and progressive diseases. The addition of Accordant’s revenues in fiscal year 2003 was offset by decreases in revenue from other clinical programs.

Cost of Revenues. Overall cost of revenues increased $1.8 billion, or 16%, compared to fiscal 2002. Of this increase, drug ingredient costs grew by $1.7 billion to $13.0 billion. This increase was driven primarily by an increase in the Average Wholesale Price index of pharmaceuticals, which in turn was driven by higher costs for newly introduced drugs, as well as, price increases for existing drugs and an increase in the number of claims adjudicated during the period. Cost of revenues, excluding drug ingredient costs, increased $119.0 million, or 27%, as compared to fiscal year 2002. The majority of the increases were attributable to non-ingredient costs associated with filling mail order prescriptions; the opening of our third mail order facility in Wilkes-Barre, Pennsylvania; increased call center operations to handle the increased volume of calls associated with implementing new mail utilizing members and promoting the use of our mail services to existing members; performance and service guarantees and non-pharmaceutical cost of revenues associated with our specialty pharmacy operations which included a full year of activity in fiscal 2003.

Selling, general and administrative expenses. Our selling, general and administrative expenses for fiscal year 2003 increased by $41.9 million, or 22%, compared to fiscal year 2002. The increase was due primarily to increased fees paid to account brokers and other costs associated with generating new sales and managing accounts. Additional rent and operating expenses associated with the new corporate headquarters building in Irving, Texas also contributed to the increase. Recent acquisitions, including Accordant, and legal expenses associated with HIPAA compliance and the OIG investigation also contributed to the increase. Selling, general and administrative expenses as a percentage of revenues remained unchanged at 1.6% in fiscal year 2003 compared to fiscal year 2002.

Non-recurring and impairment expenses. Net income for fiscal year 2002 reflected a non-recurring charge of $1.8 million ($1.1 million after taxes, or $0.01 per diluted share) primarily representing a write-off of the human resources software previously utilized by us prior to the acquisition of PCS and severance costs for certain employees that were terminated or resigned following, and as a result of, the acquisition with PCS. There were no corresponding expenses for fiscal year 2003.

Net interest expense. Interest expense, net of interest income, for fiscal year 2003 decreased $19 million compared to fiscal year 2002. As of March 31, 2003 total debt was $448.0 million compared to $500.8 million at March 31, 2002. The decrease in interest expense resulted from: (1) the repayment of debt throughout fiscal year 2003 with excess cash, (2) the increased usage of the Asset Securitization Facility, which incurs interest at a lower rate than the debt it replaced and (3) the expiration in October 2002 of $100 million of the interest rate swap.

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Loss from joint venture. In February 2001, we entered into an agreement with Express Scripts and Medco Health Solutions, Inc., Inc., to form RxHub, LLC, or RxHub, to develop electronic prescribing technology. We own one third of the equity of RxHub. We have recorded our investment in RxHub under the equity method of accounting and record our percentage interest in RxHub’s results in our consolidated statement of operations. Our proportionate share of RxHub’s loss for fiscal year 2003 was $5.0 million compared to $2.9 million in fiscal year 2002.

Income taxes. For fiscal years 2003 and 2002 our effective tax rate was approximately 39.5%.

Extraordinary loss on early retirement of debt, net of tax. For fiscal years 2003 and 2002, in connection with the refinancing and the debt repayment, we 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 $2.4 million and $8.8 million ($1.5 million and $5.3 million, net of taxes) for fiscal years 2003 and 2002, respectively.

Diluted net income per share. We reported diluted net income per share of $1.71 per share for fiscal year 2003 compared to $1.18 per share in fiscal year 2002. The weighted average shares outstanding were 98.5 million and 98.3 million for fiscal years 2003 and 2002, respectively. During fiscal year 2003, we bought back 5.5 million shares of our Class A common stock. These shares were repurchased under our stock repurchase program announced in June 2002. During fiscal year 2002 we completed a two-for-one stock split affected in the form of a stock dividend of our common stock. Financial information and stock prices contained throughout the Form 10-K have been adjusted to reflect the impact of the stock split. In August 2001 we completed the sale of nine million shares of Class A common stock.

