##### Table of Contents



---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

|  |  |                                                                                                                                             
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|X |  | Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 for the Quarterly Period Ended June 30, 2001        
| 
| 
| 
| 
| 
| 
| 
| 
|  |  | Transition Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934 for the transition period from _______ to ________

Commission File Number: 0-21447

AdvancePCS
(Exact name of registrant as specified in its charter)

|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 75-2493381                          
|(State of Incorporation) |  | (IRS Employer Identification Number)

|                                               |  |           
|---------------------------------------------- |  | ----------
|5215 North
OConnor, Suite 1600, Irving, Texas |  | 75039     
|(Address of principal executive offices)       |  | (Zip Code)

Registrants telephone number, including area code: (469) 420-6000

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 (BALLOT BOX WITH X) | No (OPEN BALLOT BOX)
|----------------------- | --------------------

As of August 13, 2001, the registrant had (1) 34,400,788 shares of Class A
common stock, $.01 par value outstanding, (2) 3,185,917 shares of Class B-1
common stock, $.01 par value, outstanding and (3) 100 shares of Class B-2
common stock, $.01 par value, outstanding.





---

TABLE OF CONTENTS



|                                            |                                                                                                    |                                                      |  |  |  |  |  | 
|------------------------------------------- | -------------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|Part I. Financial Information              
|                                            | Item 1. Financial Statements                                                                      
|                                            |                                                                                                    | Condensed Consolidated Balance Sheets               
|                                            |                                                                                                    | Condensed Consolidated Statements of Operations     
|                                            |                                                                                                    | Condensed Consolidated Statements of Cash Flows     
|                                            |                                                                                                    | Notes to Condensed Consolidated Financial Statements
|                                            | ITEM&NBSP;2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                            | ITEM&NBSP;3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II. OTHER INFORMATION                 
|SIGNATURES                                 
|EX-2.1 Stock Purchase Agreement            
|EX-2.2 Purchase Agreement Amendment        
|EX-10.1 Amendment No. 2 to Credit Agreement



---



##### Table of Contents



AdvancePCS and Subsidiaries

Index to Quarterly Report Form 10-Q

|           |         |                       |                                                                                       |                                                            |                                                                                                   |    |   |     
|---------- | ------- | --------------------- | ------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | -- | - | ----
|           |         |                       |                                                                                       |                                                            |                                                                                                   |    |   | Page
|Part I.    |         | Financial Information
|          
|          
|          
|          
|           | Item 1. | Financial Statements 
|          
|          
|          
|          
|           |         |                       |                                                                                       | A.                                                         | Condensed Consolidated Balance Sheets as of March 31, 2001 and June 30, 2001                      |    | 1
|          
|          
|          
|          
|           |         |                       |                                                                                       | B.                                                         | Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2000 and 2001 |    | 2
|          
|          
|          
|          
|           |         |                       |                                                                                       | C.                                                         | Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2000 and 2001 |    | 3
|          
|          
|          
|          
|           |         |                       |                                                                                       | D.                                                         | Notes to Condensed Consolidated Financial Statements                                              |    | 4
|          
|          
|          
|          
|           |         | Item 2.               | Management's Discussion and Analysis of Financial Condition and Results of Operations |                                                            | 8                                                                                                
|          
|          
|          
|          
|           |         |                       | Item 3.                                                                               | Quantitative and Qualitative Disclosures About Market Risk |                                                                                                   | 13
|          
|          
|          
|          
|Part II.   |         | Other Information     |                                                                                       | 15                                                        
|          
|          
|          
|          
|Signatures |         |                       |                                                                                       |                                                            | 16                                                                                               





---



##### Table of Contents












AdvancePCS and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

|                                     |                                                                                                               |                                                                                                  |                                                                                               |           |               |           |  |           |           |           | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------- | --------- | ------------- | --------- |  | --------- | --------- | --------- | 
|(in thousands except share data)     |                                                                                                               | March 31, 2001                                                                                   |                                                                                               |           | June 30, 2001 |          
|                                     |                                                                                                               |                                                                                                  |                                                                                               |           |               |           | 
|ASSETS                              
|                                    
|                                    
|                                    
|                                    
|Current assets:                     
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               | Cash and cash equivalents                                                                        |                                                                                               | $         | 110,048       |           |  | $         | 149,975   |          
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               | Accounts receivable, net of allowance for doubtful accounts
of $18,840 and $23,287, respectively |                                                                                               |           | 1,055,927     |           |  |           | 1,094,215 |          
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               | Inventories, net                                                                                 |                                                                                               |           | 34,814        |           |  |           | 36,321    |          
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               | Prepaid expenses and other                                                                       |                                                                                               |           | 11,920        |           |  |           | 12,572    |          
|                                     |                                                                                                               |                                                                                                  |                                                                                               |           |               |          
|                                     |                                                                                                               |                                                                                                  | Total current assets                                                                          |           |               | 1,212,709 |  |           |           | 1,293,083 | 
|                                    
|                                    
|                                    
|                                    
|Noncurrent assets:                  
|                                    
|                                    
|                                    
|                                    
|                                     | Property and equipment, net of accumulated depreciation and
amortization of $37,720 and $44,331, respectively |                                                                                                  |                                                                                               | 96,640    |               |           |  | 97,137    |          
|                                    
|                                    
|                                    
|                                    
|                                     | Goodwill, net                                                                                                 |                                                                                                  |                                                                                               | 1,282,192 |               |           |  | 1,192,036 |          
|                                    
|                                    
|                                    
|                                    
|                                     | Intangible assets, net                                                                                        |                                                                                                  |                                                                                               | 382,937   |               |           |  | 376,720   |          
|                                    
|                                    
|                                    
|                                    
|                                     | Other assets                                                                                                  |                                                                                                  |                                                                                               | 29,285    |               |           |  | 28,997    |          
|                                     |                                                                                                               |                                                                                                  |                                                                                               |           |               |          
|                                     |                                                                                                               |                                                                                                  | Total assets                                                                                  |           | $             | 3,003,763 |  |           | $         | 2,987,973 | 
|                                     |                                                                                                               |                                                                                                  |                                                                                               |           |               |          
|LIABILITIES AND STOCKHOLDERS EQUITY
|                                    
|                                    
|                                    
|                                    
|Current liabilities:                
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               | Current portion of long-term debt                                                                |                                                                                               | $         | 15,250        |           |  | $         | 19,000    |          
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               | Claims and accounts payable                                                                      |                                                                                               |           | 1,382,458     |           |  |           | 1,431,590 |          
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               | Accrued salaries and benefits                                                                    |                                                                                               |           | 23,871        |           |  |           | 16,254    |          
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               | Other accrued expenses                                                                           |                                                                                               |           | 90,524        |           |  |           | 111,725   |          
|                                     |                                                                                                               |                                                                                                  |                                                                                               |           |               |          
|                                     |                                                                                                               |                                                                                                  | Total current liabilities                                                                     |           |               | 1,512,103 |  |           |           | 1,578,569 | 
|                                    
|                                    
|                                    
|                                    
|Noncurrent liabilities:             
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               | Long-term debt, net of current portion                                                           |                                                                                               |           | 829,750       |           |  |           | 812,187   |          
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               | Deferred income taxes                                                                            |                                                                                               |           | 238,419       |           |  |           | 145,712   |          
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               | Other noncurrent liabilities                                                                     |                                                                                               |           | 17,788        |           |  |           | 30,885    |          
|                                     |                                                                                                               |                                                                                                  |                                                                                               |           |               |          
|                                     |                                                                                                               |                                                                                                  | Total liabilities                                                                             |           |               | 2,598,060 |  |           |           | 2,567,353 | 
|                                     |                                                                                                               |                                                                                                  |                                                                                               |           |               |          
|                                    
|Commitments and contingencies       
|                                    
|Stockholders equity:               
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               | Preferred stock, $.01 par value; 5,000,000 shares authorized:                                   
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               |                                                                                                  | Series A-1 convertible preferred stock, $.01 par value;
65,854 shares issued and outstanding  |           |               | 1         |  |           |           | 1         | 
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               |                                                                                                  | Series A-2 convertible preferred stock, $.01 par value;
no shares issued and outstanding,     |           |               |          |  |           |           |          | 
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               | Common stock, $.01 par value; 100,000,000 shares authorized:                                    
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               |                                                                                                  | Class A common stock, $.01 par value; 32,282,307 and
32,531,706 shares issued and outstanding |           |               | 322       |  |           |           | 325       | 
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               |                                                                                                  | Class B-1 common stock, $.01 par value; 4,207,300 shares
issued and outstanding               |           |               | 42        |  |           |           | 42        | 
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               |                                                                                                  | Class B-2 common stock, $.01 par value; 100 shares
issued and outstanding                     |           |               |          |  |           |           |          | 
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               | Additional paid-in capital                                                                       |                                                                                               |           | 351,622       |           |  |           | 354,125   |          
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               | Accumulated other comprehensive loss                                                             |                                                                                               |           | (3,849        | )         |  |           | (16,597   | )        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                               | Retained earnings                                                                                |                                                                                               |           | 57,565        |           |  |           | 82,724    |          
|                                     |                                                                                                               |                                                                                                  |                                                                                               |           |               |          
|                                     |                                                                                                               |                                                                                                  | Total stockholders equity                                                                    |           |               | 405,703   |  |           |           | 420,620   | 
|                                     |                                                                                                               |                                                                                                  |                                                                                               |           |               |          
|                                     |                                                                                                               |                                                                                                  | Total liabilities and stockholders equity                                                    |           | $             | 3,003,763 |  |           | $         | 2,987,973 | 
|                                     |                                                                                                               |                                                                                                  |                                                                                               |           |               |          

