UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended June 30, 2002
[ ] Transition report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the transition period from _______ to __________
Commission file number 000-26749
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 11-2841799
(State or other jurisdiction of (I.R.S. Employee Identification No.)
incorporation or organization)
26 Harbor Park Drive
Port Washington, NY
(Address of principal executive offices)
11050
(Zip Code)
Registrant's telephone number, including area code: (516) 626-0007
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes 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. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, computed by reference to the closing sales
price as quoted on the NASDAQ National Market on September 20, 2002 was
approximately $39,133,656.
(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: 7,594,753 shares outstanding as of September
20, 2002.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the definitive Proxy
Statement to be delivered to shareholders in connection with the annual meeting
of shareholders to be held in 2002 are incorporated into Part III of this Form
10-K.
INDEX
Page No.
Forward Looking Statements
PART I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements on Accounting And Financial Disclosure
PART III
Item 10. Directors and Executive Officers of Registrant
Compliance with Section 16(a) of the Exchange Act
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
INTRODUCTORY STATEMENTS
Forward Looking Statements
When used herein, the words "may," "could," "estimate," "believe,"
"anticipate," "think," "intend," "expect" and similar expressions identify
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are not guarantees of future
performance and involve known and unknown risks and uncertainties, and other
factors, which could cause actual results to differ materially from those in the
forward-looking statements. Readers are cautioned not to place undue reliance on
such statements, which speak only as of the date hereof. For a discussion of
such risks and uncertainties, including risks relating to pricing, competition
in the bidding and proposal process, our ability to consummate contract
negotiations with prospective clients, dependence on key members of management,
government regulation, acquisitions and affiliations, the market for PBM
services, and other factors, readers are urged to carefully review and consider
various disclosures made by National Medical Health Card Systems, Inc. ("Health
Card" or the "Company") which attempt to advise interested parties of the
factors which affect Health Card's business, including, without limitation, the
disclosures made under the caption "Business" in Item 1 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 and
reincorporated in Delaware in February of 2002, that provides comprehensive
pharmacy benefit management services under the name NMHCRX. Health Card's
executive offices are in Port Washington, New York. The mission of Health Card
is to improve our clients' members' health through the timely delivery of
effective pharmaceutical care and health information management systems.
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, Health Card acquired PAI by
virtue of Acquisition merging with and into PAI. PAI, located in Little Rock,
Arkansas, is a regional pharmacy benefit management company operating in
Arkansas, Louisiana and Mississippi.
Pursuant to the Agreement, the shareholders of PAI received an aggregate of
$6,000,000 in cash and 400,000 shares of unregistered common stock of Health
Card. PAI stockholders were also entitled to receive additional consideration of
up to $2 million, payable in a combination of cash and unregistered Common
Stock, over a two-year period if certain financial targets of PAI were met,
which will be accounted for as an addition to goodwill. The financial targets
were achieved for both years; therefore, $750,000 in cash and $250,000 in Common
Stock (62,500 shares valued at $4.00 per share) was paid and issued in August,
2001, and $750,000 in cash and $250,000 in Common Stock (41,668 shares valued at
$6.00 per share) was paid and issued in August of 2002.
Additionally, 200,000 shares of Health Card common stock issued to the
shareholders of PAI that were held in escrow as security for the indemnification
obligations of the PAI shareholders were released to them on July 20, 2002.
Pursuant to the Agreement, all of the PAI 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, and entered into
non-solicitation agreements that expire on 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 put into an escrow
account to provide security for PMP's indemnification obligations. Approximately
$722,000 of the escrowed portion of the purchase price remains. Health Card has
asserted two claims against this escrow. The total of the two claims exceeds the
amount remaining in escrow, and there can be no assurance as to how much of the
remaining escrow amount will be recovered, or when. Although an agreement in
principle has been reached it has not been reduced to writing. 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 two years,
which will be accounted as an addition to goodwill. The targets which were
related to retaining specific contracts were not achieved in the first year and
consequently no additional consideration was paid for that period.
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 (the "Note"). The amount borrowed under the Note
was repaid to the bank on March 9, 2001, and the Note was cancelled upon the
consummation of the HFG Financing described below.
The Company entered into an Asset Purchase Agreement (the "Asset Purchase
Agreement"), dated January 29, 2002, with Health Solutions, Ltd. ("HSL"), HSL
Acquisition Corp., a wholly-owned subsidiary of the Company ("Sub"), and the
security holders of HSL, pursuant to which the Company acquired certain assets
of HSL relating to the PBM business it conducts under the name "Centrus" (the
"Centrus Acquisition").
The purchase price for the Centrus Acquisition was $40 million in cash, of
which $3 million is held in escrow to secure certain indemnification obligations
($2 million has been released as of July 2002). The Company acquired
approximately $1.4 million of HSL's assets and assumed approximately $1.4
million of HSL's liabilities relating to the Centrus business. The excess of the
acquisition cost over the fair value of identifiable net assets acquired was
approximately $40.7 million. In addition, the Company has agreed to pay HSL as
additional purchase price up to $4 million over a period of 3 years if the
Centrus business achieves certain financial performance targets during the
two-year period following the consummation of the transaction. HSL may also be
entitled to an additional incentive payment based on the financial performance
of the Centrus business during the one-year period following the purchase.
In connection with the Acquisition, several members of Centrus' management
team have joined the Company as employees or as a consultant, and have been
granted stock options to purchase an aggregate of 375,000 shares of Common
Stock, under the Company's 1999 Stock Option Plan, as amended. The Company
intends to continue to use the assets acquired in the Centrus Acquisition for
the delivery of cost-effective, integrated PBM services.
In part to finance the Centrus Acquisition, on January 29, 2002, the
Company and certain of its subsidiaries entered into a $40 million secured
revolving credit facility (the "Facility") with HFG Healthco-4 LLC, an affiliate
of Healthcare Finance Group, Inc. In connection with the Facility, the Company
and certain of its subsidiaries have agreed to sell, on an on-going basis, their
accounts receivable to NMHC Funding, LLC ("Funding"), a limited liability
company of which the Company and such subsidiaries are members. Funding utilizes
these receivables as collateral to secure borrowings under the Facility. The
Facility has a three year term, provides for borrowing up to $40 million at the
London InterBank Offered Rate (LIBOR) plus 2.4%, and is secured by receivables
and other assets of the Company and certain of its subsidiaries. Borrowings of
$28.4 million under the Facility were used to finance part of the purchase price
of the Centrus Acquisition. The Facility will also be used by the Company for
working capital purposes and future acquisitions.
On January 22, 2002 the Company completed a convertible note offering (the
"Note Offering") in the aggregate principal amount of $11.6 million. Pursuant to
the Note Offering, subscribers received a promissory note paying interest
quarterly on the unpaid principal balance at the rate of 12% per annum. The
Notes had a term of one year, unless otherwise extended pursuant to the terms of
the Note. The Notes were convertible at any time at the election of the holders
into shares of the Company's Common Stock ("Conversion Shares") at a conversion
price of $12.00 per share, the fair value of the Common Stock on January 22,
2002. Proceeds from the Note Offering were used to finance part of the purchase
price of the Centrus Acquisition. The aggregate principal amount of, and all
accrued interest on, the Notes was paid in full, and the Notes were cancelled,
on June 30, 2002.
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 ("PBMs") evolved to address this need. PBM's provide the means for
plan sponsors to deliver prescription drug benefits to their plan members in a
cost-effective manner.
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, HMO's and third party health care plan
administrators. Sponsors retain Health Card to manage the prescription plans
that they maintain for the benefit of their plan participants. Health Card
consults with sponsors to assist them in customizing their prescription 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," and "Government Regulation - Regulations
Regarding Privacy and Confidentiality."
Health Card's Services
Health Card provides a wide variety of services including:
o Claims Management
o Pharmacy Network
o Benefit Design Consultation
o Drug Review & Analysis
o Formulary Design and Disease Information Services
o Data Access, Reporting & Information Analysis
o Physician Profiling
o Specialty Pharmacy
o Mail Order
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.
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. Previously, some sponsors were 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 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. Similarly, Centrus
has entered into separate agreements with drug manufacturers which have been
assumed by Health Card. The Company is in the process of evaluating both sets of
contracts and will submit claims under those contracts which are most beneficial
for the Company and its sponsors.
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. The Company assumes the
legal responsibility and financial risk of paying for dispensed pharmaceuticals
whether or not it is paid by its sponsors. The loss of a substantial portion of
the pharmacies in the pharmacy network would 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. 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 97% of pharmacies in the U.S.
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. Health Card's consulting services
also enable sponsors to enhance the quality of plan participants' care while
reducing related costs. In addition, Health Card staff analyze and provide
recommendations to sponsors regarding how to improve their plan performance
based upon their objectives. General areas of focus include:
o Participant cost - sharing levels (i.e., deductibles and co - pays)
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 and other therapies that are aimed at treating a
disease in a cost-effective manner. Once a plan design has been implemented, the
clinical and account management staff monitors plan performance for customer
satisfaction 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 premature refills of prescriptions
o duration and duplication of therapy
o pregnancy and breast feeding precautions
o geriatric or pediatric precautions
o compliance with prescriptions
o other contraindications
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.
Formulary Design and Disease Information Services
Formulary Design. Health Card has established a Pharmacy and Therapeutics
Committee (the "P&T Committee") currently comprised of physicians and
pharmacists, with independent provider representation from across the country.
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 committee currently consists of seven members plus the chairman. In
addition, consultants to this core are called upon to participate on an ad hoc
basis. Health Card believes that the P&T Committee is organized and operates in
a manner that ensures the objectivity and credibility of its recommendations.
P&T Committee members are required to submit Conflict of Interest Statements
identifying any significant investment, interest, association or relationship
that might interfere with their independent judgment or recommendations as
committee members. None of the current members have disclosed any such
interests. All current members have active practice responsibilities which
include:
o Chairman, Martin Edelstein, M.D.: Specialties/ Areas of Expertise: Family
Practice, Geriatrics, Academia
o Henry Simmons, M.D., PH.D.: Specialties/ Areas of Expertise: Emergency
Medicine, Toxicology, Family Medicine, Medical Review.
o Bruce Johnson, MD: Specialties/ Areas of Expertise: Gastroenterology
o Eric Schneider, Pharm.D., Specialties/ Areas of Expertise: Ambulatory
Care Practice, Academia
o Richard Handler M.D., Specialties/ Areas of Expertise: Internal Medicine,
Rheumatology
o David Grossman M.D., Specialties/ Areas of Expertise: Cardiology
o James Tan M.D., Specialties/ Areas of Expertise: Pediatrics
o Jennifer Cerulli, Pharm.D., Specialties/ Areas of Expertise: Ambulatory
Care Practice, Academia
Health Card strives to provide plan sponsors with a formulary that promotes
the most clinically appropriate and cost effective medications in drug therapy,
independent of manufacturer bias.
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 medication treatments. Health Card has developed disease
information systems covering cardiovascular and gastrointestinal conditions,
behavioral health, 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, known as INFO.
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.
Specialty Pharmacy
Health Card's specialty pharmacy program manages high cost self-injected
medications for some of its sponsors. Recently, this class of medications has
become a significant percentage of Health Card's sponsors' pharmacy budget. This
growth is a function of increased utilization as well as an increase in the
number of available treatment agents.
The specialty pharmacy services manage utilization of these agents on two
levels: first, at a macro level, by identifying trends in utilization patterns,
recommending protocols based on nationally accepted guidelines, and monitoring
compliance; second, on a micro level, by Health Card working with the dispensing
pharmacy to assure that guidelines are followed, patient follow up is occurring
and outcomes are measured.
Diseases treated by specialty pharmacy medication include: HIV/AIDS,
Hepatitis HCV, Multiple Sclerosis, Hemophilia, Gaucher's Disease, Chronic Renal
Failure, Infertility, Arthritis (OARA), Crohn's Disease, Human Growth Hormone
Deficiency, Cystic Fibrosis, and Respiratory Syncytial Virus (RSV).
Mail Order
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 was
renewed as of June 30, 2002 for an additional 1-year term. 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.
Sponsors
Health Card's Sponsors are located throughout the United States. Sponsors
include managed care organizations, local governments, unions, corporations,
HMO's 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 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
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.
In October 1998, the Company acquired IPA, which is an independent practice
association under the laws of New York. The Company acquired PSCNY IPA, Inc.
("PSCNY") as part of the Centrus acquisition (see Note 2 to Consolidated
Financial Statements comprising Item 8 hereof). Health Card's IPA was dissolved.
PSCNY was used by Centrus to contract with Health Maintenance Organizations or
providers containing financial risk-sharing provisions, which represents some of
Centrus' largest sponsors. PSCNY's name was changed to National Medical Health
Card IPA, Inc. in September 2002. 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.
Significant Sponsors
For the fiscal year ended June 30, 2002, Vytra Health Plans Long Island,
Inc., Vytra Health Plans Managed Systems, Inc. and Vytra Health Services, Inc.
(individually and collectively, "Vytra") and MVP Healthcare ("MVP") were the
only sponsors 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 was terminated as of June 30, 2002. Health Card's wholly owned
subsidiary, HSL Acquisition Corp., acquired the company that has been providing
services to MVP, a former Centrus Sponsor.
Although Vytra was a significant sponsor, Health Card's management does not
believe that the loss of Vytra as a sponsor will have a material adverse effect
on Health Card.
MVP has been a client of Centrus since 1990. The term of the current
agreement commenced on January 1, 2000 and terminates on December 31, 2002. The
contract was assigned to Health Card effective March 1, 2002. Health Card is
currently negotiating with MVP to extend the contract. It is management's
expectation that a new multi-year contract will be put in place effective
January 1, 2003. For the year ended June 30, 2002, revenues from MVP represented
15% of Health Card's gross revenues.
