U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2002
--------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
---------------------- -----------------------
Commission file number 000-26749
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-2581812
- -------------------------------------------------------------------------------
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
26 Harbor Park Drive, Port Washington, NY 11050
- ------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (516) 626-0007
----------------------------
- -------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
------------- -------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's Common Stock, as of
November 4, 2002 was 7,610,907 shares.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
INDEX Page
----
FORWARD-LOOKING STATEMENTS 3
PART I - FINANCIAL INFORMATION 4
ITEM 1 - CONDENSED FINANCIAL STATEMENTS: 4
CONSOLIDATED BALANCE SHEET as of June 30, 2002 4
and September 30, 2002 (unaudited)
CONSOLIDATED STATEMENT OF INCOME (unaudited) 5
for the three months ended September 30, 2001 and 2002
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) 6
for the three months ended September 30, 2001 and 2002
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 15
CONDITION AND RESULTS OF OPERATIONS
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 22
MARKET RISK
ITEM 4 - CONTROLS AND PROCEDURES 22
PART II - OTHER INFORMATION 23
ITEM 1 - LEGAL PROCEEDINGS 23
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS 23
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 23
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
ITEM 5 - OTHER INFORMATION 24
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 24
Forward Looking Statements
When used herein, the words "may," "could," "estimate," "believe,"
"anticipate," "think," "intend," "expect" and similar expressions identify
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are not guarantees of future
performance and involve known and unknown risks and uncertainties, and other
factors, which could cause actual results to differ materially from those in the
forward-looking statements. Readers are cautioned not to place undue reliance on
such statements, which speak only as of the date hereof. For a discussion of
such risks and uncertainties, including risks relating to pricing, competition
in the bidding and proposal process, our ability to consummate contract
negotiations with prospective clients, dependence on key members of management,
government regulation, acquisitions and affiliations, the market for PBM
services, and other factors, readers are urged to carefully review and consider
various disclosures made by National Medical Health Card Systems, Inc. ("Health
Card" or the "Company") which attempt to advise interested parties of the
factors which affect Health Card's business, including, without limitation, the
disclosures made under the caption "Business" in Item 1 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2002, filed with the SEC on September 30, 2002.
PART I - FINANCIAL INFORMATION
Item 1 - CONDENSED FINANCIAL STATEMENTS
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($ in thousands)
June 30, September 30,
Assets 2002 2002
---- ----
Current: (Unaudited)
Cash and cash equivalents (including cash equivalent investments of $1,187 and
$1,189, respectively) $ 1,768 $ 2,620
Restricted cash 2,653 2,410
Accounts receivable, less allowance for doubtful accounts of $2,248 and 59,285 60,940
$2,400, respectively
Rebates receivable 15,775 17,836
Due from affiliates 504 3,812
Deferred tax asset 1,542 1,542
Other current assets 610 1,186
- ----------------------------------------------------------------------------- ---------- ----------
- ----------------------------------------------------------------------------- ---------- ----------
Total current assets 82,137 90,346
Property, equipment and software development costs, net 9,031 8,737
Due from affiliates 3,620 -
Intangible assets, net of accumulated amortization of $406 and $575, respectively 2,523 2,354
Goodwill 52,035 52,035
Other assets 549 503
- ----------------------------------------------------------------------------- ---------- -----------
- ----------------------------------------------------------------------------- ---------- -----------
Total Assets $ 149,895 $ 153,975
- ----------------------------------------------------------------------------- ---------- -----------
- ----------------------------------------------------------------------------- ---------- -----------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 108,525 $101,035
Revolving credit facility and loans payable-current 13,835 24,382
Current portion of capital lease obligations 556 558
Due to officer/stockholder 696 435
Income taxes payable - 104
Other current liabilities 1,178 171
- ---------------------------------------------------------------------------- ---------- ----------
- ---------------------------------------------------------------------------- ---------- ----------
Total current liabilities 124,790 126,685
Capital lease obligations, less current portion 809 727
Long term loans payable and other liabilities 865 1,100
Deferred tax liability 2,154 2,154
- ---------------------------------------------------------------------------- ---------- ----------
- ---------------------------------------------------------------------------- ---------- ----------
Total liabilities 128,618 130,666
- ---------------------------------------------------------------------------- ---------- -----------
- ---------------------------------------------------------------------------- ---------- -----------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock $.10 per value; 10,000,000 shares authorized,
none outstanding - -
Common Stock, $.001 par value, 25,000,000 shares authorized, 7,550,239
and 7,801,907 shares issued, 7,359,239 and 7,610,907 outstanding, respectively 8 8
Additional paid-in-capital 14,292 14,959
Retained earnings 7,721 9,086
Treasury stock at cost, 191,000 shares (744) (744)
- --------------------------------------------------------------------------- ---------- --------
- --------------------------------------------------------------------------- ---------- --------
Total Stockholders' Equity 21,277 23,309
- --------------------------------------------------------------------------- ---------- --------
- --------------------------------------------------------------------------- ---------- --------
Total Liabilities and Stockholders' Equity $ 149,895 $153,975
- ---------------------------------------------------------------------------- ---------- ---------
See accompanying condensed notes to consolidated financial statements
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
($ in thousands, except per share amounts)
(Unaudited)
Three months ended
September 30,
2001 2002
---- -- ----
Revenues $ 80,645 $ 147,367
Cost of claims 73,392 136,488
- ------------------------------------------------------------------------------ ------------ -------------
- ------------------------------------------------------------------------------ ------------ -------------
Gross profit 7,253 10,879
Selling, general and administrative expenses* 5,983 8,340
- ------------------------------------------------------------------------------ ------------ -------------
- ------------------------------------------------------------------------------ ------------ -------------
Operating income 1,270 2,539
Other income (expense):
Interest expense (60) (320)
Interest income 196 56
Other income, net - 38
- ------------------------------------------------------------------------------ ------------ -------------
- ------------------------------------------------------------------------------ ------------ -------------
136 (226)
- ------------------------------------------------------------------------------ ------------ -------------
- ------------------------------------------------------------------------------ ------------ -------------
Income before provision for income taxes 1,406 2,313
Provision for income taxes 417 948
- ------------------------------------------------------------------------------ ------------ -------------
- ------------------------------------------------------------------------------ ------------ -------------
Net Income $ 989 $ 1,365
- ------------------------------------------------------------------------------ ------------ -------------
- ------------------------------------------------------------------------------ ------------ -------------
Earnings per common share:
Basic $ 0.14 $ 0.18
- ------------------------------------------------------------------------------ ------------ -------------
- ------------------------------------------------------------------------------ ------------ -------------
Diluted $ 0.13 $ 0.17
- ------------------------------------------------------------------------------ ------------ -------------