See accompanying notes to financial statements.

1



---



##### Table of Contents






AdvancePCS and Subsidiaries

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

(Unaudited)

|                           |                                              |                          |         |                    |         |   |           |            |           | 
|-------------------------- | -------------------------------------------- | ------------------------ | ------- | ------------------ | ------- | - | --------- | ---------- | --------- | 
|                           |                                              |                          |         | Three Months Ended |        
|                           |                                              |                          |         | June 30,           |        
|                           |                                              |                          |         |                    |        
|                           |                                              |                          |         | 2000               |         |   | 2001      |           
|                           |                                              |                          |         |                    |         |   |           |           
|Revenues                   |                                              | $                        | 553,214 |                    |         | $ | 3,147,894 |           
|                           |                                              |                          |         |                    |         |  
|Cost of operations:       
|                          
|                          
|                          
|                          
|                           | Cost of revenues                             |                          |         | 531,034            |         |   |           | 3,040,787  |          
|                          
|                          
|                          
|                          
|                           | Selling, general and administrative expenses |                          |         | 11,849             |         |   |           | 45,384     |          
|                          
|                          
|                          
|                          
|                           | Non-recurring                                |                          |         |                   |         |   |           | 854        |          
|                           |                                              |                          |         |                    |         |  
|                           |                                              | Total cost of operations |         |                    | 542,883 |   |           |            | 3,087,025 | 
|                           |                                              |                          |         |                    |         |  
|                           | Operating income                             |                          |         | 10,331             |         |   |           | 60,869     |          
|                          
|                          
|                          
|                          
|Interest income            |                                              |                          | 350     |                    |         |   | 1,579     |           
|                          
|                          
|                          
|                          
|Interest expense           |                                              |                          | (1,130  | )                  |         |   | (20,878   | )         
|                           |                                              |                          |         |                    |         |  
|Income before income taxes |                                              |                          | 9,551   |                    |         |   | 41,570    |           
|                          
|                          
|                          
|                          
|Provision for income taxes |                                              |                          | (3,616  | )                  |         |   | (16,411   | )         
|                           |                                              |                          |         |                    |         |  
|Net income                 |                                              | $                        | 5,935   |                    |         | $ | 25,159    |           
|                           |                                              |                          |         |                    |         |  
|Basic                     
|                          
|                          
|                          
|                          
|                           | Net income per share                         |                          | $       | 0.24               |         |   | $         | 0.68       |          
|                           |                                              |                          |         |                    |         |  
|                           | Weighted average shares outstanding          |                          |         | 25,037,466         |         |   |           | 36,739,006 |          
|                           |                                              |                          |         |                    |         |  
|Diluted                   
|                          
|                          
|                          
|                          
|                           | Net income per share                         |                          | $       | 0.22               |         |   | $         | 0.55       |          
|                           |                                              |                          |         |                    |         |  
|                           | Weighted average shares outstanding          |                          |         | 26,978,526         |         |   |           | 45,809,123 |          
|                           |                                              |                          |         |                    |         |  

See accompanying notes to financial statements.

2



---



##### Table of Contents






AdvancePCS and Subsidiaries

Condensed Consolidated Statements of Cash Flows
(in thousands)

(Unaudited)