MVP covers over 450,000 lives in various lines of business including HMO,
ASO, and Indemnity programs. MVP has experienced strong growth over the past two
years. Revenues have grown over 60%. MVP continues to expand its service area
while increasing penetration in existing markets.
Sales and Marketing
Health Card markets its services through a sales and marketing department
led by a direct sales force of 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 uses advertising,
public relations and marketing literature for sales support.
Health Card continues to make significant investments in sales and
marketing initiatives. These efforts are expected to yield continuous
improvements to our relationships with existing clients as well as to create
access to new customers in our major marketing areas.
Furthermore, Health Card continues to expand its web presence
(www.nmhcrx.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. Some of Health Card's competitors have been in existence for
longer periods of time and are better established than Health Card. Some 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,
utilization review services 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 13, 2002, Health Card and its subsidiaries had 201
employees. Of the 201 total employees, 189 are full-time and 12 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.
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 employees provide the required services to maintain and enhance
the Company's information systems infrastructure. Occasionally, outside,
unaffiliated consultants are retained for additional expertise. Historically,
Health Card had received data processing services and technology infrastructure
consulting services from Sandata Technology Inc. and its subsidiaries
("Sandata"). Sandata is a public company (NASDAQ: SAND) of which Bert E.
Brodsky, Health Card's Chairman of the Board, is also Chairman, CEO, Treasurer
and a principal stockholder. 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
eventually eliminate the Company's expenses payable to Sandata.
Government Regulation
The activities of PBM's such as Health Card are subject to regulation at
the federal and state levels. Health Card believes that its operations, as
currently conducted, substantially comply with the laws and regulations material
to the operation of its business. Existing laws that may affect Health Card's
operations and relationships include, but are not limited to, the following
federal laws: the Anti-Kickback Statute, the Health Insurance Portability and
Accountability Act ("HIPAA"), the Food, Drug and Cosmetic Act (the "FDCA"), and
the Employee Retirement Income Security Act of 1974 ("ERISA"). In addition,
various laws of individual states are applicable to Health Card's businesses.
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 or those relationships 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 laws and regulations affecting the
business, operations and relationships of Health Card is set forth below.
Anti-Kickback Statute
The 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 of 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. Many states, including several in which Health Card does
business, have adopted laws similar in scope to the Anti-Kickback Statute, and
these state laws often are applicable to services for which payment may be made
by anyone, including commercial insurers and private pay patients, not just
payments made under a federal health care program.
Regulations have been adopted under the federal Anti-Kickback Statute which
provide safe harbors for certain remuneration arrangements that 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. The failure to fall within a safe harbor does
not mean that an arrangement is in violation of the law, although it may result
in heightened scrutiny or challenge.
The Anti-Kickback Statute has been broadly interpreted by the courts, the
Office of Inspector General (the "OIG") of the Department of Health and Human
Services ("HHS"), and pertinent administrative bodies. Courts have ruled that a
violation of the statute exists if one purpose of the remuneration was to induce
patient referrals or purchases. Also, the OIG has identified as possibly
improper under the statute so-called "product conversion" programs, pursuant to
which pharmaceutical manufacturers provide incentives to physicians and
pharmacies to change a prescription to a drug made by the pharmaceutical
manufacturer, or recommend such a change. Health Card is not aware of any
instance in which the Anti-Kickback Statute has been applied (i) to prohibit
independent PBMs, such as Health Card, 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 PBMs and their sponsors and
participating pharmacies. In June 1998, however, the United States Attorney's
Office for the Eastern District of Pennsylvania began an investigation into
whether rebates and other payments made by pharmaceutical manufacturers to PBMs,
and payments made by PBMs to retail pharmacies, violate the Anti-Kickback
Statute and other federal laws. Health Card understands that several PBMs and
pharmaceutical manufacturers have received subpoenas in connection with this
investigation, but is unaware of any related prosecutions or settlements. Health
Card does not believe that it is a subject of this investigation, nor has it
received any subpoenas or been requested to produce any documents in connection
therewith.
Health Card believes that it is in compliance with the Anti-Kickback
Statute and existing regulations thereunder, and with the similar state laws
enacted in the states where it does business. There can be no assurance,
however, that Health Card will not be subject to challenge or a proceeding under
the Anti-Kickback Statute, the regulations thereunder or any similar state laws.
Any such challenge or proceeding could have a material adverse effect on Health
Card's business, results of operations or financial condition, regardless of
whether Health Card is found to have violated such statutes or regulations.
Regulations Regarding Privacy and Confidentiality
Most states, and the federal government, regulate the dissemination and use
of personally identifiable health information about a patient. This is an area
of increasing focus by several states, including New York. To date, no
legislation has been enacted that materially restricts Health Card's ability to
provide its services; however, it is possible that new laws or regulations
further restricting the dissemination or use of such information could be
adopted, or that existing laws and regulations will be interpreted in such a
manner as to further restrict Health Card's ability to obtain and use
information about its plan participants. Such new laws or interpretations could
have a material adverse effect on Health Card's business, results of operations
or financial condition.
In December 2000, HHS issued final regulations under HIPAA, regarding the
privacy of individually identifiable health information (the "Privacy Rules").
The Privacy Rules, which become effective in April 2003, impose extensive
requirements relating to the disclosure and use of protected health information.
HHS has also issued a final rule on standards for electronic transactions and
code sets to be used by health plans, healthcare providers, and healthcare
clearinghouses in those transactions (the "Transaction Standards and Code
Sets"). HHS has also issued draft regulations governing the security of
protected health information which impose detailed requirements on health care
providers, health plans, healthcare clearinghouses, and their business
associates relating to the storage, utilization, and transmission of health
information (the "Security Rules"). Organizations subject to the Privacy Rules,
the Transaction Standards and Code Sets, and the Security Rules will be required
to revise the way in which they use, store, and disseminate protected health
information.
Health Card has formed a HIPAA Compliance Committee comprised of
representatives from each of Health Card's departments. The goals of the
Committee are to (i) ensure compliance with HIPAA including, to the extent
applicable to it, the Privacy Rules, the Transaction Standards and Code Sets,
and the Security Rules; (ii) focus internal resources on the standardization of
electronic communication, wherever appropriate; (iii) implement practices to
support the principles of patient privacy; (iv) implement practices to ensure
the security of electronic transmissions; and (v) implement the Transaction
Standards and Code Sets.
In addition, Health Card has adopted the standards of communication for the
PBM industry set by the National Council for Prescription Drug Programs, and
performs risk assessments, employee training with respect to patient
confidentiality, and evaluations of business practices in order to continue to
support patient privacy.
Health Card cannot predict accurately what effect the HIPAA regulations may
have on its operations, including the costs of compliance, and there can be no
assurance that the restrictions and duties imposed by the regulations (and the
various state laws and regulations regarding patient privacy) will not have a
material adverse effect on Health Card's business, results of operations or
financial condition.
FDA Regulation
The United States Food and Drug Administration (the "FDA") has authority
under the FDCA to regulate promotional materials about drugs that are issued "by
or on behalf" of a pharmaceutical manufacturer. In January 1998, the FDA
published a draft Guidance for Industry (the "Guidance") concerning certain
promotional practices performed by PBMs on behalf of pharmaceutical
manufacturers (referred to in the Guidance as "sponsors"). The FDA was concerned
that sponsors might attempt to avoid FDA regulation in connection with the
promotion of their drugs by utilizing PBMs to conduct the marketing activity.
The advertising materials of PBMs are ordinarily not subject to FDA authority.
In the Guidance, the FDA asserted that it would hold sponsors responsible for
the promotional activities of certain PBMs if such activities violated the FDCA.
For a PBM that is not a subsidiary of the sponsor, the FDA would look to several
factors to determine whether the sponsor should be responsible for the
promotional activities of the PBM, including, among others, the relationship
between the sponsor and the PBM, and whether the sponsor has control of or
influence over the activities of the PBM or the content of the violative
material disseminated by the PBM.
The FDA received many comments questioning, among other things, the FDA's
authority to regulate the communications of PBMs that were not owned by the
sponsors. The FDA effectively withdrew the Guidance in the fall of 1998. Health
Card is not owned or controlled by a pharmaceutical manufacturer, but it does
have contractual relationships with them, and, had the Guidance been finalized,
the FDA could potentially have considered these pharmaceutical manufacturers to
be responsible for certain aspects of Health Card's business. Although the
Guidance has effectively been withdrawn, there can be no assurance that the FDA
will not again attempt to assert jurisdiction over certain aspects of the
business of PBMs in the future, and in such event, the impact could materially
adversely affect Health Card's operations.
ERISA
Some of Health Card's sponsors are self-funded health plans. These plans
are subject to ERISA, which imposes certain obligations on those deemed
fiduciaries of the health plans. Health Card believes that its activities do not
subject it to any ERISA fiduciary obligations with respect to the plans for
which it provides PBM services. In addition, Health Card's current form of
agreement with plan sponsors specifically provides that Health Card is not a
fiduciary of the plan. Although courts have declined to extend ERISA fiduciary
obligations to managed care companies, there can be no assurance that the U.S.
Department of Labor (which enforces ERISA) or a court will not assert that
Health Card (or some other PBM) has a fiduciary obligation in connection with
its activities on behalf of its self-funded sponsors. If Health Card is deemed
to be a fiduciary, it could potentially be subject to claims regarding benefit
denials and breach of fiduciary duties in connection with its provision of
services.
Medicare Prescription Drug Benefits
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.
Regulations Applicable to Health Care Professionals
All states regulate the practice of medicine, nursing, pharmacy, and other
licensed health professions. Activities deemed by a state's regulatory authority
to constitute the practice of medicine, nursing, pharmacy, 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 services,
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, pharmacy, or any other licensed health
profession. Health Card is licensed as a pharmacy in New York, although it does
not believe that it is required to be so licensed in New York or any other
jurisdiction. Health Card cannot assure that a regulatory authority in a state
in which it engages in any of the foregoing activities would not assert a
contrary position and subject it to sanctions for the unauthorized practice of
medicine, nursing, pharmacy or other licensed health profession.
Third Party Administrator and Utilization Review Laws
Many states have licensure or registration laws regulating third party
administrators ("TPAs") and utilization review companies. These laws differ from
state to state, and their application to PBMs is often unclear. Health Card has
registered or become licensed as a TPA or utilization review company in those
states in which it has concluded that such registration or licensure is
required. Prior to September 1998, however, Health Card conducted its activities
without obtaining any TPA licenses. There can be no assurance that Health Card
will not be subject to fines and other penalties if it is determined that such
licensure was required prior to Health Card obtaining a license, and that such
fines and other penalties would not have a material adverse effect on Health
Card's business, results of operations or financial condition.
Network Access Limitations
Many states have adopted legislation restricting the ability of a PBM to
limit participation in its pharmacy provider network or to remove a provider
from the network. These laws may require Health Card or its sponsors to accept
for participation in the network any retail pharmacy willing to meet the
applicable plan's price and other terms, and may restrict the ability of Health
Card and its sponsors to remove a pharmacy from the network without certain "due
process" protections. None of these laws are expected to have a material adverse
effect on Health Card's business, however.
Proposed Regulation of PBMs
Although neither the federal government, nor any state, currently directly
regulates the activities of PBMs, several states, including New York, have
introduced legislation in recent years which, if enacted, would directly
regulate the activities of PBMs. In addition, several influential bodies,
including the National Association of Insurance Commissioners, the National
Association of Boards of Pharmacy, and the National Committee on Quality
Assurance, are considering proposals to regulate PBMs and certain of their
activities, such as formulary and utilization management. If these or other
similar bodies adopt model acts which would regulate the activities of PBMs,
states may be influenced to incorporate such model acts in their statutes. If
laws directly regulating PBMs are passed in states in which Health Card does
business, such laws could materially affect Health Card's operations.
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
"Leased Premises"). The Company subleases the Leased Premises from BFS Realty,
LLC, an affiliate of the Company's Chairman (the "Affiliate"). The Affiliate
leases the Leased Premises from the Nassau County Industrial Development Agency
("NCIDA") pursuant to a lease that was entered into by NCIDA and the Affiliate
in July 1994, which expires in March 2005. The Affiliate has the right to become
the owner of the Leased Premises upon expiration of that lease. The Affiliate
subleases a portion of the Leased Premises to the Company (the "Lease"). As of
November 1, 2001, the Company and the Affiliate amended the Lease. The Lease
provides that, effective August 1, 2001, the rent payable to the Company shall
be an aggregate annual rent of $308,305. While formerly the Company made
estimated monthly real estate tax, utilities and maintenance-expense payments to
the Affiliate, the Lease now provides that the Company will pay its pro-rata
share of such expenses directly, to the entities to whom payment must be made.
The Company estimates that such monthly expenses will approximate an aggregate
of $336,000 per year. The annual rent will increase by 5% per year during the
term of the Lease. The annual expenses are also expected to increase, although
the Company cannot estimate by how much. The Lease expires in July, 2010. The
Company believes that the Leased Premises are adequate for current purposes.
Leasehold improvements made to this space during the fiscal year ended June 30,
2002, were approximately $60,000.
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 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.
Additionally, the Company leases office space through its subsidiaries in
Little Rock, Arkansas, Tulsa, Oklahoma and Latham, New York. The aggregate
annual rental payments for leased space in Little Rock are approximately
$169,000; for leased space in Tulsa are approximately $48,000; and for Latham,
approximately $700,000. In Latham, the subsidiary currently occupies two floors;
the Company anticipates that the amount of space leased by the Company (and,
concomitantly, the amount of rent paid) will be significantly reduced in the
near future.