Fiscal Year 2002 Compared to Fiscal Year 2001

Revenues. Our revenues for fiscal year 2002 increased by $5.7 billion, or 88%, compared to revenues for fiscal year 2001. Over 70% of this increase was due to the acquisition of PCS in October 2000. Approximately $4.8 billion or 85% of the increase in revenues was attributable to growth in Data Services as a result of a 69% increase in the number of pharmacy claims processed during the period. Claims processed increased from 270 million in fiscal year 2001 to 456 million for fiscal year 2002. Approximately 13% of the increase in revenue was attributable to additional sales of our mail pharmacy services, resulting from a 95% increase in the number of mail prescriptions dispensed. Mail pharmacy prescriptions dispensed increased from 5.7 million in fiscal year 2001 to 11.0 million for fiscal year 2002.

Cost of Revenues. Overall cost of revenues increased $5.5 billion, or 87%, compared to fiscal year 2001. Of this increase, over 70% was attributable to the PCS acquisition. Drug ingredient costs grew by $5.2 billion to $11.3 billion. Cost of revenues, excluding drug ingredient costs, increased $211 million, or 94% as compared to fiscal year 2001. These increases were attributable primarily to the additional revenue and cost of revenue associated with the PCS acquisition.

Selling, general and administrative expenses. Our selling, general and administrative expenses for fiscal year 2002 increased by $60.3 million, or 47%, compared to the same period in fiscal year 2001. This increase is due to the acquisition of PCS and the comparison of six months of financial data in fiscal year 2001 to one full year of PCS expenses in fiscal year 2002 offset by the decrease in goodwill amortization of approximately $23.8 million as a result of the adoption of SFAS 142 “Goodwill and Other Intangible Assets” (SFAS 142). Selling, general and administrative expenses as a percentage of revenues was approximately 1.6% in fiscal year 2002 compared to 2.0% in fiscal year 2001. This was due to greater economies of scale from the integration of PCS and due to the increase in revenue associated with our data services. Additional revenues generated by customers using our network pharmacy providers typically do not result in a proportional increase in selling, general and administrative expenses.

Non-recurring and impairment expenses. Net income for the year ended March 31, 2002 reflected a non-recurring charge of $1.8 million ($1.1 million net of taxes, or $0.01 per diluted share) primarily representing a write-off of the human resources software previously utilized by Advance prior to the acquisition of PCS and severance costs for certain employees that were terminated or resigned following and as a result of the acquisition with PCS.

Net income for the fiscal year ended March 31, 2001 reflected a non-recurring charge of $11.1 million ($6.8 million net of taxes, or $0.09 per diluted share) representing an impairment related to the combination of our mail facilities. Our mail facility in Richardson, Texas has been closed and operations moved to the Fort Worth and Birmingham facilities. In addition, the charges include severance costs for certain management employees that were terminated or resigned following and as a result of the acquisition of PCS. All of these severance costs to management employees were paid prior to March 31, 2001.

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Net interest expense. Interest expense, net of interest income, for fiscal year 2002, increased $15.7 million compared to the same period in fiscal year 2001. The increase resulted from the acquisition of PCS, which was partially funded by over $800 million in additional debt.

Loss from joint venture. In February 2001, we entered into an agreement with Express Scripts and Medco Health Solutions, Inc., to form RxHub, LLC (RxHub) to develop electronic prescribing technology. We own one third of the equity of RxHub. We have recorded our investment in RxHub under the equity method of accounting and record our percentage interest in RxHub’s results in our consolidated statement of operations. Our proportionate share of RxHub’s loss for fiscal year 2002 and 2001 was $2.9 million and zero, respectively.

Income taxes. For fiscal year 2002 our effective tax rate was approximately 39.5%. For fiscal year 2001 our recorded income tax expense approximated an effective tax rate of 52.8%. The difference in rates is primarily due to the amortization of non-deductible goodwill in fiscal year 2001, which was approximately $21 million. Goodwill amortization was not recorded in fiscal year 2002 due to the implementation of SFAS 142.

Extraordinary loss on early retirement of debt. In connection with the bank debt repayments made in fiscal year 2002 and the securitization, we 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 $5.3 million, net of tax.

Diluted net income per share. We reported diluted net income per share of $1.18 per share for fiscal year 2002 compared to $0.30 per share for the same period in fiscal year 2001. The weighted average shares outstanding were 72.4 million and 98.3 million for fiscal years 2001 and 2002, respectively. We issued securities convertible into common stock in connection with the PCS acquisition, resulting in an increase in weighted average shares outstanding. In August 2001, we completed the sale of nine million shares of Class A common stock. In addition, during fiscal year 2002 we completed a two-for-one stock split affected in the form of a stock dividend of our common stock. Financial information and stock prices contained throughout the Form 10-K have been adjusted to reflect the impact of the stock split.