|                                               |                                                                                    |                                              |                                                                                |                                           |       |                             |         |         |       |         |         |  
|---------------------------------------------- | ---------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------------------- | ----- | --------------------------- | ------- | ------- | ----- | ------- | ------- | -
|                                               |                                                                                    |                                              |                                                                                |                                           |       | Three Months Ended June 30, |        
|                                               |                                                                                    |                                              |                                                                                |                                           |       |                             |        
|                                               |                                                                                    |                                              |                                                                                |                                           |       | 2000                        |         |         | 2001  |        
|                                               |                                                                                    |                                              |                                                                                |                                           |       |                             |         |         |       |        
|Cash flows from operating activities:         
|                                              
|                                              
|                                              
|                                              
|                                               | Net income                                                                         |                                              | $                                                                              | 5,935                                     |       |                             | $       | 25,159  |      
|                                              
|                                              
|                                              
|                                              
|                                               | Adjustments to reconcile net income to net cash
provided by operating activities -
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                    | Depreciation and amortization                |                                                                                |                                           | 3,102 |                             |         |         | 9,117 |        
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                    | Provision for doubtful accounts and reserves |                                                                                |                                           | 6     |                             |         |         | 5,986 |        
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                    | Deferred income taxes                        |                                                                                |                                           |      |                             |         |         | 1,693 |        
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                    | Change in certain assets and liabilities -  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                    |                                              | Accounts receivable                                                            |                                           |       | (703                        | )       |         |       | (43,104 | )      
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                    |                                              | Inventories                                                                    |                                           |       | (323                        | )       |         |       | (1,507  | )      
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                    |                                              | Prepaid expenses and other assets                                              |                                           |       | 355                         |         |         |       | (666    | )      
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                    |                                              | Claims and accounts payable, accrued expenses
and other
noncurrent liabilities |                                           |       | 3,816                       |         |         |       | 61,944  |        
|                                               |                                                                                    |                                              |                                                                                |                                           |       |                            
|                                               |                                                                                    |                                              |                                                                                | Net cash provided by operating activities |       |                             | 12,188  |         |       |         | 58,622  |  
|                                               |                                                                                    |                                              |                                                                                |                                           |       |                            
|Cash flows from investing activities:         
|                                              
|                                              
|                                              
|                                              
|                                               | Purchase of property and equipment                                                 |                                              |                                                                                | (7,191                                    | )     |                             |         | (6,885  | )    
|                                               |                                                                                    |                                              |                                                                                |                                           |       |                            
|                                               |                                                                                    |                                              |                                                                                | Net cash used in investing activities     |       |                             | (7,191  | )       |       |         | (6,885  | )
|                                               |                                                                                    |                                              |                                                                                |                                           |       |                            
|Cash flows from financing activities:         
|                                              
|                                              
|                                              
|                                              
|                                               | Distributions to former FFI owners                                                 |                                              |                                                                                | (3,670                                    | )     |                             |         |        |      
|                                              
|                                              
|                                              
|                                              
|                                               | Net proceeds from issuance of Common Stock                                         |                                              |                                                                                | 98                                        |       |                             |         | 2,300   |      
|                                              
|                                              
|                                              
|                                              
|                                               | Deferred financing costs                                                           |                                              |                                                                                |                                          |       |                             |         | (298    | )    
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from long-term obligations                                                |                                              |                                                                                | 8,000                                     |       |                             |         | 13,000  |      
|                                              
|                                              
|                                              
|                                              
|                                               | Payments on long-term obligations                                                  |                                              |                                                                                | (8,000                                    | )     |                             |         | (26,812 | )    
|                                               |                                                                                    |                                              |                                                                                |                                           |       |                            
|                                               |                                                                                    |                                              |                                                                                | Net cash used in financing activities     |       |                             | (3,572  | )       |       |         | (11,810 | )
|                                               |                                                                                    |                                              |                                                                                |                                           |       |                            
|Increase in cash                               |                                                                                    |                                              | 1,425                                                                          |                                           |       |                             | 39,927  |        
|                                              
|                                              
|                                              
|                                              
|Cash and cash equivalents, beginning of period |                                                                                    |                                              | 55,243                                                                         |                                           |       |                             | 110,048 |        
|                                               |                                                                                    |                                              |                                                                                |                                           |       |                            
|Cash and cash equivalents, end of period       |                                                                                    | $                                            | 56,668                                                                         |                                           |       | $                           | 149,975 |        
|                                               |                                                                                    |                                              |                                                                                |                                           |       |                            

See accompanying notes to financial statements.

3



---



##### Table of Contents






AdvancePCS and Subsidiaries

Notes to Condensed Consolidated Financial Statements

1. Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements
have been prepared by AdvancePCS in accordance with accounting principles
generally accepted in the United States for interim financial information in
the form prescribed by the Securities and Exchange Commission, or Commission,
in instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of AdvancePCSs management, the June 30, 2001 and
2000 unaudited interim financial statements include all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of results
for this interim period. In the opinion of AdvancePCSs management, the
disclosures contained in this Form 10-Q are adequate to make the information
presented not misleading when read in conjunction with the Notes to
Consolidated Financial Statements included in the Form 10-K of AdvancePCS for
the year ended March 31, 2001. The results of operations for the three months
ended June 30, 2001 are not necessarily indicative of the results to be
expected for the full year or for any future period.

The accompanying condensed consolidated financial statements have been
restated, in accordance with APB Opinion No. 16, to give retroactive effect,
for all periods presented, to the combination of AdvancePCS and First Florida
International Holdings, Inc. and its affiliated companies (FFI) on July 5,
2000, which has been accounted for as a pooling of interests. See Note 3.

In July 2001, Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 141 Business Combinations and SFAS
No. 142 Goodwill and Other Intangible Assets. SFAS No. 142, among other
things, eliminates the amortization of goodwill and certain identified
intangible assets. Intangible assets, including goodwill, that are not subject
to amortization will be tested for impairment annually, or more frequently if
events or changes in circumstances indicate that the asset might be impaired,
using a two step impairment assessment. The first step of the impairment test
identifies potential impairment and compares the fair value of the reporting
unit with its carrying amount, including goodwill. If the fair value of the
reporting unit exceeds its carrying amount, goodwill of the reporting unit is
not considered impaired, and the second step of the impairment test is not
necessary. If the carrying amount of the reporting unit exceeds its fair
value, the second step of the impairment test shall be performed to measure the
amount of impairment loss, if any. The Company (AdvancePCS, or Advance
prior to October 2, 2000) has a six-month period to complete the first step of
the transitional goodwill impairment test. The amounts used in the
transitional impairment test will be measured as of April 1, 2001. If the
carrying amount of the net assets of the reporting unit (including goodwill)
exceeds the fair value of that reporting unit, the second step of the
transitional impairment test must be completed no later than March 31, 2002.
Early application of SFAS No. 141 and 142 is permitted for non calendar year
end companies with fiscal years beginning after March 15, 2001, but before
December 15, 2001. The Company has elected early adoption of these statements
as of the beginning of its first quarter of fiscal year 2002. See Note 2.

In June 1998, Financial Accounting Standards Board issued SFAS No. 133
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
requires all derivatives to be recognized as either assets or liabilities in
the statement of financial position and measured at fair value. In addition,
SFAS No. 133 specifies the accounting for changes in the fair value of a
derivative based on the intended use of the derivative and the resulting
designation. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is
effective beginning in fiscal year March 31, 2002. We have entered into
interest rate protection agreements that have fixed the LIBOR rate as of
November 7, 2000 at 6.60% for $400 million

4



---



##### Table of Contents



of our variable rate debt under our credit facility. The notional amount
drops to $300 million in October 2001 and to $200 million in October 2002. We
have declared these agreements hedges in accordance with SFAS No. 133, as
amended, and have recognized the fair value of these financial instruments in
the consolidated balance sheet effective April 1, 2001 upon adoption of SFAS
No. 133. These instruments have been marked to market at June 30, 2001 with
the adjustment recognized as a component of other comprehensive loss in
stockholders equity. The fair value of our interest rate swaps, a liability
of $12,748,000 at June 30, 2001, was based upon quoted market prices. Under
SFAS No. 133, we have recorded a transition liability of $12,748,000 and a
charge to other comprehensive loss in the three months ended June 30, 2001.