In addition, Health Card rents a two family house in Port Washington, New
York (near the Company's offices) from P.W. Capital, LLC, (a company affiliated
with Health Card's Chairman of the Board) 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, 2002, Health Card paid P.W.
Capital, LLC, $66,000 in rent for this facility. For the same reasons, Health
Card rents two houses from Living In Style, LLC, an entity owned by three of
Health Card's executive officers. The leases provide for annual rental payments
of a total of $126,000 for the first year, increasing by 5% each year.
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
or financial condition.
An action was commenced against the Company on April 30, 2002 by Midwest
Health Plans Inc. ("MHP") in the United States District Court for the Eastern
District of Michigan. The complaint alleges, among other things, that the
parties entered into a contract dated July 1999 (the "Agreement"), and further
alleges that the Company has overcharged MHP for the administration of
prescription benefit services in contravention to the terms of the Agreement.
MHP is seeking $3 million dollars in damages. The Company filed an answer and
counterclaim on June 12, 2002. In the counterclaim, the Company claimed damages
in excess of $2.8 million based on Midwest's failure to pay under a contract. In
late June 2002, Midwest agreed to make two payments in the amount of $1.34
million and $1.36 million to partially settle the Company's claims against
Midwest. As a part of that payment, Midwest dropped one of its two claims
against the Company that had sought to setoff or recoup alleged overcharges by
the Company. The Company continues to have counterclaims totaling over $200,000
against Midwest for Midwest's failure to pay the amounts it had agreed to pay
Health Card for goods and services. Trial currently is scheduled for September
22, 2003. Factual discovery cut-off is February 28, 2003. The Company believes
the claims alleged in the complaint are without merit and intends to vigorously
defend the action.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
N/A
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY 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,
2001 2002
---- ----
High Low High Low
First Quarter $3.25 $1.88 $4.82 $1.45
Second Quarter 2.25 1.16 10.40 2.65
Third Quarter 3.13 1.31 15.61 9.10
Fourth Quarter 3.49 2.90 12.90 7.90
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 13, 2002 was 46.
Dividend Policy
Health Card has not declared or paid any cash dividends in the past. Health
Card is prohibited, under the terms of the Facility, from making any
distributions to shareholders or declaring or paying any dividend. Even if such
prohibition were not in effect, 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.
Recent Sales of Unregistered Securities
Pursuant to the terms of the PAI Agreement, the Company issued 400,000
shares of unregistered Common Stock of the Company to certain PAI stockholders
at the time of the acquisition. The stock issued to the PAI Stockholders was
valued at $849,920. In August 2001, the Company issued 62,500 shares of
unregistered Common Stock of the Company to the PAI stockholders as additional
consideration. These shares were valued at $250,000. In August of 2002 the
Company issued an additional 41,668 shares of Common Stock to the PAI
shareholders, again valued at $250,000. Information concerning the PAI Agreement
is provided in Item 1 ("Description of Business") of this Form 10-K, and in Note
2 of the Notes to Consolidated Financial Statements in Item 8 hereof. The
Company was advised that the issuance of such shares was exempt from
registration under the Securities Act by virtue of Section 4(1) thereof.
On January 22, 2002 the Company completed a convertible note offering (the
"Note Offering") in the aggregate principal amount of $11.6 million. Pursuant to
the Note Offering, the subscribers, two of whom are directors of the Company,
each received a promissory note (each a "Note") paying interest quarterly on the
unpaid principal balance at the rate of 12% per annum. The Notes had a term of
one year, unless otherwise extended pursuant to the terms of the Note. The Notes
were convertible at any time at the election of the holders into shares of the
common stock of the Company ("Conversion Shares") at a conversion price per
share equal to $12.00, the fair value of the common stock on January 22, 2002.
The Note holders were also granted certain registration rights with respect to
the Conversion Shares pursuant to a Registration Rights Agreement. The Company
was advised that the Notes Offering was exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) of that Act and Regulation D
promulgated thereunder.
The entire $11.6 million principal amount of the Notes, plus accrued
interest, was retired on June 30, 2002.
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, 2002 and provide
certain supplemental data. The selected consolidated income statement data for
the years ended June 30, 2000, 2001, and 2002 and the selected consolidated
balance sheet data as of June 30, 2001 and 2002 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, 1998 and 1999 and the selected consolidated balance sheet data as of June
30, 1998, 1999 and 2000 have been derived from audited consolidated financial
statements of Health Card that are not included in this Form 10-K. 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. All amounts are in thousands, except per share
amounts.
Year Ended June 30,
1998 1999 2000 2001 2002
Income Statement Data: (1)
Revenues...................... $ 95,473 $ 128,262 $ 167,676 $ 272,119 $ 459,832
Cost of claims................ 86,715 115,768 153,377 249,572 424,733
------ ------- ------- ------- -------
Gross profit................... 8,758 12,494 14,299 22,547 35,099
Selling, general and 7,192 10,171 12,358 21,423 27,230
----- ------ ------ ------ ------
administrative expenses*
Operating income 1,566 2,323 1,941 1,124 7,869
Other income (expense) (181) 592 922 877 (502)
----- ----- ----- ----- -----
Income before provision for 1,385 2,915 2,863 2,001 7,367
income taxes
Provision for income taxes 569 976 1,247 843 2,900
--- --- ----- --- -----
Net income................... $ 816 $ 1,939 $ 1,616 1,158 $ 4,467
=== ===== ===== ===== =====
Earnings per common share:
Basic.......................... $ 0.16 $ 0.37 $ 0.24 $ 0.16 $ 0.62
Diluted........................ $ 0.16 $ 0.37 $ 0.24 $ 0.16 $ 0.56
Weighted average number of
shares outstanding:
Basic........................... 4,967 5,205 6,720 7,101 7,213
Diluted........................ 4,969 5,205 6,720 7,200 7,909
*Includes amounts charged by
affiliates aggregating......... $ 4,905 $ 2,817 $ 2,986 $ 4,081 $ 1,889
Balance Sheet Data:
Cash and cash equivalents $ 1,306 $ 1,978 $ 14,595 $ 10,877 $ 1,768
Working capital (deficit) (8,658) (6,681) 6,030 (7,091) (42,653)
Total assets 18,344 30,846 44,363 79,110 149,895
Long term debt including 10 2 2,332 1,875 16,065
current portion
Total stockholders' equity (deficit) (2,006) 1,998 13,425 15,472 21,277
Supplemental Data (2)
Retail pharmacy claims processed 2,406 3,066 4,059 7,403 14,371
Mail pharmacy claims processed 132 171 255 487 767
Estimated plan participants 401 521 505 1,500 2,500
(at period end)
(1) Reference is made to Item 1 hereof (Description of Business) and Item 7
hereof (Management's Discussion & Analysis) for descriptions of the various
acquisitions that have been consummated in the last 3 years, and the financing
arrangements that have been set in place; such acquisitions and financings
affect the comparability of the information provided in the foregoing tables for
fiscal years 2001 and 2002.
(2) 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, Centrus, National
Medical Health Card IPA, Inc. ("IPA") (which was formerly known as PSCNY IPA,
Inc.), Specialty, NMHCRX Contracts, Inc. ("Contracts") and PBM Technology, Inc.
("PBM Tech"). Also included are the accounts of Funding. 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. The
results of operations and balance sheet of Centrus and Funding have been
included in the consolidation as of January 29, 2002, the effective date that
the Company acquired Centrus. 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 pharmacy benefit programs and services. Health Card also recognizes
administrative fees and earns rebates 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 specific terms of the contracts that Health
Card enters into with its sponsors will determine whether Health Card recognizes
the gross revenue related to the cost of the prescriptions filled. In certain
limited cases, the Company has not recognized the gross revenue or cost related
to prescriptions filled for a specific sponsor. This has no impact on the
Company's gross profit since neither the revenue nor the related cost of the
prescriptions is recorded.
The following table sets forth the breakdown of Health Card's revenues
relating to pharmaceuticals dispensed and administrative fees ($ in thousands):
Years Ended June 30,
2000 2001 2002
Revenues relating to
Pharmaceuticals $165,171 $266,959 $447,862
Administrative fees and other 2,505 5,160 11,970
---------- -------- ---------
Total Revenues $167,676 $272,119 $459,832
-------- -------- --------
Health Card does not take possession or legal ownership of the
pharmaceuticals 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.
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, for which it
receives administrative fees, or through a third party rebate administrator.
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 administrator
provides estimates to Health Card based on its 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 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 contractually required to be paid
within 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.
Certain of Health Card's sponsors are entitled to all or a portion of
rebates received by Health Card, which portion varies contractually by sponsor.
The manufacturer rebates retained by Health Card, after the sponsors receive
their contractual amounts, have historically had a significant impact on Health
Card's financial performance. For the fiscal years ended June 30, 2000, 2001 and
2002 the rebates retained by Health Card has equaled 27%, 19% and 19%,
respectively, of the Company's total gross profit. Due to the expected continued
growth and diversification of Health Card's business, Health Card expects
rebates to continue to account for a significant, but declining, percentage of
its total gross profit.
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 when these arrangements expire, there
could be 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 organic 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 organic 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.
Results of Operations
Fiscal Year Ended June 30, 2002 Compared to Fiscal Year Ended June 30, 2001
Revenues increased $187.7 million, or approximately 69%, from $272.1
million for the fiscal year ended June 30, 2001, to $459.8 million for the
fiscal year ended June 30, 2002. Of the increase, $127.1 million, or 68% was due
to the inclusion of revenues from Centrus, subsequent to January 29, 2002. PMP
accounted for another $19.2 million, or 10.2%, of the increase since it was
acquired on March 5, 2001 and included a full fiscal year in 2002 compared to
less than four months in the fiscal year ended June 30, 2001. Another $39.6
million of the increase was due to revenues related to new sponsors or new
services offered during fiscal 2002. The majority of the balance of the
year-over-year increase 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.
Two other factors affecting the year-over-year increase were: rebates payable to
the Company's sponsors increased by $10.2 for the twelve months ended June 30,
2002 as compared to the twelve months ended June 30, 2001. Since these rebates
are treated as a reduction in revenues this led to reduction in the overall
year-over-year revenue increase. Secondly, there were certain contracts during
fiscal year 2002 that the Company recognized on a net revenue basis. There were
no contracts during the twelve months ended June 30, 2001 that the Company
recognized on the net revenue basis. The specific terms of the contracts that
Health Card enters into with its sponsors will determine whether Health Card
recognizes the gross revenue related to the cost of the prescriptions filled. In
certain limited cases, the Company has not recognized the gross revenue or cost
related to prescriptions filled for a specific sponsor. This has no impact on
the Company's gross profit since neither the revenue nor the related cost of the
prescriptions is recorded. Finally, revenues for the twelve months ended June
30, 2001 were negatively impacted by a reduction in revenues of $733,000 that
arose when the Company settled certain fees due from a major sponsor related to
a capitation arrangement for calendar year 1999.
Cost of claims increased $175.1 million, or approximately 70%, from $249.6
million for the fiscal year ended June 30, 2001, to $424.7 million for the
fiscal year ended June 30, 2002. Centrus accounted for $122.9 million, or 70% of
the increase. PMP accounted for another $17.3 million, or 10% of the increase.
The balance of the increase is related to the increased revenue as described
above. An increase of $12.4 million, $9.1 million of which is related to
Centrus, in gross rebates received, which is treated as a reduction in cost of
claims, for the fiscal year ended June 30, 2002 as compared to the fiscal year
ended June 30, 2001 led to a reduction in the year-over-year increase. As a
percentage of revenues, cost of claims increased from 91.7% to 92.4% for the
fiscal years ended June 30, 2001 and June 30, 2002, respectively. The increase
relates primarily to the higher cost of claims on the Centrus book of business,
which serves managed care clients primarily. Industry-wide, managed care clients
have a greater cost of claims, and consequently a lower gross margin, than other
types of business in the PBM industry. Centrus' cost of claims for the fiscal
year ended June 30, 2002 ran about 3 - 6 percentage points greater than the rest
of the Company's business, and since Centrus accounted for 28% of the Company's
revenue in the fiscal year, this impacted the overall cost of claims percentage.
Gross profit increased from $22.5 million for the fiscal year ended June
30, 2001 to $35.1 million for the fiscal year ended June 30, 2002; a $12.6
million, or 56%, increase. In addition, to the revenue volume increase, Centrus
accounted for $4.2 million, or 33%, of the increase. PMP accounted for another
$1.9 million, or 15%, of the increase. The increase in rebates (and admin-
istrative fees related to the collection of rebates) after accounting for the
amount of rebates that are shared with sponsors, accounted for another $4.6
million, or 37%. Gross profit, as a percentage of revenue, declined from 8.3% to
7.6% for the fiscal years ended June 30, 2001 and June 30, 2002, respectively.
The decrease year-over-year is again principally related to the lower margins
achieved by Centrus. 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 $5.8 million, or approximately 27%, from $21.4
million for the fiscal year ended June 30, 2001 to $27.2 million for the fiscal
year ended June 30, 2002. Approximately 67% of the increase, or $3.9 million,
was related to the acquisition of Centrus. There were also year-over-year
increases in the following areas: (i) an approximate $1,202,000 increase in
expenditures related to increases in compensation and benefits, primarily
associated with new employees including senior management; (ii) an approximate
$709,000 increase in depreciation and amortization expenses related to increased
hardware procurement and software development in prior periods; (iii) an
approximate $1,189,000 increase in the use of outside consultants primarily to
update the Company's information technology infrastructure; and (iv) an
approximate $360,000 increase in commission expense related to the increase in
new revenues not related to the acquisitions. Partially offsetting these
increases were: (i) a reduction of approximately $1,376,000 related to actual
payments made and/or reserves accrued during the fiscal year ended June 30,
2001, but not the fiscal year ended June 30, 2002 related to the following
matters: (A) the settlement of the West Contra Costa lawsuit (see Note 9 to the
Consolidated Financial Statements that comprise Item 8 hereof); (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, in April of
2001, of a certain patent infringement litigation involving the use by the
Company of certain PBM information technology systems; (ii) the reduction in
general and administrative expenses charged by affiliates described below, and
(iii) an approximate $396,000 decrease in intangible amortization due to the
adoption of SFAS 142. Per SFAS 142, the Company no longer amortizes goodwill as
of July 1, 2001 (see Note 1 to the Consolidated Financial Statements Comprising
Item 8 hereof).