Liquidity and Capital Resources

Net cash provided by operating activities. Net cash provided by operating activities was $268.6 million, $143.3 million and $92.3 million for the fiscal years ended March 31, 2003, 2002 and 2001, respectively. The increase of $125.3 million in 2003 and $51.0 million in 2002 was primarily due to increased earnings of $52.7 million in fiscal year 2003 and $94.1 million in fiscal year 2002, as well as changes in our working capital components. Although we had a working capital deficit of $248.3 million and $228.9 million as of March 31, 2003 and 2002, respectively, the majority of our current obligations are not due until cash is collected from our customers. We use our excess cash balances to reduce debt under our credit facilities, which results in a net deficit in our working capital. Our net cash provided by operating activities improved due to the timing of receivables and payables resulting from our claims processing cycle. A majority of our claims billings are processed on a fourteen-day cycle, beginning on Saturdays. As a result, cash balances, accounts receivable and accounts payable reflected in our consolidated balance sheets may fluctuate period to period depending on the day of the week that the fiscal year actually ends in relationship to the timing of invoicing, receipt of cash from our customers and our payments to the pharmacies. Therefore, we experience fluctuations in our cash balances depending upon the day of the cycle. We manage the effect of these fluctuations by borrowing on our bank revolving line of credit during certain cycle days. Inventory increased $34.0 million and $24.2 million as of March 31, 2003 and 2002, respectively, reflecting inventory investment buying programs in the latter part of each year and increased inventory requirements as a result of the opening of our Wilkes-Barre, Pennsylvania mail facility in 2003.

Net cash used in investing activities. Net cash used in investing activities was $147.4 million, $64.5 million and $763.2 million for the fiscal years ended March 31, 2003, 2002 and 2001, respectively. Investing activities in each year principally consisted of acquisitions and capital expenditures. Cash used for acquisitions, net of cash acquired, and investments in affiliates principally consisted of $71.5 million for Accordant in 2003 and $675.0 million for the acquisition of PCS in 2001.

In November 2002, we acquired 100% of the common stock of privately held Accordant, a disease management company that focuses on helping patients with complex, chronic and progressive diseases. The aggregate purchase price for Accordant of $71.5 million, net of cash acquired, includes the final determination of the working capital adjustment and transaction costs. The results of Accordant have been included in our consolidated financial statements since the acquisition date. The acquisition agreement includes a provision for the payment of up to an additional $25 million, dependent upon Accordant achieving certain financial and operating targets during calendar year 2003. Any additional consideration will be paid during calendar year 2004 and treated as an adjustment to the purchase price. The final allocation of the purchase price will be based on appraisals, which are currently being finalized.

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Capital expenditures, which principally included investments in our systems and facilities, were $69.3 million in 2003, $51.1 million in 2002 and $41.2 million in 2001. The 2003 amounts principally related to our new mail pharmacy in Wilkes-Barre, Pennsylvania, software and system upgrades including HIPAA compliance and the build-out of our new call center in Knoxville, Tennessee. The 2002 amounts related to purchases of property and equipment associated with the growth and expansion of our systems and facilities.

Net cash (used in) provided by financing activities. Net cash (used in) provided by financing activities was ($149.1) million, ($49.7) million and $725.8 million for the years ended March 31, 2003, 2002 and 2001, respectively. The 2003 activity consisted of $111.5 million for repurchases of approximately 5.5 million shares of our common stock under our stock repurchase program and net debt repayments of $53.1 million, which included $12.2 million for repurchases of our 8 ½% Senior Notes Due 2008 (Senior Notes), offset in part by proceeds from stock option exercises of $17.2 million. In 2002, we completed the sale of nine million shares of Class A common stock. The proceeds, net of offering costs, of approximately $291.0 million, were used to fund debt repayments. The 2001 activity primarily reflected $970.0 million in debt issued to fund the acquisition of PCS as described below, partially offset by $251.0 million in net debt repayments and deferred financing costs. Additional stock and Senior Notes purchases, if any, will be made in such amounts and at such times, as we deem appropriate based upon prevailing market and business conditions.

