SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year 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 000-26749
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
New York 11-2581812
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
26 Harbor Park Drive, Port Washington, New York 11050
(Address of Principal Executive Offices) (Zip Code)
(516) 626 - 0007
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None _______________________________________
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing: $8,367,338 as of September 21, 2001.
(APPLICABLE ONLY TO REGISTRANTS 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 REGISTRANTS)
Indicate the number of shares outstanding of the registrant's common stock,
as of the latest practicable date: 7,183,996 shares outstanding as of September
21, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
None
INDEX
Forward Looking Statements 4
PART I
Item 1. Description of Business 4
Item 2. Description of Property 24
Item 3. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 26
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 27
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis of Financial Condition 30
and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 40
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements on Accounting And Financial 40
Disclosures
PART III
Item 10. Directors and Executive Officers of Registrant 42
Compliance with Section 16(a) of the Exchange Act 44
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management 51
Item 13. Certain Relationships and Related Transactions 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 59
Signatures
INTRODUCTORY STATEMENTS
Forward Looking Statements
When used herein, the words "may," "could," "estimate," "believe,"
"anticipate," "think," "intend," "will be," "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 hereof and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 hereof.
PART I
Item 1. DESCRIPTION OF BUSINESS.
General
Health Card is an independent company, incorporated in New York in 1981,
that provides comprehensive pharmacy benefit management services. Health Card's
programs are designed to assist pharmacy benefit plan sponsors by monitoring the
cost and quality of prescription drugs and related services.
Recent Acquisitions
On July 20, 2000 (the "Effective Date"), pursuant to the terms of an
Agreement and Plan of Merger, dated as of June 27, 2000 (the "Agreement"), by
and among Health Card, PAI Acquisition Corp., a wholly owned subsidiary of
Health Card ("Acquisition"), Pharmacy Associates, Inc. ("Pharmacy Associates" or
"PAI") and the shareholders of Pharmacy Associates (each a "Shareholder" and
collectively the "Shareholders"), Acquisition merged with and into Pharmacy
Associates. Pharmacy Associates, located in Little Rock, Arkansas, is a regional
pharmacy benefit management company operating in Arkansas, Louisiana and
Mississippi.
Pursuant to the Agreement, the Shareholders as of the Effective Date
received an aggregate of $6,000,000 in cash and 400,000 shares of unregistered
common stock of Health Card. In addition, since Pharmacy Associates' pre-tax
income for the 12 months ending on June 30, 2001 (the "First Earn-Out Period")
was greater than $1,000,000. Health Card was required to pay to the Shareholders
the amount determined by the calculations described below (the "Contingent
Payment") :
(i) if Pharmacy Associates achieves a pre-tax income equal to or greater
than $2,500,000 in the First Earn-Out Period, then the Contingent
Payment for such Earn-Out Period shall be $1,000,000;
(ii) if Pharmacy Associates achieves a pre-tax income of greater than
$1,000,000 but less than $2,500,000 in the First Earn-Out Period, then
the Contingent Payment for such Earn-Out Period shall be equal to (x)
the amount of pre-tax income in excess of $1,000,000 achieved by
Pharmacy Associates during such Earn-Out Period (such excess amount
not to exceed $1,500,000) divided by $1,500,000, multiplied by (y)
$1,000,000; and
(iii)if Pharmacy Associates does not achieve a pre-tax income of at least
$1,000,000 in the First Earn-Out Period, then the Shareholders will
not be entitled to a Contingent Payment for such Earn-Out Period.
Seventy-five percent (75%) of the Contingent Payment is payable in cash,
with the remaining twenty-five percent (25%) payable in unregistered shares of
common stock of Health Card based on the Health Card Average Price (hereinafter
defined). The Health Card Average Price shall mean the average of the last
reported per share trading price of Health Card common stock over the 30
business day period immediately preceding the date of determination; provided,
that if such average is below $4.00, then the deemed Health Card Average Price
shall be $4.00, and if such average is above $6.00, the deemed Health Card
Average Price shall be $6.00. The Contingent Payment for the First Earn-Out
Period, which was paid in August of 2001, consisted of $750,000 in cash and
62,500 shares of Common Stock valued at $4.00 per share. If Pharmacy Associates'
pre-tax income for the 12 months ending June 30, 2002 meets or exceeds the
thresholds described above, Health Card will be obligated to make a second
Contingent Payment.
Additionally, 200,000 shares of Health Card common stock issued to the
Shareholders as part of the merger will be held in escrow as security for the
indemnification obligations of the Shareholders under the Agreement until July
20, 2002.
Pursuant to the Agreement, all of the Shareholders agreed not to become
involved, in any manner or capacity whatsoever, with any entity or individual
that engages or proposes to engage in pharmacy benefit management, except Health
Card or Pharmacy Associates, until June 27, 2003. Each of the Shareholders
further agreed not to (i) seek to transact any business with or alter the
relationship in any way between any of Pharmacy Associates' customers or
prospective customers and (ii) solicit for employment or in any way alter the
relationship between Pharmacy Associates and any person who was or is an
employee of Pharmacy Associates during the period of April 20, 2000 until July
20, 2003.
On March 5, 2001, PMP Acquisition Corp. (the "Purchaser"), a wholly owned
subsidiary of the Company, acquired substantially all of the assets, and certain
of the liabilities, of Provider Medical Pharmaceutical, LLC ("PMP"), an Oklahoma
limited liability company, pursuant to an Asset Purchase Agreement among the
Company, the Purchaser, PMP and the members of PMP. The assets acquired from PMP
included, among other things, PMP's accounts receivable and intellectual
property, PMP's rights under various contracts and the goodwill value of PMP's
business.
The purchase price for the assets consisted of (i) $4,000,000 in cash, (ii)
the satisfaction by the Company of PMP's bank indebtedness of approximately
$1,255,000, and (iii) cancellation of the $1,500,000 promissory note from PMP to
Health Card, dated January 16, 2001. Part of the cash portion of the purchase
price was paid into an escrow account to provide security for the
indemnification obligations of PMP and its members to the Purchaser. The Company
will be required to pay up to $1,000,000 of additional cash consideration if
certain financial targets relating to PMP's business are met over the next three
years.
The cash portion of the purchase price was obtained by a loan to the
Company from The Chase Manhattan Bank pursuant to a Master Grid Note in the
principal amount of $4,000,000.00 (the "Note"). The term of the Note expires on
December 31, 2001. Interest on any advances under the Note is payable beginning
on March 30, 2001 and the last day of each month thereafter; the interest rate
is determined at the time of each such advance. The amount borrowed under the
Note was repaid to the bank on March 9, 2001, and no advances have been made
since that date.
Simultaneously with the consummation of the acquisition, Health Card
entered into an employment agreement with Mark Lewandowski, the former President
of PMP, pursuant to which Mr. Lewandowski will serve as Health Card's Senior
Vice President of Business Development.
Industry Background
In response to escalating health care costs, cost containment efforts in
the health care industry have led to rapid growth in managed care and other
containment efforts. Despite these efforts, continued advances in medical
technology, new drug development and increasing drug utilization have led to
significant increases in health care costs. This has created a need for more
efficient, cost-effective drug delivery mechanisms. Pharmacy benefit management
companies evolved to address this need. These companies created an opportunity
for plan sponsors to provide prescription drug benefits to their plan members in
a cost-effective manner through:
o mail pharmacy services o claims management
o formulary management o drug review and analysis
while often improving patient compliance with recommended drug and
treatment guidelines. An industry source estimates that 2000 U.S. purchases for
prescription drugs increased 16% from 1999 to approximately $141 billion. The
total number of prescriptions filled in 2000 reached approximately 2.8 billion.
Services
General
Sponsors of pharmacy benefit plans managed by Health Card are located
throughout the United States, and include managed care organizations, local
governments, unions, corporations, one HMO and third party health care plan
administrators. Sponsors retain Health Card to manage the prescription drug
plans that they maintain for the benefit of their plan participants. Health Card
consults with sponsors to assist them in customizing their prescription drug
plans to meet the particular sponsor's needs. Heath Card has also developed and
is continuing to expand its consulting and disease information services to meet
(i) the growing needs of sponsors to address cost management pressures, and (ii)
the increasing needs of plan participants, particularly those requiring costly
long-term and recurring therapies.
Health Card's on-line claims management system manages the cost of the plan
at the point of service by confirming that:
o the submitted claim is in conformity with plan terms and conditions,
o the plan participant is eligible for benefits, and pays any applicable
deductible and/or co-payment amounts, and
o only the negotiated discounts on prescription items will be paid to
participating pharmacies.
The data collected during the claims management process provides a basis
for reporting and analyses upon which recommendations are made to sponsors.
These recommendations are intended to assist sponsors in lowering the costs of
their plans while improving quality and service. See "Services - Data Access,
Reporting and Information Analysis."
Health Card provides a wide variety of services including, but not limited
to:
o Claims Management
o Pharmacy Network
o Benefit Design Consultation
o Preferred Drug Management
o Drug Review & Analysis
o Consulting Services and Disease Information Services
o Data Access, Reporting & Information Analysis
o Physician Profiling
Claims Management
Claims Processing. Each sponsor's plan participant is issued a health card
which identifies the plan participant and the sponsor. The card may be utilized
at any one of the pharmacies participating in Health Card's multi-state pharmacy
network and the sponsor's plan. Health Card allows the plan participant to
purchase approved prescription drugs and the other physician-prescribed items,
with the plan participant paying a deductible and/or co-payment amount, if any,
to the pharmacy.
Plan participants present their health card together with a physician's
prescription to a participating pharmacy. The pharmacist, using standard
industry software, enters each claim on the pharmacy's computer; the claim is
electronically communicated to Health Card for on-line real time processing and
resolution. In the ordinary case where the prescription is for a drug listed on
the sponsor's formulary, the pharmacist is advised of the appropriate co-payment
and deductible, if any, to be collected from the plan participant and of the
payment the pharmacy will receive from Health Card. Health Card's on-line claims
management system sends appropriate messages regarding preferred drugs and
contraindications, based upon plan participants' existing claims history with
Health Card. The prescription is then dispensed by the pharmacist to the plan
participant, who pays the appropriate co-payment and/or deductible amount and
signs a signature log maintained by the participating pharmacy. Plan
participants are provided with a list of pharmacies participating in Health
Card's pharmacy network. Plan participants may alternatively choose to fill
prescriptions at a non-participating pharmacy. Occasionally a plan participant's
claim is rejected or a prior authorization is required based on plan parameters,
in which case the participant may be referred to the plan's sponsor or to Health
Card's customer service department.
As of November 1, 2000, Pharmacy Associates' sponsors' claims were
incorporated into Health Card's on-line claims management system. As of June 16,
2001 PMP's sponsors' claims were incorporated into Health Card's on-line claims
management system.
Invoicing and Payments. Often, sponsors are charged an agreed fee for each
prescription filled plus an administrative and/or dispensing fee for managing
each claim. Sometimes sponsors are charged an adjustable monthly fee or
projected maximum fee based on the number of plan participants, utilization,
costs of drugs or other criteria. Health Card provides flexibility of invoicing
for its sponsors. Sponsors pay Health Card; Health Card pays an individually
negotiated amount to its participating independent and chain pharmacies. Plan
participants filing for direct payment receive an allowable payment which is
usually specified by the sponsor. See "Services - Pharmacy Network", and Note 1
to the Consolidated Financial Statements comprising Item 8 hereof.
Rebate Administration. Drug manufacturers may issue rebates in connection
with the use of certain prescription drugs. Health Card submits claims for
rebates for specified sponsors pursuant to an agreement with its rebate
administrator (the "Administrator") effective as of July 1, 2001. Based on the
agreement, the payment of rebates is contingent upon Health Card adopting the
Administrator's formulary for Health Card's specified sponsors. Health Card
submits the claims for its specified sponsors to the Administrator. The
Administrator submits Health Card's rebate claims, and may submit such claims
along with rebate claims of others, to the appropriate drug manufacturer,
pursuant to the agreements the Administrator has negotiated with these drug
manufacturers. Health Card's agreement with the Administrator provides that it
is obligated to pay Health Card a per claim fee, within a specified period of
time after each quarter. The Administrator retains a portion of the total
rebates as an administrative fee. The agreement may be terminated at any time by
either party for any reason after the initial term of the Agreement, which ends
on June 30, 2004; termination prior to such date requires the payment of an
early termination fee by the terminating party. Pursuant to a prior agreement
with PAI, the Administrator has prepaid certain estimated rebates to PAI. PAI is
obligated to repay this amount, plus interest at 8.5%, in four equal
installments at the end of four successive quarters starting December 31, 2000,
and ending September 30, 2001.
Pursuant to a verbal agreement between Health Card and Specialty Pharmacy
Care, Inc. ("Specialty"), a wholly owned subsidiary of Health Card, Health Card
submits claims for rebates to Specialty for certain of Health Card's sponsors.
Specialty performs the services of a rebate administrator for which it is paid
an administrative fee. Health Card has entered into approximately forty separate
agreements with drug manufacturers. While the terms of each agreement between
Health Card and the drug manufacturers are unique, the basic concept is the
same. Such agreements generally provide that Health Card must list the specified
products of each of the drug manufacturers on Health Card's approved formularies
with the specified sponsors. Health Card may not prefer, either directly or
indirectly, any competing products over the specified drug manufacturer's
products except for reasons of medical appropriateness. The drug manufacturers
are obligated to pay rebates within a specified period of time after Health Card
submits its claims, based on agreed upon specified percentages which can vary
based on certain contractual criteria. The manufacturers establish a baseline
rebate based on Health Card's initial claims and are obligated to pay
incremental rebates based on increases beyond the baseline.
Upon receipt of rebates from the drug manufacturers or the rebate
administrators, Health Card shares certain amounts with its sponsors. All, part,
or none of the rebates received by Health Card may be remitted to certain of
Health Card's sponsors, depending upon the terms of Health Card's agreements
with each sponsor. See Item 7 hereof.
Pharmacy Network
Health Card maintains a pharmacy network that includes both retail and mail
options. Health Card's agreements with many pharmacies do not require it to make
payments within a specified period. However, Health Card knows from experience
that timely payment is a significant consideration of the pharmacies. Health
Card endeavors to process claims promptly and obtain funds from sponsors prior
to making payments to participating pharmacies; still there can be no assurance
that sponsors will pay Health Card in a timely fashion. Health Card may be
required to pay participating pharmacies whether or not it has been paid by its
sponsors. The loss of a substantial portion of the pharmacies in the pharmacy
network could have a material adverse effect on Health Card's business,
operating results and financial condition. See Item 7 hereof.
Retail Pharmacy Network Management. Health Card maintains a comprehensive
multi-state network of participating pharmacies. Both the retail and mail order
components of the pharmacy network are managed by Health Card's on-line claims
management system. Certain of Health Card's sponsors require Health Card to
maintain a pharmacy network with specified numbers of pharmacies in various
locations to serve plan participants. Pharmacy Associates also maintains a
network in certain states in the Southeast. Health Card's retail pharmacy
network consists of over 53,000 pharmacies, with the result that cards issued by
the Company are recognized in over 90% of pharmacies in the U.S.
Mail Pharmacy Claims Management. Mail pharmacy service is generally used by
plan participants as a cost effective means of minimizing the inconvenience
resulting from repeated trips to retail pharmacies to fill prescriptions; this
is especially common when a plan participant with a chronic condition receives
long-term drug therapy. In addition, the plan participant generally saves money
through a reduction in the number of co-payments he would have paid had the
prescriptions been filled repeatedly at a retail pharmacy. Further, with mail
pharmacy service, the sponsor is charged a lower dispensing fee for prescription
ingredients compared to those charged by a retail pharmacy.
Health Card presently has a non-exclusive relationship with Eckerd Health
Services d/b/a Express Pharmacy Services ("Express Pharmacy") pursuant to which
Express Pharmacy acts as a participating pharmacy and dispenses drugs to plan
participants by mail. The agreement between Health Card and Express Pharmacy is
for a one year automatically renewable term. The agreement was renewed as of
June 30, 2001. Either party has the right to terminate the agreement at the end
of any renewal term, in each case on 90 days' prior written notice. The
agreement provides that Express Pharmacy will:
o provide the covered drugs by mail to participants
o collect the appropriate co-payment and
o if required by the plan, collect any additional payment if a brand
drug is dispensed when a generic drug is available.
Claims submitted by mail order pharmacies are managed using Health Card's
on-line claims management system and are subject to the same review and
verification as those claims submitted by retail pharmacies.
E-Pharmacy Service Management. Health Card intends to establish and
maintain an e-pharmacy website pursuant to which participants in Health Card's
e-pharmacy program will be able to purchase over-the-counter medications,
vitamins, nutritional supplements and prescription drugs through the Internet.
The Company's previous e-pharmacy arrangement has been terminated.
Benefit Design Consultation
Health Card assists sponsors in defining their financial and
employee-benefit objectives for their prescription drug benefit plans and in
developing a program to meet such objectives. In addition, Health Card staff
analyze and provide recommendations to sponsors regarding how to improve their
plan(s) performance based upon their objectives. General areas of focus include:
o Participant cost sharing levels
o Covered and excluded drugs
o Clinical management strategies
o Alternate programs and services
The clinical services staff, with occasional assistance from the operations
staff, produces customized periodic reports, and disseminates publicly
available, peer reviewed, nationally recommended treatment data regarding
generic substitution guidelines. Once a plan design has been implemented, the
clinical and account management staff monitors plan performance for customer
satisifaction and cost effectiveness, and may periodically recommend changes to
the plan.
Drug Review and Analysis
Health Card's drug review and analysis services include prospective reviews
of potential claims and concurrent and retrospective reviews of submitted
claims. These include a series of on-line reviews which permit a pharmacist
filling a prescription to examine the plan participant's claims history for:
o drug interactions o geriatric or pediatric precautions
o premature refills of prescriptions o compliance with prescriptions
o duration and duplication of therapy o other contraindications
o pregnancy and breast feeding precautions
Health Card transmits such information to the dispensing pharmacist for
information purposes only - not to replace the prescribing physician's or the
dispensing pharmacist's professional judgment. Health Card's consulting
department retrospectively analyzes the drug utilization patterns of plan
participants for each sponsor. Health Card may then recommend changes in the
sponsor's plan design, preferred drug management, and disease information
systems initiatives to contain costs or to better serve the plan participants.
Consulting Services and Disease Information Services
Pharmacy Benefit Plan Consulting. Health Card's consulting services are
designed to enable sponsors to enhance the quality of plan participants' care
while reducing related costs. Using data relating to the progression and
treatment of diseases, Health Card disseminates information regarding therapies
that are aimed at treating a disease in a cost-effective manner. Health Card's
information systems, which include a comprehensive database, allow Health Card
to provide (i) drug review and analysis, (ii) appropriate reports and
information, and (iii) disease information services. Health Card believes that
technology and information systems advances will allow for future integration of
health care claims information, including hospital, laboratory and clinical
costs. Health Card further believes that integration will enable it to assess
outcomes on a statistical basis and based on such statistical assessments to
make recommendations regarding effective prescribing practices. Health Card
believes this should allow for improved patient care while controlling therapy
costs.
Health Card has established a Pharmacy & Therapeutics Committee (the "P&T
Committee") currently comprised of physicians and pharmacists. The P&T
Committee's primary responsibility is to assist sponsors in designing a well
managed, therapeutically appropriate, cost-effective preferred drug listing or
"formulary." The goal of the P&T Committee is to enable sponsors to optimize
plan participant care through drug policy development and education. The P&T
Committee typically meets quarterly and performs the following functions:
o provides information to sponsors to ensure that the covered drugs of
each plan reflect the current standard of medical practice and
pharmacology,
o evaluates drugs for inclusion in a plan as a preferred drug,
o analyzes current literature for safety, efficacy and
cost-effectiveness of covered drugs,
o provides recommendations on drug therapy and utilization,
o evaluates drug review and analysis programs and criteria,
o determines those drugs which require prior authorization from the
sponsor, and
o reviews the associated guidelines for those drugs' proper use.
The P&T Committee currently consists of eight members: Martin Edelstein,
M.D., Paul Cohen, M.D., Carole Moodhe, M.D., and David Grossman, M.D., each of
whom is a practicing physician and medical school professor, Jack M. Rosenberg,
a university professor of clinical pharmacy and pharmacology, Joseph B. Laudano,
a manager of medical affairs of a major drug company, Howard G. Levine, a
pharmacist who is the Chairman of the Board of an independent pharmacy group,
and John Ciufo, who is Health Card's Senior Vice President of Strategic Planning
and its liaison with the P&T Committee. Mr. Ciufo is the only member of the P&T
Committee otherwise affiliated with Health Card. Vytra Health Plans, Health
Card's largest customer, has the right to designate one member of the P&T
Committee, but has not exercised its right. Each Committee member is requested
to disclose his or her affiliation with any drug company. Mr. Laudano and Mr.
Rosenberg have disclosed a current affiliation with drug companies.
Disease Information Services. Through its disease information services,
Health Card provides information to sponsors that is intended to enable them to
enhance their prescription benefit plans and to improve the treatment of plan
participants with certain medical conditions. In providing disease information
services, based upon recommended drug and treatment guidelines, Health Card:
o reviews and analyzes drugs prescribed and prescriptions dispensed,
o recommends plan guidelines, and
o conducts plan participant and physician profiling.
By analyzing plan participants' pharmacy claims patterns, Heath Card can
provide information to sponsors and health care providers, assisting in the
early identification of patients whose care might be improved through additional
or alternative treatment of medication. Health Card has developed disease
information systems covering cardiovascular and gastrointestinal conditions,
migraines, diabetes and asthma, among others.
Health Card's disease information services utilize the recommended drug and
treatment guidelines, changes in the drug and treatment guidelines, current
medical literature and its own assessments to identify plan participants
"at-risk" for a particular disease. If the disease information services identify
participants "at-risk" for particular diseases, Health Card may provide the
recommended drug and treatment guidelines to sponsors, treating physicians and
plan participants. If requested by the sponsor, Health Card monitors a
participant's compliance with the recommended drug and treatment guidelines,
including prescription usage. If it appears, based upon Health Card's analysis
of the participant's claims history, that the recommended drug and treatment
guidelines are not being applied, Health Card may, if requested by the sponsor,
contact the physician, via either telephone or letter, suggesting additional
options. Physician performance and adherence to the recommended drug and
treatment guidelines are monitored by using Health Card's information systems.
Data Access, Reporting and Information Analysis
Health Card's on-line claims management system enables Health Card to
efficiently provide sponsors with:
o On-line system access whereby the sponsor is able to update and
maintain certain plan areas such as participant eligibility
o Periodic utilization and financial reports, which Health Card
representatives utilize to assist sponsors regarding benefit design,
cost containment initiatives, disease information initiatives, generic
equivalents programs and formulary management
o Plan performance indicators and ad hoc reporting through Health Card's
proprietary decision support tool - HC Focus.
Physician Profiling
Health Card will, at the request of either a physician or a sponsor,
analyze (i.e., profile) a physician's prescription history and consult with
either the physician or the sponsor about the physician's prescribing pattern.
Health Card might, for example, discuss alternatives to therapies that the
physician regularly prescribes based on the drug and treatment guidelines. This
practice is designed to enhance the therapeutic benefits received by the plan
participant and, where possible, to achieve cost savings. It is also designed to
promote conformity with plan benefits and the recommended drug and treatment
guidelines.