General and administrative expenses charged by affiliates decreased
approximately $2.2 million, or 54%, year-over-year from $4.1 million to $1.9
million for the fiscal years ended June 30, 2001 and June 30, 2002,
respectively. The Company has eliminated most of the related party transactions
effective January 1, 2002. The majority of the decrease related to reduced
information technology services and management and consulting services procured
from affiliated companies. The hiring of full time employees and the use of
outside consultants replaced the use of affiliated companies to update the
information technology infrastructure.
Selling, general, and administrative expenses as a percent of revenue
improved from 7.9% for the fiscal year ended June 30, 2001 to 5.9% for the
fiscal year ended June 30, 2002. This improvement stems from the continued
growth of the Company due to improving efficiencies with scale.
For the fiscal year ended June 30, 2001, the Company recognized other
income, net, of approximately $877,000. For the fiscal year ended June 30, 2002,
the Company incurred other expense, net, of approximately $502,000. The
components of the approximate $1,379,000 increase in net expense were an
approximate $889,000 increase in interest expense, an approximate $591,000
decrease in interest income, and an approximate $101,000 gain on sold assets
during the fiscal year ended June 30, 2002. The primary reasons for the net
increase in expense were the interest expense incurred on the Company's
revolving credit facility and on the Note Offering during the fiscal year ended
June 30, 2002 to finance the acquisition of Centrus (see Item 1, "Description of
Business-Recent Acquisitions", and Note 2 to the Consolidated Financial
Statements comprising Item 8 hereof). Partially offsetting the increase in
interest expense was the approximate $101,000 deferred gain during the fiscal
year ended June 30, 2002 on the sale of assets related to a sale-leaseback
transaction. (See Note 9 to the Consolidated Financial Statements comprising
Item 8 hereof.)
Income before the provision for income taxes increased approximately $5.4
million, or 268%, from approximately $2.0 million, for the fiscal year ended
June 30, 2001, to approximately $7.4 million for the fiscal year ended June 30,
2002. The primary reason for the increase was the improving efficiencies that
come with scale. For the fiscal year ended June 30, 2002 revenues increased 69%
over the fiscal year ended June 30, 2001, while selling, general, and
administrative expenses increased only 27%. In addition, while gross margin
percentages declined year-over-year due to the acquisition of Centrus, the gross
profit dollars increased by 56%. These factors contributed to the marked
improvement - 268% - in profitability.
EBITDA (earnings before interest, taxes, depreciation and amortization)
increased by approximately $7.4 million or 199%, from $3.7 million for the
fiscal year ended June 30, 2001 to $11.1 million for the fiscal year ended June
30, 2002. The primary factor for the increase was the approximate $6.7 million
increase in operating income described above. In addition, there was an
approximate $870,000 increase in depreciation and amortization, including
Centrus. This increase was partially offset by an approximate $202,000 decrease
in goodwill and other intangibles amortization.
The effective tax rate decreased from 42.1% for the fiscal year ended June
30, 2001 to 39.4% for the fiscal year ended June 30, 2002. The decrease stemmed
primarily from a reduction in non-deductible goodwill amortization.
Net income for the fiscal year ended June 30, 2002 was approximately $4.5
million as compared to approximately $1.2 million for the fiscal year ended June
30, 2001; a 285% increase. Earnings per diluted share increased by $0.40, to
$0.56 for the fiscal year ended June 30, 2002.
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 $736,000 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 Note 9 to the Consolidated Financial Statements comprising Item 8
hereof); (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 a certain patent infringement litigation involving the use by the
Company of certain PBM information technology systems 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 $862,000, 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 Note 9 to the Consolidated Financial Statements that
comprise Item 8 hereof, 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.
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, 2002, the Company had a
working capital deficit of $42.7 million as compared to a working capital
deficit of $7.1 million as of June 30, 2001. The primary reason for the decline
in working capital was the acquisition of Centrus for $40 million in cash. This
decline was partially offset by the increased profitability generated by the
Company during the fiscal year ended June 30, 2002. The Company has now acquired
three companies since July 2000 utilizing primarily cash. This has had the
effect of increasing the Company's working capital deficits until sufficient
profitability is generated to pay back the cost of the acquisitions.
Net cash provided by operating activities was $12.1 million and $20.4
million for the fiscal years ended June 30, 2001 and 2002, respectively. Of the
$8.3 million increase, $3.3 million is related to increased net income generated
during the fiscal year ended June 30, 2002. For the fiscal year ended June 30,
2002, accounts payable increased by $49.7 million primarily related to Centrus'
claims and rebates payables being added. At the same time, accounts and rebates
receivables increased by $37.7 million, again primarily due to Centrus. The net
effect of these two items was $12 million of net cash provided by operations.
For the fiscal year ended June 30, 2001 accounts and rebates receivables
increased by $11.5 million and accounts payable increased by $19.5 million, a
net provision of cash of $8 million, a difference of $4 million during the two
periods.
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. The Company has put in place a $40 million revolving credit facility
for acquisitions and working capital financing. However, 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 as compared to $42.9 million for the fiscal year ended June
30, 2002. The primary differences in the two periods were the acquisitions
completed. The fiscal year ended June 30, 2001 included the acquisitions of PAI
and PMP which used net cash of $11.3 million. The fiscal year ended June 30,
2002 included the acquisition of Centrus which used $40.3 million of net cash
and $1.0 million of additional consideration paid to the PAI shareholders (see
Note 2 to Consolidated Financial Statements comprising Item 8 hereof). The
difference in the amount of net cash required for these three acquisitions was
$30.0 million. The net cash outlay for PAI as of June 30, 2002 was $5.5 million,
representing the initial payment of $6.0 million plus $0.2 million of related
expenses, plus the $1.0 in additional consideration, 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. The net cash
outlay for Centrus was $40.3 million, representing the initial payment of $40.0
million plus $0.3 of related expenses. None of Centrus' existing cash was
acquired. Partially offsetting the increase in cash used over the two periods
was the $1.3 million gross proceeds from the sale-leaseback transaction in
October 2001. (See Note 9 to Consolidated Financial Statements comprising Item 8
hereof.)
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. With the acquisition of Centrus, the Company
assumed five capital leases for computer and telephone equipment. The principal
balance of these assets at the time of the acquisition was $139,447. The leases
have various terms and payments. Three of those leases have subsequently been
paid off in full. The principal balance of all remaining capital leases as of
June 30, 2002 was approximately $1,365,000.
The Company has entered into various real estate operating leases with both
related and unrelated parties. The Company has entered into various operating
leases with unrelated third parties for office equipment. These leases have
different payment terms and expirations dates. The Company also entered into a
sale-leaseback operating lease of certain fixed assets (principally computer
hardware and externally developed software) with an affiliate of the Company's
Vice Chairman. See Note 9 to the Consolidated Financial Statements comprising
Item 8 hereof for a further description of these various leases.
On January 29, 2002, the Company entered into a $40 million revolving
credit facility, details of which are set forth in Item 1 above and in Note 9 to
the Consolidated Financial Statements. Borrowings of $28.7 million under the
Facility were used to finance part of the purchase price of the Company's
acquisition of Centrus. The Facility contains various covenants that, among
other things, require the Company to maintain certain financial ratios, as
defined in the agreements governing the Facility. As of September 13, 2002,
approximately $24.5 million was outstanding under the Facility, and the Company
was in compliance with its financial-ratios covenants.
The total future payments under these contractual obligations as of
June 30, 2002 is as follows:
Payments Due by Period
Contractual Obligations ($ in thousands)
Less than After 5
Total 1 year 1-3 years 4-5 years years
----- --------- --------- --------- -------
Long Term Debt $13,882 $13,856 $ 26 -- --
Capital Lease Obligations 1,525 653 872 -- --
Operating Leases 10,342 1,612 2,671 $2,127 $3,932
Sale-leaseback 1,034 443 591 -- --
------- ------- ------ ------ ------
Total Contractual
Cash Obligations $26,783 $16,564 $4,160 $2,127 $3,932
======= ======= ====== ====== ======
PAI stockholders were eligible to receive up to $2,000,000 in additional
consideration payable in combination of cash and common stock if certain
financial targets of PAI were met for the fiscal years ended June 30, 2001 and
2002. These targets have been achieved and the $2 million has been earned. At
the end of August 2001, $750,000 in cash was paid, and 62,500 shares of the
Company's Common Stock valued at $4.00 per share were issued to the PAI
stockholders. At the end of August 2002, $750,000 in cash was paid, and 41,668
shares of the Company's Common Stock valued at $6.00 per share were issued to
the PAI stockholders.
The members of PMP are eligible to receive additional consideration of up
to $1,000,000 if certain PMP clients are retained over the next three years.
These targets were not met in the first year so no additional consideration was
due and payable. It is the Company's expectations that these amounts will not be
earned in the second and third years either as the identified clients were not
generally retained directly, although they were replaced.
The shareholders of Centrus are eligible to receive additional
consideration of up to $4,000,000, payable over three years, if certain
financial targets are met over the next two years.
In February 1998, the Company entered into an agreement with an
unaffiliated party for computer software products and professional services. The
agreement required the Company to pay an initial license fee. In addition, if
certain milestones are met based on the number of processed claims, as defined
in the agreement, the initial license fee increases in specified increments. To
date, four such milestones have been met, resulting in a 100% increase in the
license fee. The agreement also provides for the annual payment of a fee for
maintenance and updating services equal to 18% of the initial license fee, as
defined. It is anticipated that, based on internal growth and the Centrus
acquisition, that the last milestone will be met. If the remaining milestone is
reached, the cash outlay by the Company would be $100,000.
The Company anticipates that current cash positions, after its three
acquisitions and the repayment of certain affiliate and shareholder debt,
together with anticipated cash flow from operations, will be sufficient to
satisfy the Company's contemplated cash requirements for at least 24 months.
This is based upon current levels of capital expenditures and anticipated
operating results for the next 24 months. However, it is one of the Company's
stated goals to acquire other pharmacy benefit management companies, evidenced
by the three acquired since July 2000. This will require cash and depending on
the Company's evaluation of future acquisitions, additional cash may be
required. In the event that the Company's plans change or its assumptions prove
to be inaccurate, or the proceeds from the Facility prove to be insufficient to
fund operations and acquisitions, the Company could be required to seek
additional financing sooner than anticipated. There can be no assurance that
such financing could be obtained at rates or on terms acceptable to the Company,
if at all.
Other Matters
Inflation
Management does not believe that inflation has had a material adverse
impact on Health Card's net income.
Subsequent Events
On August 20, 2002, the Company announced that it has signed a letter of
intent to acquire Wellpartner Inc., a home-delivery pharmacy based in Portland,
Oregon. Wellpartner offers personal pharmacy convenience through mail,
telephone, facsimile, or online shopping to members throughout the United
States. If this acquisition is consummated, the Company believes it will enhance
its ability to offer integrated, full-service, mail order pharmacy services to
its customers.
Critical Accounting Policies and Estimates
General
Health Card's discussion and analysis of its financial condition and
results of operations are based upon Health Card's Consolidated Financial
Statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires Health Card to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses; these estimates
and judgments also effect related disclosure of contingent assets and
liabilities. On an on-going basis, Health Card evaluates its estimates,
including those related to rebate income, bad debt, intangible assets, income
taxes and financing operations. Health Card bases its estimates on experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes that of its significant accounting policies (see Note
1 to the Consolidated Financial Statements comprising Item 8 hereof), the
following may involve a higher degree of judgment and complexity than others:
Revenue Recognition
The Company has historically entered into two types of arrangements for the
payment of administrative fees: fee for service (per claim charges) and
capitation (per member per month charges). Under the fee for service
arrangement, the Company is paid by its sponsors for the Company's contractually
agreed upon rates based upon actual claims adjudicated plus a fixed transaction
fee. Under the capitation arrangement, the fee is based on the number of
participants per month; the Company pays for the cost of prescriptions filled
and thus shares the risk of operating profit or loss with these plans. Since
January 1, 2000, all services have been provided on a fee for service basis
only.
Revenue under the fee for service arrangement is recognized when the claims
are adjudicated. Included as revenue are the Company's administrative fees, and
charges relating to pharmaceuticals dispensed by the Company's network of
pharmacies. Revenue is reduced by the amount of rebates paid to the Company's
sponsors.
The specific terms of the contracts that Health Card enters into with its
sponsors will determine whether Health Card recognizes the gross revenue related
to the cost of the prescriptions filled. In certain limited cases, the Company
has not recognized the gross revenue or cost related to prescriptions filled for
a specific sponsor. This has no impact on the Company's gross profit since
neither the revenue nor the related cost of the prescriptions is recorded.
Rebates are recognized when the Company is entitled to them in accordance
with the terms of its arrangements with drug manufacturers, third party rebate
administrators, and sponsors, and when the amount of the rebates is
determinable. The Company records the gross rebate receivable and the
appropriate payable to the sponsors based on estimates, which are subject to
final settlement. The estimates are based upon the claims submitted and the
Company's rebate experience, and are adjusted as additional information becomes
available.