Indebtedness. In conjunction with the acquisition of PCS, we obtained an $825 million Senior Secured Credit Facility that included a $175 million revolving credit facility, a $100 million interim revolving credit facility and two term notes (Term A and Term B) totaling $550 million. The Term A note was due on October 2, 2005 but was fully repaid in fiscal 2002 from the proceeds of our shelf offering along with a portion of the Term B note, see “Item 8. Financial Statements and Supplementary Data”, Note 12. Stockholders’ Equity. The remainder of the Term B note was repaid with the proceeds from the $150 million facility (Asset Securitization Facility), discussed below. The $100 million interim facility was eliminated, and the revolving credit facility expires on October 2, 2005. As of March 31, 2003, we had no amount outstanding under this revolving credit facility.

In September 2002 we amended our Senior Secured Credit Facility to increase the size of the revolver from $175 million to $275 million. No amounts were outstanding under the revolving facility at March 31, 2003. The credit facility contains covenants that are typical for this type of debt, including limitations on capital expenditures, minimum fixed charge, interest coverage and total leverage ratios. We are in compliance with all covenants.

Also in connection with our acquisition of PCS, we issued to Rite Aid $200 million in senior subordinated notes. In March 2001, we issued $200 million of Senior Notes due 2008. The proceeds from this offering were used to retire the $200 million senior subordinated notes that were issued to Rite Aid. In the second quarter of fiscal year 2003, we 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 assets. There are no restrictions on the ability of the guarantors to pay dividends, make loans or advances to the parent. We are in compliance with all covenants.

The Senior Notes are guaranteed by all of our 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, we 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 us. 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.

In December 2001, we securitized certain of our accounts receivable pursuant to the Asset Securitization Facility. We used the proceeds to repay $150 million of our Term B note that had a balance outstanding of approximately $300 million at that time. In June 2002, we increased the Asset Securitization Facility to $300 million. We used the proceeds to pay the remaining $150 million of our Term B note. The Asset Securitization Facility is included in our debt balance as of March 31, 2003 and 2002 and will continue to be reflected “on-balance sheet”.

In connection with the bank debt repayments made during fiscal year 2003 and 2002 and the securitization, we 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 $2.4 million and $8.8 million ($1.5 million and $5.3 million net of taxes), respectively.

In order to hedge variable rate interest payments made in conjunction with our debt, we entered into an interest rate protection agreement that fixed the LIBOR rate in November 2000 at 6.60% for $400 million. The notional amount was

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reduced by $100 million in October 2001 and 2002. As of March 31, 2003, the notional amount was $200 million. The swap will expire in October 2003. We are accounting for this interest rate swap as a cash flow hedge in accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). The fair value of the swap, an obligation of $5.6 million and $14.5 million at March 31, 2003 and 2002, respectively, was based upon quoted market prices. The fair value represents the estimated amount we would have to pay to terminate the swap agreement taking into account current interest rates. The related gains or losses on this agreement are deferred in stockholders’ equity as a component of other comprehensive income. During the fiscal years ended March 31, 2003 and 2002, the amount charged to other comprehensive income, net of taxes was $5.4 million and $8.8 million, respectively, and the net amount reclassified into earnings (interest expense) was $5.8 million and $1.6 million. The estimated net amount of the existing losses reported in accumulated other comprehensive income at March 31, 2003 that are expected to be reclassified into earnings as interest expense within the next 12 months is $5.6 million.

Contractual Obligations

The following table sets forth our schedule of current maturities of long-term debt, excluding the deferred interest rate swap loss of $5.6 million at March 31, 2003, and future minimum lease payments due under noncancellable operating leases (in thousands):

Share Repurchases

In June 2002, we filed a Form 8-K announcing the authorization from the board of directors of a stock repurchase program of up to $150 million of our outstanding shares of Class A common stock in the open market or private transactions. During the year ended March 31, 2003, we purchased 5.5 million shares under this repurchase program, which are included in treasury stock, at a cost of $111.5 million.

Outlook

Historically, we have been able to fund our operations and continued growth through cash flow from operations. In fiscal years 2003, 2002 and 2001 our operating cash flow funded our capital expenditures and was used to reduce our debt, repurchase shares, make acquisitions and invest in money market funds.