Changes in Revenue Recognition

Advance purchased PCS Holding Corporation (PCS) on October 2, 2000 and
has included this business in our consolidated results of operations since that
date. The Company changed its revenue recognition policy to conform the
different policies used by Advance and PCS. Historically, PCS had recorded its
claims processing fees on a net basis. The Company has conformed Advance and
PCS policies and reports claims processing fees on a gross basis in the
statements of operations. The change in policy results in higher revenues and
an equal increase in the cost of revenues. In addition, the historical
statements of operations of the Company have been revised to recognize clinical
service fees net in revenues in accordance with the Companys current policy
that conforms Advances policy to the policy previously followed by PCS. Prior
to October 2, 2000, the Company recognized the entire amount of the rebate,
including the service fee, in revenues and the portion of the rebate paid to
plan sponsors in cost of revenues. The change in policy resulted in lower
revenues and an equal decrease in cost of revenues. These changes had no
effect on gross profit or operating income.

Use of Estimates

Preparation of the condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods. As of
June 30, 2001 and for the three month period then ended, the Company had made
significant estimates of the purchase price, fair market value of the assets
acquired and liabilities assumed in the PCS acquisition; clinical service
revenues and costs; reserves for uncollectable accounts and contract losses;
and the value of our investment in Consumer Health Interactive, among others.
The Company continually evaluates the appropriateness of the amounts recorded
and revises these estimates regularly. Actual results could differ from those
estimates.

2. Amortization of Goodwill

The Company has adopted SFAS No. 142 effective April 1, 2001. The Company
has two reporting units of goodwill, its pharmacy benefit management (PBM)
acquisitions and Baumel-Eisner (a clinical trials company). Under SFAS No. 142
goodwill is no longer amortized. In addition, certain identified intangibles
with indefinite lives are also not amortized. Amortization expense for the
three months ended June 30, 2001 was $2,575,000 which represented the
amortization relating to the identified intangible assets still required to be
amortized under SFAS No. 142. For each of the next five years intangible
amortization expense relating to these identified intangibles will be
$10,301,000. Under SFAS No. 142 assembled workforce is not considered to be an
intangible asset. We have reclassified this asset to goodwill. The intangible
asset established for trade name is deemed to have an indefinite life and is no
longer amortized in accordance with SFAS No. 142 because the trade name is
expected to generate cashflows indefinitely. The effect of the adoption of
SFAS No. 142 as of April 1, 2001 and June 30, 2001 is summarized in the
following table:

5



---



##### Table of Contents



|                                                             |               |       |         |                |           |   |                |         |         |          |         |           |              |   |        |         |         |  
|------------------------------------------------------------ | ------------- | ----- | ------- | -------------- | --------- | - | -------------- | ------- | ------- | -------- | ------- | --------- | ------------ | - | ------ | ------- | ------- | -
|                                                             |               |       |         | April 1, 2001  |           |   | June 30, 2001  |        
|                                                             |               |       |         |                |           |   |                |        
|                                                             |               |       |         | Gross          |           |   |                |         |         |          | Gross   |          
|                                                             |               |       |         | Carrying       |           |   | Accumulated    |         |         | Carrying |         |           | Accumulated  |  
|                                                             |               |       |         | Amount         |           |   | Amortization   |         |         | Amount   |         |           | Amortization |  
|                                                             |               |       |         |                |           |   |                |         |         |          |         |           |              |  
|                                                             |               |       |         | (in thousands) |           |   | (in thousands) |        
|Goodwill:                                                   
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | PBM Services  |       | $       | 1,197,335      |           |   | $              | (27,200 | )       |          | $       | 1,197,335 |              |   | $      | (27,200 | )      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Baumel Eisner |       |         | 24,156         |           |   |                | (2,255  | )       |          |         | 24,156    |              |   |        | (2,255  | )      
|                                                             |               |       |         |                |           |   |                |         |         |          |         |          
|                                                             |               | Total |         | $              | 1,221,491 |   |                | $       | (29,455 | )        |         | $         | 1,221,491    |   |        | $       | (29,455 | )
|                                                             |               |       |         |                |           |   |                |         |         |          |         |          
|Intangible assets with indefinite
lives as of April 1, 2001:
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Trade name    |       | $       | 106,600        |           |   | $              | (1,333  | )       |          | $       | 106,600   |              |   | $      | (1,333  | )      
|                                                             |               |       |         |                |           |   |                |         |         |          |         |          
|Intangible assets with finite lives:                        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Customer Base |       | $       | 265,600        |           |   | $              | (4,427  | )       |          | $       | 265,600   |              |   | $      | (6,640  | )      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Contracts     |       |         | 7,000          |           |   |                | (933    | )       |          |         | 7,000     |              |   |        | (1,050  | )      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Other         |       |         | 7,400          |           |   |                | (612    | )       |          |         | 7,400     |              |   |        | (857    | )      
|                                                             |               |       |         |                |           |   |                |         |         |          |         |          
|                                                             |               | Total |         | $              | 280,000   |   |                |         | (5,972  | )        |         | $         | 280,000      |   |        | $       | (8,547  | )
|                                                             |               |       |         |                |           |   |                |         |         |          |         |          
|Deferred taxes                                               |               | $     | 147,654 |                |           | $ | (2,424         | )       |         | $        | 147,654 |           |              | $ | (3,377 | )      
|                                                             |               |       |         |                |           |   |                |         |         |          |         |          

As required by SFAS No. 142 the results for the prior years quarter have
not been restated. A reconciliation of net income as if SFAS No. 142 had been
adopted is presented below for the three months ended June 30, 2000.

|                              |                                    |                         |       |                |   | 
|----------------------------- | ---------------------------------- | ----------------------- | ----- | -------------- | - | 
|                              |                                    |                         |       | Three Months   |  
|                              |                                    |                         |       | Ended June 30, |  
|                              |                                    |                         |       | 2000           |  
|                              |                                    |                         |       |                |  
|                              |                                    |                         |       | (in thousands) |  
|Reported net income           |                                    | $                       | 5,935 |               
|                             
|                             
|                             
|                             
|Add back:                     | Goodwill amortization (net of tax) |                         |       | 612            |  
|                             
|                             
|                             
|                             
|                              |                                    | Intangible amortization |       |                |  | 
|                              |                                    |                         |      
|Adjusted net income           |                                    | $                       | 6,547 |               
|                              |                                    |                         |      
|Basic net income per share:  
|                             
|                             
|                             
|                             
|                              | Reported net income                |                         | $     | 0.24           |  
|                             
|                             
|                             
|                             
|                              | Adjusted net income                |                         | $     | 0.26           |  
|                             
|                             
|                             
|                             
|Diluted net income per share:
|                             
|                             
|                             
|                             
|                              | Reported net income                |                         | $     | 0.22           |  
|                             
|                             
|                             
|                             
|                              | Adjusted net income                |                         | $     | 0.24           |  

3. Acquisitions

Effective October 1, 2000, Advance acquired all of the equity of PCS. The
aggregate purchase price paid by Advance was approximately $1.0 billion, of
which Advance paid Rite Aid Corporation (Rite Aid), the seller, $675 million
in cash, and issued to Rite Aid $200 million in senior subordinated notes and
$125 million in Advance convertible preferred stock. The senior subordinated
notes were paid in full in March 2001 through proceeds obtained from the
issuance of $200 million in 81⁄2% Senior Notes due

6



---



##### Table of Contents



2008.   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. (JLL). The
acquisition of PCS has been accounted for using the purchase method of
accounting. The Company incurred approximately $50 million in acquisition
costs. The excess of the purchase price paid over the net identifiable assets
and liabilities of PCS has been recorded as goodwill.