Sponsors
Health Card's Sponsors are located throughout the United States. Sponsors
include managed care organizations, local governments, unions, corporations, an
HMO and third party health care plan administrators of prescription drug
programs. Health Card's sponsors are typically asked to sign a standard form of
managerial agreement that governs Health Card's relationship with that sponsor.
Pursuant to this standard agreement, Health Card pays claims and furnishes other
related services through a network of pharmacies. The sponsor provides the
details of the plan to be managed, along with a list of all covered participants
and eligibility updates. The sponsor is liable for all charges incurred by
unauthorized people unless Health Card was notified in writing or electronically
of ineligibility. Health Card is obligated to ensure that an adequate number of
member pharmacies are available, furnish a description of the plan to the
pharmacies, require such pharmacies to comply with the member pharmacy
agreement, process claims and determine whether claims qualify for payment.
Health Card is also obligated to furnish the sponsor with a bi-weekly or
semi-monthly account statement which includes a summary of claims costs in the
preceding period, and a description of the drugs which are included and excluded
from the plan.
Pursuant to the standard agreement, the sponsor is obligated to pay Health
Card the cost of claims to Health Card (less any cash advances paid) as the
bi-weekly or semi-monthly statements are received by the sponsor. The account
statement will also include an amount due to Health Card for the auditing,
approval and payment of claims processed during the preceding period. The
contracting party typically agrees to make all payments within a specified
period after the billing cycle, except that any additional charges, for which a
separate fee is agreed to by the parties, will be remitted by the contracting
party within 30 days after receipt of billing from Health Card. Health Card
agrees to establish the cost of drugs to each sponsor. The sponsor can review
these records. While most of Health Card's larger sponsors negotiate other
agreements with Health Card, many sponsors sign the standard form or a modified
version of the standard form. The specific terms of each managerial agreement,
including any incentive arrangements, are negotiated by Health Card on a case by
case basis. While Health Card may take into account factors such as the number
of plan participants, margins and economies of scale, among others, in
determining the terms of its arrangements with sponsors, Health Card generally
does not use set guidelines when determining these terms. See Item 7 hereof.
Significant Sponsors
For the fiscal year ended June 30, 2001, Vytra Health Plans Long Island,
Inc., Vytra Health Plans Managed Systems, Inc. and Vytra Health Services, Inc.
(individually and collectively, "Vytra") was the only sponsor that accounted for
10% or more of Health Card's revenues. Health Card has been providing services
to Vytra since 1990. The business relationship with Vytra is detailed in the
immediately following sections.
Vytra
Vytra is a particularly significant sponsor, as the following table
indicates:
Percent of
Health Card's Number of
Year Ended June 30, Revenues Participants
1999 39% 150,061
2000 27% 133,218
2001 16% 128,720
Health Card provides services to Vytra under an arrangement that expires in
December 2001 (the "Current Arrangement").
Under the Current Arrangement, Health Card provides Vytra pharmacy benefit
management services and charges Vytra a fee based on the number of claims
processed during each applicable billing period. Vytra is invoiced for the
processed prescription claims of its members on a semi-monthly basis.
Pursuant to the Current Arrangement, Health Card is Vytra's primary
provider of pharmacy benefit management services. Vytra has the right to place a
percentage of its claims with other pharmacy benefit management companies,
individual physicians or groups of physicians associated with Vytra. If Vytra
processes more than such percentage of its claims with other parties, Health
Card can terminate the Current Arrangement or renegotiate the present amounts
charged to Vytra.
The Current Arrangement requires Health Card to arrange for and maintain an
adequate and accessible pharmacy network for Vytra plan participants (i.e., a
specified number of pharmacies). Health Card meets this standard if one or more
participating pharmacies are located in each zip code in Queens, Nassau and
Suffolk County, in the State of New York. In addition, Health Card must exercise
its best efforts to maintain pharmacy network participation in accordance with
certain historical levels. Health Card is not responsible if the number of
pharmacies in the network declines because of pharmacy closings, consolidations
or changes in the pharmacy payment schedule. Health Card has agreed with Vytra
that it will not terminate a major chain of participating pharmacies during the
term of the Current Arrangement without Vytra's consent. However, if Vytra does
not consent and the inclusion of such chain results in higher actual costs to
Health Card, then Vytra will be required to pay such increase on a quarterly
basis. In addition, Vytra may require Health Card to add specific pharmacies to
the pharmacy network. Similarly, if the inclusion of such pharmacies results in
higher actual costs to Health Card, Vytra will be responsible for the increase.
The Current Arrangement requires that Health Card maintain a Pharmacy &
Therapeutics Committee. Vytra has the right to designate one representative to
serve on the Pharmacy & Therapeutics Committee, but, as of the date of this
Annual Report on Form 10-K, Vytra has not exercised this right.
The Current Arrangement also sets forth certain guarantees that Health Card
must meet. These include:
o processing certain percentages of claims within certain periods,
o making all reasonable efforts to process all claims within a maximum
period,
o answering all calls within a specified average time,
o ensuring that a certain percentage of mail order prescriptions, which
do not require pharmacy or physician intervention, are dispensed
within certain periods,
o making all reasonable efforts to make sure all mail order
prescriptions are dispensed within a maximum time period, o reaching
certain generic substitution rates, and
o maintaining a certain level of rebates per claim.
The Current Arrangement further requires that Health Card establish an
irrevocable standby letter of credit in favor of Vytra for $2,000,000 in order
to ensure the fulfillment of certain of Health Card's obligations to Vytra. As
of the date of this Annual Report on Form 10-K, Vytra has not drawn against this
letter of credit.
If Health Card were to lose Vytra as a sponsor, or lose a significant
portion of Vytra's business, it would have a material adverse effect on Health
Card's business, operating results and financial condition.
Sales and Marketing
Health Card markets its services through a sales and marketing department
led by the Senior Vice President of Sales and Marketing, who utilizes a direct
sales force of eight Regional Sales Directors and external brokerage and
consultant relationships. Health Card's sales executives target sponsors
throughout the United States. In addition, Health Card contracts with brokers
and consultants who are retained to market Health Card's services to prospective
sponsors for agreed upon fees based on the number of plan participants enrolled
in a Health Card supported plan and/or the number of claims processed under such
plan. Health Card also attends numerous trade shows and utilizes advertising,
public relations and marketing literature for sales support.
In addition, Health Card has recently launched a marketing strategy that
includes new corporate brand and identity. The Company has adopted new visual
imagery and taglines to convey its heightened focus on blending "Best in Class"
practices with high technology and personalized service. At the core of the new
imagery is a stock car racing theme focused on the visual imagery of pit crews
projecting the Company's "High Tech, High Touch" and "extraordinary customer
service" philosophy. This "branding" and new images will be used in all
marketing materials and print media advertising. Additionally, Health Card
markets its services by attending, exhibiting and providing guest speakers to a
number of industry trade shows.
Furthermore, Health Card continues to expand its web presence
(www.nmhc.com) as both a functional tool for clients to conduct the many
value-added services provided by Health Card, and as a portal for eligible plan
members to make inquiries and place orders. The web site offers a page dedicated
to online services which allows plan participants to fill out customer service
surveys and to obtain direct payment claim forms, and to access the pharmacy
network listings. In addition, Health Card uses its web presence to make
available specific resources to clients who have unique reporting and data
management requests. All member information is subject to the most stringent
security measures available in the industry, protecting patient confidentiality
and meeting HIPAA compliance standards.
Competition
Health Card competes with numerous companies which provide the same or
similar services. Many of Health Card's competitors have been in existence for
longer periods of time and are better established than Health Card. Many of them
also have broader public recognition, financial and marketing resources
substantially greater than Health Card, and more experienced management. In
addition, some of Health Card's sponsors and potential sponsors may find it
desirable to perform for themselves those services now being rendered by Health
Card. Furthermore, there is a distinct possibility that consolidation and
alliances within the industry will adversely impact the operations and prospects
for independent pharmacy benefit management companies such as Health Card.
Health Card's ability to attract and retain sponsors is substantially
dependent on its capability to provide efficient and accurate claims management,
pharmacy benefit program management and related reporting, auditing and
consulting services. Health Card believes that the following factors help Health
Card successfully compete:
o a broad base of experience in the information technology and pharmacy
benefit management industries,
o flexible and sophisticated on-line information systems, which
integrate all of the data input, reporting, analysis, and access
functions provided by Health Card, and
o a focus on customer service.
Employees
As of September 7, 2001, Health Card and its subsidiaries had 149
employees: 43 of these employees are located in the Little Rock, Arkansas and
Tulsa, Oklahoma offices. Of the 149 total employees, 146 are full-time and 3 are
part-time. Health Card is not a party to any collective bargaining agreement,
and Health Card considers its relations with its employees to be satisfactory.
See Item 13 hereof.
Information Systems
Health Card's on-line claims management system depends in large part on
software licensed from an unaffiliated party. By a license agreement dated
February 18, 1998, Health Card was granted a non-exclusive and nontransferable
perpetual license to use this party's claims adjudication software system. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" in Item 7 hereof and Note 9
("Commitments and Contingencies") to the Consolidated Financial Statements
comprising Item 8 hereof.
Health Card receives data processing services and technology infrastructure
consulting services from Sandata, Inc. and its subsidiaries ("Sandata"). Sandata
is a public company (NASDAQ: SAND) of which Bert E. Brodsky, Health Card's
Chairman of the Board and Chief Executive Officer, is also Chairman, CEO,
Treasurer and a principal stockholder. See Item 13 hereof.
Government Regulation
The activities of pharmacy benefit management companies such as Health Card
are subject to regulation at the federal, state and local levels. While Health
Card may not have complied in the past, it has recently reviewed its operations
for areas of non-compliance and believes that it substantially complies with the
laws and regulations material to the operation of its business or is taking
steps to identify and comply with such laws and regulations. The laws that may
affect Health Card's operations and relationships include, but are not limited
to, the federal Anti-Kickback, FDA, anti-trust and ERISA laws, the Health
Insurance Portability and Accountability Act and the laws of various states
relating to health, utilization review, and the licensing and regulation of
professions, including physicians, nurses, pharmacists and pharmacies. Health
Card is also subject to laws and regulations relating to business corporations
in general.
Regulatory authorities have very broad discretion to interpret and enforce
these laws and to promulgate corresponding rules and regulations. Violations of
these laws and regulations may result in criminal and/or civil fines and
penalties, injunctive relief to prevent future violations, other sanctions, loss
of professional licensure and exclusion from participation in federal and state
health care programs, including Medicare and Medicaid.
The interpretation and applicability of some of the laws and regulations
applicable to Health Card's business are unclear. Health Card's business
activities and relationships with sponsors, pharmacies, rebate administrators,
plan participants, and brokers have not been the subject of regulatory
investigation or review on either the state or the federal level. Health Card
has not obtained or applied for any opinion of any regulatory or judicial
authority that its business operations and relationships with sponsors,
pharmacies, rebate administrators, plan participants or brokers are in
compliance with applicable laws and regulations. There can be no assurance that
Health Card has interpreted the applicable laws and regulations in the same way
as regulatory or judicial authorities, or that the laws and regulations and/or
the interpretation thereof will not change.
A more detailed analysis of certain specific laws and regulations affecting
the business, operations and relationships of Health Card is set forth below.
Anti-Kickback Regulations
The federal Anti-Kickback Statute prohibits knowingly paying or receiving
remuneration in return for referring an individual for the furnishing of an item
or service, or for the purchasing, ordering or arranging for any item or service
for which payment may be made in whole or in part under a federal health care
program, including Medicare or Medicaid. The term "remuneration" in the statute
expressly includes any kickback, bribe or rebate. Violation of this law is a
felony, punishable by fines up to $25,000 per violation and imprisonment for up
to five years. Violation may also give rise to civil penalties of up to $50,000
per violation and exclusion from the Medicare and Medicaid programs.
Safe harbor regulations have been adopted under the Anti-Kickback Statute
which immunize certain remuneration arrangements which might otherwise violate
the statute, such as properly reported discounts (including certain rebates)
received from vendors and properly disclosed payments made by vendors to group
purchasing organizations. While it is unclear whether Health Card's conduct,
operations, and relationships would fall within a safe harbor under the Statute
or regulations promulgated thereunder, failure to fall within a safe harbor does
not mean that Health Card's practices would violate the law, although it may
result in heightened scrutiny or challenge.
Health Card believes that it is not in violation of the Anti-Kickback
Statute because (i) it does not receive any remuneration directly from Medicare,
Medicaid or any other government sponsored health care program, and (ii) it does
not believe the payments to it from any of its sponsors, other than Vytra and a
state licensed HMO client, are derived from funds from Medicare, Medicaid or
other federal government sponsored health care programs. With respect to other
sponsors, although Health Card does not have any knowledge to the contrary, it
cannot be sure that no portion of a sponsor's payment is derived from a
government health care program source. However, even if Health Card were found
to receive indirectly a benefit from such a government sponsored health care
program in the form of a rebate from a rebate administrator or from a drug
manufacturer, Health Card believes that its conduct would not violate the
Anti-Kickback Statute because it receives and shares rebates with its sponsors
only to share cost savings and reduce the cost of pharmacy benefit services, not
to induce referrals. Health Card cannot be sure, however, that a government
regulatory agency or judicial tribunal would not view the receipt and sharing of
rebates as a violation of the federal Anti-Kickback Statute.
The Anti-Kickback Statute and related regulations have been broadly
interpreted by the federal courts to prohibit the payment or receipt of any form
of remuneration, even if only one purpose of such remuneration is to obtain a
referral for any item or service that is covered by a federal health care
program. Certain states other than New York have similar statutes that may
extend the prohibitions to items or services that are paid for by
non-governmental third-party payers, as well as individuals who pay directly for
their own health care.
Health Card is not aware of any instance in which the Anti-Kickback Statute
has been applied (i) to prohibit independent pharmacy benefit management
companies from receiving rebates from drug manufacturers based on drug sales by
pharmacies to plan participants, formulary management programs or therapeutic
substitution programs, or (ii) to the contractual relationships between
independent pharmacy benefit management companies and their sponsors and
participating pharmacies.
In the last few years, private citizens have commenced litigation, known as
Qui Tam actions, against health care providers and suppliers on behalf of the
federal government alleging that such providers and suppliers filed false claims
with the Medicare and/or Medicaid programs. While the law on the issue is still
unsettled, if Health Card's activities with respect to its receipt and sharing
of rebates were challenged as a kickback in such a Qui Tam proceeding and
determined to form the basis for a false claim under the Anti-Kickback Statute,
Health Card could be subject to substantial penalties and treble damages in
addition to the punishments described above. Health Card's exposure to
litigation and enforcement actions is increased because of the availability of
such Qui Tam actions to a broader class of plaintiffs.
Pharmacy Regulations
New York prohibits unlicensed persons from engaging in the practice of
pharmacy. The practice of pharmacy is defined as "the preparing, compounding,
preserving, or the dispensing of drugs, medicines and therapeutic devices on the
basis of prescriptions or other legal authority." Health Card believes that it
is engaging in the business of providing management and administrative services
for prescription benefit plans and not in the practice of pharmacy.
As a precautionary measure, in order to preclude any possible finding that
it is engaged in the unauthorized practice of pharmacy, Health Card became a
licensed pharmacy in New York in March 1999. Health Card cannot be sure that the
New York Department of Education will not claim that Health Card was engaged in
the practice of pharmacy without a license prior to that date. Health Card has
not determined, and does not believe that it could determine with any degree of
accuracy, the nature or extent of any sanctions that might be imposed on it as a
result of such claim.
As a licensed pharmacy, Health Card is subject to all of the laws and
regulations governing pharmacies including those regarding professional
misconduct. Professional misconduct for a pharmacy is defined to include, among
other things, (i) splitting fees in connection with the furnishing of
professional care or services, including the sale of drugs, (ii) receiving
valuable consideration as a commission, discount or gratuity in connection with
the sale of drugs, and (iii) paying or receiving any consideration to or from a
third party for referring a patient, or in connection with the performance of a
professional service.
Health Card is not aware of any interpretation by any court or governmental
agency of the laws and regulations regarding fee splitting or referral fees by
licensed professionals to any arrangements similar to those engaged in by Health
Card nor has Health Card obtained or applied for any opinion of any regulatory
or judicial authority that its business operations or relationships are or will
be in compliance with such laws and regulations. The following aspects of Health
Card's business should be considered in light of these laws and regulations.
Health Card receives rebates direct from drug manufacturers as well as from
one or more third party rebate administrators through contracts between them and
pharmaceutical companies. While Health Card shares the proceeds of those rebates
with some of its sponsors, it does not share any rebates with pharmacies.
In connection with its formulary management program, Health Card's P&T
Committee, or its formulary administrators, considers the net cost of various
drugs as one factor in determining which drugs should be included in the Health
Card formulary. While the determination to include or exclude drugs from the
formulary is primarily based on the quality and efficacy of the drugs, their net
cost after any available rebate is also considered. If Health Card chooses to
include certain drugs in its formulary, or adapt the formulary of its formulary
administrator, for which it receives rebates, it may be required under the terms
of its agreements with rebate administrators or drug manufacturers to exclude
certain other drugs from its formulary in order to receive those rebates.
Although it is licensed as a pharmacy, Health Card does not believe that
its activities as a pharmacy benefit manager constitute the rendering of
pharmacy services that would subject it to the professional misconduct
regulations for its pharmacy benefit management activities. Even if it were
determined that Health Card's activities constitute the practice of pharmacy,
Health Card does not believe that any of its activities are of the type
prohibited by the laws governing the pharmacies or the rules of professional
misconduct applicable to pharmacies. Health Card cannot be sure, however, that
the New York Department of Education would not come to a different conclusion
and commence a regulatory investigation or seek to impose sanctions on it for
such conduct.
Regulations Regarding Certain Rights of Privacy and Confidentiality
It is also professional misconduct in New York for a pharmacy to
disseminate personally identifiable health information about a patient without
the patient's prior written authorization. Improper dissemination of such
information may subject a pharmacist to fines, penalties, other sanctions,
injunctive relief, professional disciplinary actions and loss of license.
In the course of its business, Health Card receives data regarding each
plan participant's prescription drug utilization history. Under some
circumstances, Health Card may also receive other medical information regarding
a plan participant. The availability of such information to Health Card may
enable it to draw certain conclusions about a plan participant's health. For
example, a plan participant receiving long-term insulin therapy may be
identified as a diabetic. Health Card calls these identifications "inferred
disease states."
Based on the information Health Card obtains regarding a plan participant's
inferred disease state, Health Card may make recommendations to sponsors on how
to reduce costs and improve the plan to better serve plan participants. Health
Card routinely shares such information with its sponsors through its computer
network. Under the terms of most plans, Health Card also may be required to
provide patient specific information directly to sponsors, including drug
history information that may suggest an inferred disease state. In utilizing the
data received by Health Card in this manner, it is possible that Health Card
could be found to have violated the privacy rights of plan participants under
the laws of New York and other states in which it does business. Such a
determination could have a material adverse effect on Health Card's ability to
provide disease information services, an area of its business that Health Card
believes gives it a competitive advantage and is anticipated to be an important
element of its future success.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
required the Secretary of Health and Human Services to issue standards
concerning health information privacy. Health Card has formed a HIPAA Compliance
Committee comprised of a representative from each of Health Card's departments.
The group has been meeting periodically since October 2000 to review the HIPAA
Compliance Project and establish new goals as needed. The goal of the Committee
is to focus internal resources on the standardization of electronic
communication wherever appropriate; to implement practices to support the
principles of patient privacy; and to implement practices to ensure the security
of electronic transmissions.
Health Card is or is becoming compliant with the standards of communication
for the PBM industry set by the National Council for Prescription Drug Programs.
Health Card performs risk assessments, employee training with respect to patient
confidentiality, and evaluations of business practices in order to continue to
support patient privacy. The HIPAA Compliance Committee has presented several
reports to senior management concerning the goals of standardization, patient
privacy and electronic security.
Health Card is not a covered entity as defined by the HIPAA Privacy
Regulations. Health Card is a Business Associate as defined by the Privacy
Regulations and as such supports HIPAA requirements as an extension of our
existing business practices.
Health Card cannot predict accurately what effect HIPAA regulations may
have on its operations, and there can be no assurance that the restrictions and
duties imposed by the regulations will not have a material adverse effect on
Health Card's business, results of operations or financial conditions.
Regulations Applicable to Health Care Professionals
All states, including New York, regulate the practice of medicine, nursing
and other licensed health professions. Activities deemed by a state's regulatory
authority to constitute the practice of medicine, nursing, or any other licensed
health profession without the proper license would subject the actor to the
penalties provided under such state's laws.
In the course of its business, Health Card provides disease information
services, drug usage monitoring programs, preferred drug management, and
consulting services. Health Card does not believe that these or any of its other
activities as a pharmacy benefit management company, constitute the practice of
medicine, nursing or any other licensed health profession. Health Card cannot
assure that a regulatory authority in New York, or any other state in which it
engages in such activities, would not assert a contrary position and subject it
to the sanctions described above.
Utilization Review Regulations
Under the Insurance Law and Article 49 of the Public Health Law, the State
of New York regulates utilization review. Utilization review is defined as the
review to determine whether health care services that have been, are being or
will be provided are medically necessary. Health care services, for purposes of
the utilization review law, are defined to include the provision of
pharmaceutical products. In some of the contracts to which it is a party, Health
Card agrees to provide "drug utilization review" and "drug utilization
management." However, Health Card believes that the drug review and analysis
services it provides to its sponsors do not involve making determinations as to
the medical necessity of the pharmaceutical products provided that would subject
it to regulation under the utilization review laws.
FDA Regulation
The United States Food and Drug Administration has asserted general
authority to regulate promotional activities of, and materials disseminated by,
pharmacy benefit management companies that are owned or influenced by or subject
to contractual relationships with drug companies. In January 1998, the FDA
published a draft guidance concerning certain promotional practices performed by
such pharmacy benefit management companies. Among the practices discussed in the
FDA's commentary to the draft guidance were the use of product-specific
financial incentives to influence drug selection and prescribing decisions,
disease information programs, and the use of specified or preferred drug
formularies. Although the FDA's draft guidance has effectively been withdrawn,
there can be no assurance that the FDA will not again attempt to assert
jurisdiction over certain aspects of Health Card's business in the future, and
in such event, the impact could materially adversely affect Health Card's
operations.
Since Health Card is neither owned, nor directly controlled or influenced
by a drug company, it believes that the existing regulations do not apply to it.
However, due to its contractual relationship with rebate administrators and
various drug companies, there can be no assurance that some of Health Card's
activities may not be subject to FDA review and regulation. In such event, some
of Health Card's activities and its rebate program may require modification or
elimination.
Medicare Prescription Drug Benefit
Medicare reimbursement and coverage of prescription drugs could change
significantly in the near future. Medicare presently covers only a limited
number of outpatient prescription drugs, but legislative initiatives are being
considered to expand Medicare coverage of drugs, in some instances as part of a
broad reform of the Medicare program. Some proposals have included provisions
for incorporating the services of pharmacy benefit managers into the program to
control costs. Health Card cannot assess at this stage whether such legislation
will be approved or how it would address drug coverage or costs or impact Health
Card's business. Enactment of legislation to expand Medicare drug coverage could
create broader markets for pharmacy benefit managers. Alternatively, it could
regulate or limit the services of pharmacy benefit managers and have an adverse
impact upon Health Card's business.