We anticipate that cash flows from operations, combined with our current cash balances and amounts available under our credit facility, will be sufficient to meet our currently planned internal operating requirements and expansion programs, including capital expenditures and our stock repurchase program, for at least the next 18 months. However, if we continue our expansion, acquisition and alliance plans, we may be required to seek additional debt or equity financing in order to achieve those plans. There is no guarantee that such debt or equity financing will be available at terms acceptable to us, if at all.

As disclosed in the Explanatory Note of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K, the Company is in discussions with the Staff of the SEC to determine the extent to which earlier periods may need to be augmented with audited and/or unaudited disaggregated footnote information under Rule 3-10(f) of Regulation S-X. The Staff of the SEC has advised the Company that until this issue is resolved, the Staff will not declare effective any registration statements or post-effective amendments to registration statements. The Company is also restricted from making offerings under effective registration statements or under Rules 505 and 506 of Regulation D of the Securities Act of 1933 to any purchases that are not accredited investors under Rule 501(a) of Regulation D. (The Company is not restricted from issuing securities upon the exercise of outstanding warrants or options or pursuant to employee benefit plans. Additionally, the restriction does not apply to transactions involving secondary offering or sales of securities under Rule 144.) This could impede our ability to access capital markets and to engage in certain transactions. There can be no assurance as to the outcome of the Company’s discussions with the SEC. Please see the Explanatory Note to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K for additional information about these discussions with the SEC.

Recently Adopted Accounting Pronouncements

In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation- Transition and Disclosure, an amendment of FASB Statement No. 123” (SFAS 148). 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 were adopted as of March 31, 2003. We have not yet reached a determination of whether and, if so, when to change the existing accounting for stock-based compensation to the fair value method in accordance with the transition alternatives of SFAS 148.

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). FIN 45 requires an entity to recognize an initial liability for the fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on our financial position or results of operations.

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In September 2002, the Emerging Issues Task Force released Issue No. 02-16, “Accounting by a Reseller for Cash Consideration Received from a Vendor” (EITF 02-16). Under this pronouncement, any consideration received from a vendor is presumed to be a reduction of the prices of the vendor’s products and should, therefore, be characterized as a reduction of cost of revenues. This EITF applies to rebates and administrative fees received from pharmaceutical manufacturers. We have previously recorded rebates, net of the amount distributed to our customers and administrative fees as components of our Clinical Services revenue. Prior period reclassification is allowed to the extent there is no impact on net income. The application of the provisions of EITF 02-16 does not change our net income, gross profit or cash flows. As a result of the adoption, our fiscal year 2003, 2002 and 2001 revenues have been reduced by $1.4 billion, $933.2 million and $533.9 million, respectively. Cost of revenues have been reduced by the same amounts.

In July 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146). 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. The adoption of SFAS 146 did not have a material impact on our financial position or results of operations.

In May 2002, the FASB issued SFAS No. 145 “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002” (SFAS 145). This Statement rescinds FASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, and an amendment of that Statement, and FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements”. This Statement restricts the classification of gains and losses from extinguishment of debt to only those transactions that are unusual and infrequent in nature as defined by APB Opinion No. 30 as extraordinary. We adopted SFAS 145 on April 1, 2003. For subsequent periods, 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 years ended March 31, 2003 and 2002, respectively, will be reclassified to income before income taxes to conform to the requirements under SFAS 145.

In November 2001, EITF No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer” (EITF 01-9) was issued. Under the pronouncement, any consideration given to a customer is characterized as a reduction of revenues. This EITF applies to rebates we collect on behalf of our plan sponsor customers and was effective for interim periods beginning after December 15, 2001. We have previously recorded our revenues, net of the amount amounts paid to our customers, which is consistent with that specified in EITF 01-9, which we adopted in fiscal year 2002, with no impact to our financial position or results of operations.

Recently Issued Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), which clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not provide sufficient equity at risk for the entity to support its activities. FIN 46 is effective for all variable interest entities created after January 31, 2003. For variable interest entities acquired or created prior to February 1, 2003, the provisions of FIN 46 must be applied to the first interim or annual period beginning after June 15, 2003. We do not have any variable interest entities and therefore, do not expect the adoption of FIN 46 to have a material impact on our financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS 149). This statement amends SFAS 133 by requiring that contracts with comparable characteristics be accounted for similarly and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003 and must be applied prospectively. We do not expect the adoption of SFAS 149 to have a material impact on our financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150 “Accounting For Certain Financial Instruments with Characteristics of both Liabilities and Equity” (SFAS 150). This statement established standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003 and must be applied prospectively by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. We do not expect the adoption of SFAS 150 to have a material

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impact on our financial position or results of operations since we do not currently have any financial instruments with characteristics of both liabilities and equity.