The following unaudited pro forma information presents the results of
operations of the Company as if the PCS acquisition had taken place at the
beginning of the period presented and excludes the effect of the changes in
goodwill and intangibles in accordance with SFAS No. 141 and No. 142 (in
thousands, except per share amounts):

|                      |         |   |                |      | 
|--------------------- | ------- | - | -------------- | ---- | 
|                      |         |   | Three Months   |     
|                      |         |   | Ended June 30, |     
|                      |         |   | 2000           |     
|                      |         |   |                |     
|Revenues              |         | $ | 2,707,971      |     
|                     
|                     
|                     
|                     
|Net income            |         |   | 3,099          |     
|                     
|                     
|                     
|                     
|Net income per share:
|                     
|                     
|                     
|                     
|                      | Basic   |   | $              | 0.11 | 
|                     
|                     
|                     
|                     
|                      | Diluted |   | $              | 0.08 | 

On July 5, 2000, Advance completed a merger with FFI.   The Company issued
3.5 million shares of its common stock in exchange for all the outstanding
shares of FFI. The merger constituted a tax-free reorganization and has been
accounted for as a pooling of interests under APB 16. Accordingly, all prior
period consolidated financial statements presented have been restated to
include the combined results of operations, financial position, and cash flows
as though FFI had always been a part of the Company. Total combination related
costs and provisions were approximately $1,200,000 and reflected as an expense
in the second fiscal quarter of 2001.

The table below presents a reconciliation of revenues and net income (in
thousands) as reported in the consolidated statements of operations with those
previously reported by the Company. The references to Advance in this table are
to the Companys historical operating results prior to the merger with FFI and
excludes the effect of the changes in goodwill and intangibles in accordance
with SFAS No. 141 and No. 142.

|                                           |         |   |                |         | 
|------------------------------------------ | ------- | - | -------------- | ------- | 
|                                           |         |   | Three Months   |        
|                                           |         |   | Ended June 30, |        
|                                           |         |   | 2000           |        
|                                           |         |   |                |        
|Revenues:                                 
|                                          
|                                          
|                                          
|                                          
|                                           | Advance |   | $              | 530,101 | 
|                                          
|                                          
|                                          
|                                          
|                                           | FFI     |   |                | 23,113  | 
|                                           |         |   |               
|Total supplemental consolidated revenues   |         | $ | 553,214        |        
|                                           |         |   |               
|Net income:                               
|                                          
|                                          
|                                          
|                                          
|                                           | Advance |   | $              | 5,900   | 
|                                          
|                                          
|                                          
|                                          
|                                           | FFI     |   |                | 35      | 
|                                           |         |   |               
|Total supplemental consolidated net income |         | $ | 5,935          |        
|                                           |         |   |               

7



---



##### Table of Contents



4. Net Income Per Share

Basic net income per share is computed using the weighted average number
of common shares (including both Class A common stock and Class B common stock)
outstanding during the periods presented. Diluted net income per share is
computed in the same manner as basic net income per share but includes the
number of additional common shares that would have been outstanding for the
period if the other dilutive securities had been issued. The difference between
the number of weighted average shares used in the basic and diluted calculation
for all periods are outstanding stock options and stock warrants, all
calculated under the treasury stock method in accordance with SFAS No. 128
Earnings Per Share. In addition, in the quarter ended June 30, 2001, our
preferred stock is convertible at the discretion of the holders into 3,292,700
shares of Class A common stock and is included in the diluted weighted average
share calculation.

5. Income Taxes

In the three months ended June 30, 2000, our income tax expense
approximated an effective tax rate of 38%. In the three months ended June 30,
2001, our effective tax rate was approximately 39%. The higher rate in 2001
resulted from the acquisition of PCS with slightly higher associated state tax
rates.

6. Recent Announcements

On June 18, 2001, the Company announced the launch of AdvancePCS
SpecialtyRx to provide health care for patients using injectable and other
expensive, high-technology drugs, while controlling the costs incurred by
medical plan sponsors to provide these therapies. The Company entered into a
definitive agreement to acquire the outstanding common stock of TheraCom, Inc.
(TheraCom), a specialty pharmacy and distribution company located in
Bethesda, Maryland. Also, the Company established a joint venture with
Priority Healthcare Corp., a national specialty pharmacy and distribution
company located in Lake Mary, Florida. AdvancePriority SpecialtyRx will begin
immediately utilizing the existing infrastructures of both companies.
AdvancePCS owns 51% of the venture and Priority Healthcare Corp. owns 49%.

Effective August 1, 2001 the Company completed the acquisition of 100% of
the equity of TheraCom. The aggregate purchase price paid by the Company was
629,096 shares of Class A common stock. An additional 192,003 shares of Class A
common stock were placed in escrow. In addition, the Company paid $10.6 million
to eliminate TheraComs outstanding indebtedness. The acquisition will be
accounted for using the purchase method of accounting. The excess of the
purchase price paid over the net identifiable assets and liabilities of
TheraCom will be recorded as a separate segment of goodwill and not amortized.
The acquisition of TheraCom allows the Company to enter the specialty pharmacy
and distribution business. As a result of the acquisition, the Company expects
to be able to offer specialty products to our existing customers. Unaudited
pro forma financial information is not presented since TheraCom is not a
material business combination for the Company.




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

Results Of Operations  AdvancePCS

The following table sets forth certain consolidated, unaudited historical
financial data of AdvancePCS. Historical revenues for AdvancePCS have been
classified to reflect adoption of consistent revenue presentation policies as
described in Note 1 to Condensed Consolidated Financial Statements  Changes
in Revenue Recognition.