Regulation in Other States
Health Card is in the process of evaluating its involvement with sponsors
and plan participants located in states other than New York. Health Card is
conducting that review systematically, focusing its attention initially on those
states where it has the most sponsors and/or plan participants. As a result,
Health Card has applied for and became licensed as a third party administrator
in Ohio, Kansas, Kentucky, South Carolina and Michigan. In addition, Pharmacy
Associates is licensed as a third party administrator in Louisiana, has
determined that it need not be licensed in Arkansas and is currently reviewing
the requirements for licensure in Mississippi.
Health Card intends to apply for a third party administrator's license in
each state in which it determines that its business operations require it. Prior
to September 1998, Health Card conducted its activities without applying for any
such licenses. While Health Card has sought to comply with all such laws that
are in effect in the states in which it conducts its business, Health Card
cannot be sure that it will not be subject to fines and other penalties
including injunctive relief, as a result of its past non-compliance. Health Card
has not determined, and does not believe that it could determine with any degree
of accuracy, the nature or extent of any punishment that might be imposed on it
as a result of such historical non-compliance.
New York does not regulate prescription benefit management companies.
Health Card cannot be sure that New York or any other state will not assert
regulatory authority over it or its activities as a pharmacy benefit management
company or otherwise, now or at any time in the future. If a state does assert
such regulatory authority, Health Card will seek to comply with all applicable
regulations; however, Health Card cannot be sure compliance will be achieved. If
Health Card is unable to comply, it may not be permitted to conduct its
activities in those states as it currently conducts them, or at all.
Health Card has requested advice from special counsel regarding changes in
laws and regulations covering insurance, health, licensure and certain other
regulatory matters governed by New York State laws and federal laws. Health Card
has not retained counsel, or obtained any advisory opinion from any state
administrative or regulatory agency, regarding the laws of any other state.
Health Card cannot be sure that its activities in such other states are in
compliance with all applicable laws and regulations of such states, and thus,
its activities in those other states may subject it to judicial and regulatory
review and such sanctions and/or punishments as may be provided under the laws
and regulations of such states.
Item 2. DESCRIPTION OF PROPERTY.
The Company currently occupies approximately 26,500 square feet of office
space located at 26 Harbor Park Drive, Port Washington, New York 11050 (the
"Facility"). The Company subleases the Facility from BFS Realty, LLC, an
affiliate of the Company's Chairman (the "Affiliate"). The Affiliate leases the
Facility from the Nassau County Industrial Development Agency, pursuant to a
lease (the "Lease"), which was entered into by that Agency and the Affiliate in
July 1994. The Lease expires in March 2005. The Affiliate has the right to
become the owner of the Facility upon expiration of the Lease. The Affiliate
subleases a portion of the Facility to the Company. The Company currently pays
rent to the Affiliate in the amount of $336,780 per year, plus monthly expenses
for maintenance, real estate taxes, utilities and the like. The rent increases
5% annually. The Affiliate also receives rent from other companies that occupy
space in the Facility, some of which are affiliated with the Company's Chairman.
The Company believes that the Facility is adequate for current purposes. A copy
of the lease between the Company and the Affiliate is attached hereto as Exhibit
10.60.
PAI currently occupies approximately 7,000 square feet of office space in
Little Rock, Arkansas, at an annual rent of $110,372, including monthly
expenses. The landlord for these premises is Executive Park Partnership. The
lease expires on April 30, 2002. PAI is currently negotiating with Executive
Park Partnership the terms of a lease that would commence May 1, 2002 and would
increase the space occupied by PAI.
Pursuant to a lease dated August 10, 1998 and expiring on August 31, 2005,
Health Card occupies approximately 1,500 square feet at 63 Manorhaven Boulevard,
Port Washington, New York, which is used as a pharmacy. The landlord for these
premises is 61 Manorhaven Boulevard, LLC, of which the Company's Chairman is the
sole member. The current monthly rent is $1,654 per month through August 31,
2002. The annual rent increases by 5% per year. Additional rent, in the form of
certain expenses, is also payable.
In addition, Health Card rents a two family house in Port Washington, New
York (near the Company's offices) from P.W. Capital, LLC, which is used for
out-of-town employees. Health Card evaluated the cost of hotels for these
individuals and determined it was more cost efficient to rent the house at a
monthly rate of $5,500. During the fiscal year ended June 30, 2001, Health Card
paid P.W. Capital, LLC, $16,500 in rent for this facility.
Item 3. LEGAL PROCEEDINGS.
Health Card is involved in various legal proceedings, including those
described in the following paragraphs, incidental to the conduct of its
business. While there can be no assurance, Health Card does not expect that any
such proceedings will have a material adverse effect on its business, operations
and financial condition.
An action was commenced against Health Card on December 8, 1998 by the West
Contra Costa Unified School District (the "School District") and an individual
plaintiff in the State of California. The case was subsequently moved to Federal
court. The complaint alleged, among other things, that the parties entered into
a contract in November 1996, and that Health Card unilaterally terminated the
contract on December 16, 1996. The complaint further alleged that the
termination resulted in the School District incurring approximately $150,000 in
costs and $867,000 in expenses to obtain coverage from December 1996 until
October 1997. The complaint also sought treble damages. While settlement
documents are currently being finalized, the parties have reached an agreement
that contemplates Health Card paying to the plaintiffs an amount that is
significantly lower than the amount of costs and expenses claimed, and funding a
part of the plaintiffs' litigation against another defendant. The proceeds of
any settlement with or verdict against such defendant will be divided between
Health Card and the School District. Although, the settlement papers have not
been finalized, Health Card believes that these terms will be the crux of the
agreement.
An action has been commenced by a former executive of Health Card, Mary
Casale, who alleges that employees of Health Card engaged in sex discrimination
in violation of Title VII of the Civil Rights Act of 1964. The matter is
presently pending before the New York District Office of the Equal Employment
Opportunity Commission ("EEOC"). The EEOC has made no findings or other
determinations as to the merits of the parties' claims or defenses. The Company
is being defended pursuant to an employment practices liability insurance
policy, the coverage of which is subject to various terms, conditions, and
exclusions. Only a preliminary investigation into this matter has been
conducted, and discovery has not commenced. Ms. Casale has yet to bring suit in
state or federal court, and, thus, could conceivably assert additional claims.
The Company denies the material allegations Ms. Casale has brought against it
and intends to defend itself vigorously.
On October 23, 2000, the Company was served with a complaint filed by
Allcare Health Management Systems, Inc. ("Allcare") in the United States
District Court for the Northern District of Texas, alleging that the Company and
numerous other defendants infringed certain patent rights allegedly owned by
Allcare. On April 10, 2001, the Company settled the lawsuit with Allcare, and
all of the claims against the Company were dismissed by the Court, with
prejudice, on April 17, 2001. As part of the settlement, the Company and its
subsidiaries were released from any and all claims that were or could be brought
in the lawsuit. The release covers all prior periods as well as all future
periods as long as the Company continues licensing its pharmacy benefit
management information technology systems (the "NMHCS Systems") from a licensee
of Allcare. Furthermore, the future activities of entities acquired by the
Company are covered under the release as long as such entities' systems are
converted to the NMHCS Systems within six months of acquisition. The settlement
provides Allcare the right to audit the Company in the future to insure the
NMHCS Systems are still covered by the release. The Company also has the option
to extend the duration of the release, for a fee, if it licenses its NMHCS
Systems from a different vendor in the future.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
Market Information
Health Card's Common Stock is traded on the Nasdaq National Market under
the symbol "NMHC" on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ"). The table below sets forth high and low sale prices
of the Common Stock, as furnished by NASDAQ.
Fiscal Years ended June 30,
2000 2001
---- ----
High Low High Low
First Quarter $7.75 $4.81 $3.25 $1.88
Second Quarter 5.63 2.75 2.25 1.16
Third Quarter 5.25 2.81 3.13 1.31
Fourth Quarter 3.38 1.75 3.49 2.90
Holders
Health Card has been advised by its transfer agent (Continental Stock
Transfer & Trust Company) that the approximate number of record holders of its
common stock as of September 21 2001 was 46.
Dividend Policy
Health Card has not declared or paid any cash dividends in the past and
does not anticipate doing so in the foreseeable future. Health Card intends to
retain any earnings to finance its growth. Any future payments of dividends will
be at the discretion of the Board of Directors and will depend upon such factors
as the Board of Directors deems relevant. No assurance can be given that Health
Card will pay dividends in the foreseeable future.
Recent Sales of Unregistered Securities
In August of 2001, a total of 62,500 shares of Common Stock of Health Card
were issued to certain shareholders of Pharmacy Associates in connection with
the acquisition. The shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act of 1993, and in
accordance with the contingent payment provisions of the acquisition agreement.
For a detailed description of the acquisition of Pharmacy Associates, see Item 1
hereof, "Description of Business - Recent Acquisitions" and Note 2 of
Consolidated Financial Statements.
Item 6. SELECTED FINANCIAL DATA.
The following tables summarize certain selected financial information for
each of the years in the five year period ended June 30, 2001 and provides
certain supplemental data. The selected consolidated income statement data for
the years ended June 30, 1999, 2000 and 2001 and the selected consolidated
balance sheet data as of June 30, 2000 and 2001 have been derived from the
audited consolidated financial statements of Health Card included in Item 8
hereof. The selected consolidated income statement data for the years ended June
30, 1997 and 1998 and the selected consolidated balance sheet data as of June
30, 1997, 1998 and 1999 have been derived from the audited consolidated
financial statements of Health Card which are not included in this Form 10-K.
Revenue and cost of claims for all five years have been adjusted based on EITF
00-14 (see Item 7 hereof and Note 1 to Consolidated Financial Statements). The
impact is to reduce revenues and cost of claims by the same amounts each year so
there is no impact to gross profit. The information contained in this table
should be read in conjunction with Health Card's consolidated financial
statements and notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Item 7 hereof.
Year Ended June 30,
1997 1998 1999 2000 2001
Income Statement Data:
Revenues...................... $70,248,597 $95,473,116 $128,262,665 $167,675,627 $272,119,140
Cost of Claims................ 63,137,128 86,715,134 115,768,372 153,377,200 249,572,132
---------- ---------- ----------- ----------- -----------
Gross Profit.................. 7,111,469 8,757,982 12,494,293 14,298,427 22,547,008
Selling, general and
administrative expenses*.. 5,855,282 7,192,027 10,171,314 12,357,819 21,423,140
--------- --------- ---------- ---------- ----------
Operating income (loss)..... 1,256,187 1,565,955 2,322,979 1,940,608 1,123,868
Other income (expense)...... 42,595 (180,507) 592,032 922,066 877,402
---------- --------- ------------ --------- ---------
Income before income taxes
(loss)..................... 1,298,782 1,385,448 2,915,011 2,862,674 2,001,270
Provision for income taxes
(benefit).................. (189,984) 569,000 976,000 1,247,000 843,330
--------- ------- ------- --------- -------
Net income (loss)........... $ 1,488,766 $ 816,448 $ 1,939,011 $ 1,615,674 $ 1,157,940
=========== =========== =========== =========== ===========
Earnings (loss) per
common share:
Basic..................... $ 0.46 $ 0.16 $ 0.37 $ 0.24 $ 0.16
=========== ========== =========== =========== ===========
Diluted................... $ 0.37 $ 0.16 $ 0.37 $ 0.24 $ 0.16
=========== ========== =========== =========== ==========
Weighted average number of
common shares outstanding:
Basic..................... 3,258,459 4,966,885 5,205,084 6,720,104 7,100,674
Diluted................... 4,008,481 4,969,166 5,205,084 6,720,104 7,199,526
*Includes amounts charged by
affiliates aggregating.... $4,511,144 $ 4,904,514 $ 2,816,982 $ 2,985,506 $ 4,080,998
Year Ended June 30,
1997 1998 1999 2000 2001
Balance Sheet Data:
Cash and cash equivalents... $ 1,782,597 $ 1,305,792 $ 2,815,863 $ 15,724,730 $12,474,945
Working capital (deficit)... (7,436,095) (8,658,324) (6,680,593) 6,030,219 (7,089,973)
Total assets................ 11,871,820 18,343,900 30,846,011 44,363,618 79,109,564
Long-term debt (including
current portion)............ 263,648 9,742 1,950 2,331,881 1,875,443
Total stockholders' equity
(deficit)................... (2,343,671) (2,006,282) 1,998,315 13,425,259 15,472,219
Year Ended June 30,
1997 1998 1999 2000 2001
Supplemental Data (1):
Retail pharmacy claims
processed.................. 1,990,976 2,405,627 3,066,098 4,058,748 7,402,712
Mail pharmacy claims
processed.................. 62,413 131,611 171,295 255,211 487,131
Estimated plan participants
(at period end)............. 291,446 401,226 521,150 505,401 1,500,000
(1) This data has not been audited. See Items 1 and 7 hereof.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The audited consolidated financial statements include the accounts of
Health Card and its wholly owned subsidiaries, PAI, PMP, IPA, and Specialty.
Unless the context otherwise requires, references herein to the "Company" or
"Health Card" refer to the Company and its subsidiaries on a consolidated basis.
The results of operations and balance sheet of PAI have been included in the
consolidation as of July 20, 2000, the effective date that the Company acquired
PAI. The results of operations and balance sheet of PMP have been included in
the consolidation as of March 5, 2001, the effective date that the Company
acquired PMP. All material intercompany balances and transactions have been
eliminated in the consolidation.
Health Card derives its revenue from the provision of comprehensive
pharmacy benefit management services to sponsors of prescription benefit plans.
Substantially all of the services Health Card provides to its sponsors are
related to the adjudication of the drug claims at the point of service. Health
Card also recognizes administrative fees at the time of claims adjudication.
Revenue is earned and recognized as follows: administrative fees are agreed
upon with the sponsor on either a per claim charge or a per plan participant per
month charge. Per claim fees are billed to sponsors for the claims adjudicated
during the period. Per plan participant per month fees are generally billed to
sponsors at the beginning of the month. The amount of revenue related to the
drugs dispensed by pharmacies participating in Health Card's pharmacy network is
recognized at the time of dispensing the drug as the cost is incurred. The
amount of revenue recognized is reduced by the amount of rebates that Health
Card shares with its sponsors.
The following table sets forth the breakdown of Health Card's charges
relating to pharmaceuticals dispensed and administrative fees:
Years Ended June 30,
1999 2000 2001
Charges relating to
Pharmaceuticals $127,120,998 $165,170,552 $266,958,691
Administrative fees and other 1,141,667 2,505,075 5,160,449
------------ ------------ -----------
Total Revenues $128,262,665 $167,675,627 $272,119,140
------------ ------------ ------------
Health Card does not take possession or legal ownership of the
pharmaceutical drugs dispensed by the pharmacy network, although Health Card
assumes the legal responsibility and financial risk of paying for dispensed
pharmaceuticals whether or not Health Card is paid by its sponsors, unless it
states otherwise in Health Card's contracts with individual pharmacies and/or
chains. All of Health Card's new pharmacy contracts specify that the pharmacies
will not be paid if Health Card is not paid by its sponsors.
Health Card utilizes its comprehensive pharmacy benefit database to perform
outcome studies and to develop disease information programs which are used to
reduce overall healthcare costs. These programs currently produce a small amount
of revenue. Health Card believes that these value added information based
services are becoming a more important component of managed care, and therefore
these services may provide an increasing source of revenue for Health Card in
the future.
Cost of claims includes the amounts paid to network pharmacies, including
mail service pharmacies, for pharmaceutical claims, and reductions resulting
from the gross rebates received from drug manufacturers. Cost of claims are
recognized as follows: the contractual obligation of Health Card to pay for
these drugs is recorded as cost of claims at the time of dispensing of the drug
by the pharmacy network. Cost of claims is reduced by the rebates that Health
Card receives. Rebates are earned from drug manufacturers based on drugs
utilized by plan participants at the time of dispensing. Health Card's portion
of these rebates, which varies by sponsor, is recorded monthly based upon the
claims adjudicated in that month.
Health Card processes its rebate claims either direct with the drug
manufacturers, through its wholly-owned subsidiary, Specialty, or through a
third party rebate administrator. During the fiscal year ended June 30, 2001,
Health Card dealt with three different rebate administrators. Effective July 1,
2001, Health Card has entered into an agreement with the Administrator to handle
all of its consolidated rebate claims which it does not otherwise submit direct
to the drug manufacturers.
The amount of rebates recognized as reductions to revenue or cost of claims
is based on estimates tied to actual claims data. The third party administrators
provide estimates to Health Card based on their analysis of the amount of
rebates that Health Card's claims should generate. These estimates are prepared
based on estimates of how Health Card's claims might influence the market share
of a particular drug covered under an agreement with a drug manufacturer. Market
share is generally defined as the percentage of utilization of a certain drug or
drugs within its therapeutic class. Under Health Card's contract with its
previous rebate administratior which terminated June 30, 2001, and its new
contract with the Administrator, Health Card receives a specified amount per
claim. Therefore once the total number of claims is known, then the total amount
of rebates to be received will be known. These amounts are paid within 120-150
days after the end of a quarter.
Health Card computes the amount of rebates due direct from the drug
manufacturers based on the actual claims data, the criteria established in each
individual contract, and the specified payment schedules. The drug manufacturers
are obligated to reimburse Health Card for earned rebates within a specified
period of time.
Manufacturer rebates have historically had a significant impact on Health
Card's financial performance as the following table shows:
Years ended June 30,
1999 2000 2001
---------------------
Rebates as a:
% Of cost of claims 2.1% 2.4% 3.9%
% Of total gross profit 20% 27% 45%
% Of income before taxes 87% 133% 508%
Due to the expected continued growth and diversification of Health Card's
business, Health Card also expects rebates as a percentage of cost of claims, to
increase and continue to account for a significant percentage of total gross
profit and income before taxes. Certain of Health Card's sponsors are entitled
to all or a portion of rebates received by Health Card, which portion varies by
sponsor. If such rebate programs were to be discontinued or adversely altered by
drug manufacturers, or if the terms of Health Card's rebate sharing arrangements
with its sponsors were adversely altered, it would have a material adverse
effect on Health Card's business, operating results and financial condition.
Due to changing market conditions and competition, it is possible that the
percentage of rebates retained by Health Card based on its arrangements with its
sponsors may change when these arrangements expire and may be lower in
arrangements with new sponsors. Any such change in the percentage of rebates
retained and recorded as a reduction of revenue could have a material adverse
effect on Health Card's business, operating results and financial condition.
Credit risk relating to the rebates receivable is evaluated based on the
financial strength of the rebate administrator and the drug manufacturers.
Health Card believes that most of the drug manufacturers are Fortune 500
companies. Health Card does not believe a credit risk reserve is necessary.
The pharmacy benefit management industry is intensely competitive,
generally resulting in continuous pressure on Health Card's gross profit as a
percentage of total revenue. In recent years, industry consolidation and
dramatic growth in managed healthcare have led to increasingly aggressive
pricing of pharmacy benefit management services. Given the pressure on all
parties to reduce healthcare costs, Health Card expects this competitive
environment to continue for the foreseeable future.
Health Card plans to continue its internal growth through increased
marketing of its services and by expanding the range of services offered,
particularly to include value added consulting and information-based services
which Health Card believes to be in growing demand within the healthcare
industry. In addition, Health Card intends to continue to pursue an acquisition
program to supplement its internal growth by making acquisitions of other
pharmacy benefit management service providers, as well as related services
providers.
Public Offering
On August 2, 1999, Health Card completed the sale of 1,600,000 shares of
its common stock in an underwritten public offering (the "Public Offering").
Pursuant to the Public Offering, Health Card received net proceeds of
approximately $9,538,037. Concurrently, the Bert E. Brodsky Revocable Trust (the
"Brodsky Trust") sold 400,000 shares of common stock of Health Card in an
underwritten offering. Of the proceeds received by the Brodsky Trust, it used
approximately $1,992,900 to partly repay certain indebtedness owed by certain
affiliates of the Brodsky Trust to Health Card. See Item 13 hereof.
Results of Operations
Fiscal Year Ended June 30, 2001 Compared to Fiscal Year Ended June 30, 2000
Revenues increased $104.4 million, or approximately 62%, from $167.7
million for the fiscal year ended June 30, 2000, to $272.1 million for the
fiscal year ended June 30, 2001. Of the increase, $75.7 million, or 72% was due
to the inclusion of revenues from PAI, subsequent to July 20, 2000, and PMP,
subsequent to March 5, 2001. $15.6 million of the increase was due to revenues
related to new sponsors or new services offered. The majority of the balance of
the year-over-year increase, or approximately $13.1 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. Both periods were negatively impacted by a net
reduction in revenues that arose when the Company settled certain fees due from
a major sponsor related to a capitation arrangement for calendar years 1997 -
1999. The net reduction in revenues was $821,000 for the fiscal year ended June
30, 2000, and $733,000 for the fiscal year ended June 30, 2001. The calendar
year 2000 and 2001 contract with this sponsor is no longer a capitation
arrangement.
Revenues for both the fiscal years were adjusted based on EITF 00-14,
Accounting for Certain Sales Incentives - Coupons, Rebates and Discounts. The
financial impact of this is to reduce revenues by the amount of rebates to be
paid to sponsors and reduce cost of claims by the gross amount of rebates
received by the Company. Previously the net difference between the gross amount
received by the Company and the amount paid to sponsors was treated as a
reduction in cost of claims with no change to revenue. The impact of this change
was to reduce revenue and cost of claims by $4.6 million and $5.9 million for
the fiscal years ended June 30, 2000 and 2001, respectively.
Cost of claims increased $96.2 million, or approximately 63%, from $153.4
million for the fiscal year ended June 30, 2000, to $249.6 million for the
fiscal year ended June 30, 2001. PAI and PMP accounted for $67.8 million, or 70%
of the increase. As a percentage of revenues, cost of claims increased from
91.5% to 91.7% for the fiscal years ended June 30, 2000 and June 30, 2001,
respectively. The percentage for the fiscal year ended June 30, 2000 was
favorably impacted by a $736,000 reduction in rebates payable, which reduced
cost of claims, which arose when the Company reevaluated its liabilities to a
plan sponsor. The effect of this reduction is unrelated to the reduction in
revenues and cost of claims described in the preceding paragraph.
Gross profit increased from $14.3 million for the fiscal year ended June
30, 2000 to $22.5 million for the fiscal year ended June 30, 2001; an $8.2
million, or 58%, increase. PAI and PMP accounted for $7.9 million, or 96%, of
the increase. Gross profit as a percentage of revenue declined from 8.5% to 8.3%
for the fiscal years ended June 30, 2000 and June 30, 2001, respectively. The
decline is partially attributable to the impact of the one-time adjustment,
described in the explanation for the change in cost of claims above. The Company
has also seen a decline in profit margins due to competitive pressures.