Bad Debt
Health Card maintains allowances for doubtful accounts for estimated losses
resulting from the liability of its sponsors to make required payments. If the
financial condition of Health Card's sponsors were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
Deferred Taxes
Health Card periodically considers whether or not it should record a
valuation allowance to reduce its deferred tax assets to the amount that is more
likely than not to be realized. While Health Card has considered future taxable
income and ongoing tax planning strategies in assessing the need for the
valuation allowance, in the event Health Card were to determine that it would be
able to realize its deferred tax assets in the future in excess of its net
recorded amount, an adjustment to the deferred tax asset would increase income
in the period such determination was made. Likewise, should Health Card
determine that it would not be able to realize all or part of its net deferred
tax asset in the future, an adjustment to the deferred tax asset would be
charged to income in the period such determination was made.
Goodwill and Intangible Impairment
In assessing the recoverability of the Company's goodwill and other
intangibles, the Company must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets. If
these estimates or their related assumptions change in the future, the Company
may be required to record impairment charges for these assets not previously
recorded. On July 1, 2001 the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," and will be required
to analyze its goodwill for impairment issues on a periodic basis thereafter.
During the year ended June 30, 2002, the Company did not record any impairment
losses related to goodwill and other intangible assets.
Capitalized Software
The costs of software developed for internal use incurred during the
preliminary project stage are expensed as incurred. Direct costs incurred during
the application development stage are capitalized. Costs incurred during the
post-implementation/operation stage are expensed as incurred. Capitalized
software development costs are amortized on a straight-line basis over their
estimated useful lives, commencing on the date the software is placed into use,
primarily three years.
Item 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, 2002, 2001
and 2000, and the related Schedules, are included in this Form 10-K following
Item 14 hereof.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Reference is made to the Current Report on Form 8-K dated July 19, 2002,
and to the Current Report on Form 8-K dated June 15, 2001, regarding Health
Card's dismissals of its independent auditors.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required is incorporated herein by reference to the fiscal
year 2002 definitive Proxy Statement under the caption "Election of Directors",
which the Company anticipates will be filed by October 28, 2002.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference
to the fiscal 2002 Definitive Proxy Statement under the caption "Executive
Compensation", which the Company anticipates will be filed by October 28, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference
to the fiscal 2002 Definitive Proxy Statement under the captions "Security
Ownership of Certain Beneficial Owners" and Security Ownership of Management",
which the Company anticipates will be filed by October 28, 2002.
Item 13. Certain Relationships and Related Transaction
The information required by this item is incorporated herein by reference
to the fiscal 2002 Definitive Proxy Statement under the caption "Certain
Relationships and Related Transactions", which the Company anticipates will by
filed by October 28, 2002.
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-4
Consolidated Balance Sheet as of June 30, 2001 and 2002 F-5
Consolidated Statement of Income for each of the years ended
June 30, 2000, 2001 and 2002 F-6
Consolidated Statement of Stockholders' Equity for each
of the years ended June 30, 2000, 2001 and 2002 F-7
Consolidated Statement of Cash Flows for each of the years ended
June 30, 2000, 2001 and 2002 F-8
Notes to Consolidated Financial Statements F-9 - F-34
2. Financial Statement Schedules
Schedule II: Valuation and Qualifying Accounts S-1
3. Exhibits
Exhibit
Number Description of Exhibit
3.1 Certificate of Incorporation of Health Card (7)
3.4 By-Laws of Health Card (7)
4.1 Form of Specimen Common Stock Certificate (9)
4.2 Form of Warrant Agreement, including form of Representatives'
Warrants (1)
10.1 Mail Service Provider Agreement, dated July 1, 1996, between Health
Card and Thrift Drug, Inc. d/b/a Express Pharmacy Services (1)
10.2 Amendment to Mail Service Provider Agreement, dated January 1, 1997,
between Health Card and Thrift Drug, Inc. d/b/a Express Pharmacy
Services (1)
10.3 Software License Agreement and Professional Service Agreement,
dated February 18, 1998, between Health Card and Prospective
Health, Inc. (1)
10.4 1999 Stock Option Plan (1)
10.5 Employee Covenant Agreement, dated June 15, 1998, between Health Card
and Mary Casale (1)
10.6 Employee Covenant Agreement, dated June 16, 1998, between Health Card
and Ken Hammond (1)
10.7 Stock Option Agreement, dated August 3, 1999, between Health Card and
Ken Hammond (4)
10.8 Employment Agreement, dated March 27, 2000, between Health Card and
David Gershen (4)
10.9 Stock Option Agreement, dated May 1, 2000, between Health Card and
David Gershen (4)
10.10 Employment Agreement, dated May 3, 2000, between Health Card and James
Bigl (4)
10.11 Stock Option Agreement, dated June 12, 2000, between Health Card and
James Bigl (4)
10.12 Stock Option Agreement, dated August 3, 1999, between Health Card and
Kenneth J. Daley (4)
10.13 Stock Option Agreement, dated August 3, 1999, between Health Card and
Gerald Angowitz (4)
10.14 Assignment, dated November 1, 1996, from Sandata, Inc., to BFS Realty,
LLC (1)
10.15 Lease, dated August 10, 1998, between 61 Manorhaven Boulevard, LLC and
Health Card (1)
10.16 Letter, dated June 3, 1999, from Bert Brodsky to Health Card (1)
10.17 Letter, dated June 3, 1999, from Gerald Shapiro to Health Card (1)
10.18 Agreement of Guaranty, dated June 1, 1998, by Bert E. Brodsky in favor
of Health Card (1)
10.19 Promissory Note, dated July 31, 2000, made payable by P.W. Capital, LLC
to the order of Health Card, in the amount of $3,890,940 (4)
10.20 Letter, dated June 8, 1999, from P.W. Capital Corp. to Health Card (1)
10.21 Letter, dated June 9, 1999, from Bert E. Brodsky to Health Card (1)
10.22 Letter, dated June 8, 1999, from the Bert E. Brodsky Revocable Trust to
Health Card (1)
10.23 Letter Agreement, dated June 30, 1999, between the Bert E. Brodsky
Revocable Trust and Health Card (1)
10.24 Employment Agreement, dated July 1, 1999, between Health Card and
Bert E. Brodsky (1)
10.25 Letter, dated June 8, 1999, from Bert E. Brodsky to Health Card (1)
10.26 Form of Lock-Up Agreement (1)
10.27 Acquisition and Merger Agreement, dated as of June 27, 2000, between
Health Card and Pharmacy Associates, Inc. (3)
10.28 Lease Agreement, dated March 4, 1996, between Pharmacy Associates,
Inc. and Executive Park Partnership (4)
10.29 Amendment to Lease, dated November 2, 1998, between Pharmacy
Associates, Inc. and Executive Park Partnership (4)
10.30 Amendment to Lease, dated November 19, 1998, between Pharmacy
Associates, Inc. and Executive Park Partnership (4)
10.31 Lease Agreement, dated July 8, 1999, between Pharmacy Associates,
Inc. and Executive Park Partnership (4)
10.32 Asset Purchase Agreement dated as of March 5, 2001 among National
Medical Health Card Systems, Inc., PMP Acquisition Corp., Provider
Medical Pharmaceutical, LLC and members of PMP (5)
10.33 Employment Agreement, dated June 4, 2001, between National Medical
Health Card Systems, Inc. and Tery Baskin (6)
10.34 Stock Option Agreement, dated June 4, 2001, between National Medical
Health Card Systems, Inc. and Tery Baskin (6)
10.35 Stock Option Agreement, dated June 12, 2001, between National Medical
Health Card Systems, Inc. and James Bigl (6)
10.36 Asset Purchase Agreement dated January 29, 2002 by and among the
Company, Health Solutions Limited ("HSL"), HSL Acquisition Corp., a
wholly-owned subsidiary of the Company, and the security holders of
HSL (8)
10.37 Receivables Purchase and Transfer Agreement dated January 29, 2002
by and among the Company and certain of its subsidiaries and
and NMHC Funding, LLC (8)
10.38 Loan and Security Agreement dated January 29, 2002 by and between
NMHC Funding, LLC and HFC Healthco-4, LLC, an affiliate of
Healthcare Finance Group, Inc. (8)
10.39 Lease Agreement dated as of August 1, 2001, between National Medical
Health Card Systems, Inc. and BFS Realty, LLC (6)
10.40 Amended Lease Agreement dated as of August 1, 2001, between National
Medical Health Card Systems, Inc. and BFS Realty, LLC
21 List of Subsidiaries
23.1 Consent of Ernst & Young to the incorporation by reference in the
Registration Statement on Form S-8 (File No. 333-82224) of its report
dated September 30, 2002
23.2 Consent of Goldstein Golub Kessler to the incorporation by reference
in the Registration Statement on Form S-8 (File No. 333-82224) of its
report dated August 31, 2001
23.3 Consent of BDO Seidman LLP to the incorporation by reference in the
Registration Statement on Form S-8 (File No. 333-82224) of its report
dated September 19, 2000
99.1 Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act
99.2 Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act
(1) Denotes document filed as an Exhibit to Health Card's Registration
Statement on Form S-1 (Registration Number: 333-72209) and incorporated herein
by reference.
(2) Denotes documentation filed as an Exhibit to Health Card's Report on
Form 10-K for the fiscal year ended June 30, 1999.
(3) Denotes document filed as an Exhibit to Health Card's Form 8-K for an
event dated July 20, 2000 and incorporated herein by reference.
(4) Denotes documentation filed as an Exhibit to Health Card's Report on
Form 10-K for the year ended June 30, 2000.
(5) Denotes document filed as an Exhibit to Health Card's Form 8-K for an
event dated March 5, 2001.
(6) Denotes document filed as an Exhibit to Health Card's Report on Form
10-K for the year ended June 30, 2001.
(7) Denotes document filed as an Exhibit to Health Card's Definitive Proxy
Statement on Schedule 14-A filed on December 21, 2001 and incorporated herein by
reference.
(8) Denotes document filed as an Exhibit to Health Card's Current Report on
Form 8-K for events dated January 29, 2002 and incorporated herein by reference.
(9) Denotes document filed as an Exhibit to Health Card's Amendment number
1 on Form 8-A/A filed with the Securities and Exchange Commission on May 21,
2002 and incorporated herein by reference.
(b) Reports on Form 8-K
A Form 8-K was filed with the Securities and Exchange Commission on May 30,
2002.
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
-----------------------------------------------------------------------
Date: September 30, 2002
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 of the Board
Date: September 30, 2002
By /s/ Gerald Shapiro
--------------------------------------------------------------------------
Gerald Shapiro, Vice Chairman of the Board, Secretary,
Date: September 30, 2002
By /s/ James J. Bigl
-------------------------------------------------------------------------
James J. Bigl, Chief Executive Officer,
Principal Executive Officer and Director
Date: September 30, 2002
By /s/ Gerald Angowitz
--------------------------------------------------------------------------
Gerald Angowitz, Director
Date: September 30, 2002
By /s/ Kenneth J. Daley
--------------------------------------------------------------------------
Kenneth J. Daley, Director
Date: September 30, 2002
By /s/ Paul J. Konigsberg
--------------------------------------------------------------------------
Paul J. Konigsberg, Director
Date: September 30, 2002
By /s/ Ronald L. Fish
--------------------------------------------------------------------------
Ronald L. Fish, Director
Date: September 30, 2002
By /s/ David J. Gershen
--------------------------------------------------------------------------
David J. Gershen, Principal Financial and Accounting Officer
Date: September 30, 2002
CERTIFICATIONS
I, James J. Bigl, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of National Medical
Health Card Systems, Inc. and its Subsidiaries;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
National Medical Health Card Systems, Inc. and its Subsidiaries as of, and for,
the periods presented in this annual report.
Dated: September 30, 2002 /s/ James J. Bigl
James J. Bigl, Chief Executive Officer
I, David J. Gershen, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of National Medical
Health Card Systems, Inc. and its Subsidiaries;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
National Medical Health Card Systems, Inc. and its Subsidiaries as of, and for,
the periods presented in this annual report.
Dated: September 30, 2002 /s/ David J. Gershen
David J. Gershen, Chief Financial Officer
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Reports F-2 - F-4
Consolidated Financial Statements:
Balance Sheet F-5
Statement of Income F-6
Statement of Stockholders' Equity F-7
Statement of Cash Flows F-8
Notes to Consolidated Financial Statements F-9 - F-32
Report of Independent Auditors
The Board of Directors and Stockholders of
National Medical Health Card Systems, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of National
Medical Health Card Systems, Inc. and subsidiaries as of June 30, 2002, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the year then ended. Our audit also included the financial statement
schedule listed in the index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of National
Medical Health Card Systems, Inc. and subsidiaries at June 30, 2002, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in note 1 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets effective July 1, 2001.