8



---



##### Table of Contents



|                                              |                             |                |        |                             |         |   |         |           |           | 
|--------------------------------------------- | --------------------------- | -------------- | ------ | --------------------------- | ------- | - | ------- | --------- | --------- | 
|                                              |                             |                |        | Three Months Ended June 30, |        
|                                              |                             |                |        |                             |        
|                                              |                             |                |        | 2000                        |         |   | 2001    |          
|                                              |                             |                |        |                             |         |   |         |          
|                                              |                             |                |        | (in thousands)              |        
|Revenues:                                    
|                                             
|                                             
|                                             
|                                             
|                                              | Data services               |                | $      | 467,852                     |         |   | $       | 2,677,524 |          
|                                             
|                                             
|                                             
|                                             
|                                              | Mail services               |                |        | 53,214                      |         |   |         | 335,647   |          
|                                             
|                                             
|                                             
|                                             
|                                              | Clinical and other services |                |        | 32,148                      |         |   |         | 134,723   |          
|                                             
|                                             
|                                             
|                                             
|                                              |                             | Total revenues |        |                             | 553,214 |   |         |           | 3,147,894 | 
|                                             
|                                             
|                                             
|                                             
|Gross profit                                  |                             |                | 22,180 |                             |         |   | 107,107 |          
|                                             
|                                             
|                                             
|                                             
|Selling, general, and administrative expenses |                             |                | 11,849 |                             |         |   | 45,384  |          
|                                             
|                                             
|                                             
|                                             
|Operating income                              |                             |                | 10,331 |                             |         |   | 60,869  |          
|                                             
|                                             
|                                             
|                                             
|Net income                                    |                             | $              | 5,935  |                             |         | $ | 25,159  |          

Historical AdvancePCS:

Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000

Revenues.   Our revenues for the three months ended June 30, 2001 increased
by $2.6 billion, or 469%, compared to revenues for the three months ended June
30, 2000. The increase in revenues was primarily the result of our acquisition
of PCS on October 2, 2000. Approximately $2.2 billion, or 85%, of the increase
in revenues was attributable to data services and a 395% increase in the number
of pharmacy claims processed during the period. Claims processed increased
from 23 million in the three months ended June 30, 2000 to 113 million for the
three months ended June 30, 2001. Approximately 11% of the increase was
attributable to additional sales of our mail pharmacy services, resulting from
a 470% increase in the number of mail prescriptions dispensed. Mail pharmacy
prescriptions dispensed increased from 452,000 in the three months ended June
30, 2000 to 2.6 million for the three months ended June 30, 2001. The
remaining 4% of the increase in revenues resulted from an increase in clinical
and other services revenues derived from formulary and disease management
services, as well as clinical trials.

Gross profit.   Our gross profit for the three months ended June 30, 2001
increased by $84.9 million, or 383%, compared to the same period in 2000. This
increase was attributable primarily to the additional revenue and gross profit
associated with the PCS acquisition. As a percentage of revenues, gross profit
was approximately 3.4% in the three months ended June 30, 2001 and 4.0% in the
same period in 2000. The decrease was primarily due to an increase in data
services revenues from the PCS acquisition, which have lower percentage margins
than other services.

Selling, general and administrative expenses.   Our selling, general and
administrative expenses for the three months ended June 30, 2001 increased by
$33.5 million, or 283% compared to the same period in 2000. This increase is
due largely to the acquisition of PCS. Selling, general and administrative
expenses as a percentage of revenues decreased from 2.1% for the three months
ended June 30, 2000 to 1.4% in the same period in 2001 as the result of greater
economies of scale 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 charges.The non-recurring charge of $854,000 ($521,000
after taxes, or $0.01 per diluted share) primarily represents additional
severance costs for certain employees that were terminated or resigned
following and as a result of the acquisition with PCS. All of these severance
costs were paid prior to June 30, 2001. We expect to consolidate certain
operations in connection with the integration of PCS, which will result in
additional non-recurring charges in future quarters.

9



---



##### Table of Contents



Interest income and interest expense.   Interest expense, net of interest
income, for the three months ended June 30, 2001 increased $18.5 million
compared to the same period in 2000. The increase resulted from the acquisition
of PCS, which was partially funded by approximately $800 million in debt.

Income taxes.   For the three months ended June 30, 2001 our effective tax
rate was approximately 39%. For the three months ended June 30, 2000 our
recorded income tax expense approximated an effective tax rate of 38%. The
higher rate in 2001 resulted from the acquisition of PCS with slightly higher
associated state tax rates.

Diluted net income per share.   We reported diluted net income per share of
$0.55 per share for the three months ended June 30, 2001 compared to $0.22 per
share for the same period in 2000. The weighted average shares outstanding
were 27.0 million and 45.8 million for the three months ended June 30, 2000 and
2001, respectively. We issued securities convertible into common stock in
connection with the PCS acquisition, resulting in an increase in weighted
average shares outstanding.

Pro Forma Results of Operations for PCS Acquisition

The following table sets forth certain pro forma, unaudited financial data
for the PCS acquisition. Historical revenues for Advance and PCS have been
revised to reflect adoption of consistent revenue recognition policies as
described in Note 1 to Condensed Consolidated Financial Statements  Changes
in Revenue Recognition.

|                                              |                             |                |        |                    |           |  |          |           |           | 
|--------------------------------------------- | --------------------------- | -------------- | ------ | ------------------ | --------- |  | -------- | --------- | --------- | 
|                                              |                             |                |        | Three Months Ended |          
|                                              |                             |                |        | June 30,           |          
|                                              |                             |                |        |                    |          
|                                              |                             |                |        | 2000 (1)           |           |  | 2001 (2) |          
|                                              |                             |                |        |                    |           |  |          |          
|                                              |                             |                |        | (in thousands)     |          
|Revenues:                                     |                             |                |        |                   
|                                             
|                                             
|                                             
|                                             
|                                              | Data services               |                | $      | 2,328,098          |           |  | $        | 2,677,524 |          
|                                             
|                                             
|                                             
|                                             
|                                              | Mail services               |                |        | 266,696            |           |  |          | 335,647   |          
|                                             
|                                             
|                                             
|                                             
|                                              | Clinical and other services |                |        | 113,177            |           |  |          | 134,723   |          
|                                             
|                                             
|                                             
|                                             
|                                              |                             | Total revenues |        |                    | 2,707,971 |  |          |           | 3,147,894 | 
|                                             
|                                             
|                                             
|                                             
|Gross profit                                  |                             |                | 81,897 |                    |           |  | 107,107  |          
|                                             
|                                             
|                                             
|                                             
|Selling, general, and administrative expenses |                             |                | 54,098 |                    |           |  | 45,384   |          
|                                             
|                                             
|                                             
|                                             
|Operating income                              |                             |                | 27,799 |                    |           |  | 60,869   |          



---

|(1) |  | Operating income would have
been $39,486,000 and selling, general and
administrative expenses would have been $42,411,000 if SFAS No. 142 had
been adopted for the three-month period ending June 30, 2000.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Actual AdvancePCS results for the three-month period ending June 30,
2001.                                                                                                                                 

Pro Forma AdvancePCS:

Actual Three Months Ended June 30, 2001 Compared to Pro Forma Three Months Ended June 30, 2000

Revenues.   Our revenues for the three months ended June 30, 2001 increased
by $439.9 million, or 16%, compared to the pro forma revenues for the three
months ended June 30, 2000. Approximately $349.5 million, or 79%, of the
increase in revenues was attributable to data services and an 8.4% increase in
the number of pharmacy claims processed during the period. Claims processed
increased from 104 million in the pro forma three months ended June 30, 2000 to
113 million for the three months ended June 30, 2001. Approximately 16% of the
increase was attributable to additional sales of our mail pharmacy

10



---



##### Table of Contents



services, resulting from a 16% increase in the number of mail
prescriptions dispensed. The remaining 5% of the increase in revenues resulted
from an increase in clinical and other services revenues derived from formulary
and disease management services.