- ------------------------------------------------------------------------------ ------------ -------------
Weighted average number of common shares outstanding:
Basic 7,143 7,524
- ------------------------------------------------------------------------------ ------------ -------------
- ------------------------------------------------------------------------------ ------------ -------------
Diluted 7,474 7,919
- ------------------------------------------------------------------------------ ------------ -------------
- ------------------------------------------------------------------------------ ------------ -------------
* Includes amounts charged by affiliates aggregating $ 831 $ 297
---------------------------------------------------------------------------- ------------ --------------
- ------------------------------------------------------------------------------ ------------ --------------
See accompanying condensed notes to consolidated financial statements
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
Three months ended
September 30,
2001 2002
---- ----
Cash flows from operating activities:
Net income $ 989 $ 1,365
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 685 1,044
Amortization of deferred gain - (39)
Loss on disposal of capital assets 9 -
Provision for doubtful accounts 384 153
Compensation expense accrued to officer/stockholder (265) (261)
Deferred income taxes (34) -
Interest accrued on stockholders' loans (4) -
Changes in assets and liabilities, net of effect from
acquisitions:
Restricted cash 57 243
Accounts receivable (3,330) (1,808)
Rebates receivable 354 (2,061)
Other current assets 4 128
Due to/from affiliates 571 (392)
Other assets (2) -
Accounts payable and accrued expenses (4,302) (7,490)
Income taxes payable and other current liabilities 453 (654)
Other long term liabilities (696) 285
- ------------------------------------------------------------------------------ -------- -------
- ------------------------------------------------------------------------------ -------- -------
Net cash used in operating activities (5,127) (9,487)
- ------------------------------------------------------------------------------ -------- -------
- ------------------------------------------------------------------------------ -------- -------
Cash flows from investing activities:
Capital expenditures (1,116) (580)
Proceeds from sale of capital assets 1 -
- ----------------------------------------------------------------------------- ------- -------
- ----------------------------------------------------------------------------- ------- -------
Net cash used in investing activities (1,115) (580)
- ----------------------------------------------------------------------------- -------- -------
- ----------------------------------------------------------------------------- -------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options - 418
Proceeds from revolving credit facility - 170,950
Repayment of revolving credit facility - (160,408)
Deferred financing costs - 47
Repayment of debt and capital lease obligations (238) (88)
- ------------------------------------------------------------------------------ --------- ----------
- ------------------------------------------------------------------------------ --------- ----------
Net cash (used in) provided by financing activities (238) 10,919
- ------------------------------------------------------------------------------ --------- ----------
- ------------------------------------------------------------------------------ --------- ----------
Net (decrease) increase in cash and cash equivalents (6,480) 852
Cash and cash equivalents at beginning of period 10,877 1,768
- ------------------------------------------------------------------------------- -------- ----------
- ------------------------------------------------------------------------------- -------- ----------
Cash and cash equivalents at end of period $ 4,397 $ 2,620
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All $ in thousands, except per share amounts)
(Unaudited)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
National Medical Health Card Systems, Inc. (the "Company" or "Health Card") and
its wholly owned subsidiaries, Pharmacy Associates, Inc. ("PAI"), Interchange
PMP, Inc. ("PMP"), Centrus Corporation, formerly known as HSL Acquisition Corp.
(see Note 2) ("Centrus"), National Medical Health Card IPA, Inc. ("IPA"),
formerly known as PSCNY IPA, Inc., Specialty Pharmacy Care, Inc. ("Specialty"),
NMHCRX Contracts, Inc. ("Contracts"), and PBM Technology Inc. ("PBM Tech"). Also
included on a consolidated basis are the accounts of NMHC Funding, LLC
("Funding"), a limited liability company of which the Company and its
subsidiaries are the owners of all of the membership interests. Unless the
context otherwise requires, references herein to the "Company" or "Health Card"
refer to the Company and its subsidiaries, on a consolidated basis. All material
inter-company balances and transactions have been eliminated in the
consolidation.
The unaudited consolidated financial statements have been prepared by the
Company in accordance with accounting principles generally accepted in the
United States for interim financial information and substantially in the form
prescribed by the Securities and Exchange Commission in instructions to Form
10-Q and in Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by such accounting principles for
complete financial statements. In the opinion of the Company's management, the
September 30, 2002 and 2001 unaudited interim financial statements include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of results for these interim periods. In the opinion of the
Company's management, the disclosures contained in this Form 10-Q are adequate
to make the information presented not misleading when read in conjunction with
the Notes to Consolidated Financial Statements included in the Company's Form
10-K for the year ended June 30, 2002. The results of operations for the three
month period ended September 30, 2002 are not necessarily indicative of the
operating results to be expected for the full year.
For information concerning the Company's significant accounting policies,
reference is made to the Company's Annual Report on Form 10-K, for the year
ended June 30, 2002 (the "Annual Report").
2. BUSINESS ACQUISITIONS
The Company entered into an Asset Purchase Agreement (the "Asset Purchase
Agreement"), dated as of January 29, 2002, with Health Solutions, Ltd., a New
York corporation ("HSL"), HSL Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of the Company ("Sub"), and the security holders of HSL
named therein, pursuant to which the Company agreed to acquire certain assets of
HSL relating to the pharmacy benefit management business (PBM) conducted by HSL
under the name "Centrus" (the "Acquisition"). Centrus provides PBM services
primarily to managed care organizations in the northeast. The Company intends to
continue to use the Centrus assets to provide PBM services. The Centrus business
complements the Company's business while significantly strengthening the
Company's presence in the managed care market.
The aggregate purchase price of the Acquisition was $40 million in cash, of
which $3 million is held in escrow to secure certain indemnification
obligations, ($2 million has been released as of July 2002). The Company
acquired approximately $1.4 million of HSL's assets which included $0.9 million
of property and equipment and $0.5 million of software. The Company also agreed
to assume approximately $1.4 million of HSL's liabilities relating to the
Centrus business which included $1.1 million of rebates due to sponsors, $0.1
million of capital leases, and $0.2 million of miscellaneous payables. The
acquisition was accounted for under the purchase method of accounting and the
results of Centrus' operations were included in the consolidated financial
statements commencing with the acquisition date. The excess of the acquisition
costs over the fair value of identifiable net assets acquired was $40,671.5,
which consists of the following components: (i) customer relationships valued at
$2,415, which will be amortized over five (5) years; (ii) an employment
agreement and a consulting agreement valued at a combined value of $89, which
will be amortized over two (2) years: (iii) non-compete contracts valued at $76,
which will be amortized over four (4) years, and (iv) goodwill of $38,091.5,
which will not be amortized for book purposes per SFAS 142 (see Note 8). For tax
purposes, the goodwill and other intangibles will be amortized over fifteen
years. In addition, the Company has agreed to pay HSL as additional purchase
price up to $4 million over a period of three (3) years if the acquired Centrus
business achieves certain financial performance targets during the two-year
period following the Closing. HSL may also be entitled to an additional
incentive payment based on the financial performance of the Centrus business
during the one-year period following the Closing.