/s/ ERNST & YOUNG LLP
Melville, New York
September 5, 2002
INDEPENDENT AUDITOR'S 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 statements of income,
stockholders' equity (deficit) and cash flows of National Medical Health Card
Systems, Inc. and Subsidiaries for the year ended June 30, 2000. 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 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 results of operations and cash
flows of National Medical Health Card Systems, Inc. and Subsidiaries for the
year ended June 30, 2000 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
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CONSOLIDATED BALANCE SHEET
($ in thousands)
- -------------------------------------------------------------------------------------------------------------------------
June 30, June 30,
2001 2002
---- ----
- -------------------------------------------------------------------------------------------------------------------------
Assets
Current:
Cash and cash equivalents (including cash equivalent investments
of $1,216 and $1,187, respectively) $ 10,877 $ 1,768
Restricted cash 1,598 2,653
Accounts receivable, less allowance for doubtful accounts of $1,847 30,081 59,285
and $2,248, respectively
Rebates receivable 7,789 15,775
Due from affiliates 987 504
Deferred tax asset 1,103 1,542
Other current assets 1,004 610
- -------------------------------------------------------------------------------------------------------------------------------
Total current assets 53,439 82,137
Property, equipment and software development costs, net 8,584 9,031
Due from affiliates 3,832 3,620
Intangible assets, net of accumulated amortization of $39 and $406, respectively 266 2,523
Goodwill 12,944 52,035
Other Assets 45 549
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 79,110 $ 149,895
================================================================================================================================
Liabilities And Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 57,646 $ 108,525
Revolving credit facility and loans payable-current 110 13,835
Current portion of capital lease obligations 542 556
Due to officer/stockholder 542 696
Due to affiliates 344 -
Other current liabilities 1,346 1,178
- --------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 60,530 124,790
Capital lease obligations, less current portion 1,333 809
Long-term loans payable and other liabilities 73 865
Deferred tax liability 1,702 2,154
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 63,638 128,618
- --------------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock $.10 par value; 10,000,000 shares authorized, none outstanding - -
Common Stock $.001 par value, 25,000,000 shares authorized, 7,312,496 and 7 8
7,550,239 shares issued 7,121,496 and 7,359,239 outstanding, respectively
Additional paid-in-capital 13,255 14,292
Retained earnings 3,254 7,721
Treasury stock at cost, 191,000 shares (744) (744)
Notes receivable - stockholders (300) -
- ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 15,472 21,277
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 79,110 $ 149,895
=================================================================================================================================
See accompanying notes to consolidated financial statements
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
(All amounts in thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended June 30,
----------------------------------------------------------
2000 2001 2002
---- ---- ----
Revenue $ 167,676 $ 272,119 $ 459,832
Cost of claims 153,377 249,572 424,733
- ---------------------------------------------------------------------------------------------------------------------------------
Gross profit 14,299 22,547 35,099
Selling, general and administrative expenses* 12,358 21,423 27,230
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income 1,941 1,124 7,869
- ----------------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (81) (236) (1,125)
Interest income 1,003 1,113 522
Other income, net - - 101
- ----------------------------------------------------------------------------------------------------------------------------------
922 877 (502)
- ----------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 2,863 2,001 7,367
Provision for income taxes 1,247 843 2,900
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,616 $ 1,158 $ 4,467
==================================================================================================================================
Earnings per common share:
Basic $ 0.24 $ 0.16 $ 0.62
==================================================================================================================================
Diluted $ 0.24 $ 0.16 $ 0.56
==================================================================================================================================
Weighted-average number of common shares outstanding:
Basic 6,720 7,101 7,213
==================================================================================================================================
Diluted 6,720 7,200 7,909
==================================================================================================================================
* Includes amounts charged by affiliates aggregating: $ 2,986 $ 4,081 $ 1,889
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement Of Stockholders' Equity
(All amounts in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Notes Preferred Stock Common Stock Additional Treasury Stock
Receivable --------------- ------------ Paid-in- Retained --------------
Stockholders Shares Amount Shares Amount Capital Earnings Shares Amount
Balance at June 30, 1999 $ (1,356) - $ - 5,312 $ 5 $ 2,869 $ 480 - $ -
Sale of stock - - - 1,600 2 9,536 - - -
Stock purchase - - - - - - - 191 (744)
Interest paid on notes receivable 50 - - - - - - - -
Principal paid on notes receivable 1,000 - - - - - - - -
Interest on notes receivable (33) - - - - - - - -
Net income - - - - - - 1,616 - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 (339) - - 6,912 7 12,405 2,096 191 (744)
Principal paid on notes receivable 65 - - - - - - - -
Interest paid on notes receivable (26) - - - - - - - -
Stock Issued- PAI acquisition - - - 400 - 850 - - -
Net income - - - - - - 1,158 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 (300) - - 7,312 7 13,255 3,254 191 (744)
Principal paid on notes receivable 300 - - - - - - - -
Exercise of stock options - - - 175 1 787 - - -
Stock issued-PAI acquisition - - - 63 - 250 - - -
Net income - - - - - 4,467 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002 $ - - $ - 7,550 $ 8 $ 14,292 $ 7,721 191 $(744)
===================================================================================================================================
See accompanying notes to consolidated financial statements
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
Years Ended June 30,
--------------------
2000 2001 2002
---- ---- ----
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,616 $ 1,158 $ 4,467
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,300 2,585 3,264
Amortization of deferred gain - - (102)
Net gain on sale of capital assets - - (331)
Provision for doubtful accounts 996 857 546
Compensation expense accrued to officer/stockholder 60 482 154
Deferred income taxes 979 391 13
Interest accrued on stockholders' loans (33) (26) -
Changes in assets and liabilities, net of effect from
acquisitions
Restricted cash (292) (468) (1,055)
Accounts receivable (1,171) (10,155) (29,750)
Rebate receivable 1,618 (1,304) (7,986)
Other current assets 26 (594) 387
Due to/from affiliates (251) (346) 351
Other assets - 42 (54)
Accounts payable and accrued expenses 1,664 19,527 49,713
Income taxes payable and other current liabilities (709) (58) 83
Other long term liabilities - - 715
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,803 12,091 20,415
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (2,432) (3,842) (3,196)
Loans (to)/from stockholders (390) - -
Proceeds form sale of capital assets - 30 1,321
Acquisition of Centrus, net of cash acquired - - (40,287)
Acquisition of PAI, net of cash acquired - (4,614) (1,000)
Acquisition of PMP, net of cash acquired - (6,706) -
Repayment of note by stockholder 1,050 - 300
Principal received on notes from stockholders - 65 -
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,772) (15,067) (42,862)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Sale of common stock - net 9,538 - -
Proceeds from exercise of stock options - - 788
Proceeds from convertible note offering - - 11,600
Repayment of convertible note offering - - (11,600)
Proceeds from revolving credit facility - 4,000 28,700
Repayment of revolving credit facility - (4,000) (14,887)
Treasury stock (744) - -
Deferred financing costs - - (486)
Repayment of debt and capital lease obligations (208) (742) (777)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 8,586 (742) 13,338
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 12,617 (3,718) (9,109)
Cash and cash equivalents at beginning of period 1,978 14,595 10,877
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 14,595 $ 10,877 $ 1,768
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All $ in thousands, except per share amounts)
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 ("PBM") 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 order pharmacy claims
management, specialty 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 audited consolidated financial statements include the accounts of
National Medical Health Card Systems, Inc., and its wholly owned subsidiaries,
Pharmacy Associates, Inc. ("PAI"), Interchange PMP, Inc. ("PMP"), Centrus
Corporation f/k/a HSL Acquisition Corp. (see Note 2) ("Centrus") National
Medical Health Card IPA, Inc. ("IPA"), which was formerly known as PSCNY IPA,
Inc., Specialty Pharmacy Care, Inc. ("Specialty"), NMHCRX Contracts, Inc.
("Contracts"), and PBM Technology Inc. ("PBM Tech"). Also included on a
consolidated basis are the accounts of NMHC Funding, LLC ("Funding"), a limited
liability company of which the Company and its subsidiaries are the owners of
all of the membership interests. Unless the context otherwise requires,
references herein to the "Company" or "Health Card" refer to the Company and its
subsidiaries, on a consolidated basis. All material intercompany balances and
transactions have been eliminated in the consolidation
In October 1998, the Company acquired IPA, which is an independent practice
association under the laws of New York. The Company acquired PSCNY IPA, inc.
(`PSCNY") as part of the Centrus Acquisition (see note 2). Health Card's IPA was
dissolved. PSCNY was utilized by Centrus to contract with Health Maintenance
Organizations or providers containing financial risk-sharing provisions which
represents some of Centrus' largest sponsors. PSCNY's name was changed to IPA In
September 2002. 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.
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 is paid administrative fees by the
drug manufacturers and/or retains a percentage of rebates collected.
Currently, Specialty does not have any full-time employees. Specialty
reimburses the Company for the use of its employees on an as-needed basis.
In April, 2002, Contracts was incorporated. This subsidiary was formed to
contract with certain larger sponsors. The nature of the contractual terms with
these sponsors leads the Company to recognize revenue on a net basis (see
revenue recognition policy below). Contracts does not currently have any full
time employees.
PBM Tech was incorporated in April 2002. This subsidiary was formed to
manage the Company's intellectual property. PBM Tech maintains an office in
Wilmington, Delaware and employs its own employees.
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). Restricted cash balances at
June 30, 2001 and 2002 includes approximately $1,598 and $2,653, respectively,
which are restricted as to their use as related to the maintenance of minimum
cash balances in accordance with Ohio statute.
The Company has historically entered into two types of arrangements for the
payment of administrative fees: fee for service (per claim charges) and
capitation (per member per month charges). Under the fee for service
arrangement, the Company is paid by its sponsors for the Company's contractually
agreed upon rates based upon actual claims adjudicated plus a fixed transaction
fee. Under the capitation arrangement, the 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. Since
January 1, 2000, all services have been provided by the Company on a fee for
service basis only.
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. The Company assumes the legal responsibility and financial risk of
paying for dispensed pharmaceuticals whether or not the Company is paid by its
sponsors.
The specific terms of the contracts that Health Card enters into with its
sponsors will determine whether Health Card recognizes the gross revenue related
to the cost of the prescriptions filled. In certain limited cases, the Company
has not recognized the gross revenue or cost related to prescriptions filled for
a specific sponsor. This has no impact on the Company's gross profit since
neither the revenue nor the related cost of the prescriptions is recorded.
The Company follows the provisions of EITF 00-14, Accounting for Certain
Sales Incentives - Coupons, Rebates and Discounts in connection with the
Company's rebates to sponsors. These rebates are recognized when the Company is
entitled to them in accordance with the terms of the Company's arrangements with
drug manufacturers, 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, 2000, 2001 and 2002, the rebates retained by the
Company were approximately $3,818, $4,255 and $6,513, 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 (generally 3 to 7 years). 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, 2001 and 2002,
approximately $870 and $824, 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, which prior to June 2001 was five years
and subsequently has been primarily three years. Amortization expense was
approximately $842, $1,327 and $1,834 for the years ended June 30, 2000, 2001
and 2002, respectively.
A significant portion of the Company's computer software for its reporting
system was previously developed by a company affiliated by common ownership (see
Note 4). Currently, the Company's development is performed by its own employees
or by unrelated third party consultants. 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 from its claims
adjudication system.
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 under the treasury stock method.
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, 2001 and 2002, were approximately $16,457 and $7,710, respectively.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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. Loans due from affiliates
and an officer bear market interest rates; therefore, the Company believes that
the carrying amount approximates fair value.
For comparability, certain 2000 and 2001 amounts have been reclassified,
where appropriate, to conform to the financial statement presentation used in
2002.
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, 2002.
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 has adopted SFAS Nos. 141 and 142 as of July 1, 2001 and
has performed the requisite impairment testing. As of June 30, 2002 there is no
impairment to the goodwill recorded on the accompanying balance sheet.
SFAS 142 requires the disclosure of net income and earnings per share
computed on a pro forma basis by reversing the goodwill amortized in the periods
presented. Such pro forma disclosures are required in the period of adoption and
thereafter until all periods presented reflect goodwill accounted for in
accordance with SFAS 142. Had SFAS 142 been effective prior to July 1, 2001, the
Company's net income would have been unchanged for the year ended June 30, 2000
and $1,554 or $0.22 per basic and diluted share for the year ended June 30,
2001.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001, with
transition provisions for certain matters. FASB's new rules on asset impairment
supersede SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of, and provide a single accounting model
for long-lived assets to be disposed of. Although retaining many of the
fundamental recognition and measurement provisions of SFAS No. 121, the new
rules significantly change the criteria that would have to be met to classify an
asset as held-for-sale. The new rules supersede the provisions of Accounting
Principals Board Opinion No. 30 ("APB No. 30") with regard to reporting the
effects of a disposal of a segment of a business and require expected future
operating losses from discontinued operations to be displayed in discontinued
operations in the period in which the losses are incurred rather than as of the
measurement date as presently required by APB No. 30. In addition, more
dispositions will qualify for discontinued operations treatment in the income
statement. The Company does not believe that the implementation of SFAS No. 144
will have any impact on its financial statements as of and for the year ending
June 30, 2003.
2. ACQUISITIONS
The Company entered into an Asset Purchase Agreement (the "Asset Purchase
Agreement"), dated as of January 29, 2002, with Health Solutions, Ltd., a New
York corporation ("HSL"), HSL Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of the Company ("Sub"), and the security holders of HSL
named therein, pursuant to which the Company agreed to acquire certain assets of
HSL relating to the pharmacy benefit management business conducted by HSL under
the name "Centrus" (the "Acquisition"). Centrus provides PBM services primarily
to managed care organizations in the northeast. The Company intends to continue
to use the Centrus assets to provide PBM services. The Centrus business
complements the Company's business while significantly strengthening the
Company's presence in the managed care market.
The aggregate purchase price of the Acquisition was $40 million in cash, of
which $3 million is held in escrow to secure certain indemnification
obligations. ($2 million has been released as of July 2002). The Company
acquired approximately $1.4 million of HSL's assets which included $0.9 million
of property and equipment and $0.5 million of software. The Company also agreed
to assume approximately $1.4 million of HSL's liabilities relating to the
Centrus business which included $1.1 million of rebates due to sponsors, $0.1
million of capital leases, and $0.2 million of miscellaneous payables. The
acquisition was accounted for under the purchase method of accounting and the
results of Centrus' operations were included in the consolidated financial
statements commencing with the acquisition date. The excess of the acquisition
costs over the fair value of identifiable net assets acquired was $40,671.5,
which consists of the following components: (i) customer relationships valued at
$2,415, which will be amortized over five (5) years; (ii) an employment
agreement and a consulting agreement valued at a combined value of $89, which
will be amortized over two (2) years: (iii) non-compete contracts valued at $76,
which will be amortized over four (4) years, and (iv) goodwill of $38,091.5,
which will not be amortized for book purposes per SFAS 142 (see Note 1). For tax
purposes, the goodwill and other intangibles will be amortized over fifteen
years. In addition, the Company has agreed to pay HSL, as additional purchase
price, up to $4 million over a period of three years if the acquired Centrus
business achieves certain financial performance targets during the two-year
period following the Closing. HSL may also be entitled to an additional
incentive payment based on the financial performance of the Centrus business
during the one-year period following the Closing.