Impact of Inflation

Changes in prices charged by manufacturers and wholesalers for pharmaceuticals we dispense affect our cost of revenues. Historically, we have been able to pass the effect of such price changes to our customers under the terms of our agreements. As a result, changes in pharmaceutical prices due to inflation have not adversely affected us. There can be no guarantee that we will be able to pass on the effect of such future price changes to our customers.

We have not entered into derivatives or other financial instruments for trading purposes. We have entered into interest rate protection agreements (interest rate swaps – see “Item 8. Financial Statements and Supplementary Data”, Note 2. Summary of Significant Accounting Policies) that have fixed the LIBOR rate as of November 7, 2000 at 6.60% for $400 million of our variable rate debt under our credit facility. The notional amount was reduced by $100 million in October 2001 and 2002. As of March 31, 2003, the notional amount was $200 million. The swap will expire in October 2003. We use the interest rate swaps to manage our interest rate risk on future interest payments. As of March 31, 2003, our outstanding variable rate debt was $260 million. Based on the amount of variable rate debt in excess of the notional amount of the interest rate protection agreement at March 31, 2003, we do not believe that a change in interest rates would have a material effect on our results of operations but could impact the fair value of debt outstanding relative to current market rates.

A sensitivity analysis is used to determine the impact interest rate changes will have on the fair value of the interest rate swap, measuring the change in the net present value arising from the change in the interest rate. The fair value of the swap is then determined by calculating the present value of all cash flows expected to arise there under, with future interest rate levels implied from prevailing mid-market swap rates. Anticipated cash flows are then discounted on the assumption of a continuously compounded zero-coupon yield curve.

The information required by this item is found on pages F-1 through F-35 hereof.

Previous Independent Accountants

After a competitive bid process that began in September 2001, AdvancePCS dismissed Arthur Andersen LLP as its independent accountants effective February 12, 2002. AdvancePCS’s Audit Committee and Board of Directors participated in and approved the decision to change independent accountants. Arthur Andersen LLP’s audit reports on the AdvancePCS’s financial statements for the fiscal year 2001 did not contain an adverse opinion or disclaimer of opinion and no such report was qualified or modified as to uncertainty, audit scope or accounting principles. In connection with its audit for AdvancePCS fiscal year 2001 and through February 12, 2002, there were no disagreements between AdvancePCS and Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Arthur Andersen LLP would have caused them to make reference thereto in their report on the financial statements for such years. During the Company’s fiscal year 2001 and through February 12, 2002, there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. AdvancePCS requested Arthur Andersen LLP to furnish it with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the above statements made by the Company. A copy of such letter, dated February 15, 2002, was filed as Exhibit 16 to AdvancePCS’s Current Report on Form 8-K, dated as of February 12, 2002.

New Independent Accountants

AdvancePCS engaged PricewaterhouseCoopers LLP as its new independent accountants as of February 12, 2002. During the fiscal year 2001 and through February 12, 2002, AdvancePCS did not consult with PricewaterhouseCoopers LLP regarding any of the matters or events set forth in Item 304(a) (2) of Regulation S-K.

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PART III

The information required by this item will be incorporated by reference to our definitive proxy statement for our 2003 annual meeting of stockholders (the “Proxy Statement”) to be filed with the Securities and Exchange Commission not later than 120 days following our fiscal year pursuant to Regulation 14A.

The information required by this item will be incorporated by reference to the Proxy Statement.

The information required by this item will be incorporated by reference to the Proxy Statement.

The information required by this item will be incorporated by reference to the Proxy Statement.

Disclosure Controls and Internal Controls. Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act, such as this Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles.

Evaluation of Disclosure Controls and Procedures. The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-14(c) under the Exchange Act) as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s reports filed or submitted under the Exchange Act and that our internal controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles.

Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in the Company’s internal controls or in other factors that could significantly affect such controls. There were no significant deficiencies or material weaknesses and therefore there were no corrective actions taken.

Limitations on the Effectiveness of Controls. The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or

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procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART IV

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.