Selling, general, and administrative expenses, which include amounts
charged by affiliates, increased $9.0 million, or approximately 73%, from $12.4
million for the fiscal year ended June 30, 2000 to $21.4 million for the fiscal
year ended June 30, 2001. Approximately 46% of the increase, or $4.2 million,
was related to the inclusion of PAI and PMP in the consolidated numbers. The
balance of the growth in these expenses was principally related to five areas:
(i) an approximate $1,533,000 increase in expenditures related to increases in
compensation and benefits, primarily associated with new employees including
senior management; (ii) an approximate $635,000 increase in depreciation and
amortization expenses related to increased hardware procurement and software
development; (iii) an approximate $430,000 increase in data processing charges
related to increased information technology services; (iv) an aggregate of
approximately $1,353,000 related to actual payments made and/or reserves accrued
related to the following matters: (A) the settlement of the West Contra Costa
lawsuit (see Item 3, Legal Proceedings), (B) the reconciliation and settlement
of amounts due to a former major sponsor (See Note 7 to the Consolidated
Financial Statements), and (C) the settlement of the Allcare patent infringement
(See Item 3 - Legal Proceedings), and (v) an approximate $283,000 increase in
legal fees related primarily to the defense of the items discussed in (iv)
above.
General and administrative expenses charged by affiliates increased
approximately $1,095,000, or 37%, year-over-year from $2,986,000 to $4,081,000
for the fiscal year ended June 30, 2000 and June 30, 2001, respectively. The
majority of the increase related to additional rent related to additional space
taken in fiscal year 2001, increased information technology services, and
additional administrative support services and supplies to support the continued
expansion of the business.
Other income, net, declined by approximately $45,000, or 5%, from $922,000
in the fiscal year ended June 30, 2000, to $877,000 in the fiscal year ended
June 30, 2001. The main factor in the decline was an approximate $155,000
increase in interest expense, primarily related to the fact that the Company
entered into a capital lease agreement with Hewlett Packard for computer
hardware and related software that went into effect in March 2000. The increase
in interest expense was partially offset by an approximate $111,000 increase in
interest income related to increased cash flow due to the inclusion of PAI, PMP
and SPC.
Income before income taxes declined approximately $861,000, or 30%, from
approximately $2,863,000, for the fiscal year ended June 30, 2000, to
approximately $2,001,000 for the fiscal year ended June 30, 2001. The primary
reasons for the decline were the one time adjustments noted above: (i) the
$733,000 revenue reduction in the fiscal year ended June 30, 2001; (ii) the
$1,353,000 payments/accrued reserve for settlements in the fiscal year ended
June 30, 2001; and (iii) the $736,000 reduction in rebates payable in the fiscal
year ended June 30, 2000. While income before income taxes declined
year-over-year, EBITDA (earnings before interest, taxes, depreciation and
amortization) for these same periods actually increased by approximately
$478,000, or 15%, from $3,241,000 for the fiscal year ended June 30, 2000 to
$3,719,000 for the fiscal year ended June 30, 2001. This was due to the
inclusion of approximately $568,000 of goodwill amortization related to the PAI
and PMP acquisitions in the period ended June 30, 2001, approximately $93,000 of
depreciation of PAI's and PMP's assets during this same year, as well as
approximately $635,000 of incremental depreciation and amortization of new
assets procured and capitalized during the year ended June 30, 2001. These
increases offset the approximate $818,000 decline in operating income
year-over-year.
There were a total of four negative adjustments reflected in the Company's
financial performance during the fiscal year ended June 30, 2001, related to
settlements with sponsors and/or lawsuits. These settlements, which are
described above and in Item 3 - Legal Proceedings, and which relate to prior
fiscal years, reduced income before income taxes by approximately $2,086,000. Of
this total, $773,000 was actually paid out during the fiscal year, with the
balance to be paid during the fiscal year ended June 30, 2002. The Company is
not currently aware of any other issues that might require a settlement. The
Company believes its bad debt reserves and other reserves should be sufficient
based on current information.
The effective tax rate decreased from 43.6% for the fiscal year ended June
30, 2000 to 42.1% for the fiscal year ended June 30, 2001. The decrease stemmed
primarily from a lower effective state tax rate net of federal taxes.
Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30, 1999
Revenues increased $39.4 million, or approximately 31%, from $128.3 million
for the fiscal year ended June 30, 1999 to $167.7 million for the fiscal year
ended June 30, 2000. The increase related to revenues from new sponsors during
the fiscal year was approximately $21 million. The majority of the remaining
increase of approximately $17 million was due to 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. The remainder of the increase,
approximately $630,000, was due to new services offered during the year around
the e-pharmacy and clinical services.
Revenues for both the fiscal years were adjusted based on EITF 00-14,
Accounting for Certain Sales Incentives - Coupons, Rebates and Discounts. The
financial impact of this is to reduce revenues by the amount of rebates to be
paid to sponsors and reduce cost of claims by the gross amount of rebates
received by the Company. Previously the net difference between the gross amount
received by the Company and the amount paid to sponsors was treated as a
reduction in cost of claims with no change to revenue. The impact of this change
was to reduce revenue and cost of claims by $5.8 million and $4.6 million for
the fiscal years ended June 30, 1999 and 2000, respectively.
Revenues grew year over year despite the loss of two key clients during the
June 30, 2000 fiscal year. One, a previous significant sponsor, terminated its
contract with Health Card as of January 1, 2000. The second was placed in
receivership by the State of Florida as of January 1, 2000, and their members
were dispersed to other plans not covered by Health Card. These two sponsors
accounted for $20.5 million and $21.4 million in revenues during the fiscal
years ended June 30, 1999 and 2000, respectively. The revenue from these two
sponsors was replaced by the $21 million of revenue from new sponsors described
above. This helped to mitigate the overall impact of their loss on an actual run
rate basis. Two other factors influencing the year to year comparison were:
revenues of the fiscal year ended June 30, 1999 included a one-time rate
increase of $500,000 from a major sponsor, and the revenue for the fiscal year
ended June 30, 2000 was net of an $821,000 reduction in revenue when Health Card
settled certain fees from a major sponsor as consideration for a new two year
arrangement with this sponsor.
Cost of claims increased $37.6 million, or approximately 32%, from $115.8
million for the fiscal year ended June 30, 1999 to $153.4 million for the fiscal
year ended June 30, 2000. As a percentage of revenues, cost of claims increased
from 90.3% for the fiscal year ended June 30, 1999 to 91.5% for the fiscal year
ended June 30, 2000. The primary reason for the cost of claims increasing as a
percentage of revenue has to do with a risk sharing arrangement Health Card had
with a major sponsor. During the fiscal year ended June 30, 2000 the cost of
drugs covered under this arrangement were greater than the agreed upon capitated
rate, which led to a sharing of those costs between Health Card and the sponsor.
This fact along with the $821,000 revenue reduction mentioned above led to a
differential between revenue and cost under this contract of $1.6 million during
fiscal 2000. This risk sharing arrangement is no longer in effect. Partially
offsetting this increase in costs was a $540,000 increase in the amount of
manufacturer rebates received due to the increased volume of claims in fiscal
2000 and the administrative fee to be paid to Specialty. See "Business Services
- - Claims Management - - Rebate Administration". In addition, during the fiscal
year ended June 30, 2000 rebates payable were reduced by $736,000 when Health
Card reevaluated its liability to a plan sponsor. Cost of claims for the fiscal
year was decreased by the same amount.
Gross profit increased $1.8 million, or approximately 14%, from $12.5
million for the fiscal year ended June 30, 1999 to $14.3 million for the fiscal
year ended June 30, 2000, primarily as a result of the increase in revenues,
offset by the increase in cost of claims.
Selling, general and administrative expenses, which include amounts charged
by affiliates, increased $2.2 million, or approximately 22%, from $10.2 million
for the fiscal year ended June 30, 1999 to $12.4 million for the fiscal year
ended June 30, 2000. $1.3 million of the increase resulted from increases in
compensation, benefits, rent, sales and marketing and other expenses related to
the continued expansion of Health Card's business. The majority of the
compensation and benefits increase is related to approximately twenty additional
employees at June 30, 2000 compared to June 30, 1999. Depreciation and
amortization expenses also increased by approximately $528,000, as a function of
increased hardware procurement and software development as Health Card continues
to enhance its information technology capabilities. Health Card also evaluated
its receivables due from certain sponsors, including a key sponsor currently in
receivership, as described above, and determined it should increase its reserves
and/or write-off some balances. The impact on Health Card was an incremental
$338,000 in bad debt expense in fiscal 2000 as compared to fiscal 1999. This
accounted for the majority of the remaining increase in selling, general and
administrative expenses. While selling, general and administrative expenses
increased year over year in an absolute amount, they grew at a slower rate than
the increase in revenue. These expenses as a percentage of revenue actually
declined from 7.6% in fiscal year 1999 to 7.2% in fiscal year 2000.
General and administrative expenses charged by affiliates increased
$169,000, or approximately 6%, from $2,817,000 for the fiscal year ended June
30, 1999 to $2,986,000 for the fiscal year ended June 30, 2000, primarily as a
result of increased information technology services and rent to support the
business.
Other income increased approximately $330,000, from $592,000 for the fiscal
year ended June 30, 1999 to $922,000 for the fiscal year ended June 30, 2000.
The net increase to income was due to an increase in interest income of $327,000
earned on increased cash from the Public Offering and an $83,000 decrease in
offering costs. This addition to income was partially offset by an $80,000
increase in interest expense from a capital lease for computer hardware.
The provision for income taxes increased approximately $271,000 from
$976,000 for the fiscal year ended June 30, 1999 to $1,247,000 for the fiscal
year ended June 30, 2000. The provision for the fiscal year ended June 30, 1999
was reduced by the utilization of a $595,000 net operating loss carryforward.
There is no remaining net operating loss carryforward to the year ended June 30,
2000.
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 pharmacy benefit management companies or of
companies providing related services. As of June 30, 2001, the Company had a
working capital deficit of $7.1 million as compared to working capital of $6.0
million as of June 30, 2000. The primary reasons for the change in working
capital were the acquisitions of PAI and PMP. The Company utilized $11.3 million
of cash and cash equivalents, net of cash received, to acquire these companies
during the fiscal year ended June 30, 2001. These funds came from the Company's
working capital; thus a long term asset, goodwill, was acquired with a short
term asset, cash.
Net cash provided by operating activities was $6.1 million and $12.6
million for the fiscal years ended June 30, 2000 and 2001, respectively. For the
fiscal year ended June 30, 2001, accounts payable increased by $9.4 million more
than accounts receivable, thus providing cash. For the fiscal year ended June
30, 2000, accounts payable increased by more than accounts receivable as well,
but only by $0.5 million. There was also $2.6 million of non-cash depreciation
and amortization related to the acquisitions and increased fixed assets during
the fiscal year ended June 30, 2001 as compared to $1.3 million for the fiscal
year ended June 30, 2000.
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. There can be no assurance that such financing could be obtained at
rates or on terms acceptable to the Company, if at all. 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 $15.1 million for the fiscal year
ended June 30, 2001. The net cash outlay for PAI was initially $4.6 million,
representing the initial payment of $6.0 million plus $0.3 million of related
expenses, less PAI's cash balance at July 20, 2000 of $1.7 million. The net cash
outlay for PMP was $6.7 million, representing the initial payment of $6.8
million plus $0.2 million of related expenses, less PMP's cash balance at March
5, 2001 of $0.3 million. In addition, there were $3.8 million of capital asset
additions during the period. For the fiscal year ended June 30, 2000 there were
$2.4 million of capital asset additions, which was partially offset by the
repayment of a note by the majority stockholder. Net cash used in financing
activities was $742,000 for the fiscal year ended June 30, 2001, reflecting
repayments against capital leases. This compares to $8.6 million provided by
financing activities for the fiscal year ended June 30, 2000, reflecting the
cash received from the Public Offering described herein.
During fiscal year 2000, the Company entered into three capital lease
transactions for hardware and software. The purchase price of these capital
assets was $2,537,730. One hardware lease is for a term of 57 months with
monthly payments of $40,322. Another hardware lease is for a term of 60 months
with monthly payments of $3,245. The software lease is for a term of 33 months
with monthly payments of $13,662. The principal balance of these three capital
leases as of June 30, 2001 was $1,875,443.
The Company assumed all the assets and liabilities of PAI, as of July 20,
2000, including two outstanding loans as follows: (i) a note payable to Regions
Bank with a principal balance as of June 30, 2001 of $71,136. Such note is
payable in monthly installments in the amount of $2,432, including interest at
the rate of 7.75% and principal through July 2004. Repayment of such note is
currently secured by a lien on and a security interest in an automobile; and
(ii) a loan representing prepaid rebates from its rebate administrator with a
principal balance as of June 30, 2001 of $86,625, payable with interest at the
rate of 8.5% in four quarterly payments of $94,261 commencing December 31, 2000
and ending September 30, 2001.
PAI stockholders were eligible to receive up to $1,000,000 in additional
consideration payable in combination of cash and common stock if certain
financial targets of PAI were met for the fiscal year ended June 30, 2001. These
targets have been achieved and the $1 million has been earned. $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, 2001. The PAI
stockholders are eligible to receive one more payment of up to $1 million if
certain financial targets of PAI are met for the fiscal year ended June 30,
2002.
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, three such milestones have been met, resulting in a 75% 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 that, based on internal growth and the PAI and PMP
acquisitions, at least one additional milestone will be met during calendar year
2001. If the two remaining milestones are reached, the cash outlay by the
Company would be $200,000.
The Company anticipates that current cash positions, after the PAI and PMP
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 two acquired during the fiscal year ended June 30, 2001. This will
require cash. Depending on the Company's evaluation of future acquisitions,
additional cash may be required. Therefore, the Company has put in place a
$4,000,000 revolving credit line for acquisitions with its bank. The Company has
no current borrowings against this credit line. The Company is also currently
negotiating a larger amount, based on anticipated future earnings and its
balance sheet, to meet anticipated future needs. In the event that the Company's
plans change or its assumptions prove to be inaccurate, or that the additional
financing is not consummated, or the proceeds of the financing 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.
Recent Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
Nos. 141 and 142, Business Combinations and Goodwill and Other Intangibles,
respectively. FASB 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. Under FASB 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 is in the process of determining the impact of these
pronouncements on its financial position and operations.
Subsequent Events
Effective August 1, 2001, Health Card entered into a new lease for the
premises it occupies in Port Washington, New York. See Item 2 hereof
(Description of Properties) for a description of such lease.
In August of 2001, the Company and West Contra Costa School District
reached an agreement on the terms of a settlement of the litigation involving
these two parties. See Item 3 hereof (Legal Proceedings) for a description of
the litigation and the contemplated settlement.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The audited financial statements of Health Card as of June 30, 2000 and
2001 and for the years ended June 30, 1999, 2000 and 2001 are included in this
Form 10-K following Item 14 hereof.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
On June 15, 2001, Health Card dismissed BDO Seidman LLP ("Seidman") as its
principal independent accountant. Seidman's report on Health Card's financial
statements for either of the years ended June 30, 2000 or 1999 did not contain
an adverse opinion or disclaimer of opinion, nor were either of those reports
modified as to uncertainty, audit scope or accounting principles. Health Card's
decision to change accountants was approved by Health Card's audit committee and
its board of directors. During Health Card's two most recent fiscal years and
the subsequent interim period preceding such dismissal, there were no
disagreements between Health Card and Seidman on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure. As of June 15, 2001, Health Card has engaged Goldstein Golub Kessler,
LLP as its principal independent accountant to audit its financial statements
for the fiscal year ended June 30, 2001.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Executive Officers and Directors
Certain information concerning the executive officers and Directors of
Health Card is set forth below:
------------------------------------------------- -------- -------------------------------------------------
Name Age Positions Held
------------------------------------------------- -------- -------------------------------------------------
------------------------------------------------- -------- -------------------------------------------------
Bert E. Brodsky 58 Chairman of the Board and Chief Executive Officer
------------------------------------------------- -------- -------------------------------------------------
------------------------------------------------- -------- -------------------------------------------------
Gerald Shapiro 71 Vice Chairman of the Board and Secretary
------------------------------------------------- -------- -------------------------------------------------
------------------------------------------------- -------- -------------------------------------------------
James Bigl 38 President
------------------------------------------------- -------- -------------------------------------------------
------------------------------------------------- -------- -------------------------------------------------
Tery Baskin 47 Chief Operating Officer
------------------------------------------------- -------- -------------------------------------------------
------------------------------------------------- -------- -------------------------------------------------
David Gershen 46 Treasurer and Chief Financial Officer
------------------------------------------------- -------- -------------------------------------------------
------------------------------------------------- -------- -------------------------------------------------
Gerald Angowitz 52 Director
------------------------------------------------- -------- -------------------------------------------------
------------------------------------------------- -------- -------------------------------------------------
Kenneth J. Daley 64 Director
------------------------------------------------- -------- -------------------------------------------------
------------------------------------------------- -------- -------------------------------------------------
Ronald Fish 60 Director
------------------------------------------------- -------- -------------------------------------------------
------------------------------------------------- -------- -------------------------------------------------
Paul Konigsberg 65 Director
------------------------------------------------- -------- -------------------------------------------------
------------------------------------------------------------------------------------------------------------
Bert E. Brodsky has served as Chairman of the Board of Health Card since
December 7, 1998, and as Chief Executive Officer since June, 1998. Mr. Brodsky
has at various times since 1983 served as Chairman of the Board, President and a
Director of Health Card. Mr. Brodsky has served as Chairman of the Board and
Treasurer of Sandata, Inc., a provider of computerized data processing services
and custom software and programming services, since June 1983 and as President
of Sandata from December 1989 through January 2000. Sandata's shares of common
stock are publicly traded. From October 1983 through December 1993, Mr. Brodsky
served as Chairman of the Board of Compuflight, Inc., a provider of computerized
flight planning services. Since August 1980, Mr. Brodsky has served as Chairman
of the Board and President of P.W. Medical Management, Inc., which provides
financial and consulting services to physicians. For more than the past five
years, Mr. Brodsky has served as President of P.W. Capital Corp., a consulting
services firm and Chairman of Sandsport Data Services, Inc., a computer services
firm and wholly-owned subsidiary of Sandata. Mr. Brodsky has also been the
Operating Manager of BFS Realty, LLC, a real estate company, since October 1996,
BFS Realty II, LLC, a real estate company, since November 1996 and 4 B's Realty,
LLC, a real estate company, since July 1996. See Item 13 hereof.
Gerald Shapiro has served as Vice Chairman of the Board of Health Card
since February 4, 1998. Mr. Shapiro has also served as Secretary since October
28, 1998. From June 1, 1998 until December 7, 1998, Mr. Shapiro served as
Chairman of the Board. For more than the past five years, Mr. Shapiro has been
an employee of Sandata, President of Lee Management Associates, Inc., a
physician billing and consulting firm, Chairman and Treasurer of Mediclaim,
Inc., a physician billing and consulting firm, President of Brookhaven M.R.I.,
Inc., a company that operates magnetic resonance imaging machines, Vice
President of Mobile Health Management Services, Inc., a provider of medical
screening services. From 1973 to 1978, Mr. Shapiro served as President of Ally &
Gargano, Inc., an advertising agency, and from 1971 to 1973 he was President of
Hertz Corporation.
James Bigl has served as President of Health Card since June 12, 2000.
Immediately prior to joining Health Card, Mr. Bigl served as President and CEO
of York HealthNet, SelectPro and USI Care Management ("USI"). In late 1998, Mr.
Bigl directed the sale of the Pharmacy Benefit Management Company he founded at
Yale-New Haven to USI. In October of 1994, Mr. Bigl oversaw the wide ranging
operations, including home infusion, health care collections, real estate and
retail pharmacy at Yale-New Haven Health's for-profit division. For the last
fifteen years, Mr. Bigl has been working in the retail pharmacy and Pharmacy
Benefit Management Industries.
Tery Baskin has served as Chief Operating Officer of Health Card since June
2001. He has been a licensed pharmacist since 1978. From 1993 to July 2000 he
served as the President and a Director of Pharmacy Associates, Inc. From July
2000 to June 2001, Mr. Baskin was the Senior Vice President of PAI, which by
July 2000 was a wholly owned subsidiary of Health Card. He has served as a
Director of the American Pharmaceutical Association Foundation since 1998 and as
Treasurer since March 2001.
David Gershen has served as Senior Vice President of Finance for Health
Card since May 2000. Mr. Gershen was named Chief Financial Officer and Treasurer
of Health Card in November, 2000. From July 1996 until April 2000, Mr. Gershen
served as the Vice President of Finance and Administration of CSC Healthcare
Inc., a subsidiary of Computer Sciences Corporation ("CSC"), a healthcare
information services company. Prior thereto, and since 1985, Mr. Gershen held
various financial positions with APM, Inc., which was acquired by CSC in 1996.
Gerald Angowitz has served as a Director of Health Card since June 26,
1998. Mr. Angowitz presently serves as a management consultant through the
Angowitz Company, which provides consulting services. Mr. Angowitz had served as
Senior Vice President of Human Resources and Administration for RJR Nabisco,
Inc. ("RJR"), a consumer products manufacturer, from March 1995 until December
1999. Mr. Angowitz previously served as Vice President of Human Resources for
RJR from February 1994 to March 1995 and Vice President of employee benefits at
RJR from January 1992 to February 1994. Mr. Angowitz is the brother-in-law of
Hugh Freund, a Vice President, Secretary, principal stockholder and Director of
Sandata. Mr. Angowitz also serves on the Company's Audit and Compensation
Committees.
Kenneth J. Daley has served as a Director of Health Card since May 10,
1999. For more than the five years prior to January 1999, Mr. Daley served as
Senior Vice President of Chase Manhattan Bank. Mr. Daley also serves on the
Company's Audit and Compensation Committees.
Paul J. Konigsberg has served as a Director of the Company since November
2000. Mr. Konigsberg currently serves on the Board of Directors of Sandata,
Inc., an affiliate of Health Card, since January 1998. Mr. Konigsberg is a
certified public accountant and has been a senior partner in the accounting firm
of Konigsberg Wolf & Co., P.C. since 1970. Mr. Konigsberg also serves on the
Company's Audit and Compensation Committees.
Ronald L. Fish served as a Director of the Company since November 2000. Mr.
Fish currently serves on the Board of Directors of Sandata Inc., an affiliate of
Health Card, since June 1998. Since 1975, Mr. Fish served as Administrator,
Treasurer and Director of Unlimited Care Inc., a nursing services firm, and is a
certified public accountant. Mr. Fish also serves on the Company's Audit and
Compensation Committees.
Each of Health Card's Directors is elected for a period of one year and
serves until his successor is duly elected and qualified. Health Card paid
$18,500 in Directors' fees during the fiscal year ended June 30, 2001. No
Directors' fees had been paid previously.
Each of the executive officers serves at the pleasure of Health Card's
Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Securities Exchange Act of 1934, as amended ("Section
16"), requires that reports of beneficial ownership of capital stock and changes
in such ownership be filed with the Securities and Exchange Commission (the
"SEC") by Section 16 "reporting persons," including directors, certain officers,
holders of more than 10% of the outstanding Common Stock and certain trusts of
which reporting persons are trustees. Health Card is required to disclose in
this 10-K each reporting person whom it knows to have failed to file any
required reports under Section 16 on a timely basis during the fiscal year ended
June 30, 2001 or prior fiscal years.