Gross profit.   Our gross profit for the three months ended June 30, 2001
increased by $25.2 million, or 30.8%, compared to the same period in 2000 on a
pro forma basis. This increase was attributable primarily to the additional
revenue and gross profit generated by the improvement in operations at the two
PCS mail facilities. The improvement resulted from an overall decrease in
headcount in the mail facilities and the call centers despite a 16% growth in
prescriptions filled. As a percentage of revenues, gross profit was
approximately 3.4% in the three months ended June 30, 2001, compared to 3.0% in
the same period in 2000 on a pro forma basis.

Selling, general and administrative expenses.   Our selling, general and
administrative expenses for the three months ended June 30, 2001 decreased by
$8.7 million, or 16.1%, compared to the same period in 2000 on a pro forma
basis. Selling, general and administrative expenses as a percentage of
revenues decreased from 2.0% for the three months ended June 30, 2000 on a pro
forma basis to 1.4% in the same period in 2001. If SFAS No. 142 had been
adopted for the three months ended June 30, 2000, selling, general and
administrative expenses would have been 1.6% of revenues.

Non-recurring charges.The non-recurring charge of $854,000 ($521,000
after taxes, or $0.01 per diluted share) primarily represents additional
severance costs for certain employees that were terminated or resigned
following and as a result of the acquisition with PCS. All of these severance
costs were paid prior to June 30, 2001. We expect to consolidate certain
operations in connection with the integration of PCS, which will result in
additional non-recurring charges in future quarters.

Operating income.   Our operating income increased by $33.1 million, or
119% for the three months ended June 30, 2001 compared to the same period in
2000 on a pro forma basis. The increase resulted from the factors mentioned
above as revenues improved and PCSs headcount and costs as a percentage of
revenues declined.

Liquidity and Capital Resources

As of June 30, 2001, we had a working capital deficit of $285.5 million.
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
revolving credit facility, which results in a net deficit in working capital.
Our net cash provided by operating activities was $58.6 million for the three
months ended June 30, 2001 resulting primarily from net income and also due to
the timing of receivables and payables resulting from our continued growth.
During the three months ended June 30, 2001, we used cash of $6.9 million for
purchases of property, plant and equipment associated with the growth and
expansion of our systems and facilities.

Historically, we have been able to fund our operations and continued
growth through cash flow from operations. In fiscal years 1999, 2000, 2001, and
for the three months ended June 30, 2001, our operating cash flow funded our
capital expenditures and our short-term excess cash was used to reduce our debt
or invested in money market funds.

We anticipate that cash flow from operations, combined with our current
cash balances and amounts available under our credit facility, will be
sufficient to meet our internal operating requirements and expansion programs,
including capital expenditures, for at least the next 18 months. However, if we
successfully continue our expansion, acquisition and alliance plans, we may be
required to seek additional debt or equity financing in order to achieve these
plans.

11



---



##### Table of Contents



Recent Accounting Pronouncements

In July 2001, Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 141 Business Combinations and SFAS
No. 142 Goodwill and Other Intangible Assets. SFAS No. 142, among other
things, eliminates the amortization of goodwill and certain identified
intangible assets. Intangible assets, including goodwill, that are not subject
to amortization will be tested for impairment annually, or more frequently if
events or changes in circumstances indicate that the asset might be impaired,
using a two step impairment assessment. The first step of the impairment test
identifies potential impairment and compares the fair value of the reporting
unit with its carrying amount, including goodwill. If the fair value of the
reporting unit exceeds its carrying amount, goodwill of the reporting unit is
not considered impaired, and the second step of the impairment test is not
necessary. If the carrying amount of the reporting unit exceeds its fair
value, the second step of the impairment test shall be performed to measure the
amount of impairment loss, if any. The Company has a six-month period to
complete the first step of the transitional goodwill impairment test. The
amounts used in the transitional impairment test will be measured as of April
1, 2001. If the carrying amount of the net assets of the reporting unit
(including goodwill) exceeds the fair value of that reporting unit, the second
step of the transitional impairment test must be completed no later than March
31, 2002. Early application of SFAS No. 141 and 142 is permitted for non
calendar year end companies with fiscal years beginning after March 15, 2001,
but before December 15, 2001. The Company has elected early adoption of these
statements as of the beginning of its first quarter of fiscal year 2002. See
Note 2 to the condensed consolidated financial statements.

In June 1998, Financial Accounting Standards Board issued SFAS No. 133
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
requires all derivatives to be recognized as either assets or liabilities in
the statement of financial position and measured at fair value. In addition,
SFAS No. 133 specifies the accounting for changes in the fair value of a
derivative based on the intended use of the derivative and the resulting
designation. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is
effective beginning in fiscal year March 31, 2002. We have entered into
interest rate protection agreements 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 drops to $300 million in October 2001 and
to $200 million in October 2002. We have declared these agreements hedges in
accordance with SFAS No. 133, as amended, and have recognized the fair value of
these financial instruments on the balance sheet effective April 1, 2001 upon
adoption of SFAS No. 133. These instruments will be marked to market at each
reporting date with the adjustment recognized as a component of other
comprehensive income (loss) in stockholders equity. The fair value of our
interest rate swaps, a liability of $12,748,000 at June 30, 2001, was based
upon quoted market prices. Under SFAS No. 133, we have recorded a transition
liability of $12,748,000 and a charge to other comprehensive loss in the three
months ended June 30, 2001.

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.

Subsequent Acquisition

On June 18, 2001, the Company announced the launch of AdvancePCS
SpecialtyRx to provide health care for patients using injectable and other
expensive, high-technology drugs, while controlling the costs incurred by
medical plan sponsors to provide these therapies. The Company entered into a
definitive agreement to acquire the outstanding common stock of TheraCom, Inc.,
a specialty pharmacy and

12



---



##### Table of Contents



distribution company located in Bethesda, Maryland. Also, the Company
established a joint venture with Priority Healthcare Corp., a national
specialty pharmacy and distribution company located in Lake Mary, Florida.
AdvancePriority SpecialtyRx will begin immediately utilizing the existing
infrastructures of both companies. AdvancePCS owns 51% of the venture and
Priority Healthcare Corp. owns 49%.