Simultaneously with the consummation of the Acquisition, the Company
entered into an Employment Agreement and a Stock Option Agreement with the
former president of Centrus, pursuant to which he will serve as Executive Vice
President of Managed Care for the Company. Additionally, several members of
Centrus' management team have joined the Company as employees or a consultant,
and have been granted stock options to purchase an aggregate of 375,000 shares
of Common Stock, under the Company's 1999 Stock Option Plan, as amended.
On January 29, 2002, the Company and certain of its subsidiaries entered
into a $40 million secured revolving credit facility (the "Facility") with HFG
Healthco-4 LLC, a specialty finance company. Borrowings of $28.7 million under
the Facility were used to finance part of the purchase price of the Centrus
Acquisition and will also be used by the Company and certain of its subsidiaries
for working capital purposes and future acquisitions in support of its business
plan. Details of this financing are disclosed in Note 9, "Commitments and
Contingencies."
On January 22, 2002 the Company completed a convertible note offering (the
"Note Offering") in the aggregate principal amount of $11.6 million, which was
subordinated to the Facility. Pursuant to the Note Offering, subscribers
received a promissory note (each a "Note") paying interest quarterly on the
unpaid principal balance at the rate of 12% per annum. The subscribers,
including two who are directors of the Company, were all accredited investors.
The Notes had a term of one year, unless otherwise extended pursuant to the
terms of the Note. The Notes were convertible at any time at the election of the
holders into shares of the common stock, par value $.001 per share (the "Common
Stock") of the Company ("Conversion Shares") at a conversion price of $12.00 per
share, the fair value of the Common Stock on January 22, 2002. The Note holders
were granted certain registration rights. Proceeds from the Note Offering were
used to finance part of the purchase price of the Acquisition. The Notes were
repaid in full on June 30, 2002.
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 in cash, (ii) the
satisfaction by the Company of PMP's bank indebtedness of $1,255, and (iii)
cancellation of the $1,500 promissory note from PMP to the Company, dated
January 16, 2001. Part of the cash portion of the purchase price ($722) 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 $6,474.7 which consists of the following
components: (i) customer relationships valued at $305, which will be amortized
over 2.5 years using the straight-line method of amortization, and (ii) goodwill
of $6,169.7, which has not been amortized for book purposes since July 1, 2001
in accordance with SFAS 142. For tax purposes, the goodwill and customer
relationships will be amortized over fifteen years. The Company will be required
to pay up to $1,000 of additional cash consideration if certain financial
targets relating to PMP's business are met over the next two years, which may be
accounted for as an addition to goodwill. The targets which were related to
retaining specific contracts were not achieved in the first year and
consequently no additional consideration was paid for that period.
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 in cash
and 400,000 shares of the Company's common stock, which was valued at $850, on
the acquisition date. Of the 400,000 shares, 200,000 were placed in escrow for
two years to secure certain indemnification obligations. All of those shares
were released from escrow in July of 2002. 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 $6,345.5, which consists of the following
components: (i) customer relationships valued at $131.0, which was amortized
entirely over the first year, (ii) noncompete contracts valued at $44.4, which
will be amortized over five years using the straight-line method of
amortization, and (iii) goodwill of $6,170.1, which has not been amortized for
book purposes, since July 1, 2001 in accordance with SFAS 142. The goodwill
associated with this acquisition is not deductible for tax purposes. PAI
stockholders were entitled to receive additional consideration of up to $2,000
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 both years;
therefore, $750, in cash and $250 in Common Stock (62,500 shares valued at $4.00
per share) was paid and issued in August, 2001, and $750 in cash and $250 in
Common Stock (41,668 shares valued at $6.00 per share) were paid and issued in
August, 2002.
The following summarized unaudited pro forma results of operations set
forth below for the years ended June 30, 2001 and 2002 assume the PAI, PMP, and
Centrus acquisitions had occurred as of the beginning of these periods:
June 30, 2001 2002
- --------------------------------------------------------------------------------
Revenue $469,506 $618,730
Net income $2,810 $5,187
Net income per common share:
Basic $0.40 $0.72
Diluted $0.39 $0.66
Pro forma weighted-average number of
common shares outstanding:
Basic 7,100,674 7,212,536
Diluted 7,199,526 7,909,054
- --------------------------------------------------------------------------------
For comparability purposes, goodwill amortization has been excluded from both
years presented. 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, Property, equipment and software development costs
EQUIPMENT consist of the following:
AND SOFTWARE
DEVELOPMENT
COSTS:
Estimated
June 30, 2001 2002 Useful Life
--------- ------ ------ -----------
Equipment $ 2,841 $3,748 3 to 5 years
Software 7,889 9,673 3 to 5 years
Leasehold improvement 253 528 Term of lease
Automobile 44 44 5 years
Equipment acquired under
capital leases 2,538 2,575 5 to 8 years
- -------------------------------------------------------------------------------
13,565 16,568
Accumulated depreciation
and amortization 4,981 7,537
- --------------------------------------------------------------------------------
$8,584 $ 9,031
================================================================================
Accumulated depreciation on equipment acquired under capital lease
obligations was $501 and $867 as of June 30, 2001 and 2002, respectively.
Depreciation and amortization expense for the years ended June 30, 2000,
2001 and 2002 was approximately $1,300, $2,028 and $2,898, respectively.
Due to affiliates represents trade payables for developed software, other
software services, operating leases and maintenance costs.
The Company had historically entered into various verbal and written
agreements with Sandata Technologies, Inc. ("Sandata") and its wholly owned
subsidiaries. The Company's Chairman of the Board is also a principal
stockholder of Sandata. Sandata provides computerized data processing services
and custom software and programming services.
As of June 30, 2001, Sandata owed Health Card $504, pursuant to a
promissory note, dated May 31, 2000, in the original principal amount of $500,
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, 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, 2002, Sandata also owed
Health Card $6 for pharmacy benefit services which has subsequently been
reimbursed.
Due from affiliates also includes a note from another company affiliated by
common ownership. As of June 30, 2002, the balance due from this affiliate
including accrued interest was $4,019.3. Such amount bore interest at 8.5% per
annum, payable quarterly. The note was collateralized by 1,022,758 shares of
$.001 par value common stock of the Company registered in the name of the
Company's Chairman of the Board and was subject to his personal guarantee. The
original note was replaced by a new non-recourse promissory note dated July 31,
2000, made payable by the affiliate to the order of the Company in the amount of
$3,890.9. The note is payable in annual installments of $400, consisting of
principal and interest at the rate of 8 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 Company's Chairman of the Board and is subject to his personal
guarantee. The first two $400 payments due under the note as of July 31, 2001
and 2002 were satisfied by offsetting an equal amount owed by the Company to the
Chairman of the Board. Effective July 31, 2001, the interest rate on the note
was changed to the prime rate in effect from time to time (4.75% at June 30,
2002). For the years ended June 30, 2000, 2001 and 2002, the amount of interest
income accrued related to this note was approximately $314, $340 and $206,
respectively.
Concurrent with the consummation of the Company's Public Offering, on
August 2, 1999, a trust controlled by the Company's Chairman of the Board (the
"Selling Stockholder") sold 400,000 shares of common stock from its holdings.
The Company received approximately $1,993 from the sale by the Selling
Stockholder of which approximately $1,043 was applied to amounts owed by the
Selling Stockholder and the balance to amounts due from the affiliate. (See Note
15.)
On February 8, 2001, the President gave to the Company his Promissory Note
in the amount of $34 as evidence of the loan by the Company to the President. On
April 12, 2002, the Promissory Note was amended and Company agreed to increase
the loan to $100. The loan bears interest at 8%, and is due on April 25, 2003.
The interest rate was lowered effective July 1, 2002 to the rate at which the
Company borrows money.
Certain costs paid to the affiliates were capitalized as software
development costs. For the years ended June 30, 2001 and 2002, the amounts
charged by affiliates and capitalized were approximately $844 and $96,
respectively.
The Company purchased computer equipment and furniture and fixtures from
affiliates during the years ended June 30, 2001 and 2002 for approximately $433
and $122, 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, 2000 2001 2002
- -------------------------------------------------------------------------------
Software maintenance and
related services and supplies (a) $ 977 $ 1,244 $496
Management and consulting fees (b) 923 1,294 303
Administrative, accounting
services and supplies (c) 695 894 548
Rent and utilities (d) 391 649 542
- -------------------------------------------------------------------------------
$2,986 $4,081 $1,889
===============================================================================
(a) A company affiliated by common ownership historically provided a
significant portion of the Company's software maintenance (Note 1), certain
other software services, computer hardware under operating leases and
maintained 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.
(d) See Note 9 for information regarding leases with related parties.
Notes receivable - stockholders represents a loan to a stockholder to
purchase the Company's stock. This note bore interest at 8.5% and had a
repayment date of July 1, 2002. The note was paid in full in January 2002. The
Company has accrued approximately $235 of interest income from affiliates
arising from this note and the three loans described above during the year ended
June 30, 2002.
For the years ended June 30, 2001 and 2002, the Company paid the annual
premium of approximately $60 on behalf of the Company's Chairman of the Board
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.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30, 2001 2002
- -------------------------------------------------------------------------------
Claims payable $46,616 $82,195
Rebates payable to sponsors 6,479 16,921
Trade payables 1,598 6,693
Other payables 2,953 2,716
- -------------------------------------------------------------------------------
$57,646 $108,525
===============================================================================
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, 2002.
Payments for the year ending June 30,
2003 $ 653
2004 536
2005 336
------------------------------------------------------------------------------
Total minimum lease payments 1,525
Less amount representing interest 160
------------------------------------------------------------------------------
Present value of net minimum lease payments 1,365
Less current portion 556
- -------------------------------------------------------------------------------
Long-term lease obligations $809
===============================================================================
7. MAJOR CUSTOMERS AND PHARMACIES
For the year ended June 30, 2000, approximately 27% and 12% of revenue was
derived from two plan sponsors. For the year ended June 30, 2001, approximately
16% of revenue was from one plan sponsor, which was the only sponsor that
represented more then 10% of the Company's revenues. For the year ended June 30,
2002, approximately 15% and 10% of revenue was from two plan sponsors. Amounts
due from these sponsors at June 30, 2001 and 2002 approximated $1,936 and
$13,386, respectively. The Company's arrangements with these plan sponsors
generally are, short-term, terminable by the sponsor and/or subject to
continuing negotiation. One of the Company's major sponsors terminated its
contract as of June 30, 2002.
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 and $733, respectively. The calendar year 2000 and 2001 contract with
this sponsor was 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.
For the years ended June 30, 2000 and 2001, approximately 44% and 26%,
respectively, of the cost of claims were from two pharmacy chains. For the year
ended June 30, 2002, approximately 22% of the cost of claims was from one
pharmacy chain. Amounts payable to the two pharmacy chains at June 30, 2001 was
approximately $10,493. Amounts payable to the one chain at June 30, 2002 was
$17,803.
8. TAXES ON INCOME
Provisions for federal and state income taxes consist of the following:
Year ended June 30, 2000 2001 2002
- -------------------------------------------------------------------------------
Current:
Federal $199 $ 364 $ 2,149
State 69 89 738
- -------------------------------------------------------------------------------
268 453 2,887
- -------------------------------------------------------------------------------
Deferred:
Federal 727 324 23
State 252 66 (10)
- -------------------------------------------------------------------------------
979 390 13
- -------------------------------------------------------------------------------
Total provision $1,247 $843 $2,900
===============================================================================
Differences between the federal statutory rate and the Company's effective
tax rate are as follows:
Year ended June 30, 2000 2001 2002
- -------------------------------------------------------------------------------
Statutory rate 34.0% 34.0% 34.0%
State taxes - net of federal taxes 7.4 5.1 5.1
Permanent differences 1.5 4.2 0.3
Other 0.7 (1.2) --
- -------------------------------------------------------------------------------
43.6% 42.1% 39.4%
===============================================================================
Deferred income tax assets (current and noncurrent) resulting from
temporary differences are as follows:
June 30, 2001 2002
- -------------------------------------------------------------------------------
Accounts receivable allowances $757 $1,004
Vacation expense accrual 73 100
Officer/stockholder bonus accrual 273 326
Deferred revenue -- 102
Other -- 10
- -------------------------------------------------------------------------------
$1,103 $1,542
===============================================================================
Deferred income tax liabilities of $1,702 and $2,154 at June 30, 2001 and
2002, respectively, resulted from temporary differences between depreciation and
amortization of property and equipment.