Simultaneously with the consummation of the Acquisition, the Company
entered into an Employment Agreement and a Stock Option Agreement with the
former president of Centrus, pursuant to which he will serve as Executive Vice
President of Managed Care for the Company. Additionally, several members of
Centrus' management team have joined the Company either as an employee or a
consultant, and have been granted stock options to purchase an aggregate of
375,000 shares of Common Stock, under the Company's 1999 Stock Option Plan, as
amended.
On January 29, 2002, the Company and certain of its subsidiaries entered
into a $40 million secured revolving credit facility (the "Facility") with HFG
Healthco-4 LLC, a specialty finance company. In connection with the Facility,
the Company and certain of its subsidiaries have agreed to transfer, on an
on-going basis, their accounts receivable to Funding. Funding utilizes those
receivables as collateral to secure borrowings under the facility. The Facility
has a three year term, provides for borrowing up to $40 million at the London
InterBank Offered Rate (LIBOR) plus 2.40% (4.2% at September 30, 2002) and is
secured by receivables and other assets of the Company and certain of its
subsidiaries. Borrowings of $28.7 million under the Facility were used to
finance part of the purchase price of the Acquisition and will also be used by
the Company and certain of its subsidiaries for working capital purposes and
future acquisitions in support of its business plan. The outstanding balance as
of September 30, 2002 was approximately $24.4 million, which was all classified
as short term. The Facility requires the Company to maintain certain financial
and other covenants. The Company was in compliance with all covenants at
September 30, 2002.
The summarized unaudited pro forma results of operations set forth below
for the three months ended September 30, 2001 assumes the Centrus acquisition
had occurred as of the beginning of the period.
Three Months Ended
September, 2001
------------------
Revenues $ 145,771
Net income $ 1,204
Net income per common share:
Basic $ 0.17
Diluted $ 0.16
Pro forma weighted average number of common shares
outstanding:
Basic 7,143,235
Diluted 7,473,537
Pro forma adjusted net income per common share, including acquisitions, may
not be indicative of actual results, primarily because pro forma earnings
include historical results of operations of the acquired entity and do not
reflect any cost savings or potential sales erosion that may result from the
Company's integration efforts.
3. STOCK OPTIONS
During the three months ended September 30, 2002, the Company granted
115,703 stock options and 40,477 stock options were cancelled for a net of
75,226 stock options under the 1999 Stock Option Plan (the "Plan"). The options
granted during this period are exercisable at prices ranging from $7.32 to $8.67
and terminate five years from the grant date. The total number of shares of
common stock reserved by the Company for issuance under the Plan is 2,850,000
plus an indeterminable number of shares of common stock issuable pursuant to the
anti-dilution provisions of the Plan or upon the exercise of "reload options."
There are no options outstanding that contain the "reload" provision. Shares
issuable pursuant to options granted under the Plan as of September 30, 2002
equal 1,802,975, net of 385,243 options exercised to date.
4. EARNINGS PER SHARE
A reconciliation of shares used in calculating basic and diluted earnings per
share follows:
Three Months Ended September 30,
2001 2002
---- ----
Basic 7,143,235 7,524,438
Effect of assumed exercise of employee stock options 289,542 394,815
Contingently issuable shares related to an acquisition 40,760 -
----- ------
Diluted weighted average number of shares outstanding 7,473,537 7,919,253
========= =========
As of June 30, 2002, the Company retired the entire $11.6 million of its
Convertible Notes, which were previously due January 23, 2002.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30, September 30,
2002 2002
-------- -------------
Claims Payable $ 82,195 $ 73,739
Rebates Payable to Sponsors 16,921 21,684
Trade Payables 6,693 2,454
Other Payables 2,716 3,158
------- --------
$ 108,525 $101,035
======= ========
6. RELATED PARTY TRANSACTIONS
As of January 1, 2002, the Company has eliminated the majority of its
historical related party service transactions with the exception being rent and
some administrative services as described below. For the periods presented,
certain general, administrative and other expenses reflected in the financial
statements include allocations of certain corporate expenses from affiliates
which take into consideration personnel, estimates of the time spent to provide
services or other appropriate bases. These allocations include services and
expenses for employee benefits administration, legal, communications and other
miscellaneous services.
Management believes the foregoing allocations were made on a reasonable
basis. Although these allocations do not necessarily represent the costs which
would have been or may be incurred by the Company on a stand-alone basis,
management believes that any variance in costs would not be material.
General and administrative expenses related to transactions with affiliates
included in the statement of income are:
Three Months Ended
September 30,
-------------------------------
2001 2002
---- ----
Software maintenance and related services $ 254 $ -
Management and consulting fees 208 46
Administrative, accounting services and supplies 206 28
Rent and utilities 163 223
--- ---
$ 831 $ 297
=== ===
Due from affiliates includes a note from another company affiliated by
common ownership. As of September 30, 2002, the balance due from this affiliate,
including accrued interest, was $3,662.5. Such amount bore interest at 8.5% per
annum, payable quarterly. The note was collateralized by 1,022,758 shares of
$.001 par value common stock of the Company registered in the name of the
Company's Chairman of the Board and was secured by his personal guarantee. The
original note was replaced by a new non-recourse promissory note dated July 31,
2000, payable to the Company in the amount of $3,890.9. The note is payable in
annual installments of $400, consisting of principal and interest at the rate of
8.5% per annum on each of the first and second anniversary dates, with the total
remaining balance of principal and interest due and payable on July 31, 2003.
The note is collateralized by 1,000,000 shares of $.001 par value common stock
of the Company registered in the name of the Company's Chairman of the Board and
is secured by his personal guarantee. The first two $400 payments due under the
note as of July 31, 2001 and 2002 were satisfied by offsetting an equal amount
owed by the Company to the Chairman of the Board. Effective July 31, 2001, the
interest rate on the note was changed to the prime rate in effect from time to
time (4.75% at September 30, 2002).
On February 8, 2001, the President gave to the Company his Promissory Note
in the amount of $34 as evidence of the loan by the Company to the President. On
April 12, 2002, the Promissory Note was amended and Company agreed to increase
the loan to $100. The loan bears interest at 8%, and is due on April 25, 2003.
The interest rate was lowered effective July 1, 2002 to the rate at which the
Company borrows money.