To Health Card's knowledge, based solely on a review of copies of Forms 3,
4 and 5 furnished to it and written representations that no other reports were
required, during the fiscal year ended June 30, 2001 Health Card's officers,
Directors and 10% stockholders complied with all Section 16(a) filing
requirements applicable to them except: Messrs. Angowitz, Bigl, Brodsky, Daley,
Shapiro, Konigsberg, and Fish all failed to timely file one report relative to
one transaction each.
Item 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth certain information with respect to the
compensation paid or awarded by Health Card to the Chief Executive Officer and
other executive officers, (collectively, the "Named Executive Officers"), whose
salary and bonus exceeded $100,000 in all capacities for the fiscal year ended
June 30, 2001:
===================== ========== ======================================== ======================================= ===============
Annual Compensation Long-Term Compensation
--------------------- ---------- ---------------------------------------- --------------------------------------- ---------------
--------------------- ---------- ------------ ------------ -------------- --------------------------- ----------- ---------------
Awards Payouts
--------------------- ---------- ------------ ------------ -------------- --------------------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Year Salary Bonus Compensation Awards Options/SARs Payouts Compensation
Principal Position ($) ($) ($) ($) (#) ($) ($)
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
Bert E. Brodsky, 2001 377,015(2) 120,000(2) 89,380(10) -0- 500,000(15) -0- -0-
Chairman of the
Board
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
2000 182,114(3) 120,000(6) 97,310(10) -0- -0- -0- -0-
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
1999 403,867(4) 487,500(6) 90,717(10) -0- -0- -0- -0-
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
James Bigl, 2001 184,760 60,000 (7) 12,000(11) -0- 31,000(16) -0- 908(25)
President 578(26)
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
2000 7,230 25,000 -0- -0- 100,000(17) -0- -0-
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
David Gershen, 2001 155,250 55,000 (8) -0- -0- 11,000(18) -0- 737(25)
Chief Financial
Officer, Treasurer
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
2000 23,077 -0- -0- -0- 35,000(19) -0- -0-
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
Linda Portney, 2001 125,000 -0- 18,813(12) -0- -0- -0- 551(25)
Executive Vice 551(26)
President of
Operations(1)
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
2000 125,000 -0- 20,140(12) -0- -0- -0- 1,011(26)
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
1999 125,000 -0- 20,027(13) -0- -0- -0- 952(26)
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
Kenneth Hammond, 2001 122,192 250 7,969(13) -0- -0- -0- 380(25)
Vice President of 354(26)
Operations
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
2000 114,231 10,250 -0- -0- 10,000(20) -0- 740(26)
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
1999 103,135 10,250 -0- -0- -0- -0- 656(26)
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
John Ciufo, Vice 2001 144,588 11,922 -0- -0- -0- -0- 606(25)
President of 490(26)
Clinical Services
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
2000 141,730 20,000 -0- -0- 35,568(21) -0- 508(26)
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
1999 59,000 5,000 -0- -0- 25,568(22) -0- -0-
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
Tery Baskin, Chief 2001 132,923 56,440(9) 10,408(14) -0- 55,000(23) -0- 8,338(26)
Operating Officer
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
Gerald Shapiro, 2001 113,800(5) -0- -0- -0- 11,000(24) -0- -0-
Vice Chairman,
Secretary
===================== ========== ============ ============ ============== ============ ============== =========== ===============
(1) Ms. Portney was no longer an executive officer of the Company
effective October 2000, is no longer an employee effective June
30, 2001 and is currently providing consulting services to the
Company.
(2) Represents salary and bonus accrued for Mr. Brodsky, but not
paid. The only amount paid during the year was $15,385.
(3) Represents salary paid to Mr. Brodsky.
(4) Represents salary and consulting fees paid to certain entities
affiliated with Mr. Brodsky. See Item 13 hereof.
(5) Represents salary and consulting fees paid to Mr. Shapiro.
(6) For the fiscal year ending June 30, 2000, reflects a $120,000
bonus awarded to Mr. Brodsky in January 2000. Such bonus is
accrued in twelve equal monthly installments of $10,000, but has
not been paid. Also includes a bonus of $360,000 for the fiscal
year ended June 30, 1999.
(7) For the fiscal year ended June 30, 2001, a bonus of $60,000 was
awarded to Mr. Bigl, but was paid subsequent to June 30, 2001.
(8) For the fiscal year ended June 30, 2001, a $25,000 guaranteed
bonus was paid to Mr. Gershen per his employment agreement after
one year of service. An additional bonus of $30,000 was awarded
to Mr. Gershen, but was paid subsequent to June 30, 2001.
(9) For the fiscal year ending June 30, 2001, reflects a $25,000
bonus awarded to Mr. Baskin; such amounts were paid to Mr. Baskin
subsequent to June 30, 2001. Also reflects commissions paid
pursuant to an employment agreement with the Company, which
commission arrangement terminated on June 4, 2001 with the
execution of a new employment agreement with the Company.
(10) Includes automobile lease payments to an entity affiliated with
Mr. Brodsky. Also includes life insurance premiums paid by Health
Card on Mr. Brodsky's behalf, the aggregate amount of which
premiums are repaid to Health Card upon the payment of the policy
benefits to the beneficiary.
(11) Represents a nonaccountable expense allowance during fiscal 2001.
(12) Represents automobile lease payments to an unaffiliated entity
and amounts for automobile insurance and travel allowance.
(13) Represents automobile lease payments to an entity affiliated with
Mr. Brodsky and amounts for automobile insurance and travel
allowance.
(14) Represents payments under a bank loan collateralized by an
automobile for Mr. Baskin and life insurance premiums.
(15) Includes an option granted on February 20, 2001 to purchase
500,000 shares of common stock at an exercise price of $1.84, of
which 100,000 shares were exercisable as of June 30, 2001 and
September 21, 2001.
(16) Includes an option granted on February 20, 2001 to purchase
11,000 shares of common stock at an exercise price of $1.67, of
which 3,670 shares were exercisable as of June 30, 2001 and
September 21, 2001. Also includes an option granted on June 12,
2001 to purchase 20,000 shares of common stock at an exercise
price of $3.00, of which no shares were exercisable as of June
30, 2001 and September 21, 2001.
(17) Includes an option granted on June 12, 2000 to purchase 100,000
shares of common stock at an exercise price of $4.00, of which
33,350 shares were exercisable as of June 30, 2001 and September
21, 2001.
(18) Includes an option granted on February 20, 2001 to purchase
11,000 shares of common stock at an exercise price of $1.67, of
which 3,670 shares were exercisable as of June 30, 2001 and
September 21, 2001.
(19) Includes an option granted on May 1, 2000 to purchase 35,000
shares of common stock at an exercise price of $5.00, of which
11,670 shares were exercisable of June 30, 2001 and September 21,
2001.
(20) Includes an option granted on August 3, 1999 to purchase 10,000
shares of common stock at an exercise price of $7.50, of which
7,000 shares were exercisable as of June 30, 2001. As of
September 21, 2001, 10,000 shares of such option were currently
exercisable.
(21) Includes an option granted on August 3, 1999 to purchase 10,000
shares of common stock at an exercise price of $7.50, of which
6,700 shares were exercisable as of June 30, 2001. As of
September 21, 2001, 10,000 shares were currently exercisable.
Also includes an option granted on February 1, 2000 to purchase
25,568 shares of common stock at an exercise price of $5.87, of
which 17,049 shares of such option were exercisable as of June
30, 2001 and September 21, 2000.
(22) Includes an option granted by Mr. Brodsky on December 7, 1998 to
purchase an aggregate of 25,568 shares of Health Card common
stock from Mr. Brodsky at a price of $5.87 per share. Such option
was surrendered by Mr. Ciufo on February 1, 2000.
(23) Includes an option granted on June 4, 2001 to purchase 15,000
shares of common stock at an exercise price of $5.00, of which no
shares were exercisable as of June 30, 2001 and September 21,
2001. Also includes an option granted on July 20, 2000 to
purchase 40,000 shares of common stock at an exercise price of
$4.00, of which no shares were exercisable as of June 30, 2001.
As of September 21, 2001, 8,000 shares of such option were
currently exercisable.
(24) Includes an option granted on February 20, 2001 to purchase
11,000 shares of common stock at an exercise price of $1.67, of
which 3,670 shares were exercisable on June 30, 2001 and
September 21, 2001.
(25) Represents amounts anticipated to be contributed by Health Card
under Health Card's 401(k) Plan. Such amounts have not yet been
contributed and the obligation to pay these amounts is at the
discretion of Health Card.
(26) Represents amounts contributed by Health Card under Health Card's
401(k) Plan as of June 30, 2001.
Option/SAR Grants in Last Fiscal Year
The following table sets forth certain information concerning individual
grants of stock options during the fiscal year ending June 30, 2001:
===============================================================================================================================
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM
-------------------------------------------------------------------------------------- -----------------------------------------
------------------- ---------------- ---------------- ---------------- --------------- ------------------ ----------------------
Number of Percent of
Securities Total
Underlying Options/SARs
Options/ Granted to Exercise or
SARs Granted Employees in Base Price Expiration
Name (#) Fiscal Year ($/Sh) Date 5% ($) 10% (S)
(%)
------------------- ---------------- ---------------- ---------------- --------------- ------------------ ----------------------
------------------- ---------------- ---------------- ---------------- --------------- ------------------ ----------------------
$145,695 $424,776
Bert E. Brodsky 500,000 (1) 59.7% $1.84 2/20/06
------------------- ---------------- ---------------- ---------------- --------------- ------------------ ----------------------
------------------- ---------------- ---------------- ---------------- --------------- ------------------ ----------------------
James Bigl 11,000 (2) 1.3% $1.67 2/20/06 $5,075 $11,215
20,000 (3) 2.4% $3.00 6/12/06 $17,343 $37,597
------------------- ---------------- ---------------- ---------------- --------------- ------------------ ----------------------
------------------- ---------------- ---------------- ---------------- --------------- ------------------ ----------------------
David Gershen 11,000(2) 1.3% $1.67 2/20/06 $5,075 $11,215
------------------- ---------------- ---------------- ---------------- --------------- ------------------ ----------------------
------------------- ---------------- ---------------- ---------------- --------------- ------------------ ----------------------
Tery Baskin 15,000 (4) 1.8% $5.00 6/4/06 - -
40,000 (5) 4.8% $4.00 7/20/06 - $34,872
=================== ================ ================ ================ =============== ================== ======================
(1) Exercisable over a five year period to the extent of 100,000
shares of Common Stock in each of February 2001, February 2002,
February 2003, February 2004 and February 2005.
(2) Exercisable over a three year period to the extent of 3,670
shares of Common Stock in February 2001 and 3,665 shares of
Common Stock in each of February 2002 and February 2003.
(3) Exercisable over a three year period to the extent of 6,670
shares of Common Stock in June 2002 and 6,665 shares of Common
Stock in each of June 2003 and June 2004.
(4) Exercisable over a three year period to the extent of 5,000
shares of Common Stock in June 2002, February 2003 and February
2004.
(5) Exercisable over a five year period to the extent of 8,000 shares
of Common Stock in each of July 2001, July 2002, July 2003, July
2004 and July 2005.
Aggregated Option/SAR Exercise in Last Fiscal Year and Fiscal Year-End Option
Value Table
The following table sets forth certain information concerning the value of
unexercised options and warrants for the fiscal year ended June 30, 2001:
========================= ====================== ====================== ======================== ===========================
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options and
Options and Warrants at Warrants at June 30,
Shares Acquired on Value Realized June 30, 2001 (#) 2001 ($)
Name Exercise (#) ($) Exercisable/UnexercisableExercisable/Unexercisable
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
Bert E. Brodsky -0- -0- 100,000/400,000 124,000/496,000
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
James Bigl -0- -0- 3,670/7,330 5,175/10,335
-0- -0- 0/20,000 -0-/1,600
-0- -0- 33,350/66,650 -0-/-0-
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
David Gershen -0- -0- 3,670/7,330 5,175/10,335
-0- -0- 11,670/23,330 -0-/-0-
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
Tery Baskin -0- -0- 0/15,000 -0-/-0-
-0- -0- 0/40,000 -0-/-0-
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
Kenneth Hammond -0- -0- 7,000/3,000 -0-/-0-
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
John Ciufo -0- -0- 6,700/3,300 -0-/-0-
-0- -0- 17,049/8,519 -0-/-0-
========================= ====================== ====================== ======================== ===========================
Employee Contracts, Termination of Employment and Change-in-Control
Arrangements
Except as described below, there are no written employment or similar
agreements with any of the Named Executive Officers. See Item 13 hereof for a
discussion of certain fees paid and payable to Mr. Brodsky.
Health Card entered into an employment agreement with the majority
stockholder, Mr. Brodsky effective July 1, 1999. Pursuant to this agreement, Mr.
Brodsky has agreed to serve as Chairman of the Board of Directors at an annual
salary of $200,000, subject to adjustment by the Board of Directors. As of July
1, 2001, this amount was increased to $425,000. The agreement terminates on July
1, 2002, unless terminated by Health Card for cause, or in the event Mr. Brodsky
becomes permanently disabled. The agreement provides for certain fringe benefits
payable to or on behalf of Mr. Brodsky, such as the use of an automobile. In
addition, the agreement provides for certain termination benefits payable to Mr.
Brodsky, which depending upon the reason for termination, can equal up to two
years salary. It is anticipated that Mr. Brodsky may devote a portion of his
business time to business affairs unrelated to Health Card, provided that such
activities do not prevent him from fulfilling his obligations under the
agreement. The agreement does not quantify the amount of time that Mr. Brodsky
must devote to Health Card. However, it is contemplated that Mr. Brodsky will
devote a substantial portion of his business time to the affairs of Health Card.
In January 2000, the Board of Directors authorized the payment to Mr.
Brodsky of a bonus in the amount of $120,000. Such bonus is payable in equal
monthly installments of $10,000. This amount has continued to be accrued monthly
through June 30, 2001. No actual payments have been paid to Mr. Brodsky.
Health Card entered into an employment agreement with James Bigl effective
June 12, 2000. Pursuant to this agreement, Mr. Bigl has agreed to serve as
President at an annual salary of $188,000, in addition to (i) a $25,000 signing
bonus upon execution of the agreement and (ii) the ability to participate in the
bonus pool for senior executives. The agreement also provides for certain
termination benefits, which, depending upon the reason for termination, can
equal up to one year of salary. In connection with the employment agreement,
Health Card granted to Mr. Bigl an incentive stock option to purchase 100,000
shares of common stock at $5.00 per share. Such option vests over a three year
period commencing on June 12, 2001. The option expires on June 12, 2005. On June
12, 2001, Health Card increased the annual compensation paid to Mr. Bigl to
$213,000 in addition to $12,000 in nonaccountable expenses annually. Also on
June 12, 2001, Health Card granted to Mr. Bigl an incentive stock option to
purchase 20,000 shares of common stock at $3.00 per share. Such option vests
over a four year period commencing June 12, 2002. The option expires on June 12,
2006. A copy of the Stock Option Agreement is annexed hereto as Exhibit 10.61.
Health Card entered into an employment agreement with David Gershen
effective May 1, 2000. Pursuant to this agreement, Mr. Gershen has agreed to
serve as Chief Financial Officer and Treasurer at an annual salary of $150,000,
in addition to (i) a $25,000 bonus upon the completion of one full year of
employment with Health Card and (ii) the ability to participate in the bonus
pool for senior executives. The agreement also provides for certain termination
benefits, including, but not limited to, a change of control, which, depending
upon the reason for termination, can equal up to one year of salary. In
connection with the employment agreement, Health Card granted to Mr. Gershen an
incentive stock option to purchase 35,000 shares of common stock at $5.00 per
share. Such option vests over a three year period commencing on May 1, 2001. The
option expires on May 1, 2005. On May 1, 2001, Mr. Gershen's annual base salary
was increased to $185,000.
In connection with the PAI acquisition, Tery Baskin entered into an
employment agreement with PAI, pursuant to which Mr. Baskin agreed to serve as
PAI's Senior Vice President at an annual salary of $130,000 in addition to (i) a
one percent commission on all claims adjudicated by PAI and (ii) the ability to
participate in the bonus pool for senior executives. In connection with the
employment agreement, Health Card granted incentive stock options to Mr. Baskin
to purchase 40,000 shares of common stock at $4.00 per share. See Item 1,
Description of Business, for a detailed description of the PAI acquisition.
Health Card entered into an employment agreement with Tery Baskin effective
June 4, 2001 to serve as Chief Operating Officer, at an annual salary of
$150,000, in addition to the ability to participate in the bonus pool for senior
executives. In connection with the employment agreement, Health Card granted to
Mr. Baskin incentive stock options to purchase 15,000 shares of Common Stock at
$5.00 per share. A copy of the Employment Agreement is annexed hereto as Exhibit
10.62. A copy of the Stock Option Agreement is annexed hereto as Exhibit 10.63.
The Company has an employment arrangement with its Senior Vice President of
Sales and Marketing who is entitled to commissions of 3% of gross margins
generated from direct accounts sold, and 1% of gross margins generated from
accounts sold by salespeople under his management. Mr. Ciufo and Mr. Hammond are
employed by Health Card pursuant to letters, employee covenant agreements and/or
confidentiality and non-disclosure agreements reflecting the compensation terms
described under Item 11 hereof and prohibiting the employee from engaging in
certain competitive activity or disclosing certain information. Ms. Portney is
no longer employed by Health Card but serves as a consultant.
Compensation Committee Interlocks and Insider Participation
Until May 10, 1999, Health Card did not have a Compensation Committee or
other committee of the Board of Directors performing similar functions.
Decisions concerning the compensation of executive officers were made by the
Board of Directors.
Effective May 10, 1999, Health Card established a Compensation Committee.
The Compensation Committee is responsible for making recommendations to the
Board of Directors regarding compensation arrangements for executive officers of
Health Card, including annual bonus compensation, and consults with management
of Health Card regarding compensation policies and practices. The Compensation
Committee also makes recommendations concerning the adoption of any compensation
plans in which management is eligible to participate, including the granting of
stock options or other benefits under such plans. Messrs. Shapiro and Angowitz
and a third director comprised the first Compensation Committee. Effective
October 27, 1999, Mr. Daley replaced the third member. In November 2000, Mr.
Fish and Mr. Konigsberg were added to the Board and Compensation Committee.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of September 21,
2001, concerning the beneficial ownership of Health Card's common stock for:
o each person who is known by Health Card to be the beneficial
owner of more than five (5%) percent of Health Card's shares of
common stock,
o each of the Named Executive Officers,
o each of Health Card's Directors, and
o all of Health Card's Executive Officers and Directors as a group.
Except as otherwise indicated below, each of the entities or persons named
in the table has sole voting and investment power with respect to all shares of
common stock beneficially owned.
========================================== ======================================== =======================================
Name of Management Person Number of Shares Approximate Percentage
and Name and Address of of Outstanding Shares
Beneficial Owner (1)
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
Bert E. Brodsky 3,083,577 (2) 42.9%
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
David Craig Brodsky 383,579 5.3%
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
Gerald Shapiro 387,204 (3) 5.4%
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
James Bigl 39,020 (4) *
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
Tery Baskin 76,100 (5) *
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
David Gershen 19,340 (6) *
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
Kenneth Hammond 7,000 (7) *
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
John Ciufo 23,749 (8) *
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
Kenneth J. Daley
6 Glen Avenue 13,770 (9) *
Glen Head, NY 11545
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
Ronald Fish *
107 Law Road 7,070 (10)
Briarcliff Manor, NY 10510
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
Gerald Angowitz
37 Fieldstone Lane 13,770 (9) *
Oyster Bay, NY 11771
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
Paul Konigsberg 7,070 (10)
440 Park Avenue South, 10th Fl.
New York, NY 10016
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
All executive officers and
Directors as a group (10 persons) 4,061,249 (2)(3)(4)(5)(6)(9) 56.5%
========================================== ======================================== =======================================
* Less than 1%
(1) With the exception of the addresses specifically noted, the
address of each person named in the table is c/o National Medical
Health Card Systems, Inc., at 26 Harbor Park Drive, Port
Washington, NY 11050.
(2) Includes (i) 100,000 shares of common stock subject to options
that are currently exercisable, (ii) 100,000 shares of common
stock beneficially owned by the Bert E. Brodsky Revocable Trust,
and (iii) 1,725 shares of common stock beneficially owned by P.W.
Capital Corp., of which Mr. Brodsky is President. Does not
include an aggregate of 400,000 shares of common stock subject to
currently unexercisable options.
(3) Includes 3,670 shares of common stock subject to options that are
currently exercisable. Does not include an aggregate of 7,330
shares of common stock subject to currently unexercisable
options.
(4) Includes 37,020 shares of common stock subject to options that
are currently exercisable. Does not include an aggregate of
93,980 shares of common stock subject to currently unexercisable
options.
(5) Does not include an aggregate of 57,000 shares of common stock
subject to currently unexercisable options.
(6) Includes 15,340 shares of common stock that are currently
exercisable. Does not include an aggregate of 30,660 shares of
common stock subject to currently unexercisable options.
(7) Includes 7,000 shares of common stock subject to options that are
currently exercisable. Does not include an aggregate of 3,000
shares of common stock subject to currently unexercisable
options.
(8) Includes 23,749 shares of common stock subject to options that
are currently exercisable. Does not include an aggregate of
11,819 shares of common stock subject to currently unexercisable
options.
(9) Includes for each of Mr. Daley and Mr. Angowitz 13,770 shares of
common stock subject to options that are currently exercisable.
Does not include for each of them 17,230 shares of common stock
subject to currently unexercisable options.
(10) Includes for each of Mr. Fish and Mr. Konigsberg 7,070 shares of
common stock subject to options that are currently exercisable.
Does not include an aggregate of 13,930 shares of common stock
subject to currently unexercisable options.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
From time to time, Mr. Brodsky and his affiliates have engaged in numerous
transactions with Health Card.
Health Card's Relationship with Sandata
Health Card has entered into various verbal and written agreements, with
Sandata and its wholly-owned subsidiaries. Mr. Brodsky is the Chairman of the
Board, Treasurer and a principal stockholder of Sandata. The majority of the
services are related to database and operating system support, hardware leasing,
maintenance and related administrative services. Health Card purchases services
from Sandata, and its subsidiaries, on an as needed basis at negotiated hourly
or monthly rates. Sandata has historically procured the majority of Health
Card's computer equipment and furniture and fixtures. Sandata resells these
items to Health Card at their cost plus a 10-20% servicing fee depending on the
level of up-front consulting required to develop the proper specifications for
the equipment and set-up required. Approximately $407,000 of computer equipment
and furniture and fixtures were purchased on Health Card's behalf during the
fiscal year ended June 30, 2001. In addition, Sandata, through another
wholly-owned subsidiary, Santrax Systems, Inc. resells its telephone services to
Health Card based on actual usage.
A significant portion of Health Card's information systems for reporting
purposes has historically been developed, enhanced, modified and maintained by
Sandsport Data Services, Inc., a wholly-owned subsidiary of Sandata. During the
fiscal year ended June 30, 2001, Sandsport billed Health Card approximately
$839,000 for quality assurance testing of software programs developed by Health
Card along with network support and approximately $256,000 for help desk
services. Furthermore, Health Card currently leases computer hardware for its
data processing center at a monthly cost of approximately $44,170 from Sandsport
pursuant to an oral agreement, terminable at will by either party. Lease
payments under this lease for the fiscal years ended June 30, 2000 and 2001
totaled $490,214 and $493,965, respectively. Management of Health Card believes
that the terms of such lease and the negotiated billing rates are as fair to
Health Card as those that could be obtained from an unaffiliated third party,
although no independent fee quotes have been obtained.
