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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 000-26749
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-2581812
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(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
26 Harbor Park Drive, Port Washington, NY 11050
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (516) 626-0007
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's Common Stock, as of
May 9, 2003 was 7,610,907 shares.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES 2
INDEX Page
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FORWARD-LOOKING STATEMENTS 3
PART I - FINANCIAL INFORMATION 4
ITEM 1 - CONDENSED FINANCIAL STATEMENTS: 4
CONSOLIDATED BALANCE SHEET as of June 30, 2002 4
and March 31, 2003 (unaudited)
CONSOLIDATED STATEMENT OF INCOME (unaudited) 5
for the three months and nine months ended March 31, 2002 and 2003
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) 6
for the nine months ended March 31, 2002 and 2003
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 18
CONDITION AND RESULTS OF OPERATIONS
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 28
MARKET RISK
ITEM 4 - CONTROLS AND PROCEDURES 28
PART II - OTHER INFORMATION 29
ITEM 1 - LEGAL PROCEEDINGS 29
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS 29
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 29
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 29
ITEM 5 - OTHER INFORMATION 29
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 30
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES 3
Forward Looking Statements
When used herein, the words "may," "could," "estimate," "believe,"
"anticipate," "think," "intend," "expect" and similar expressions identify
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are not guarantees of future
performance and involve known and unknown risks and uncertainties, and other
factors, which could cause actual results to differ materially from those in the
forward-looking statements. Readers are cautioned not to place undue reliance on
such statements, which speak only as of the date hereof. For a discussion of
such risks and uncertainties, including risks relating to pricing, competition
in the bidding and proposal process, our ability to consummate contract
negotiations with prospective clients, dependence on key members of management,
government regulation, acquisitions and affiliations, the market for PBM
services, and other factors, readers are urged to carefully review and consider
various disclosures made by National Medical Health Card Systems, Inc. ("Health
Card" or the "Company") which attempt to advise interested parties of the
factors which affect Health Card's business, including, without limitation, the
disclosures made under the caption "Business" in Item 1 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 of the Company's Annual Report on Form 10-K, as amended, for the fiscal
year ended June 30, 2002, filed with the SEC on December 26, 2002.
PART I - FINANCIAL INFORMATION
Item 1 - CONDENSED FINANCIAL STATEMENTS
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($ in thousands)
June 30, March 31,
Assets 2002 2003
---- ----
Current: (Unaudited)
Cash and cash equivalents (including cash equivalent investments of $1,187 $ 1,768 $ 4,939
and $1,186, respectively)
Restricted cash 2,653 2,500
Accounts receivable, less allowance for doubtful accounts of $2,248
and $2,505, respectively 59,285 52,811
Rebates receivable 15,775 20,201
Due from affiliates 504 4,187
Deferred tax asset 1,542 1,542
Other current assets 610 1,714
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Total current assets 82,137 87,894
Property, equipment and software development costs, net 9,031 8,083
Due from affiliates 3,620 -
Intangible assets, net of accumulated amortization of $406 and $993, 2,523 2,508
respectively
Goodwill 52,035 52,936
Other assets 549 432
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Total Assets $ 149,895 $ 151,853
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Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 100,525 $ 98,252
Revolving credit facility and loans payable-current 13,835 21,531
Convertible notes payable 8,000 -
Current portion of capital lease obligations 556 466
Due to officer/stockholder 696 714
Income taxes payable - 374
Other current liabilities 1,178 180
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Total current liabilities 124,790 121,517
Capital lease obligations, less current portion 809 457
Long term loans payable and other liabilities 865 1,043
Deferred tax liability 2,154 2,154
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Total liabilities 128,618 125,171
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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, 7,550,239 and
7,801,907 shares issued, 7,359,239 and 7,610,907 outstanding, respectively 8 8
Additional paid-in-capital 14,292 14,959
Retained earnings 7,721 12,459
Treasury stock at cost, 191,000 shares (744) (744)
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Total stockholders' equity 21,277 26,682
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Total Liabilities and Stockholders' Equity $ 149,895 $ 151,853