The Company currently occupies approximately 26,500 square feet of office
space at 26 Harbor Park Drive, Port Washington, New York 11050 (the "Leased
Premises"). The Company subleases the Leased Premises from BFS Realty, LLC, an
affiliate of the Chairman of the Board (the "Affiliate"). The Affiliate leases
the Leased Premises from the Nassau County Industrial Development Agency,
pursuant to a lease which was entered into by the agency and the Affiliate in
July 1994, and which expires in March 2005. The Affiliate has the right to
become the owner of the Leased Premises upon expiration of this lease. The
Affiliate subleases a portion of the Leased Premises to the Company (the
"Lease"). As of November 1, 2001, the Company and the Affiliate amended the
Lease. The Lease provides that, effective August 1, 2001, the rent payable by
the Company shall be an aggregate annual rent of $308. While formerly the
Company made estimated monthly real estate tax, utilities and maintenance
expense payments to the Affiliate, the Lease now provides that the Company will
pay its pro-rata share of such expenses directly to the entities to whom payment
must be made. The Company estimates that such monthly expenses will approximate
an aggregate of $336 per year. The annual rent will increase by 5% per year
during the term of the Lease. The annual expenses are also expected to increase,
although the Company cannot estimate by how much. The Lease expires in July,
2010. The Company believes that the Leased Premises are adequate for current
purposes. There were no leasehold improvements made to the space during the
three months ended September 30, 2002.
7. MAJOR CUSTOMERS AND PHARMACIES
For the three months ended September 30, 2001, approximately 14% of the
consolidated revenues of the Company were from one plan sponsor administering
multiple plans. For the three months ended September 30, 2002, approximately 38%
of the consolidated revenues of the Company were from two plan sponsors
administering multiple plans. Amounts due from these sponsors as of September
30, 2002 approximated $21.2 million.
For the three months ended September 30, 2001, approximately 26% of the
cost of claims were from two pharmacy chains. For the three months ended
September 30, 2002, approximately 48% of the cost of claims were from three
pharmacy chains. Amounts payable to these three pharmacy chains at September 30,
2002 were approximately $13.5 million.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
Nos. 141 and 142, Business Combinations and Goodwill and Other Intangibles,
respectively. SFAS 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill
is no longer subject to amortization over its estimated useful life. Rather,
goodwill is subject to at least an annual assessment for impairment by applying
a fair-value based test. Additionally, an acquired intangible asset should be
separately recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented or exchanged, regardless of the acquirer's intent
to do so. The Company has adopted these SFAS's as of July 1, 2001 and has
performed the requisite impairment testing. As of June 30, 2002 there is no
impairment to the goodwill recorded on the accompanying balance sheet.
SFAS 142 requires the disclosure of net income and earnings per share
computed on a pro forma basis by reversing the goodwill amortized in the periods
presented. Such pro forma disclosures are required in the period of adoption and
thereafter until all periods presented reflect goodwill accounted for in
accordance with SFAS 142. No pro forma is required as all periods presented have
now been accounted for in accordance with SFAS 142.
In October 2001, the FASB issued SFAS NO. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001, with
transition provisions for certain matters. FASB's new rules on asset impairment
supersede SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of, and provide a single accounting model
for long-lived assets to be disposed of. Although retaining many of the
fundamental recognition and measurement provisions of SFAS No. 121, the new
rules significantly change the criteria that would have to be met to classify an
asset as held-for-sale. The new rules supersede the provisions of Accounting
Principals Board Opinion No. 30 ("APB No. 30") with regard to reporting the
effects of a disposal of a segment of a business, and require expected future
operating losses from discontinued operations to be displayed in discontinued
operations in the period in which the losses are incurred rather than as of the
measurement date as presently required by APB No. 30. In addition, more
dispositions will qualify for discontinued operations treatment in the income
statement. The Company does not believe that the implementation of SFAS No. 144
will have any impact on its financial statements as of and for the year ending
June 30, 2003.
9. SUPPLMENTAL CASH FLOW INFORMATION
During the three months ended September 30, 2001, and September 30, 2002,
the Company paid $60 and $320 in interest and $43 and $636 in income taxes,
respectively. In non-cash transactions, the Company issued 62,500 shares and
41,668 shares of its common stock, each issue valued at $250, as additional
compensation to the shareholders of PAI in August 2001 and August 2002,
respectively.
10. LITIGATION
See Item 1 of Part II of this Quarterly Report on Form 10-Q.
11. SUBSEQUENT EVENTS
As of November 1, 2002, the Company and its wholly owned subsidiary,
Integrail Acquisition Corp., entered into an Asset Purchase Agreement with
Health Solutions, Ltd. ("HSL"), and certain of its security holders (together
with HSL, the "Sellers"). Pursuant to the Agreement, Health Card acquired
substantially all of the assets of the Integrail division of HSL's operations,
for a purchase price of $1.4 million. Half of the purchase price was paid at the
closing directly to the Sellers, and half will be deposited into escrow as
security for the performance of certain indemnification obligations of the
Sellers. Funds for this transaction were supplied by the revolving credit
facility that was put into place in January, 2002. (See Note 2). The Agreement
provides that if certain operational milestones are achieved over the next 12
months, certain amounts will be released from the escrow to the Sellers. No
material liabilities were assumed.
HSL and Health Card previously entered into another Asset Purchase
Agreement. (See Note 2 above for a description of the Centrus Acquisition).
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Three Months Ended September 30, 2002
Compared to Three Months Ended September 30, 2001
Revenues increased $66.7 million, or approximately 83%, from $80.7 million
for the three months ended September 30, 2001, to $147.4 million for the three
months ended September 30, 2002. Of the increase, $75.4 million was due to the
inclusion of revenues from Centrus, which was included in the revenues for the
quarter ended September 30, 2002, but not in the quarter ended September 30,
2001. Another $1.5 million of the increase was due to revenues related to new
sponsors or new services offered during the three months ended September 30,
2002. These increases were partially offset by a $23 million decrease related to
two factors: 1) a major sponsor terminated its contract with Health Card
effective June 30, 2002, and 2) there were certain contracts during the quarter
ended September 30, 2002 that the Company recognized on a net revenue basis
versus no contracts during the three months ended September 30, 2001 that the
Company recognized on a net revenue basis. The specific terms of the contracts
that Health Card enters into with its sponsors will determine whether Health
Card recognizes the gross revenue related to the cost of the prescriptions
filled. For those few contracts that Health Card recognizes net revenue, there
is no impact on gross profit since neither the revenue nor the related costs of
the prescriptions is recorded. The majority of the balance of the increase, or
approximately $13 million, was due primarily to increased revenues from other
existing sponsors as a result of several factors including higher charges
relating to increased cost of pharmaceuticals, new drugs, plan participant
growth and an increase in the average number of claims per plan participant.