During the fiscal years ended June 30, 1999, 2000 and 2001, Health Card
incurred fees to Sandata, or its subsidiaries, in the aggregate amounts of
approximately $2,151,000, $2,331,000 and $3,612,000, respectively. As of June
30, 2001, Health Card owed $341,155 to Sandata, or its subsidiaries, which has
been paid subsequently.
Health Card has evaluated the services that Sandata has performed for it in
the past, and is in the process of bringing most of those services in-house by
hiring employees with the needed skills. This should reduce the Company's
overall costs over time.
As of June 30, 2001, Sandata owed Health Card $503,958 pursuant to a
promissory note, dated May 31, 2000, in the original principal amount of
$500,000 plus interest at the rate of 9-1/2%; interest on such note was payable
quarterly and such note was paid in full on May 31, 2001. On June 9, 2001,
Sandata again gave a promissory note to Health Card in the principal amount of
$500,000, with interest at the rate of 7%, which was to have been due on June 8,
2002. The Note was paid in full on August 15, 2001. As of June 30, 2001, Sandata
also owed Health Card $68,123 for pharmacy benefit services which has not yet
been reimbursed.
Employee Management Relationship with Medical Arts Office Services, Inc.
Medical Arts Office Services, Inc. is an affiliate of Health Card. Certain
persons employed by companies affiliated with Mr. Brodsky are also officers and
Directors of Medical Arts, of which Mr. Brodsky is the sole shareholder.
Medical Arts provides Health Card with shared legal, bookkeeping and
administrative services (including payroll processing) pursuant to an oral
agreement, terminable at will by either party.
During the fiscal year ended June 30, 2001, the total payments made by
Health Card to Medical Arts were approximately $383,545 of which $63,150 was
paid for bookkeeping services, $220,151 was paid for legal services and $100,244
was paid for administrative services. Management believes that the hourly rates
charged by Medical Arts are as fair to Health Card as those that could be
obtained from an unaffiliated third party, although no independent fee quotes
have been obtained.
Health Card's Relationship with P.W. Capital, LLC
Prior to the consummation of the Public Offering, in consideration of
consulting fees paid to P.W. Capital, LLC, Mr. Brodsky provided managerial
expertise and advice, including but not limited to advice regarding the hiring
of executive management and other personnel, marketing and sales matters, and
negotiation of contracts with sponsors and other parties. Pursuant to an
agreement with Mr. Brodsky, payment of the above consulting fees ceased upon
consummation of the Public Offering and, in consideration of the provision of
such executive services, Mr. Brodsky began to receive, and continues to receive,
remuneration as an executive officer of Health Card. See Item 11 hereof.
In addition, Health Card rents a two family house in Port Washington, New
York (near the Company's offices) from P.W. Capital, LLC, which is used for
out-of-town employees. Health Card evaluated the cost of hotels for these
individuals and determined it was more cost efficient to rent the house at a
monthly rate of $5,500. During the fiscal year ended June 30, 2001, Health Card
paid P.W. Capital, LLC $16,500 in rent for this facility.
Real Estate
The Company currently occupies approximately 26,500 square feet of office
space located at 26 Harbor Park Drive, Port Washington, New York 11050 (the
"Facility"). The Company subleases the Facility from BFS Realty, LLC, an
affiliate of the Company's Chairman (the "Affiliate"). The Affiliate leases the
Facility from the Nassau County Industrial Development Agency, pursuant to a
lease (the "Lease"), which was entered into by that Agency and the Affiliate in
July 1994. The Lease expires in March 2005. The Affiliate has the right to
become the owner of the Facility upon expiration of the Lease. The Affiliate
subleases a portion of the Facility to the Company. The Company currently pays
rent to the Affiliate in the amount of $336,780 per year, plus monthly expenses
for maintenance, real estate taxes, utilities and the like. The rent increases
by 5% annually. The Affiliate also receives rent from other companies that
occupy space in the Facility, some of which are affiliated with the Company's
Chairman. The Company believes that the Facility is adequate for current
purposes.
PAI currently occupies approximately 7,000 square feet of office space in
Little Rock, Arkansas, at an annual rent of $110,372, including monthly
expenses. The landlord for these premises is Executive Park Partnership. The
lease expires on April 30, 2002. PAI is currently negotiating with Executive
Park Partnership the terms of a lease that would commence May 1, 2002 and would
increase the space occupied by PAI.
Pursuant to a lease dated August 10, 1998 and expiring on August 31, 2005,
Health Card occupies approximately 1,500 square feet of space at 63 Manhorhaven
Boulevard, Port Washington, New York, which is used as a pharmacy. The landlord
for these premises is 61 Manorhaven Boulevard, LLC, of which Mr. Brodsky is the
sole member. The current rent is $1,654 per month through August 31, 2002; the
annual rent increases by 5% per year. Additional rent, in the form of certain
expenses, is also payable.
Indebtedness of Management
From time to time, Mr. Brodsky and certain of his affiliates (collectively
the "Brodsky Affiliates") and other officers and directors and affiliates of
Health Card have borrowed funds, or have incurred indebtedness in connection
with the purchase of shares or for other reasons, from Health Card. The
following table describes certain information relating to such indebtedness.
Largest Aggregate
Amount Owed by Debtor Debt Owed
During Fiscal Year As Of
Debtor Ended June 30, 2001 June 30, 2001
------ --------------------- -------------
P.W. Capital LLC (1).......................... $4,212,843 $4,212,843
Port Charitable Foundation (2)................ 14,000 0
Gerald Shapiro(3)............................. 338,250 300,000
Sandata, Inc.(4).............................. 527,603 503,958
------------------
(1) On June 1, 1998, Health Card assigned certain indebtedness
aggregating $1,636,785 in principal and accrued interest, if any,
from certain persons and entities, including Mr. Brodsky, to P.W.
Capital, LLC, a company affiliated with Mr. Brodsky. On June 1,
1998, P.W. Capital executed a demand promissory note made payable
to the order of Health Card in the principal amount of $4,254,785
with interest at the rate of 8.5% per annum, payable quarterly,
such amount reflecting the assigned debt and amounts then owed by
P.W. Capital to Health Card. On June 1, 1998, Mr. Brodsky
executed an unconditional guaranty in favor of Health Card for
the full and prompt payment to Health Card of all amounts payable
under shares of common stock of Health Card and is without
recourse to the maker. Such note was restructured by a new
non-recourse promissory note dated July 31, 2000, made payable by
P.W. Capital to the order of Health Card in the amount of
$3,890,940. Such note is payable in annual installments of
$400,000 consisting of principal and interest at the rate of 8
1/2% per annum on each of the first and second anniversary date,
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 Health Card.
The first $400,000 payment due under the note as of July 31,
2001, was satisfied by offsetting an equal amount owed to Mr.
Brodsky by the Company. Effective July 31, 2001, the interest
rate on the note was changed to the prime rate in effect from
time to time.
(2) Port Charitable Foundation is a company affiliated with Hugh
Freund and Carol Freund, who are husband and wife. Mr. Freund is
an Executive Vice President, Secretary, Director and principal
stockholder of Sandata.
(3) Mr. Shapiro, Vice Chairman of the Board and Secretary of Health
Card, is the Chairman of the Board and Treasurer of Mediclaim,
Inc. The amount due includes principal and interest due under a
non-recourse (except for interest) promissory note dated July 1,
1997 made payable by Mr. Shapiro to the order of Health Card in
the original principal amount of $300,000, secured by a pledge of
383,534 shares of common stock of Health Card. Interest on such
note, at the rate of 8.5% per annum, is payable quarterly. The
principal amount of the note is payable five years from the date
of the note. $63,750 of interest was paid by Mr. Shapiro during
the fiscal year ended June 30, 2001.
(4) As of June 30, 2001, Sandata owed Health Card $503,958 pursuant
to a promissory note, dated May 31, 2000, in the original
principal amount of $500,000 plus interest at the rate of 9-1/2%;
interest on such note was payable quarterly and such note was
paid in full on May 31, 2001. On June 9, 2001, Sandata again gave
a promissory note to Health Card in the principal amount of
$500,000, with interest at the rate of 7%, which was to have been
due on June 8, 2002. The Note was paid on August 15, 2001. As of
June 30, 2001, Sandata also owed Health Card $68,123 for pharmacy
benefit services which has not yet been reimbursed.
The Brodsky Revocable Trust has repaid certain of the indebtedness above to
the extent of approximately $1,992,900 (representing 73% of the proceeds from
the sale of shares by the Brodsky Trust pursuant to the Public Offering, net of
underwriting discounts and commissions, a non-accountable expense allowance and
a financial advisory fee payable to the representatives of the Public Offering).
The net proceeds from the sale of shares by the Brodsky Trust were applied first
100% to amounts owed by Mr. Brodsky to Health Card and the balance to amounts
owed by P.W. Capital to Health Card. In addition, Mr. Brodsky had agreed to pay
in full, within one year of the consummation of the Public Offering, the
remaining indebtedness owed by P.W. Capital, reflected in the above table, after
application of the net proceeds from the sale of shares by the Brodsky Trust in
the Public Offering. However, in July 2000, Health Card restructured such
indebtedness with a new non-recourse promissory note dated July 31, 2000, and
made payable by P.W. Capital to the order of Health Card in the amount of
$3,890,940. Such note is payable in annual installments of $400,000 consisting
of principal and interest at the rate of 8-1/2% per annum on each of the first
and second anniversary date, with the total remaining balance of principal and
interest due and payable on July 31, 2003. The first $400,000 payment due under
the note as of July 31, 2001, was satisfied by offsetting an equal amount owed
to Mr. Brodsky by the Company. Effective July 31, 2001, the interest rate on the
note was changed to the prime rate in effect from time to time. In the event
that P.W. Capital does not pay amounts due as and when required under this
promissory note, Health Card's recourse will be to exercise its legal remedies
with respect to the Health Card shares held by Health Card as collateral and
pursue legal action against Mr. Brodsky under a related guaranty. Such note does
not provide for default interest or penalties. Mr. Shapiro had orally agreed to
pay in full the indebtedness reflected opposite his name in the above table
within one year of the consummation of this offering. However, in July 2000,
Health Card allowed Mr. Shapiro to comply with the payment schedule reflected in
Footnote 3 to the table above. In the event that Mr. Shapiro does not pay
amounts due as and when required under his July 1997 promissory note, Health
Card's recourse will be to exercise its legal remedies with respect to the
Health Card shares held by Health Card as collateral and pursue legal action
against Mr. Shapiro for unpaid interest. Such note does not provide for default
interest or penalties. It is not anticipated that additional advances to or on
behalf of Mr. Brodsky or his affiliates will be permitted in the future, unless
approved by a majority of Health Card's disinterested Directors.
SunStar Healthcare, Inc.
SunStar Healthcare, Inc. ("SunStar") a Delaware corporation, was engaged in
providing managed health care services in the state of Florida by operating an
HMO. Its service territory covered 52 counties in central, northern and other
parts of Florida, including the metropolitan areas of Tampa, Orlando,
Jacksonville, and others. As of November 1, 1998, SunStar served approximately
57,000 enrolled plan members. On February 19, 1999, Mr. Brodsky, as trustee for
the irrevocable trusts of each of his children, purchased for $250,000 (an
aggregate of $1,000,000) preferred stock and warrants offered by SunStar.
Effective May 1, 1999, Health Card began providing services to SunStar. On
February 1, 2000, Health Card was notified that SunStar was placed in
receivership under the Department of Insurance of the State of Florida. There is
an outstanding receivable from SunStar for the month of January, 2000 of
approximately $1.2 million. Health Card has filed a claim for this amount with
the Department of Insurance of the State of Florida. There is no guarantee that
the full amount will be collected so Health Card has made an assessment of
amounts that might be collected and has reserved for the difference. During the
fiscal year ended June 30, 2000, Health Card billed SunStar approximately $10.5
million. There were no billings from Health Card to Sunstar during the fiscal
year ended June 30, 2001. See Item 7 hereof.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following consolidated financial statements of Health Card are included herein:
Independent Auditors' Reports F-2, F-3
Consolidated Balance Sheets as of June 30, 2000 and 2001 F-4
Consolidated Statements of Income for each of the years ended
June 30, 1999, 2000 and 2001 F-5
Consolidated Statements of Stockholders' Equity (Deficit) for each
of the years ended June 30, 1999, 2000 and 2001 F-6
Consolidated Statements of Cash Flows for each of the years ended
June 30, 1999, 2000 and 2001 F-7
Notes to Consolidated Financial Statements F-8
2. Financial Statement Schedules
Schedule II: Valuation and Qualifying Accounts S-1
3. Exhibits
Exhibit
Number Description of Exhibit
3.1 Restated Certificate of Incorporation of Health Card (1)
3.2 Certificate of Amendment, filed May 25, 1999, to Certificate of Incorporation of
Health Card (1)
3.3 Restated Certificate of Incorporation of Health Card, as amended (2)
3.4 Amended and Restated By-Laws of Health Card (1)
4.1 Form of Specimen Common Stock Certificate (1)
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 Letter, dated January 31, 1996, from Health Card to Mary Casale (1)
10.6 Employee Covenant Agreement, dated June 15, 1998, between Health Card
and Mary Casale (1)
10.7 Stock Option Agreement, dated July 1, 1997, between Bert Brodsky and Mary
Casale (1)
10.8 Letter, dated February 1, 2000, from Mary Casale to Bert E. Brodsky
10.9 Stock Option Agreement, dated February 1, 2000, between Health Card and
Mary Casale (4)
10.10 Letter, dated November 30, 1998, from Health Card to Marjorie O'Malley(1)
10.11 Employee Covenant Agreement, dated December 7, 1998, between Health
Card and Marjorie O'Malley(1)
10.12 Stock Option Agreement, dated December 7, 1998, between Bert Brodsky and
Marjorie O'Malley(1)
10.13 Letter, dated February 1, 2000, from Marjorie O'Malley to Bert E. Brodsky
10.14 Stock Option Agreement, dated February 1, 2000, between Health Card and
Marjorie O'Malley (4)
10.15 Letter, dated November 3, 1998, from Health Card to John Ciufo(1)
10.16 Confidentiality and Non-Disclosure Agreement, dated November 19, 1998,
between Health Card and John Ciufo(1)
10.17 Stock Option Agreement, dated December 7, 1998, between Bert Brodsky and
John Ciufo(1)
10.18 Stock Option Agreement, dated August 3, 1999, between Health Card and
John Ciufo (4)
10.19 Letter, dated February 1, 2000, from John Ciufo to Bert E. Brodsky
10.20 Stock Option Agreement, dated February 1, 2000, between Health Card and
John Ciufo (4)
10.21 Employee Covenant Agreement, dated June 16, 1998, between Health Card
and Ken Hammond(1)
10.22 Stock Option Agreement, dated August 3, 1999, between Health Card and Ken
Hammond (4)
10.23 Employee Covenant Agreement, dated June 1, 1998, between Health Card and
Linda Portney(1)
10.24 Employment Agreement, dated March 27, 2000, between Health Card and
David Gershen (4)
10.25 Stock Option Agreement, dated May 1, 2000, between Health Card and David
Gershen (4)
10.26 Employment Agreement, dated May 3, 2000, between Health Card and James
Bigl (4)
10.27 Stock Option Agreement, dated June 12, 2000, between Health Card and James
Bigl (4)
10.28 Stock Option Agreement, dated August 3, 1999, between Health Card and
Kenneth J. Daley (4)
10.29 Stock Option Agreement, dated August 3, 1999, between Health Card and
Gerald Angowitz (4)
10.31 Lease, dated January 1, 1996, between Sandata, Inc. and Health Card (1)
10.32 Assignment, dated November 1, 1996, from Sandata, Inc., to BFS Realty,
LLC(1)
10.33 First Amendment to BFS Realty, LLC Lease, dated June 1, 1998, between BFS
Realty, LLC and Health Card (1)
10.34 Second Amendment to BFS Realty, LLC Lease, dated April 1, 1999, between
BFS Realty, LLC and Health Card (1)
10.35 Lease, dated August 10, 1998, between 61 Manorhaven Boulevard, LLC and
Health Card(1)
10.36 Promissory Note, dated July 1, 1997, made payable by Bert
Brodsky to the order of Health Card in the original principal
amount of $1,000,000(1)
10.37 Letter, dated June 3, 1999, from Bert Brodsky to Health Card (1)
10.38 Promissory Note, dated July 1, 1997, made payable by Gerald Shapiro to the order
of Health Card in the original principal amount of $300,000(1)
10.39 Letter, dated June 3, 1999, from Gerald Shapiro to Health Card(1)
10.40 Promissory Note, dated June 1, 1998, made payable by P.W. Capital, LLC to the
Order of Health Card in the original principal amount of $4,254,785(1)
10.41 Agreement of Guaranty, dated June 1, 1998, by Bert E. Brodsky in favor of Health
Card(1)
10.42 Demand Promissory Note, dated January 2, 1999, made payable by P.W. Capital,
LLC to the order of Health Card, in the original principal amount of $90,100(1)
10.43 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)
10.44 Consulting Agreement, dated April 14, 1994, between P.W. Medical Management,
Inc. and Health Card (1)
10.45 Assignment, dated July 1, 1996, between P.W. Medical Management, Inc. and
P.W. Capital Corp.(1)
10.46 Letter, dated June 8, 1999, from P.W. Capital Corp. to Health Card(1)
10.47 Letter, dated June 9, 1999, from Bert E. Brodsky to Health Card(1)
10.48 Letter, dated June 8, 1999, from the Bert E. Brodsky Revocable Trust to Health
Card(1)
10.49 Letter agreement, dated June 30, 1999, between the Bert E. Brodsky Revocable
Trust and Health Card(1)
10.50 Employment Agreement, dated July 1, 1999, between Health Card and
Bert E. Brodsky(1)
10.51 Letter, dated June 8, 1999, from Bert E. Brodsky to Health Card(1)
10.52 Form of Lock-Up Agreement(1)
10.53 Acquisition and Merger Agreement, dated as of June 27, 2000, between
Health Card and Pharmacy Associates, Inc.(3)
10.54 Lease Agreement, dated March 4, 1996, between Pharmacy Associates, Inc. and
Executive Park Partnership
10.55 Amendment to Lease, dated November 2, 1998, between Pharmacy Associates, Inc.
and Executive Park Partnership
10.56 Amendment to Lease, dated November 19, 1998, between
Pharmacy Associates, Inc. and Executive Park Partnership
10.57 Lease Agreement, dated July 8, 1999, between Pharmacy Associates, Inc. and
Executive Park Partnership
10.58 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 (5)
10.59 Master Grid Note made by National Medical Health Card Systems, Inc. in favor of The Chase Manhattan
Bank (5)
10.60 Lease Agreement dated as of August 1, 2001, between National Medical Health Card Systems, Inc. and
BFS Realty, LLC
10.61 Employment Agreement, dated June 4, 2001, between National Medical Health Card Systems, Inc. and
Tery Baskin
10.62 Stock Option Agreement, dated June 4, 2001, between National Medical Health Card Systems, Inc. and
Tery Baskin
10.63 Stock Option Agreement, dated June 12 2001, between National Medical Health Card Systems, Inc. and
James Bigl
21 Subsidiaries of Health Card
(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.
(b) Reports on Form 8-K
A report on Form 8-K was filed by Health Card on June 22, 2001, regarding a
change in auditors. See Item 9 hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
--------------------------------------------------------------------------------
(Registrant)
By /s/ Bert E. Brodsky
---------------------------------------------------------------------------
Bert E. Brodsky, Chairman
(Chairman of the Board and
Chief Executive Officer)
Date: September ___, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ Bert E. Brodsky
-----------------------------------------------------------------------------
Bert E. Brodsky, Chairman, Chief Executive Officer,
Principal Executive Officer
Date: September ___, 2001
By /s/ Gerald Shapiro
------------------------------------------------------------------------------
Gerald Shapiro, Vice Chairman of the Board, Secretary Director
Date: September ___, 2001
By /s/ James Bigl
------------------------------------------------------------------------------
James Bigl, President
Date: September ___, 2001
By /s/ Gerald Angowitz
------------------------------------------------------------------------------
Gerald Angowitz, Director
Date: September ___, 2001
By /s/ Kenneth J. Daley
------------------------------------------------------------------------------
Kenneth J. Daley, Director
Date: September ___, 2001
By /s/ Paul J. Konigsberg
------------------------------------------------------------------------------
Paul J. Konigsberg, Director
Date: September ___, 2001
By /s/ Ronald L. Fish
------------------------------------------------------------------------------
Ronald L. Fish, Director
Date: September ___, 2001
By /s/ David Gershen
------------------------------------------------------------------------------
David Gershen, Principal Financial and Accounting Officer
Date: September ___, 2001
NATIONAL MEDICAL HEALTH CARD
SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------
Independent Auditors' Reports F-2 - F-3
Consolidated Financial Statements:
Balance Sheet F-4
Statement of Income F-5
Statement of Stockholders' Equity (Deficiency) F-6
Statement of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 - F-27
INDEPENDENT AUDITORS REPORT
Board of Directors
National Medical Health Card Systems, Inc.
We have audited the accompanying consolidated balance sheet of National
Medical Health Card Systems, Inc. and Subsidiaries as of June 30, 2001 and the
related consolidated statements of income, stockholders' equity (deficiency),
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
Medical Health Card Systems, Inc. and Subsidiaries as of June 30, 2001 and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
August 31, 2001
Report of Independent Certified Public Accountants
Board of Directors
National Medical Health
Card Systems, Inc. and Subsidiaries
Port Washington, New York
We have audited the accompanying consolidated balance sheet of National
Medical Health Card Systems, Inc. and Subsidiaries as of June 30, 2000, and the
related consolidated statements of income, stockholders' equity (deficit) and
cash flows for the years ended June 30, 2000 and 1999. These financial
statements are the responsibility of the management of National Medical Health
Card Systems, Inc. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
Medical Health Card Systems, Inc. and Subsidiaries as of June 30, 2000, and the
results of their operations and their cash flows for the years ended June 30,
2000 and 1999 in conformity with accounting principles generally accepted in the
United States of America.