9. COMMITMENTS AND CONTINGENCIES
The Company currently occupies approximately 26,500 square feet of office
space at 26 Harbor Park Drive, Port Washington, New York 11050 (the "Leased
Premises"). The Company subleases the Leased Premises from BFS Realty, LLC, an
affiliate of the Chairman of the Board (the "Affiliate"). The Affiliate leases
the Leased Premises from the Nassau County Industrial Development Agency,
pursuant to a lease which was entered into by the agency and the Affiliate in
July 1994, and which expires in March 2005. The Affiliate has the right to
become the owner of the Leased Premises upon expiration of this lease. The
Affiliate subleases a portion of the Leased Premises to the Company (the
"Lease"). As of November 1, 2001, the Company and the Affiliate amended the
Lease. The Lease provides that, effective August 1, 2001, the rent payable by
the Company shall be an aggregate annual rent of $308. While formerly the
Company made estimated monthly real estate tax, utilities and maintenance
expense payments to the Affiliate, the Lease now provides that the Company will
pay its pro-rata share of such expenses directly, to the entities to whom
payment must be made. The Company estimates that such monthly expenses will
approximate an aggregate of $336, per year. The annual rent will increase by 5%
per year during the term of the Lease. The annual expenses are also expected to
increase, although the Company cannot estimate by how much. The Lease expires in
July, 2010. The Company believes that the Leased Premises is adequate for
current purposes. Leasehold improvements made to this space during the years
ended June 30, 2001 and 2002 were approximately $142 and $60, respectively.
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 August 2001, the Company entered into a lease with an affiliated Company
to rent a two family home for the use of out-of-town employees while in Port
Washington. This facility is in lieu of renting multiple hotel rooms. The lease
expires in December 2005. With the acquisition of Centrus, additional "hotel"
space was required. Therefore, the Company entered into two leases with another
affiliated Company to rent two additional houses. These leases expire in April,
2007.
Additionally, the Company leases office space through its subsidiaries in
Little Rock, Arkansas, Tulsa, Oklahoma and Latham, New York. The aggregate
annual rental payments for leased space in Little Rock are approximately $169;
for leased space in Tulsa are approximately $48; and for Latham, approximately
$700. In Latham, the subsidiary currently occupies two floors; the Company
anticipates that the amount of space leased by the Company (and, concomitantly,
the amount of rent paid) will be significantly reduced in the near future.
Real estate rental expense, including utilities, for the years ended June
30, 2000, 2001 and 2002 was approximately $412, $792 and $ 1,169, respectively.
Of these amounts, approximately $391, $564 and $542, respectively, were charged
by affiliates under operating leases.
The Company has entered into various other operating leases with unrelated
third parties for office equipment. These leases have different payment terms
and expiration dates.
Future minimum payments under the noncancelable operating leases for real
estate and office equipment with related and other parties at June 30, 2002 are
as follows:
Year ending June 30,
2003 $ 1,612
2004 1,433
2005 1,238
2006 1,100
2007 1,027
Thereafter 3,932
----------------------------------------------------------------------------
$10,342
============================================================================
In addition to the operating leases above, the Company entered into a
sale-leaseback operating lease of certain fixed assets (principally computer
hardware and externally developed software) with an affiliate of the Company's
Vice Chairman. The minimum future operating lease payments at June 30, 2002 are
as follows:
Year ending June 30,
2003 $ 443
2004 443
2005 148
----------------------------------------------------------------------------
$1,034
============================================================================
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, of
which $100 was paid upon signing and $25 was payable monthly through February
1999. The initial license fee of $400 has been capitalized and fully amortized
as of June 30, 2002. 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 over the term of the agreement. In February 1999, 2001
and 2002, the Company met certain milestones, resulting in total additional
license fees of $400. 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 the Company 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 the Company unilaterally terminated the
contract on December 16, 1996. The complaint further alleged that the
termination resulted in the School District incurring approximately $150 in
costs and $867 in expenses to obtain coverage from December 1996 until October
1997. The complaint also sought treble damages. The parties reached an agreement
pursuant to which the Company paid to the plaintiffs an amount that was lower
than the amount of costs and expenses claimed, and is 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 the Company and
the School District.
An action was commenced against the Company on April 30, 2002 by Midwest
Health Plans Inc. ("MHP") in the United States District Court for the Eastern
District of Michigan. The complaint alleges, among other things, that the
parties entered into a contract dated July 1999 (the "Agreement"), and further
alleges that the Company has overcharged MHP for the administration of
prescription benefit services in contravention to the terms of the Agreement.
MHP is seeking $3 million dollars in damages. The Company filed an answer and
counterclaim on June 12, 2002. In the counterclaim, the Company claimed damages
in excess of $2.8 million based on Midwest's failure to pay under a contract. In
late June 2002, Midwest agreed to make two payments in the amount of $1.34
million and $1.36 million to partially settle the Company's claims against
Midwest. As a part of that payment, Midwest dropped one of its two claims
against the Company that had sought to setoff or recoup alleged overcharges by
the Company. The Company continues to have counterclaims totaling over $200
against Midwest for Midwest's failure to pay the amounts it had agreed to pay
Health Card for goods and services. Trial currently is scheduled for September
22, 2003. Factual discovery cut-off is February 28, 2003. The Company believes
the claims alleged in the complaint are without merit and intends to vigorously
defend the action.
The Company has entered into employment agreements with its Chairman, Chief
Executive Officer and President, Chief Operating Officer, Chief Financial
Officer, and Senior Vice President of Sales and Marketing. The agreements
provide for (i) participation in the bonus pool for senior executives, (ii)
eligibility for stock option grants under the Company's then current stock
option plan, and (iii) certain termination benefits which, depending upon the
reason for termination, can equal up to one year of salary for all of these
senior executives except the Chairman, who is eligible for up to two years. In
addition, the Senior Vice President of Sales and Marketing is entitled to
commissions earned as a percentage of gross margin generated from direct
accounts as well as from accounts sold by salespeople under her management.
On January 29, 2002, the Company and certain of its subsidiaries entered
into the Facility, a $40 million secured revolving credit facility with a
specialty finance company. In connection with the Facility, the Company and
certain of its subsidiaries have agreed to sell, on an on-going basis, their
accounts receivable to Funding. Funding utilizes those receivables as collateral
to secure borrowing under the Facility. The Facility has a three-year term,
provides for borrowing up to $40 million at the London InterBank Offered Rate
(LIBOR) plus 2.4% (4.2% at June 30, 2002) and is secured by receivables and
other assets of the Company and certain of its subsidiaries. The outstanding
balance as of June 30, 2002 was $13,813.3, which was all classified as short
term. The Facility requires the Company to maintain certain financial and other
covenants. The Company was in compliance with all covenants at June 30, 2002.
10. STOCK OPTIONS AND WARRANTS
During the years ended June 30, 2000, 2001 and 2002, the Company granted
stock options under the 1999 Stock Option Plan (the "Plan"). During 2002, the
Company amended the Plan and increased the number of shares issuable in
connection with options granted under the Plan. The total number of shares of
common stock reserved by the Company for issuance under the Plan is 2,850,000
plus an indeterminable number of shares of common stock issuable 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, 2002 equal 1,936,026. Stock options outstanding have a life of
from 4 to 10 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. All options to date have been issued with an
option exercise price at or above the fair market value of those options on the
date of grant.
The following tables summarize information about stock option activity for
the years ended June 30, 2000, 2001 and 2002:
Weighted-
average
Exercise
Number of Price per
Options Share
- -------------------------------------------------------------------------------
Outstanding options at June 30, 1999 345,180 $5.87
Canceled (345,180) 5.87
Granted 656,469 5.98
- -------------------------------------------------------------------------------
Outstanding options at June 30, 2000 656,469 5.98
Canceled (251,127) 6.23
Granted 837,942 2.92
- -------------------------------------------------------------------------------
Outstanding options at June 30, 2001 1,243,284 3.87
Canceled (222,775) 8.46
Granted 1,015,760 10.36
Exercised (175,243) 4.49
- -------------------------------------------------------------------------------
Outstanding options at June 30, 2002 1,861,026 $6.77
===============================================================================
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, 2000 2001 2002
Reported net income $1,616 $1,158 $4,467
Pro forma compensation expense (237) (320) (666)
- -------------------------------------------------------------------------------
Pro forma net income $1,379 $ 838 $3,801
===============================================================================
Pro forma earnings per share:
Basic $ .21 $ .12 $ .53
===============================================================================
Diluted $ .21 $ .12 $ .48
===============================================================================
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes ption-pricing model with the following weighted-average
assumptions used for all grants in the years ended June 30, 2000, 2001 and 2002:
no dividend yield in 2001 and 2002 and a dividend yield of 0.008% in 2000;
risk-free interest rate ranges from 1.7% to 5.8%; an expected life of options of
5.0 years for all three years, and a volatility of 45.6%, 90.8% and 86.2%,
respectively, for all grants. The weighted-average value of options granted is
$1.09, $.96 and $6.77 for the three years ended June 30, 2000, 2001 and 2002,
respectively.
The following table summarizes information about stock options outstanding
at June 30, 2002:
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 $ 2.51 565,995 3.65 years $ 1.82 240,340 $ 1.81
$ 2.52 to $ 3.78 30,000 4.09 years $ 3.17 6,670 $ 3.00
$ 3.79 to $ 5.69 212,900 3.58 years $ 4.63 74,105 $ 4.81
$ 5.70 to $ 8.55 191,211 2.75 years $ 7.36 110,283 $ 7.43
$ 8.56 to $ 12.84 859,081 5.28 years $ 10.54 33,240 $ 9.00
$ 12.85 to $ 15.10 1,839 4.63 years $ 14.68 - $ -
- ------------------------------------------------------------------------------------------------------
$ 1.67 to $ 15.10 1,861,026 3.45 years $ 6.77 464,638 $ 4.16
======================================================================================================
The Company granted the underwriters of the Public Offering 200,000
warrants for nominal consideration. The warrants entitle the holders thereof to
purchase 200,000 shares of common stock from the Company at $9.00 per share and
are exercisable for four years commencing on July 29, 2000. Of such warrants,
80,000 were subsequently purchased from the underwriters by the Company's
Chairman of the Board and are exercisable for four years commencing on July 29,
2000.
The total outstanding stock options detailed above exclude 75,000
nonstatutory options granted to one of the shareholders of Centrus, who is
providing consulting services to the Company.
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, 2002, 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, 2000 2001 2002
- -------------------------------------------------------------------------------
Cash paid:
Interest $ 98 $ 236 $ 1,125
Income taxes 960 1,287 2,277
Noncash investing and
financing activities:
Capital lease obligations
were incurred for computer
equipment and software 2,538 - -
Issuance of common stock
in connection with the
acquisition of PAI - 850 250
- -------------------------------------------------------------------------------
13. EMPLOYEE BENEFIT PLAN
Effective June 1, 1998, the Company adopted a 401(K) plan as part of an
affiliated Company plan which covered substantially all employees. Effective
January 1, 2001, the Company adopted its own 401(K) plan and rolled over all
prior balances into the new plan. At the same time, the Company merged in the
PAI 401(K) plan so that one plan now covers substantially all Company 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.
Monthly, 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, 2001 and 2002 were approximately $18,
$109 and $79, respectively.
14. EARNINGS PER SHARE
A reconciliation of shares used in calculating basic and diluted earnings
per share follows:
Year ended June 30, 2000 2001 2002
- -------------------------------------------------------------------------------
Basic 6,720,104 7,100,674 7,212,536
Effect of assumed conversion
of employee stock options - 65,406 661,999
Contingently issuable shares
(see Note 2) - 33,446 34,519
- -------------------------------------------------------------------------------
Diluted 6,720,104 7,199,526 7,909,054
===============================================================================
Outstanding options and warrants to purchase shares of common stock which
were antidilutive were not included in the computation of diluted earnings per
share (see Note 10). These options were as follows:
Year ended June 30, 2000 2001 2002
- -------------------------------------------------------------------------------
Number of options and warrants 856,469 866,284 435,700
- -------------------------------------------------------------------------------
Weighted-average exercise price $ 6.69 $ 5.22 $ 12.23
===============================================================================
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 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 a total repayment of $1,993. Of this total,
$1,043 was applied to indebtedness by the Selling Stockholder and the balance
was applied 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.
16. QUARTERLY FINANCIAL DATA (UNAUDITED):
(In thousands, except per share amounts)
FY 2002 FY 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Quarters ended 6/30 3/31 12/31 9/30 6/30 3/31 12/31 9/30
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue $145,995 $145,683 $87,509 $80,645 $79,452 $72,374 $64,429 $55,864
Income before income taxes 2,323 1,839 1,799 1,406 507 547 440 507
Net income 1,327 1,103 1,048 989 415 277 225 241
Earnings per common share:
Basic .18 .15 .15 .14 .06 .04 .03 .03
Diluted .16 .14 .13 .13 .06 .04 .03 .03
Common share prices:
High 12.90 15.61 10.40 4.82 3.49 3.13 2.25 3.25
Low 7.90 9.10 2.65 1.45 2.90 1.31 1.16 1.88
17. SUBSEQUENT EVENTS
On August 20, 2002, the Company announced that it has signed a letter of
intent to acquire Wellpartner Inc., a home-delivery pharmacy based in Portland,
Oregon. Wellpartner offers personal pharmnacy convenience through mail,
telephone, facsimile, or online shopping to members throughout the United
States. If this acquisition is consummated, the Company believes it will enhance
its ability to offer integrated, full-service, mail order pharmacy services to
its customers.
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 audit referred to in our report 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 year ended June 30, 2000. 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.
BDO Seidman, LLP
Melville, New York
September 19, 2000
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
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($ in thousands)
Additions
Balance at Charged to Balance
Beginning Costs and Other at End
Description of Year Expense (a) Write-offs Changes of Year
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Reserves and allowances
deducted from asset accounts:
Allowance for doubtful accounts
Year ended June 30, 2000 $846 $996 ($1,115) - $ 727
Year ended June 30, 2001 727 942 (96) 274 (b) 1,847
Year ended June 30, 2002 1,847 546 (145) - 2,248
(a) Charged to bad debts.
(b) Opening reserve balances of acquisitions.