Cost of claims increased $63.1 million, or approximately 86%, from $73.4
million for the three months ended September 30, 2001, to $136.5 million for the
three months ended September 30, 2002. Centrus accounted for $73.6 million of
the increase. This increase was partially offset by the two factors described in
the previous paragragh, namely, the loss of a major sponsor and the recognizing
of a few contracts on a net revenue basis. As a percentage of revenues, cost of
claims increased from 91.0% to 92.6% for the three months ended September 30,
2001 and September 30, 2002, respectively. The increase relates primarily to the
higher cost of claims on the Centrus book of business, which serves managed care
clients primarily. Industry-wide, managed care clients have a greater cost of
claims, and consequently a lower gross margin, than other types of business in
the PBM industry. Centrus' cost of claims for the three months ended September
30, 2002 ran about 7 - 10 percentage points greater than the rest of the
Company's business, and since Centrus accounted for 51% of the Company's revenue
in the three months ended September 30, 2002, this impacted the overall cost of
claims percentage.
Gross profit increased from $7.3 million for the three months ended
September 30, 2001 to $10.9 million for the three months ended September 30,
2002; a $3.6 million, or 50%, increase. In addition to the revenue volume
increase and consequent gross margin increase, Centrus accounted for $1.8
million, or 50%, of the gross profit increase. Gross profit, as a percentage of
revenue, declined from 9.0% to 7.4% for the three months ended September 30,
2001 and September 30, 2002, respectively. The decrease is again principally
related to the lower margins achieved by Centrus. The Company has also seen some
decline in profit margins due to competitive pressures.
Selling, general, and administrative expenses, which include amounts
charged by affiliates, increased $2.3 million, or approximately 39%, from $6.0
million for the three months ended September 30, 2001 to $8.3 million for the
three months ended September 30, 2002. This increase is primarily related to the
acquisition of Centrus. While the expenses specifically related to Centrus were
$3.1 million in the quarter ended September 30, 2002, this was partially offset
by reductions in other areas of the Company related to the full integration of
Centrus. The Company analyzed every department in the Company and made decisions
concerning the most efficient way to operate regardless of location. This
evaluation has led to synergies across the Company and has allowed the Company
to maximize the utilization of its resources. It is anticipated that this kind
of analysis and deployment of resources will continue as the Company grows.
General and administrative expenses charged by affiliates decreased
approximately $534,000, or 64%, year-over-year from approximately $831,000 to
approximately $297,000 for the three months ended September 30, 2001 and
September 30, 2002, respectively. The majority of the decrease related to the
hiring of employees which allowed the Company to bring in-house certain services
which historically had been obtained from related parties.
Selling, general, and administrative expenses as a percent of revenue
improved from 7.4% for the quarter ended September 30, 2001 to 5.7% for the
quarter ended September 30, 2002. This improvement stems from the continued
growth of the Company due to improving efficiencies with scale.
For the three months ended September 30, 2001, the Company recognized other
income, net, of approximately $136,000. For the three months ended September 30,
2002, the Company incurred other expense, net, of approximately $226,000. The
components of the approximate $362,000 increase in net expense were an
approximate $260,000 increase in interest expense, and an approximate $140,000
decrease in interest income, and an approximate $38,000 amortized gain on assets
sold during the fiscal year ended June 30, 2002. The primary reasons for the net
increase in expense were the interest expense incurred on the Company's
revolving credit facility during the quarter ended September 30, 2002 to finance
the acquisition of Centrus (see Note 2), and the reduction in interest income
since all balances go towards paying off the revolving credit facility.
Partially offsetting the increase in interest expense was an approximate $38,000
deferred gain on the sale of assets related to a sale/leaseback transaction,
which gain of approximately $459,000 was recorded as deferred revenue and is
being recognized over the life of the lease, which is thirty-six (36) months.
Income before the provision for income taxes increased approximately $0.9
million, or 65%, from approximately $1.4 million, for the quarter ended
September 30, 2001, to approximately $2.3 million for the quarter ended
September 30, 2002. The primary reason for the increase was the improving
efficiencies that come with scale arising from the integration of the
acquisitions the Company has completed. For the three months ended September 30,
2002 revenues increased 83% over the three months ended September 30, 2001,
while selling, general, and administrative expenses increased only 39%. In
addition, while gross margin percentages declined period-over-period due to the
acquisition of Centrus, the gross profit dollars increased by 50%. These factors
contributed to the continued improvement in the Company's profitability.
EBITDA (earnings before interest, taxes, depreciation and amortization)
increased by approximately $1.6 million or 83%, from $2.0 million for the three
months ended September 30, 2001 to $3.6 million for the three months ended
September 30, 2002. The primary factor for the increase was the approximate $1.3
million, or 100%, increase in operating income described above. In addition,
there was an approximate $116,000 increase in depreciation and amortization, and
an approximate $130,000 increase in other intangibles amortization.
The effective tax rate increased from 29.7% for the quarter ended September
30, 2001 to 41.0% for the quarter ended September 30, 2002. The tax rate of 41%
represents the Company's estimated tax rate for the full fiscal year.
Net income for the quarter ended September 30, 2002 was approximately $1.4
million as compared to approximately $1.0 million for the quarter ended
September 30, 2001; a 38% increase. Earnings per diluted share increased by
$0.04, to $0.17 for the quarter ended September 30, 2002.
Liquidity and Capital Resources
The Company's primary cash requirements are for capital expenditures and
operating expenses, including cost of pharmaceuticals, software and hardware
upgrades and the funding of accounts receivable. The Company also requires cash
for potential acquisitions of other PBM companies or of companies providing
related services. As of September 30, 2002, the Company had a working capital
deficit of $36.3 million as compared to a working capital deficit of $42.7
million as of June 30, 2002. The primary reason for the improvement in working
capital was the profitability generated by the Company during the quarter ended
September 30, 2002. In addition, there was a $3.6 million reclassification of a
long term loan receivable to short term since it is now due within one year,
(See Note 6 - Related Party Transactions). The Company has now acquired three
companies since July 2000 utilizing primarily cash. This has had the effect of
increasing the Company's working capital deficits until sufficient profitability
is generated to pay back the cost of the acquisitions.
Net cash used in operating activities was $5.1 million and $9.5 million for
the three months ended September 30, 2001 and 2002, respectively. For the three
months ended September 30, 2002, accounts payable decreased by $3.6 million more
than accounts and rebate receivables, thus using cash. For the three months
ended September 30, 2001, accounts payable decreased by more than accounts and
rebates receivables as well, but only by $1.3 million, this differential led to
a $2.3 million greater use of cash in the quarter ended September 30, 2002.
Historically, the timing of the Company's accounts receivable and accounts
payable has generally been a net source of cash from operating activities. This
is the result of the terms of trade in place with plan sponsors on the one hand,
and the Company's pharmacy network on the other hand. These terms generally lead
to the Company's payments to participating pharmacies being slower than its
corresponding collections from plan sponsors. The Company believes that this
situation is not unusual in the pharmacy benefit management industry and expects
to operate on similar terms for the foreseeable future. However, there can be no
assurance that such terms of trade will continue in the future and, if they were
to change materially, the Company could require additional working capital
financing. Furthermore, if such terms of trade were to change materially, and/or
if the Company were unable to obtain additional working capital financing, there
could be a material adverse effect on the Company's business, financial
condition, or results of operations.