BDO Seidman, LLP
Melville, New York
September 19, 2000
NATIONAL MEDICAL HEALTH CARD
SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
----------------------------------------------------------------------------------------------------------------------
June 30, 2000 2001
----------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents (including cash equivalent investments
of $11,181,583 and $1,216,372, respectively) $15,724,730 $12,474,945
Accounts receivable, less allowance for possible losses of $726,551
and $1,846,827, respectively 13,409,219 30,081,118
Rebates receivable 3,685,576 7,789,310
Due from affiliates 903,958 986,827
Deferred tax asset 409,000 1,102,932
Other current assets 268,651 1,003,709
----------------------------------------------------------------------------------------------------------------------
Total current assets 34,401,134 53,438,841
Property, Equipment and Software Development Costs, net 6,424,170 8,583,890
Due from Affiliates 3,486,996 3,831,621
Customer Relationships, net of accumulated amortization of $39,027 - 265,973
Goodwill, net of accumulated amortization of $396,228 - 12,943,502
Other Assets 51,318 45,737
----------------------------------------------------------------------------------------------------------------------
Total Assets $44,363,618 $79,109,564
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $27,430,684 $57,645,563
Current portion of capital lease obligations 456,437 542,094
Loans payable - current - 110,426
Due to officer/stockholder 60,000 541,630
Due to affiliates 311,767 343,568
Income taxes payable 11,991 -
Other current liabilities 100,036 1,345,533
----------------------------------------------------------------------------------------------------------------------
Total current liabilities 28,370,915 60,528,814
Capital Lease Obligations, less current portion 1,875,444 1,333,349
Long-term Loans Payable and Other Liabilities - 72,712
Deferred Tax Liability 692,000 1,702,470
----------------------------------------------------------------------------------------------------------------------
Total liabilities 30,938,359 63,637,345
----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 9 and 13)
Stockholders' Equity:
Preferred stock - $.10 par value; 10,000,000 shares authorized, none
outstanding - -
Common stock - $.001 par value; 25,000,000 shares authorized, 6,912,496
and 7,312,496 shares issued, respectively, and 6,721,496 and 7,121,496 6,913 7,313
outstanding, respectively
Additional paid-in capital 12,405,010 13,254,530
Retained earnings 2,096,203 3,254,143
Treasury stock at cost, 191,000 shares (743,767) (743,767)
Notes receivable - stockholders (339,100) (300,000)
----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 13,425,259 15,472,219
----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $44,363,618 $79,109,564
======================================================================================================================
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF INCOME
----------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1999 2000 2001
----------------------------------------------------------------------------------------------------------------------
Revenue $128,262,665 $167,675,627 $272,119,140
Cost of claims 115,768,372 153,377,200 249,572,132
----------------------------------------------------------------------------------------------------------------------
Gross profit 12,494,293 14,298,427 22,547,008
Selling, general and administrative expenses* 10,171,314 12,357,819 21,423,140
----------------------------------------------------------------------------------------------------------------------
Operating income 2,322,979 1,940,608 1,123,868
----------------------------------------------------------------------------------------------------------------------
Other income (expense):
Other income, net 674,936 922,066 877,402
Public offering costs (82,904) - -
----------------------------------------------------------------------------------------------------------------------
592,032 922,066 877,402
----------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,915,011 2,862,674 2,001,270
Provision for income taxes 976,000 1,247,000 843,330
----------------------------------------------------------------------------------------------------------------------
Net income $ 1,939,011 $ 1,615,674 $ 1,157,940
======================================================================================================================
Earnings per common share:
Basic $ 0.37 $ 0.24 $ 0.16
======================================================================================================================
Diluted $ 0.37 $ 0.24 $ 0.16
======================================================================================================================
Weighted-average number of common shares outstanding:
Basic 5,205,084 6,720,104 7,100,674
======================================================================================================================
Diluted 5,205,084 6,720,104 7,199,526
======================================================================================================================
* Includes amounts charged by affiliates aggregating $ 2,816,982 $ 2,985,506 $ 4,080,998
======================================================================================================================
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
----------------------------------------------------------------------------------------------------------------------
Retained
Notes Additional Earnings
Receivable Preferred Stock Common Stock Paid-in (Accumulated Treasury Stock
Stockholders Shares Amount Shares Amount Capital Deficit) Shares Amount
------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $(1,453,900) - - 4,971,577 $4,972 $ 901,128 $(1,458,482) - -
Interest on notes receivable (113,900) - - - - - - - -
Interest paid on notes receivable 171,700 - - - - - - - -
Principal paid on notes receivable 40,000 - - - - - - - -
Sale of stock - - - 340,919 341 1,999,659 - - -
Capital distributions, net of
income taxes - - - - - (32,214) - - -
Net income - - - - - - 1,939,011 - -
------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 (1,356,100) - - 5,312,496 5,313 2,868,573 480,529 - -
Sale of stock - - - 1,600,000 1,600 9,536,437 - - -
Stock purchase - - - - - - - 191,000 $(743,767)
Interest paid on notes receivable 49,583 - - - - - - - -
Principal paid on notes receivable 1,000,000 - - - - - - - -
Interest on notes receivable (32,583) - - - - - - - -
Net income - - - - - - 1,615,674 - -
------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 (339,100) - - 6,912,496 6,913 12,405,010 2,096,203 191,000 (743,767)
Principal paid on notes receivable 64,600 - - - - - - - -
Interest on notes receivable (25,500) - - - - - - - -
Stock issued - PAI acquisition - - - 400,000 400 849,520 - - -
Net income - - - - - - 1,157,940 - -
------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 $ (300,000) - - 7,312,496 $7,313 $13,254,530 $ 3,254,143 191,000 $(743,767)
====================================================================================================================================
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF CASH FLOWS
----------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1999 2000 2001
----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,939,011 $ 1,615,674 $ 1,157,940
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 772,389 1,299,984 2,584,923
Bad debt expense and allowance for possible losses 602,155 995,806 857,228
Compensation expense accrued to officer/stockholder 360,000 60,000 481,629
Deferred income taxes 201,000 979,000 390,599
Interest accrued on stockholders' loans (113,900) (32,583) (25,500)
Changes in assets and liabilities, net of effects from
purchases of PAI and PMP:
(Increase) decrease in:
Accounts receivable (7,756,836) (1,171,304) (10,154,914)
Rebates receivable (1,238,918) 1,618,210 (1,304,171)
Other current assets (188,380) 26,451 (593,675)
Due to/from affiliates 20,921 (250,875) (345,693)
Other assets - - 41,577
Increase (decrease) in:
Accounts payable and accrued expenses 6,233,083 1,663,317 19,527,015
Income taxes payable 644,608 (692,498) (55,772)
Other liabilities 47,764 (16,508) (2,224)
----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,522,897 6,094,674 12,558,962
----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (1,930,468) (2,431,861) (3,841,895)
Loans (to)/from stockholders 10,774 (390,000) -
Disposal of capital assets - - 30,500
Acquisition of PAI, net of cash and cash equivalents
acquired - - (4,614,008)
Acquisition of PMP, net of cash and cash equivalents
acquired - - (6,706,267)
Repayment of note by stockholder 40,000 1,049,583 -
Principal received on notes from stockholders 171,700 - 64,600
----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,707,994) (1,772,278) (15,067,070)
----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Sale of common stock - net 2,000,000 9,538,037 -
Capital distribution (54,214) - -
Proceeds from bank line of credit - - 4,000,000
Repayment of bank line of credit - - (4,000,000)
Treasury stock - (743,767) -
Deferred offering costs (242,826) - -
Repayment of debt and capital lease obligations (7,792) (207,799) (741,677)
----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 1,695,168 8,586,471 (741,677)
----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,510,071 12,908,867 (3,249,785)
Cash and cash equivalents at beginning of year 1,305,792 2,815,863 15,724,730
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,815,863 $15,724,730 $ 12,474,945
======================================================================================================================
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
National Medical Health Card Systems, Inc. (the "Company," "Health Card")
provides comprehensive pharmacy benefit management services to plan sponsors,
which include managed care organizations, local governments, unions,
corporations and third party health care plan administrators through its network
of licensed pharmacies throughout the United States. The Company's pharmacy
benefit management services include electronic point-of-sale pharmacy claims
management, retail pharmacy network management, mail pharmacy claims management,
benefit design consultation, preferred drug management programs, drug review and
analysis, consulting services, disease information services, data access,
reporting and information analysis, and physician profiling.
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 plan participant per month charges). Under the fee for service
arrangement, the Company is paid by the plans for their disbursements plus a set
transaction fee. Under the capitation arrangement, the Company receives its fee
based on the number of participants per month and pays for the cost of
prescriptions filled and thus shares the risk of operating profit or loss with
these plans. As of January 1, 2000, all services have been provided on a fee for
service basis only.
In October 1998, the Company acquired National Medical Health Card IPA,
Inc. ("IPA"), which is an independent practice association under the laws of New
York. This wholly owned subsidiary is an inactive company acquired from a
relative of the principal stockholder for no consideration. The Company intends
that IPA will be the contracting party with respect to any contracts with Health
Maintenance Organizations or providers containing financial risk-sharing
provisions. IPA is subject to the regulatory authority of the Department of
Health and the laws, rules and regulations applicable to independent practice
associations in New York. Activities conducted through June 30, 2001 included
organization, planning and development of the IPA's activities and securing
regulatory approvals.
Specialty Pharmacy Care, Inc. ("Specialty") was incorporated in January
2000. This wholly owned subsidiary was established to provide manufacturer
rebate administration services to Health Card. Effective as of April 2000,
Health Card began to enter into rebate agreements directly with drug
manufacturers. Although these agreements are between Health Card and drug
manufacturers, Specialty administers these contracts on behalf of Health Card.
Specialty retains a percentage of rebates collected.
Currently, Specialty does not have any full-time employees. Specialty
reimburses Health Card for the use of its employees on an as-needed basis.
The consolidated financial statements include the Company and its wholly
owned subsidiaries. All material intercompany accounts and transactions have
been eliminated in consolidation.
The Company considers all highly liquid debt instruments and other
short-term investments with an initial maturity date of three months or less
from purchase date to be cash equivalents. These also include short-term, highly
liquid municipal bonds with interest rates that are reset monthly which are
readily convertible into cash at par value (cost). Cash equivalents at June 30,
2000 and 2001 include approximately $1,130,000 and $1,598,000, respectively,
which are restricted as to their use as related to the maintenance of minimum
cash balances in accordance with Ohio statute.
Revenue under the fee for service arrangement related to the sales of
prescription drugs by the Company's nationwide network of pharmacies is
recognized when the claims are adjudicated. At the point-of-sale, the pharmacy
claims are adjudicated using the Company's on-line processing system.
Adjudication is the process by which the plan participant is checked for
eligibility of coverage, the prescription is compared to the plan parameters
established by the sponsor, the particular drug is reviewed for
contraindications based upon the plan participant's drug history, age and sex,
and the information is placed into a database available for reporting and query.
The Company invoices plan sponsors and includes as revenue the Company's
administrative fees and charges relating to pharmaceuticals dispensed by the
Company's network of pharmacies. Revenue is reduced by the amount of rebates
paid to the Company's sponsors. Cost of claims includes the amounts paid to the
Company's network of pharmacies for pharmaceutical claims reduced by gross
rebates received from drug manufacturers. The Company does not take possession
or legal ownership of the pharmaceutical drugs dispensed by the pharmacy
network. Although, in the past, the Company assumed the legal responsibility and
financial risk of paying for dispensed pharmaceuticals whether or not the
Company was paid by its sponsors, the Company's current agreements with the
pharmacies specify that the pharmacies will be paid only after the Company is
paid by its sponsors.
Revenue under capitation arrangements is recognized monthly based on the
number of participants, and costs under capitation agreements are recognized as
incurred.
Revenue for the years ended June 30, 1999, 2000 and 2001 was adjusted based
on EITF 00-14, Accounting for Certain Sales Incentives - Coupons, Rebates and
Discounts. The financial impact of this EITF is to reduce revenue by the amount
of rebates to be paid to sponsors and reduce cost of claims by the gross amount
of rebates received by the Company. Previously, the net difference between the
gross amount received by the Company and the amount paid to sponsors was treated
as a reduction in cost of claims with no change to revenue. The impact of this
change was to reduce revenue by approximately $5,800,000, $4,600,000 and
$5,900,000 for the years ended June 30, 1999, 2000 and 2001, respectively. These
rebates are recognized when the Company is entitled to them in accordance with
the terms of the Company's arrangements with drug manufacturers and third party
rebate administrators and the Company's 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. Currently some rebates are processed by a third party rebate
administrator and the remaining rebates are submitted by Specialty directly to
the drug manufacturers for reimbursement. For the years ended June 30, 1999,
2000 and 2001, net rebates recorded by the Company were approximately
$2,542,000, $3,818,000 and $4,255,000, respectively.
Property and equipment is recorded at cost. Depreciation is provided for by
the straight-line method over the estimated useful lives of the property and
equipment. Leasehold improvements are amortized on a straight-line basis over
the shorter of the term of the lease or the estimated useful lives of the
assets.
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. During the years ended June 30, 2000 and 2001,
approximately $1,179,000 and $870,000, respectively, in software development
costs related to internal programming time were capitalized.
Amortization of capitalized amounts commences on the date the software is
placed into use and is computed using the straight-line method over the
estimated economic life of the software, primarily five years. Amortization
expense was approximately $460,000, $842,000 and $1,327,000 for the years ended
June 30, 1999, 2000 and 2001, respectively.
A significant portion of the Company's computer software for its reporting
system was developed by a company affiliated by common ownership (see Note 4).
The cost includes development of software programs and enhancements, which may
either expand or modify existing programs which allows the Company to do
customized reporting off its claims adjudication system. To the extent that the
Company has capitalized certain amounts for software development and those
amounts exceeded the cost incurred by the affiliate, this excess has been
charged to stockholders' equity (deficiency) as a capital distribution.
The Company accounts for deferred offering costs in accordance with SAB
Topic 5:A. Accordingly, only specific incremental costs directly attributable to
a proposed or actual offering are classified as deferred offering costs.
The deferred offering costs in connection with the Company's Public
Offering consummated on August 2, 1999 were capitalized and subsequently charged
to equity upon consummation of the public offering (see Note 15).
Long-lived assets are evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through the estimated undiscounted future cash flows from the use of
these assets. When any such impairment exists, the related assets will be
written down to fair value. No such impairment existed through June 30, 2001.
At each balance sheet, the Company evaluates the period of amortization of
intangible assets. The factors used in evaluating the period of amortization
include: (i) current operating results, (ii) projected future operating results,
and (iii) other material factors that affect the continuity of the business.
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under this standard, deferred taxes on income are
provided for those items for which the reporting period and methods for income
tax purposes differ from those used for financial statement purposes using the
asset and liability method. Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Basic earnings per share has been computed using the weighted-average
number of shares of common stock outstanding. Diluted earnings per share has
been computed using the basic weighted-average shares of common stock issued
plus outstanding stock options and warrants, and contingently issuable shares,
in the periods in which such options and warrants, and contingently issuable
shares have a dilutive effect.
The Company may be subject to a concentration of credit risk with respect
to its trade receivables. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
allowances to cover potential or anticipated losses for uncollectible accounts.
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash balances deposited in financial
institutions which exceed FDIC or SIPC insurance limits. Amounts on deposit with
financial institutions which exceeded the FDIC or SIPC insurance limits at June
30, 2000 and 2001 were approximately $16,507,000 and $16,457,000, respectively.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
Company 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 financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
The carrying amounts of financial instruments, including cash, accounts
receivable, accounts payable and accrued liabilities, approximate fair value
because of the current nature of these instruments. The fair value of the loans
due from stockholders and affiliates is difficult to estimate due to their
related party nature. Certain amounts due to a stockholder represent accrued
salary and bonuses and do not bear interest. Loans due from affiliates bear
market interest rates; therefore, the Company believes that the carrying amount
approximates fair value.
For comparability, certain 1999 and 2000 amounts have been reclassified,
where appropriate, to conform to the financial statement presentation used in
2001.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
Nos. 141 and 142, Business Combinations and Goodwill and Other Intangibles,
respectively. FASB 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. Under FASB 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 is in the process of determining the impact of these
pronouncements on its financial position and operations.
2. ACQUISITIONS:
Pursuant to the terms of the Agreement and Plan of Merger between the
Company and Pharmacy Associates, Inc. ("PAI"), dated July 20, 2000 (the "PAI
Agreement"), the Company acquired PAI, a regional pharmacy benefit management
company operating in Arkansas, Louisiana and Mississippi. Under the terms of the
merger agreement, stockholders of PAI received an aggregate of $6,000,000 in
cash and 400,000 shares of the Company's common stock, which was valued at
$849,920 on the acquisition date. The acquisition was accounted for under the
purchase method of accounting and the results of PAI's 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 $6,345,471, which consists of the following components: (i)
customer relationships valued at $131,000 which will be amortized entirely over
the first year, (ii) noncompete contracts valued at $44,400 which will be
amortized over five years using the straight-line method of amortization, and
(iii) goodwill of $6,170,071 which will be amortized over 20 years using the
straight-line method of amortization (see the last paragraph of Note 1). PAI
stockholders may also receive additional consideration of up to $2,000,000
payable in a combination of cash and unregistered common stock over a two-year
period if certain financial targets of PAI are met which will be accounted for
as an addition to goodwill. The financial targets were achieved for the first
year, so $750,000 in cash and $250,000 in Company stock (62,500 shares) was paid
and issued on August 31, 2001.
On March 5, 2001, the Company acquired substantially all of the assets, and
certain of the liabilities, of Provider Medical Pharmaceutical, LLC ("PMP"), an
Oklahoma limited liability company, pursuant to an Asset Purchase Agreement
among the Company, a wholly owned subsidiary of the Company, PMP and the members
of PMP. The assets acquired from PMP included, among other things, PMP's
accounts receivable and intellectual property, PMP's rights under various
contracts and the goodwill value of PMP's business.
The purchase price for the assets consisted of (i) $4,000,000 in cash, (ii)
the satisfaction by the Company of PMP's bank indebtedness of $1,255,035, and
(iii) cancelation of the $1,500,000 promissory note from PMP to the Company,
dated January 16, 2001. Part of the cash portion of the purchase price was paid
into an escrow account to provide security for the indemnification obligations
of PMP and its members to the Purchaser. The acquisition was accounted for under
the purchase method of accounting and the results of PMP's 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 $6,474,659 which consists of the following
components: (i) customer relationships valued at $305,000 which will be
amortized over 2.5 years using the straight-line method of amortization, and
(ii) goodwill of $6,169,659 which will be amortized over 20 years using the
straight-line method of amortization (see the last paragraph of Note 1). The
Company will be required to pay up to $1,000,000 of additional cash
consideration if certain financial targets relating to PMP's business are met
over the next three years, which will be accounted for as an addition to
goodwill.
The following summarized unaudited pro forma results of operations set
forth below for the years ended June 30, 2000 and 2001 assume the PAI and PMP
acquisitions had occurred as of the beginning of these periods:
June 30, 2000 2001
------------------------------------------------------------------------------------------
Revenue $251,025,448 $292,529,319
Net income 1,475,987 922,391
Net income per common share:
Basic 0.21 0.13
Diluted 0.21 0.13
Pro forma weighted-average number of
common shares outstanding:
Basic 7,120,104 7,121,496
Diluted 7,120,104 7,220,348
------------------------------------------------------------------------------------------
This pro forma financial information is presented for information purposes
only. The 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. PROPERTY, EQUIPMENT AND SOFTWARE DEVELOPMENT COSTS:
Property, equipment and software development costs consist of the following:
Estimated
June 30, 2000 2001 Useful Life
----------------------------------------------------------------------------------------
Equipment $ 999,757 $ 2,840,824 5 years
Software 5,062,599 7,888,574 5 years
Leasehold improvements 109,385 253,544 Term of lease
Automobile - 44,102 5 years
Equipment acquired under
capital leases 2,537,730 2,537,730 5 to 8 years
----------------------------------------------------------------------------------------------------------------------
8,709,471 13,564,774
Accumulated depreciation
and amortization 2,285,301 4,980,884
----------------------------------------------------------------------------------------------------------------------
$6,424,170 $ 8,583,890
======================================================================================================================
Accumulated depreciation on equipment acquired under capital lease
obligations was $140,369 and $501,139 as of June 30, 2000 and 2001,
respectively.
Depreciation and amortization expense for the years ended June 30, 1999,
2000 and 2001 was approximately $772,000, $1,300,000 and $2,028,000,
respectively.
4. RELATED PARTY TRANSACTIONS:
Due to affiliates represent trade payables for developed software, other
software services, operating leases and maintenance costs.
In accordance with SAB 48, the Company has recorded amounts in excess of
affiliates' costs for capitalized software development as a capital
distribution, net of tax, as follows:
June 30, 1999 2000 2001
----------------------------------------------------------------------------------------------------------------------
Software development $ 54,214 $ - $ -
Tax effect (22,000) - -
----------------------------------------------------------------------------------------------------------------------
Net charge to stockholders' equity $ 32,214 $ - $ -
======================================================================================================================
As of June 30, 2001, Sandata owed Health Card $503,958 pursuant to a
promissory note, dated May 31, 2000, in the original principal amount of
$500,000 plus interest at the rate of 9 1/2%; interest on such note was payable
quarterly and such note was paid in full on May 31, 2001. On June 9, 2001,
Sandata again gave a promissory note to Health Card in the principal amount of
$500,000, with interest at the rate of 7%, which was to have been due on June 8,
2002. The note was paid in full on August 15, 2001. As of June 30, 2001, Sandata
also owed Health Card $68,123 for pharmacy benefit services which has not yet
been reimbursed.
Due from affiliates also includes a note from another company affiliated by
common ownership. As of June 30, 2001, the balance due from this affiliate
including accrued interest was $4,212,843. 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
majority stockholder and was subject to the personal guarantee of the majority
stockholder. Such note was restructured by a new nonrecourse promissory note
dated July 31, 2000, made payable by the affiliate to the order of the Company
in the amount of $3,890,940. Such note is payable in annual installments of
$400,000 consisting of principal and interest at the rate of 8 1/2% 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 majority stockholder and is subject to the
personal guarantee of the majority stockholder. The first $400,000 payment due
under the note as of July 31, 2001 was satisfied by offsetting an equal amount
owed to the majority stockholder by the Company. Effective July 31, 2001, the
interest rate on the note was changed to the prime rate in effect from time to
time. For the years ended June 30, 1999, 2000 and 2001, the amount of interest
income accrued was approximately $362,000, $314,000 and $340,000, respectively.
Interest paid by the affiliate in December 1998 aggregated $183,000. Concurrent
with the consummation of the Company's Public Offering, on August 2, 1999, a
trust controlled by the Company's majority stockholder (the "Selling
Stockholder") sold 400,000 shares of common stock from its holdings. The Company
received approximately $1,993,000 from the sale by the Selling Stockholder of
which approximately $1,043,000 was applied to amounts owed by the Selling
Stockholder and the balance to amounts due from the affiliate (see Note 15).
On January 2, 1999, another affiliate executed a noninterest-bearing note
payable to the Company in the amount of approximately $90,000 to evidence
advances to the affiliate in the same amount. Such advances were repaid during
fiscal 2000.
Certain costs paid to the affiliates were capitalized as software
development costs. For the years ended June 30, 2000 and 2001, the amounts
charged by affiliates and capitalized were approximately $493,000 and $844,000,
respectively.
The Company purchased computer equipment and furniture and fixtures from
affiliates during the years ended June 30, 2000 and 2001 for approximately
$182,000 and $433,000, respectively. The price of some of these assets included
20% purchasing, handling, consulting, set-up and other service fees.
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 information systems
maintenance, financial consulting, 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 consolidated statement of income are:
Year ended June 30, 1999 2000 2001
----------------------------------------------------------------------------------------------------------------------
Software maintenance and
related services and supplies (a) $ 770,396 $ 977,032 $1,244,212
Management and consulting
fees (b) 1,524,451 923,048 1,293,814
Administrative, bookkeeping
services and supplies (c) 237,307 694,581 893,494
Rent and utilities 284,828 390,845 649,478
----------------------------------------------------------------------------------------------------------------------
$2,816,982 $2,985,506 $4,080,998
======================================================================================================================
(a) A company affiliated by common ownership provides a significant
portion of the Company's software maintenance (Note 1), certain
other software services, computer hardware under operating leases
and maintains certain computer hardware.