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See accompanying condensed notes to consolidated financial statements
4
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
Three months ended Nine months ended
March 31, March 31,
2002 2003 2002 2003
---- ---- ---- ----
Revenues $ 145,683 $ 126,538 $ 313,837 $424,869
Cost of claims 136,251 114,713 289,412 390,509
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Gross Profit 9,432 11,825 24,425 34,360
Selling, general and administrative expenses* 7,295 8,672 19,336 25,690
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Operating income 2,137 3,153 5,089 8,670
Other income (expense):
Interest expense (431) (310) (541) (941)
Interest income 95 60 433 187
Other income, net 38 38 63 115
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(298) (212) (45) (639)
Income before provision for income taxes 1,839 2,941 5,044 8,031
Provision for income taxes 736 1,206 1,904 3,293
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- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1,103 $ 1,735 $ 3,140 $ 4,738
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Earnings per common share:
Basic $ 0.15 $ 0.23 $ 0.44 $ 0.62
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Diluted $ 0.14 $ 0.22 $ 0.41 $ 0.59
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Weighted average number of common shares outstanding:
Basic 7,209 7,611 7,179 7,582
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Diluted 8,023 8,067 7,750 8,024
* Includes amounts charged by affiliates aggregating: $ 244 $ 269 $ 1,642 $ 784
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See accompanying condensed notes to consolidated financial statements
5
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
Nine months ended
March 31,
2002 2003
---- ----
Cash flows from operating activities:
Net income $ 3,140 $ 4,738
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,281 3,258
Amortization of deferred gain (63) (102)
Net gain on disposal of capital assets (370) (13)
Provision for doubtful accounts 675 257
Compensation expense accrued to officer/stockholder 13 418
Deferred income taxes (343) -
Interest accrued on stockholders'/affiliate's loans - (84)
Changes in assets and liabilities, net of effect from acquisitions:
Restricted cash (1,528) 153
Accounts receivable (31,289) 6,258
Rebates receivable (3,281) (4,426)
Other current assets 68 (1,028)
Due to/from affiliates 483 (380)
Other assets (54) (19)
Accounts payable and accrued expenses 43,032 (1,579)
Income taxes payable and other current liabilities (595) (377)
Other long term liabilities 380 279
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Net cash provided by operating activities 12,549 7,353
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Cash flows from investing activities:
Capital expenditures (2,376) (1,349)
Acquisition of Integrail, net of cash acquired - (1,472)
Acquisition of PAI, net of cash acquired - (1,000)
Acquisition of Centrus, net of cash acquired (40,284) -
Repayment of note by stockholder 300 -
Proceeds from disposal of capital assets 1,321 22
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Net cash used in investing activities (41,039) (3,799)
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Cash flows from financing activities:
Proceeds from exercise of stock options 380 418
Proceeds from convertible note offering 11,600 -
Repayment of convertible note offering - (8,000)
Proceeds from revolving credit facility 28,700 512,150
Repayment of revolving credit facility (19,506) (504,459)
Deferred financing costs (532) 136
Repayment of debt and capital lease obligations (539) (628)
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Net cash provided by (used in) financing activities 20,103 (383)
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Net (decrease) increase in cash and cash equivalents (8,387) 3,171
Cash and cash equivalents at beginning of period 10,877 1,768
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Cash and cash equivalents at end of period $ 2,490 $ 4,939
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See accompanying condensed notes to consolidated financial statements
6
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All $ in thousands, except per share amounts)
(Unaudited)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
National Medical Health Card Systems, Inc. (the "Company" or "Health Card") and
its wholly owned subsidiaries, Pharmacy Associates, Inc. ("PAI"), Interchange
PMP, Inc. ("PMP"), Centrus Corporation, formerly known as HSL Acquisition Corp.
(see Note 2) ("Centrus"), National Medical Health Card IPA, Inc. ("IPA"),
formerly known as PSCNY IPA, Inc., Specialty Pharmacy Care, Inc. ("Specialty"),
Integrail, Inc. ("Integrail"), NMHCRX Mail Order, Inc. ("Mail Order"), NMHCRX
Contracts, Inc. ("Contracts"), and PBM Technology Inc. ("PBM Tech"). Also
included on a consolidated basis are the accounts of NMHC Funding, LLC
("Funding"), a limited liability company of which the Company and its
subsidiaries are the owners of all of the membership interests. Unless the
context otherwise requires, references herein to the "Company" or "Health Card"
refer to the Company and its subsidiaries, on a consolidated basis. All material
inter-company balances and transactions have been eliminated in the
consolidation.