Net cash used in investing activities was $1.1 million for the three months
ended September 30, 2001, as compared to $0.6 million for the three months ended
September 30, 2002. The reduction is related to a decrease in capital
expenditures.
During the quarter ended September 30, 2002 the Company borrowed a net of
approximately $10 million under its revolving credit facility. These funds were
primarily utilized to repay the principal balance of the Convertible Notes which
has had the effect of significantly reducing the interest expense that the
Company incurs.
The Company has entered into various capital lease transactions for
hardware and software. The company has also assumed various capital leases
through its acquisitions. The principal balance of all capital leases as of
September 30, 2002 was approximately $1,285,000.
The Company has entered into various real estate operating leases with both
related and unrelated parties. The Company has entered into various operating
leases with unrelated third parties for office equipment. These leases have
different payment terms and expiration dates. The Company also entered into a
sale-leaseback operating lease of certain fixed assets (principally computer
hardware and externally developed software) with an affiliate of the Company's
Vice Chairman. See Note 9 to the Consolidated Financial Statements comprising
Item 8 of Form 10 -K for the year ended June 30, 2002 for a further description
of these various leases.
On January 29, 2002, the Company entered into a $40 million revolving
credit facility (the "Facility"), details of which are set forth in Note 2 to
the financial statements in Part 1. Borrowings of $28.7 million under the
Facility were used to finance part of the purchase price of the Company's
acquisition of Centrus. The Facility contains various covenants that, among
other things, require the Company to maintain certain financial ratios. As of
November 4, approximately $20.0 million was outstanding under the Facility, and
the Company was in compliance with its financial ratios covenants.
The total future payments under these contractual obligations as of
September 30, 2002 is as follows:
Contractual Obligations Payments Due by Period
($ in thousands)
Total Less than 1-3 Years 4-5 Years After
1 Year 5 Years
Long Term Debt $ 24,396 $ 24,382 $ 14 $ - $ -
Capital Lease Obligations 1,285 558 727 - -
Operating Leases 10,039 1,442 2,763 2,142 3,692
Sale-leaseback 923 444 479 - -
-------- --------- ------- -------- --------
-------- --------- ------- -------- --------
Total Contractual Cash $ 36,643 $ 26,826 $ 3,983 $ 2,142 $ 3,692
Obligations
PAI stockholders were eligible to receive up to $2,000,000 in additional
consideration payable in combination of cash and common stock if certain
financial targets of PAI were met for the fiscal years ended June 30, 2001 and
2002. These targets have been achieved and the $2 million has been earned and
paid. At the end of August 2001, $750,000 in cash was paid, and 62,500 shares of
the Company's Common Stock valued at $4.00 per share were issued to the PAI
stockholders. At the end of August 2002, $750,000 in cash was paid, and 41,668
shares of the Company's Common Stock valued at $6.00 per share were issued to
the PAI stockholders.
The members of PMP are eligible to receive additional consideration of up
to $1,000,000 if certain PMP clients are retained over the next three years.
These targets were not met in the first year so no additional consideration was
due and payable. It is the Company's expectation that these amounts will not be
earned in the second and third years either as the identified clients were not
generally retained directly, although they were replaced.
The shareholders of Centrus are eligible to receive additional
consideration of up to $4,000,000, payable over three years, if certain
financial targets are met over the next two years.
In February 1998, the Company entered into an agreement with an
unaffiliated party for computer software products and professional services. The
agreement required the Company to pay an initial license fee. In addition, if
certain milestones are met based on the number of processed claims, as defined
in the agreement, the initial license fee increases in specified increments. To
date, four such milestones have been met, resulting in a 100% increase in the
license fee. The agreement also provides for the annual payment of a fee for
maintenance and updating services equal to 18% of the initial license fee, as
defined. It is anticipated, based on internal growth and the Centrus
acquisition, that the last milestone will be met. If the remaining milestone is
reached, the cash outlay by the Company would be $100,000.
The Company anticipates that current cash positions, after its three
acquisitions and the repayment of certain affiliate and shareholder debt,
together with anticipated cash flow from operations, will be sufficient to
satisfy the Company's contemplated cash requirements for at least 24 months.
This is based upon current levels of capital expenditures and anticipated
operating results for the next 24 months. However, it is one of the Company's
stated goals to acquire other pharmacy benefit management companies, evidenced
by the three acquired since July 2000. This will require cash and depending on
the Company's evaluation of future acquisitions, additional cash may be
required. In the event that the Company's plans change or its assumptions prove
to be inaccurate, or the proceeds from the Facility prove to be insufficient to
fund operations and acquisitions, the Company could be required to seek
additional financing sooner than anticipated. There can be no assurance that
such financing could be obtained at rates or on terms acceptable to the Company,
if at all.
Other Matters
Inflation
Management does not believe that inflation has had a material adverse
impact on Health Card's net income.
Critical Accounting Policies and Estimates
General
Health Card's' discussion and analysis of its financial condition and
results of operations are based upon Health Card's unaudited consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires Health Card to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses; these
estimates and judgments also effect related disclosures of contingent assets and
liabilities. On an on-going basis, Health Card evaluates its estimates and
judgements, including those related to revenue recognition, bad debt, intangible
assets, income taxes, and financing operations. Health Card bases its estimates
on experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes that of its significant accounting policies (See Note
1 to the Consolidated Financial Statements comprising Item 8 of Form 10-K for
the year ended June 30, 2002), the following may involve a higher degree of
judgment and complexity than others:
Revenue Recognition
(a) The Company has historically entered into two types of arrangements for
the payment of administrative fees: fee for service (per claim charges) and
capitation (per member per month charges). Under the fee for service
arrangement, the company is paid by its sponsors for the Company's contractually
agreed upon rates based upon actual claims adjudicated, plus a fixed transaction
fee. Under the capitation arrangement, the fee is based on the number of
participants per month; the Company pays for the cost of prescriptions filled
and thus shares the risk of operating profit or loss with these plans. Since
January 1, 2000, all services have been provided on a fee for service basis
only.
Revenue under the fee for service arrangement is recognized when the claims
are adjudicated. Included as revenue are the Company's administrative fees and
charges relating to pharmaceuticals dispensed by the Company's network of
pharmacies. Revenues are reduced by the amount of rebates paid to the Company's
sponsors.