(b) The Company incurred fees to certain other affiliated companies
for various management and consulting services.
(c) A company affiliated by common ownership provides the Company
with various administrative, legal and accounting services.
Notes receivable - stockholders represents a loan to a stockholder to
purchase the Company's stock. This note bears interest at 8.5% and has a
repayment date of July 1, 2002. The Company has accrued approximately $422,000
of interest income from affiliates arising from this note and the two loans
described above during the year ended June 30, 2001.
For the years ended June 30, 2000 and 2001, the Company paid the annual
premium of approximately $69,000 and $60,000, respectively, on behalf of Mr.
Brodsky for a life insurance policy. The aggregate amount of premiums paid for
such policy will be repaid to the Company upon the payment of the policy's
benefits to the beneficiary.
See Note 9 for information regarding leases with related parties.
5. ACCOUNTS PAYABALE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
June 30, 2000 2001
----------------------------------------------------------------------------------------
Claims payable $22,571,928 $46,615,563
Rebates payable to sponsors 3,565,258 6,479,069
Other payables 1,293,498 4,550,931
----------------------------------------------------------------------------------------
$27,430,684 $57,645,563
========================================================================================
6. CAPITAL LEASE OBLIGATIONS:
The following is a schedule, by year, of future minimum lease payments
under capitalized leases, together with the present value of the net minimum
lease payments at June 30, 2001.
Payments for the year ending June 30,
2002 $ 687,753
2003 632,104
2004 522,804
2005 335,556
--------------------------------------------------------------------------------
Total minimum lease payments 2,178,217
Less amount representing interest 302,774
--------------------------------------------------------------------------------
Present value of net minimum lease payments 1,875,443
Less current portion 542,094
--------------------------------------------------------------------------------
Long-term lease obligations $1,333,349
================================================================================
7. MAJOR CUSTOMERS AND PHARMACIES:
For the year ended June 30, 1999, approximately 39%, 14% and 13% of revenue
was from three plan sponsors. For the year ended June 30, 2000, approximately
27% and 12% of revenue was from two plan sponsors. For the year ended June 30,
2001, approximately 16% of the consolidated revenue of the Company was from one
plan sponsor. Amounts due from these sponsors at June 2000 and 2001 approximated
$3,859,000 and $1,936,000, respectively. The Company's arrangements with these
plan sponsors generally are either oral, short-term, terminable by the sponsor
or subject to continuing negotiation. The major sponsor during the year ended
June 30, 2001 executed a two-year contract with the Company which runs through
December 31, 2001.
During the year ended June 30, 1999, the Company recorded approximately
$500,000 of additional revenue when the amount of an adjustment under the
provisions of one of its arrangements to adjust for the increased cost of drugs,
primarily related to the prior year, became determinable, upon the Company
receiving verbal acceptance of the calculations.
During the years ended June 30, 2000 and 2001, the Company settled certain
fees due from a major sponsor related to a capitation arrangement for calendar
years 1997 through 1999. The impact of these settlements was to reduce revenue
by $821,000 and $733,000, respectively. The calendar year 2000 and 2001 contract
with this sponsor is no longer a capitation arrangement. During the year ended
June 30, 2001, the Company also reached an agreement with a former major sponsor
to settle amounts due. This settlement increased selling, general and
administrative expenses by $588,000.
For the years ended June 30, 1999, 2000 and 2001, approximately 43%, 44%
and 26%, respectively, of the cost of claims were from two pharmacy chains.
Amounts payable to these two pharmacy chains at June 30, 2000 and 2001 were
approximately $9,608,000 and $10,493,000, respectively.
As specified in one of its arrangements with a major sponsor, the Company
has deposited with this sponsor an irrevocable standby letter of credit of
$2,000,000 to ensure the fulfillment of certain obligations by the Company to
the sponsor. As of June 30, 2001, no claims have been made under this letter of
credit. The letter of credit expires on December 31, 2001 which shall be
automatically extended through March 31, 2002 if the sponsor renews its contract
with the Company.
8. TAXES ON INCOME:
Provisions for federal and state income taxes consist of the following:
Year ended June 30, 1999 2000 2001
--------------------------------------------------------------------------------
Current:
Federal $596,000 $ 199,000 $363,918
State 179,000 69,000 88,813
--------------------------------------------------------------------------------
775,000 268,000 452,731
--------------------------------------------------------------------------------
Deferred:
Federal 135,000 727,000 323,911
State 66,000 252,000 66,688
--------------------------------------------------------------------------------
201,000 979,000 390,599
--------------------------------------------------------------------------------
$976,000 $1,247,000 $843,330
================================================================================
In the year ended June 30, 1999, $22,000 of income tax benefits reduced the
capital distribution in that year (see Note 4).
Differences between the federal statutory rate and the Company's effective
tax rate are as follows:
Year ended June 30, 1999 2000 2001
--------------------------------------------------------------------------------
Statutory rate 34.0% 34.0% 34.0%
State taxes - net of federal taxes 5.4 7.4 5.1
Utilization of net operating loss carryforward (7.3) - -
Permanent differences 1.4 1.5 4.2
Other - .7 (1.2)
--------------------------------------------------------------------------------
33.5% 43.6% 42.1 %
================================================================================
Deferred income tax assets (current and noncurrent) resulting from
temporary differences are as follows:
Year Ended June 30, 2000 2001
--------------------------------------------------------------------------------
Accounts receivable allowances $309,000 $ 757,200
Vacation expense accrual 43,000 72,414
Officer/stockholder bonus accrual 57,000 273,318
--------------------------------------------------------------------------------
$409,000 $1,102,932
================================================================================
Deferred income tax liabilities of $692,000 and $1,702,470 at June 30, 2000
and 2001, respectively, resulted from temporary differences in property and
equipment.
9. COMMITMENTS AND CONTINGENCIES:
The Company currently occupies approximately 26,500 square feet of office
space located at 26 Harbor Park Drive, Port Washington, New York 11050 (the
"Facility"). The Company subleases the Facility from BFS Realty, LLC, an
affiliate of the Company's chairman (the "Affiliate"). The Affiliate leases the
Facility from the Nassau County Industrial Development Agency, pursuant to a
lease (the "Lease") which was entered into by that agency and the Affiliate in
July 1994. The Lease expires in March 2005. The Affiliate has the right to
become the owner of the Facility upon expiration of the Lease. The Affiliate
subleases a portion of the Facility to the Company. The Company currently pays
rent to the Affiliate in the amount of $336,780 per year, plus monthly expenses
for maintenance, real estate taxes, utilities and the like. The rent increases
5% annually. The Affiliate also receives rent from other companies that occupy
space in the Facility, some of which are affiliated with the Company's chairman.
The Company believes that the Facility is adequate for current purposes.
Leasehold improvements made to this space during the years ended June 30, 2000
and 2001 were approximately $37,000 and $142,000, respectively.
In September 1998, the Company leased space for a pharmacy in Port
Washington, New York, from a Company affiliated by common ownership under a
seven-year agreement expiring August 31, 2005.
Additionally, the Company leases office space through its subsidiary in
Arkansas expiring in April 2002.
Rent expense charged by affiliates including utilities for the years ended
June 30, 1999, 2000 and 2001 under operating leases amounted to approximately
$285,000, $391,000 and $564,000, respectively.
Future minimum rent payments under the noncancelable operating leases with
related and other parties at June 30, 2001 are as follows:
Year ending June 30,
2002 $ 467,000
2003 374,000
2004 393,000
2005 412,000
2006 412,000
Thereafter 2,409,000
--------------------------------------------------------------------------------
$4,467,000
================================================================================
Rent expense for the years ended June 30, 1999, 2000 and 2001 was
approximately $274,000, $412,000 and $792,000, respectively.
In February 1998, the Company entered into an agreement to purchase
computer software products and professional services with an unrelated company.
The agreement required the Company to pay an initial license fee of $400,000, of
which $100,000 was paid upon signing and $25,000 was payable monthly through
February 1999. The initial license fee of $400,000 has been capitalized and
fully amortized as of June 30, 2001. In addition, if certain milestones are
reached based on the number of processed claims, as defined, the license fee
increases incrementally, up to an additional $500,000 over the term of the
agreement. In February 1999 and again in February 2001, the Company met certain
milestones, resulting in total additional license fees of $300,000. These
amounts were capitalized and are being amortized over three years. The agreement
also provides for the annual payment of 18% of the then current cumulative
license fee, as defined, as a service maintenance fee which is expensed as
incurred.
An action was commenced against Health Card on December 8, 1998 by the West
Contra Costa Unified School District (the "School District") and an individual
plaintiff in the State of California. The case was subsequently moved to Federal
court. The complaint alleged, among other things, that the parties entered into
a contract in November 1996, and that Health Card unilaterally terminated the
contract on December 16, 1996. The complaint further alleged that the
termination resulted in the School District incurring approximately $150,000 in
costs and $867,000 in expenses to obtain coverage from December 1996 until
October 1997. The complaint also sought treble damages. While settlement
documents are currently being finalized, the parties have reached an agreement
that contemplates Health Card paying to the plaintiffs an amount that is
significantly lower than the amount of costs and expenses claimed, and funding a
part of the plaintiffs' litigation against another defendant. The proceeds of
any settlement with or verdict against such defendant will be divided between
Health Card and the School District. Although, the settlement papers have not
been finalized, Health Card believes that these terms will be the crux of the
agreement.
The Company entered into an employment agreement with the majority
stockholder effective July 1, 1999. Pursuant to this agreement, the majority
stockholder has agreed to serve as chairman of the board of directors at an
annual salary of $200,000, subject to adjustment by the board of directors. As
of July 1, 2001, this amount was increased to $425,000. The agreement terminates
on July 1, 2002, unless terminated by the Company for cause, or in the event the
stockholder becomes permanently disabled. The agreement provides for certain
fringe benefits payable to or on behalf of the majority stockholder, such as the
use of an automobile. In addition, the agreement provides for certain
termination benefits payable to the majority stockholder which, depending upon
the reason for termination, can be equal to up to two years' salary.
The Company has an employment arrangement with its senior vice president of
sales and marketing who is entitled to commissions of 3% of gross margins
generated from direct accounts sold and 1% of gross margins generated from
accounts sold by salespeople under his management.
The Company entered into an employment agreement with its president
effective June 12, 2000. Pursuant to this agreement, an annual salary of
$188,000, in addition to (i) a $25,000 signing bonus upon execution of the
agreement and (ii) the ability to participate in the bonus pool for senior
executives has been specified. The agreement also provides for certain
termination benefits which, depending upon the reason for termination, can equal
up to one year of salary. In connection with the employment agreement, the
Company granted an incentive stock option to purchase 100,000 shares of common
stock at $5.00 per share. Such option vests over a three-year period commencing
on June 12, 2001. The option expires June 12, 2005. On June 12, 2001, Health
Card increased the annual compensation paid to Mr. Bigl to $213,000 plus $12,000
in nonaccountable expenses annually. On June 12, 2001, Health Card granted to
Mr. Bigl an incentive stock option to purchase 20,000 shares of common stock at
$3.00 per share. Such option vests over a four-year period commencing June 12,
2002. The option expires on June 12, 2006.
The Company entered into an employment agreement with its chief financial
officer and treasurer effective May 1, 2000. Pursuant to this agreement, an
annual salary of $150,000, in addition to (i) a $25,000 bonus upon the
completion of one full year of employment with the Company and (ii) the ability
to participate in the bonus pool for senior executives has been specified. The
agreement also provides for certain termination benefits which, depending upon
the reason for termination, including but not limited to a change of control,
can equal up to one year of salary. In connection with the employment agreement,
the Company granted 35,000 incentive stock options to purchase shares of common
stock at $5.00 per share. Such option vests over a three-year period commencing
on May 1, 2001. The option expires on May 1, 2005. On May 1, 2001, Mr. Gershen's
annual base salary was increased to $185,000.
In connection with the PAI acquisition, Tery Baskin entered into an
employment agreement with PAI, pursuant to which Mr. Baskin agreed to serve as
PAI's senior vice president at an annual salary of $130,000 in addition to (i) a
1% commission on all claims adjudicated by PAI and (ii) the ability to
participate in the bonus pool for senior executives. In connection with the
employment agreement, Health Card granted incentive stock options to Mr. Baskin
to purchase 40,000 shares of common stock at $4.00 per share. See Item 1,
Description of Business, for a detailed description of the PAI acquisition.
Health Card entered into an employment agreement with Tery Baskin effective
June 4, 2001 to serve as chief operating officer, at an annual salary of
$150,000, in addition to the ability to participate in the bonus pool for senior
executives. In connection with the employment agreement, Health Card granted to
Mr. Baskin an option to purchase 15,000 shares of common stock at $5.00 per
share.
The Company has a $4,000,000 revolving line of credit with a bank. The line
bears interest at the bank's prime rate plus 1% and expires on December 31,
2001. As of June 30, 2001, there are no amounts due under this line.
10. STOCK OPTIONS AND WARRANTS:
During the years ended June 30, 2000 and 2001, the Company granted
incentive stock options under the 1999 Stock Option Plan (the "Plan"). The total
number of shares of common stock reserved by the Company for issuance under the
Plan is 1,650,000 plus an indeterminable number of shares of common stock
issuable 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 June 30, 2001 equal 1,243,284. Stock options outstanding
have a life of from 4 to 6 years, as defined in Section 422 of the Internal
Revenue Code. Incentive options may not be granted for a price less than 100% of
the fair market value of the common stock as of the date of the grant or 110% in
the case of an individual who owns more than 10% of the combined voting power of
all classes of stock of the Company.
The following tables summarize information about stock option activity for
the years ended June 30, 1999, 2000 and 2001:
--------------------------------------------------------------------------------
Weighted-
average
Exercise
Number of Price per
Options Share
Shares under option at June 30, 1998 255,689 $5.87
Granted 89,491 5.87
--------------------------------------------------------------------------------
Shares under option at June 30, 1999 345,180 5.87
Canceled (345,180) 5.87
Granted 656,469 5.98
--------------------------------------------------------------------------------
Shares under option at June 30, 2000 656,469 5.98
Canceled (251,127) 6.23
Granted 837,942 2.92
--------------------------------------------------------------------------------
Shares under option at June 30, 2001 1,243,284 $3.87
================================================================================
SFAS No. 123, Accounting for Stock-Based Compensation, requires the Company
to provide pro forma information regarding net income and net income per common
share as if compensation costs for the Company's stock option plans had been
determined in accordance with the fair value method prescribed in SFAS No. 123.
Had compensation expense been recorded under the provisions of SFAS No. 123, the
impact on the Company's net earnings and earnings per share would have been:
Year ended June 30, 1999 2000 2001
--------------------------------------------------------------------------------
Reported net income $1,939,011 $1,615,674 $1,157,940
Pro forma compensation
expense (67,145) (236,664) (320,241)
--------------------------------------------------------------------------------
Pro forma net income $1,871,866 $1,379,010 $ 837,699
================================================================================
Pro forma earnings per share:
Basic and diluted $ .36 $ .21 $ .12
================================================================================
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for all grants in the years ended June 30, 1999, 2000 and 2001:
no dividend yield in 2001 and a dividend yield of 0.008% in 1999 and 2000;
risk-free interest rate ranges from 4.2% to 6.8%; an expected life of options
for 4.3, 5.0, and 5.0 years, respectively; and a volatility of .1%, 45.6% and
90.8%, respectively, for all grants. The weighted-average value of options
granted is $.87, $1.09 and $.96 for the years ended June 30, 1999, 2000 and
2001, respectively.
The following table summarizes information about stock options outstanding
at June 30, 2001:
Outstanding Exercisable
--------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
average average average
Option Number Remaining Exercise Number Exercise
Price Range of Shares Life Price of Shares Price
--------------------------------------------------------------------------------------
$1.67 to $6.00 1,051,152 4.48 years $3.21 324,943 $4.04
$7.50 192,132 3.63 years $7.50 74,940 $7.50
--------------------------------------------------------------------------------------
$1.67 to $7.50 1,243,284 4.35 years $3.87 399,883 $4.69
======================================================================================
The Company granted the underwriters of the Public Offering 200,000
warrants for nominal consideration. The warrants entitle the underwriters to
purchase 200,000 shares of common stock from the Company at $9.00 per share. The
warrants are exercisable for four years commencing on July 29, 2000.
11. 2000 RESTRICTED STOCK GRANT PLAN:
On October 16, 2000, the board of directors approved the adoption of the
Company's 2000 Restricted Stock Grant Plan (the "Stock Grant Plan"). The Stock
Grant Plan was subsequently adopted by the shareholders at the Company's annual
meeting on November 20, 2000. The Stock Grant Plan provides for the issuance of
shares that are subject to both standard restrictions on the sale or transfer of
such shares (e.g., the standard seven-year vesting schedule set forth in the
Stock Grant Plan) and/or restrictions that the board may impose, such as
restrictions relating to length of service, corporate performance or other
restrictions. As of June 30, 2001, no grants had been made under the Stock Grant
Plan and, therefore, no shares had vested under it. There are 700,000 shares of
common stock reserved for issuance in connection with grants made under the
Stock Grant Plan.
12. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental cash flow information is as follows:
Year Ended June 30, 1999 2000 2001
--------------------------------------------------------------------------------
Cash paid:
Interest $ 250 $ 98,496 $ 236,132
Income taxes 131,827 960,498 1,287,287
Noncash investing and
financing activities:
Capital lease obligations
were incurred for computer
equipment and software - 2,537,730 -
Issuance of common stock
in connection with the
acquisition of PAI - - 849,920
--------------------------------------------------------------------------------
13. EMPLOYEE BENEFIT PLAN:
Effective June 1, 1998, the Company adopted a 401(k) plan covering
substantially all employees. Participants may elect to contribute to the plan a
minimum of 1% to a maximum of 18% of their annual compensation, not to exceed a
dollar limit set by law. Annually, the Company will determine a discretionary
matching contribution equal to a percentage of each participant's contribution.
Contributions made by the Company for the years ended June 30, 2000 and 2001
were approximately $18,000 and $51,000, respectively.
PAI also had a 401(k) plan covering substantially all employees. This plan
was kept in effect at the time of the acquisition, and remains in effect as of
today. The plan will be merged into the Company plan by December 31, 2001.
Participants in the PAI plan may elect to contribute to the plan a minimum of 1%
to a maximum of 18% of their annual compensation, not to exceed a dollar limit
set by law. There is a mandatory company match which is funded monthly equal to
2.5% of eligible members' salaries. There is also an additional discretionary
annual match. Contributions made by PAI from July 20, 2000 through June 30, 2001
were approximately $58,000.
14. EARNINGS PER SHARE:
A reconciliation of shares used in calculating basic and diluted earnings
per share follows:
Year ended June 30, 1999 2000 2001
--------------------------------------------------------------------------------
Basic 5,205,084 6,720,104 7,100,674
Effect of assumed conversion
of employee stock options - - 65,406
Contingently issuable shares (see Note 2) - - 33,446
--------------------------------------------------------------------------------
Diluted 5,205,084 6,720,104 7,199,526
================================================================================
Outstanding options and warrants to purchase shares of common stock were
not included in the computation of diluted earnings per share because they were
antidilutive (see Note 10). These options were as follows:
Year ended June 30, 1999 2000 2001
--------------------------------------------------------------------------------
Number of options and warrants 345,180 856,469 866,284
================================================================================
Weighted-average exercise price $ 5.87 $ 6.69 $ 5.22
================================================================================
15. PUBLIC OFFERING:
The registration statement for the Company's Public Offering became
effective on July 28, 1999. The Company consummated the Public Offering on
August 2, 1999 and issued 1,600,000 shares of common stock at an offering price
of $7.50 per share. In addition, the underwriters were granted an overallotment
option by the Company to buy 300,000 shares of common stock at $7.50 per share
exercisable by September 11, 1999. The underwriters did not exercise this
option. Concurrent with the Public Offering, the Selling Stockholder sold
400,000 shares of common stock from its holdings at $7.50 per share. The Company
received gross proceeds of $12,883,100 representing payment for the sale of the
1,600,000 shares, plus 73% of the proceeds from the sale of the 400,000 shares
by the Selling Stockholder for repayment of $1,992,900 of indebtedness by the
Selling Stockholder in the amount of $1,042,500 and the balance to amounts owed
by affiliates of the Selling Stockholder to the Company. Such proceeds were
reduced by underwriting discounts and commissions, a nonaccountable expense
allowance and a financial advisory fee paid to the underwriters plus certain
fees and expenses paid by the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------
16. QUARTERLY FINANCIAL DATA (UNAUDITED):
(In thousands, except per share amounts) FY 2001 FY 2000
------------------------------------------------------------------------------------------------------------------------------------
Quarters ended 6/30 3/31 12/31 9/30 6/30 3/31 12/31 9/30
------------------------------------------------------------------------------------------------------------------------------------
Revenue (as originally reported) $79,452 $72,374 $65,594 $57,008 $42,985 $44,055 $45,747 $39,527
Revenue 79,452 72,374 64,429 55,864 41,410 43,090 44,650 38,526
Income before income taxes 507 547 440 507 56 919 892 996
Net income 415 277 225 241 1 529 532 554
Earnings per common share:
Basic .06 .04 .03 .03 (.01) .08 .08 .09
Diluted .06 .04 .03 .03 (.01) .08 .08 .09
Cash dividends declared per common share
Common share prices:
High 3.49 3.13 2.25 3.25 3.38 5.25 5.63 7.75
Low 2.90 1.31 1.16 1.88 1.75 2.81 2.75 4.81
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
Board of Directors
National Medical Health Card Systems, Inc.
The audit referred to in our report to the board of directors of National
Medical Health Card Systems, Inc. and Subsidiaries, dated August 31, 2001,
relating to the consolidated financial statements of National Medical Health
Card Systems, Inc. and Subsidiaries, included the audit of the schedule listed
under Item 14 of Form 10-K for the year ended June 30, 2001. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based upon our audit.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
August 31, 2001
Report of Independent Certified Public Accountants on Financial Statement
Schedule
The audits referred to in our report to the Board of Directors of National
Medical Health Card Systems, Inc. and Subsidiaries, dated September 19, 2000,
relating to the consolidated financial statements of National Medical Health
Card Systems, Inc. and Subsidiaries, included the audit of the schedule listed
under Item 14 of Form 10-K for the years ended June 30, 2000 and 1999. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Melville, New York
September 19, 2000
SUPPLEMENTARY INFORMATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
----------------------------------------------------------------------------------------------------------------------
Additions
Balance at Charged to Balance
Beginning Costs and Other at End
Description of Period Expense (a) Write-offs Changes of Period
----------------------------------------------------------------------------------------------------------------------
Reserves and allowances deducted from asset accounts:
Allowance for possible
losses
Year ended June 30, 1999 $244,189 $602,155 - - $ 846,344
Year ended June 30, 2000 846,344 995,806 $1,115,599 - 726,551
Year ended June 30, 2001 726,551 942,417 96,166 $274,025 (b) 1,846,827
(a) Charged to bad debts.
(b) Opening reserve balances of acquisitions.