Effective August 1, 2001 the Company completed the acquisition of 100% of
the equity of TheraCom. The aggregate purchase price paid by the Company was
629,096 shares of Class A common stock. An additional 192,003 shares of Class A
common stock were placed in escrow. In addition, the Company paid $10.6 million
to eliminate TheraComs outstanding indebtedness. The acquisition will be
accounted for using the purchase method of accounting. The excess of the
purchase price paid over the net identifiable assets and liabilities of
TheraCom will be recorded as goodwill and not amortized. Unaudited pro forma
financial information is not presented since TheraCom is not a material
business combination for the Company.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary market risk is that of interest rate risk. A change in LIBOR
or the Prime Rate as set by Bank of America, N.A. would affect the rate at
which we could borrow funds under our credit facilities.

We have entered into interest rate protection agreements (interest rate
swaps  see Note 1 to the condensed consolidated financial statements) 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 drops to
$300 million in October 2001 and to $200 million in October 2002. We use the
interest rate swaps to manage our interest rate risk on future interest
payments.

Interest rate risk is monitored on the basis of changes in interest rates,
in particular, changes in the three month LIBOR rate. As of June 30, 2001 the
Company has $200 million of 8 1/2 % Senior Notes and $631 million in bank debt.
The interest on the bank debt is calculated based upon a margin over LIBOR.
Since the Company has interest rate protection agreements for $400 million, an
additional $231 million is subject to changes in interest rates. A 10 basis
point change in interest rates would affect net income by approximately $35,000
for a three month period.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. We have based these forward-looking statements on our
current expectations and projections about future events. Statements that are
predictive in nature, that depend upon or refer to future events or conditions
or that include words such as expects, anticipates, intends, plans,
believes, estimates, thinks, and similar expressions are forward-looking
statements. These statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results and performance to be
materially different from any future results or performance expressed or
implied by these forward-looking statements. These factors include, among other
things, those matters set forth in our Form 10-K, as amended, under the caption
Risk Factors, as well as the following:



| |  |  | general economic and business conditions;                                                                     
| | - |  | --------------------------------------------------------------------------------------------------------------
|
| |  |  | demographic changes;                                                                                          
|
| |  |  | new governmental regulations and changes in, or the failure to
comply with existing, governmental regulations;

13



---



##### Table of Contents





| |  |  | legislative proposals that impact our industry or the way we do business;
| | - |  | -------------------------------------------------------------------------
|
| |  |  | changes in our industry;                                                 
|
| |  |  | changes in Medicare and Medicaid payment levels;                         
|
| |  |  | liability and other claims asserted against us;                          
|
| |  |  | integration of PCS and realization of synergies;                         
|
| |  |  | competition; and                                                         
|
| |  |  | our ability to attract and retain qualified personnel.                   

Although we believe that these statements are based upon reasonable
assumptions, we can give no assurance that our goals will be achieved. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on these forward-looking statements. These forward-looking statements
are made as of the date of this Form 10-Q. We assume no obligation to update or
revise them or provide reasons why actual results may differ.

14



---



##### Table of Contents






PART II. OTHER INFORMATION

Item 1 - 5

Not applicable.

Item 6. Exhibits and Reports on Form 8-K.

(a)   Exhibits.

|            |  |    |          |                                                                                                                                                                                                    
|----------- |  | -- | -------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |    | Exhibits
|            |  |    |         
|2.1*        |  | -- |          | Stock Purchase Agreement dated as of June 18, 2001 by and
among AdvancePCS and the several selling shareholders named on
Schedule I.                                                               
|           
|           
|           
|           
|2.2*        |  | -- |          | Purchase Agreement Amendment dated July 25, 2001 by and among
AdvancePCS and the several selling shareholders named on
Schedule I.                                                                 
|           
|           
|           
|           
|3.1         |  | -- |          | Second Amended and Restated Certificate of Incorporation of
AdvancePCS (filed as Exhibit 99.1 to our Form 8-K filed with
the Commission on December 11, 2000 and incorporated herein by
reference).
|           
|           
|           
|           
|3.2         |  | -- |          | Second Amended and Restated Bylaws of AdvancePCS (filed as
Exhibit 3.1 to our Form 8-K filed with the Commission on
October 16, 2000 and incorporated herein by reference).                        
|           
|           
|           
|           
|10.1*       |  | -- |          | Amendment No. 2 to Credit Agreement dated as of October 2,
2000 by and among AdvancePCS, Merrill Lynch Capital
Corporation and a syndicate of banks.                                               



---

|* |  | Filed herewith.
|- |  | ---------------

(b)   Reports on Form 8-K.

On May 29, 2001, we filed a Form 8-K for the following two purposes. One
was the announcement of the Companys revenue and earnings for FY2001 fourth
quarter and full year. The other purpose was the announcement of the
Companys intention to file a registration statement with the Securities and
Exchange Commission registering an aggregate of 7,300,000 shares of Class A
common stock to be sold from time to time by the Company and various selling
stockholders.

On June 18, 2001, we filed a Form 8-K announcing the launch of AdvancePCS
SpecialtyRx. In connection with the launch of this specialty pharmacy
business, the Company has, among other things, entered into a definitive
agreement to acquire TheraCom, Inc, a specialty pharmacy provider based in
Bethesda, Maryland and a wholly-owned subsidiary of Dresing-Leirman, Inc.

15



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|                      |  |  |                            |  |  |                                                                                                                                  
|--------------------- |  |  | -------------------------- |  |  | ---------------------------------------------------------------------------------------------------------------------------------
|                      |  |  | ADVANCEPCS
   (Registrant)
|                     
|Date: August 13, 2001 |  |  | By:                        |  |  | /s/  David D. Halbert
David D. HalbertChairman of the Board and ChiefExecutive Officer                                           
|                     
|Date: August 13, 2001 |  |  | By:                        |  |  | /s/  Danny Phillips
Danny PhillipsChief Financial Officer andExecutive Vice President(Principal Financial and
Accounting Officer)

16



---



##### Table of Contents



Exhibit Index

|            |  |    |          |                                                                                                                                                                                                    
|----------- |  | -- | -------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |    | Exhibits
|            |  |    |         
|2.1*        |  | -- |          | Stock Purchase Agreement dated as of June 18, 2001 by and
among AdvancePCS and the several selling shareholders named on
Schedule I.                                                               
|           
|           
|           
|           
|2.2*        |  | -- |          | Purchase Agreement Amendment dated July 25, 2001 by and among
AdvancePCS and the several selling shareholders named on
Schedule I.                                                                 
|           
|           
|           
|           
|3.1         |  | -- |          | Second Amended and Restated Certificate of Incorporation of
AdvancePCS (filed as Exhibit 99.1 to our Form 8-K filed with
the Commission on December 11, 2000 and incorporated herein by
reference).
|           
|           
|           
|           
|3.2         |  | -- |          | Second Amended and Restated Bylaws of AdvancePCS (filed as
Exhibit 3.1 to our Form 8-K filed with the Commission on
October 16, 2000 and incorporated herein by reference).                        
|           
|           
|           
|           
|10.1*       |  | -- |          | Amendment No. 2 to Credit Agreement dated as of October 2,
2000 by and among AdvancePCS, Merrill Lynch Capital
Corporation and a syndicate of banks.                                               



---

|* |  | Filed herewith.
|- |  | ---------------