(b) The specific terms of the contracts that Health Card enters into with
its sponsors will determine whether Health Card recognizes the gross revenue
related to the cost of the prescriptions filled. In certain limited cases, the
Company has not recognized the gross revenue or cost related to prescriptions
filled for a specific sponsor. This has no impact on the Company's gross profit
since neither the revenue nor the related cost of the prescriptions is recorded.
(c) Rebates are recognized when the Company is entitled to them in
accordance with the terms of its arrangements with drug manufacturers, third
party rebate administrators, and sponsors, and when the amount of the rebates is
determinable. The Company records the gross rebate receivable and the
appropriate payable to the sponsors based on estimates, which are subject to
final settlement. The estimates are based upon the claims submitted and the
Company's rebate experience, and are adjusted as additional information becomes
available.
Bad Debt
Health Card maintains allowances for doubtful accounts for estimated losses
resulting from the liability of its sponsors to make required payments. If the
financial condition of Health Card's sponsors were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
Goodwill and Intangible Asset Impairment
In assessing the recoverability of the Company's goodwill and other
intangibles, the Company must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets. If
these estimates or their related assumptions change in the future, the Company
may be required to record impairment charges for these assets not previously
recorded. On July 1, 2001 the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," and will be required
to analyze its goodwill for impairment issues on a periodic basis thereafter. To
date, the Company has not recorded any impairment losses related to goodwill and
other intangible assets.
Deferred Taxes
Health card periodically considers whether or not it should record a
valuation allowance to reduce its deferred tax assets to the amount that is more
likely than not to be realized. While Health Card has considered future taxable
income and ongoing tax planning strategies in assessing the need for the
valuation allowance, in the event Health Card were to determine that it would be
able to realize its deferred tax assets in the future in excess of its net
recorded amount, an adjustment to the deferred tax asset would increase income
in the period such determination was made. Likewise, should Health Card
determine that it would not be able to realize all or part of its net deferred
tax asset in the future, an adjustment to the deferred tax asset would be
charged to income in the period such determination was made.
Capitalized Software
The costs of software developed for internal use incurred during the
preliminary project stage are expensed as incurred. Direct costs incurred during
the application development stage are capitalized. Costs incurred during the
post-implementation/operation stage are expensed as incurred. Capitalized
software development costs are amortized on a straight-line basis over their
estimated useful lives, commencing on the date the software is placed into use,
primarily three years.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not Applicable.
ITEM 4 - CONTROLS AND PROCEDURES
Disclosure controls and procedures are the controls and procedures designed
to ensure that information that the Company is required to disclose in its
reports under the Exchange Act is recorded, processed, summarized and reported
within the time periods required. They include, without limitation, controls and
procedures designed to ensure that information is accumulated and communicated
to our management in order to allow timely decisions regarding required
disclosure.
Under the supervision and with the participation of management, chiefly our
principal executive officer and our principal financial officer, Health Card
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures within 90 days of the filing date of this quarterly
report. Based on that evaluation, our principal executive officer and our
principal financial officer have concluded that these controls and procedures
are effective. There have been no significant changes in our internal controls,
or in other factors that could significantly affect these controls, subsequent
to the date of the evaluation.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
An action was commenced against the Company on April 30, 2002 by Midwest
Health Plans Inc. ("MHP") in the United States District Court for the Eastern
District of Michigan. The complaint alleges, among other things, that the
parties entered into a contract dated July 1999 (the "Agreement"), and further
alleges that the Company has overcharged MHP for the administration of
prescription benefit services in contravention to the terms of the Agreement.
MHP is seeking $3 million dollars in damages. The Company filed an answer and
counterclaim on June 12, 2002. In the counterclaim, the Company claimed damages
in excess of $2.8 million based on MHP's failure to pay under a contract. In
late June 2002, MHP agreed to make two payments in the amount of $1.34 million
and $1.36 million to partially settle the Company's claims against MHP. As a
part of that payment, MHP dropped one of its two claims against the Company that
had sought to setoff or recoup alleged overcharges by the Company. The Company
continues to have counterclaims totaling approximately $150,000 against MHP for
its failure to pay the amounts it had agreed to pay Health Card for goods and
services. Trial currently is scheduled for September 22, 2003. Factual discovery
cut-off is February 28, 2003. The Company believes the claims alleged in the
complaint are without merit and intends to vigorously defend the action.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
For information concerning the Company's 1999 Stock Option Plan, and the
options currently issued and outstanding thereunder, see Note 3 to the Financial
Statements comprising Item 1 of Part I of this Form 10-Q.
Pursuant to the terms of the PAI Agreement, in August 2001 and August 2002,
the Company issued 62,500 and 41,668 shares respectively, of unregistered Common
Stock of the Company to the PAI stockholders as additional consideration. These
issuances were valued at $250,000 each. The Company was advised in each case
that the issuance of such shares was exempt from registration under the
Securities Act by virtue of Section 4(2) thereof.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDRS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
3.1 Certificate of Incorporation of Health Card (7)
3.4 By-Laws of Health Card (7)
4.1 Form of Specimen Common Stock Certificate (9)
4.2 Form of Warrant Agreement, including form of Representatives' Warrants (1)
10.1 Mail Service Provider Agreement, dated July 1, 1996, between Health Card
and Thrift Drug, Inc. d/b/a Express Pharmacy Services (1)
10.2 Amendment to Mail Service Provider Agreement, dated January 1, 1997,
between Health Card and Thrift Drug, Inc. d/b/a Express Pharmacy
Services (1)
10.3 Software License Agreement and Professional Service Agreement, dated
February 18, 1998, between Health Card and Prospective Health, Inc. (1)
10.4 1999 Stock Option Plan (1)
10.5 Employee Covenant Agreement, dated June 15, 1998, between Health Card
and Mary Casale (1)
10.6 Employee Covenant Agreement, dated June 16, 1998, between Health Card
and Ken Hammond (1)
10.7 Stock Option Agreement, dated August 3, 1999, between Health Card
and Ken Hammond (4)
10.8 Employment Agreement, dated March 27, 2000, between Health Card
and David Gershen (4)
10.9 Stock Option Agreement, dated May 1, 2000, between Health Card and
David Gershen (4)
10.10 Employment Agreement, dated May 3, 2000, between Health Card and
James Bigl (4)
10.11 Stock Option Agreement, dated June 12, 2000, between Health Card
and James Bigl (4)
10.12 Stock Option Agreement, dated August 3, 1999, between Health Card
and Kenneth J. Daley (4)
10.13 Stock Option Agreement, dated August 3, 1999, between Health Card
and Gerald Angowitz (4)
10.14 Assignment, dated November 1, 1996, from Sandata, Inc., to BFS Realty,
LLC (1)
10.15 Lease, dated August 10, 1998, between 61 Manorhaven Boulevard, LLC
and Health Card (1)
10.16 Letter, dated June 3, 1999, from Bert Brodsky to Health Card (1)
10.17 Letter, dated June 3, 1999, from Gerald Shapiro to Health Card (1)
10.18 Agreement of Guaranty, dated June 1, 1998, by Bert E. Brodsky in
favor of Health Card (1)
10.19 Promissory Note, dated July 31, 2000, made payable by P.W. Capital, LLC
to the order of Health Card, in the amount of $3,890,940 (4)
10.20 Letter, dated June 8, 1999, from P.W. Capital Corp. to Health Card (1)
10.21 Letter, dated June 9, 1999, from Bert E. Brodsky to Health Card (1)
10.22 Letter, dated June 8, 1999, from the Bert E. Brodsky Revocable Trust to
Health Card (1)
10.23 Letter Agreement, dated June 30, 1999, between the Bert E. Brodsky
Revocable Trust and Health Card (1)
10.24 Employment Agreement, dated July 1, 1999, between Health Card and
Bert E. Brodsky (1)
10.25 Letter, dated June 8, 1999, from Bert E. Brodsky to Health Card (1)
10.26 Form of Lock-Up Agreement (1)
10.27 Acquisition and Merger Agreement, dated as of June 27, 2000, between
Health Card and Pharmacy Associates, Inc. (3)
10.28 Lease Agreement, dated March 4, 1996, between Pharmacy Associates, Inc.
and Executive Park Partnership (4)
10.29 Amendment to Lease, dated November 2, 1998, between Pharmacy Associates,
Inc. and Executive Park Partnership (4)
10.30 Amendment to Lease, dated November 19, 1998, between Pharmacy Associates,
Inc. and Executive Park Partnership (4)
10.31 Lease Agreement, dated July 8, 1999, between Pharmacy Associates, Inc.
and Executive Park Partnership (4)
10.32 Asset Purchase Agreement dated as of March 5, 2001 among National Medical
Health Card Systems, Inc., PMP Acquisition Corp., Provider Medical
Pharmaceutical, LLC and members of PMP (3)
10.33 Employment Agreement, dated June 4, 2001, between National Medical Health
Card Systems, Inc. and Tery Baskin (6)
10.34 Stock Option Agreement, dated June 4, 2001, between National Medical
Health Card Systems, Inc. and Tery Baskin (6)
10.35 Stock Option Agreement, dated June 12, 2001, between National Medical
Health Card Systems, Inc. and James Bigl (6)
10.36 Asset Purchase Agreement dated January 29, 2002 by and among the Company,
Health Solutions Limited ("HSL"), HSL Acquisition Corp., a wholly-owned
subsidiary of the Company, and the security holders of HSL (8)
10.37 Receivables Purchase and Transfer Agreement dated January 29, 2002 by
and among the Company and certain of its subsidiaries and
NMHC Funding, LLC (8)
10.38 Loan and Security Agreement dated January 29, 2002, by and between NMHC
Funding, LLC and HFC Healthco-4, LLC, an affiliate of Healthcare
Finance Group, Inc. (8)
10.39 Lease Agreement dated as of August 1, 2001, between National Medical
Health Card Systems, Inc. and BFS Realty, LLC (6)
10.40 Amended Lease Agreement dated as of August 1, 2001, between National
Medical Health Card Systems, Inc. and BFS Realty, LLC (6)
10.41 2003 Employee Stock Purchase Plan (11)
10.42 Asset Purchase Agreement dated as of November 1, 2002, by and between
the Company, Integrail Acquisition Corp., Health Solutions, Ltd.,
and certain security holders of Health Solutions, Ltd.
10.43 Assignment Agreement dated as of November 1, 2002, by and between the
Company, Integrail Acquisition Corp., and Health Solutions, Ltd.
23.1 Consent of Ernst & Young LLP to the incorporation by reference in
the Registration Statement on Form S-8 (File No. 333-8224) of its
report dated September 30, 2002 (10)
23.2 Consent of Goldstein Golub Kessler LLP to the incorporation by reference
in the Registration Statement on Form S-8 (File No. 333-82224) of its
report dated August 31, 2001 (10)
23.3 Consent of BDO Seidman LLP to the incorporation by reference in the
Registration Statement on Form S-8 (File No. 333-82224) of its report
dated September 19, 2000 (10)
99.1 Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act
99.2 Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act
(1) Denotes document filed as an Exhibit to Health Card's Registration
Statement on Form S-1 (Registration Number: 333-72209) and
incorporated herein by reference.
(2) Denotes documentation filed as an Exhibit to Health Card's Report
on Form 10-K for the fiscal year ended June 30, 1999.
(3) Denotes document filed as an Exhibit to Health Card's Form 8-K for
an event dated July 20, 2000 and incorporated herein by reference.
(4) Denotes documentation filed as an Exhibit to Health Card's Report on
Form 10-K for the year ended June 30, 2000.
(5) Denotes document filed as an Exhibit to Health Card's Form 8-K for
an event dated March 5, 2001.
(6) Denotes document filed as an Exhibit to Health Card's Report on
Form 10-K for the year ended June 30, 2001.
(7) Denotes document filed as an Exhibit to Health Card's Definitive
Proxy Statement on Schedule 14-A filed on
December 21, 2001 and incorporated herein by reference.
(8) Denotes document filed as an Exhibit to Health Card's Report on
Form 8-K for events dated January 29, 2002 and incorporated herein
by reference.
(9) Denotes document filed as an Exhibit to Health Card's Amendment No.
1 on Form 8-K/A filed with the Securities and Exchange Commission on
May 21, 2002 and incorporated herein by reference.
(10) Denotes document filed as an Exhibit to Health Card's Form 10-K for
the fiscal year ended June 30, 2002.
(11) Denotes document filed as an Exhibit to Health Card's Definitive
Proxy Statement on Schedule 14-A on October 25, 2002, and
incorporated herein by reference.
(b) Reports on Form 8-K
(1) 8-K filed July 18, 2002 regarding retirement of the Convertible Notes.
(2) 8-K/A filed July 18, 2002 regarding retirement of the Convertible Notes.
(3) 8-K filed July 23, 2002 regarding change in certifying accountant.
(4) 8-K/A filed July 23, 2002 regarding change in certifying accountant.
- -----------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
(Registrant)
Date: November 12, 2002 By: /s/ James J. Bigl
--------------------------------------
James J. Bigl
Chief Executive Officer
By: /s/ David J. Gershen
-------------------------------------
David J. Gershen
Chief Financial Officer and
Treasurer
CERTIFICATION
I, James J. Bigl, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Medical
Health Card Systems, Inc. and its Subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data, and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/James J. Bigl
---------------------------
James J. Bigl,
Chief Executive Officer
CERTIFICATION
I, David Gershen, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Medical
Health Card Systems, Inc. and its Subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data, and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ David Gershen
--------------------------------
David Gershen,
Chief Financial Officer