The unaudited consolidated financial statements have been prepared by the
Company in accordance with accounting principles generally accepted in the
United States for interim financial information and substantially in the form
prescribed by the Securities and Exchange Commission in instructions to Form
10-Q and in Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by such accounting principles for
complete financial statements. In the opinion of the Company's management, the
March 31, 2003 and 2002 unaudited interim financial statements include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of results for these interim periods. In the opinion of the
Company's management, the disclosures contained in this Form 10-Q are adequate
to make the information presented not misleading when read in conjunction with
the Notes to Consolidated Financial Statements included in the Company's Form
10-K, as amended, for the year ended June 30, 2002. The results of operations
for the three and nine month periods ended March 31, 2003 are not necessarily
indicative of the operating results to be expected for the full year.
Certain amounts in the prior period have been reclassified to conform to
the current period presentation. For information concerning the Company's
significant accounting policies, reference is made to the Company's Annual
Report on Form 10-K, as amended, for the year ended June 30, 2002 (the "Annual
Report").
2. BUSINESS ACQUISITIONS
As of November 1, 2002, the Company and its wholly owned subsidiary,
Integrail Acquisition Corp., entered into an Asset Purchase Agreement with
Health Solutions, Ltd. ("HSL"), and certain of its security holders (together
with HSL, the "Sellers"). Pursuant to the Agreement, Health Card acquired
substantially all of the assets of the Integrail division of HSL's operations,
for a purchase price of $1,400. Integrail provides software and analytical tools
in the area of informatics which allows for the blending of medical and pharmacy
data to predict future outcomes.
Half of the $1,400 purchase price was paid at the closing directly to the
Sellers, and half was deposited into escrow as security for the performance of
certain indemnification obligations of the Sellers. The Company acquired
approximately $500 of HSL's assets which included $158 of property and
equipment, $225 of software, $76 of prepaid expenses, and $41 of accounts
receivable. The Company also agreed to assume approximately $500 of liabilities
related to Integrail which included $166 of debt under capital leases, $78 of
miscellaneous payables, and $259 due to HSL for prior equipment and services
provided to Integrail by HSL. The acquisition was accounted for under the
purchase method of accounting and the results of Integrail'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 $1,472, which consists of the following
components: (i) software and company know how valued at $575, which will be
amortized over three (3) years; and (ii) goodwill of $897, which will not be
amortized for book purposes per SFAS 142 (see Note 8). The allocation of the
purchase price is preliminary subject to final valuation. For tax purposes, the
goodwill and other intangibles will be amortized over fifteen years. Funds for
this transaction were supplied by the revolving credit facility that was put
into place in January 2002. (See below). The Agreement provides that if certain
operational milestones are achieved over the next 12 months, certain amounts
will be released from the escrow to the Sellers.
The Company entered into an Asset Purchase Agreement (the "Asset Purchase
Agreement"), dated as of January 29, 2002, with Health Solutions, Ltd., a New
York corporation ("HSL"), HSL Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of the Company ("Sub"), and the security holders of HSL
named therein, pursuant to which the Company agreed to acquire certain assets of
HSL relating to the pharmacy benefit management business (PBM) conducted by HSL
under the name "Centrus" (the "Acquisition"). Centrus provides PBM services
primarily to managed care organizations in the northeast. The Company intends to
continue to use the Centrus assets to provide PBM services. The Centrus business
complements the Company's business while significantly strengthening the
Company's presence in the managed care market.
The aggregate purchase price of the Acquisition was $40,000 in cash, of
which $3,000 was held in escrow to secure certain indemnification obligations
(the escrow dollars have been released as of January 2003). The Company acquired
approximately $1,400 of HSL's assets which included $900 of property and
equipment and $500 of software. The Company also agreed to assume approximately
$1,400 of HSL's liabilities relating to the Centrus business which included
$1,100 of rebates due to sponsors, $100 of capital leases, and $200 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 $40,672, 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 valued at $83, 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 $38,098 which will not be amortized for
book purposes per SFAS 142 (see Note 8). For tax purposes, the goodwill and
other intangibles will be amortized over fifteen years. In addition, the Company
has agreed to pay HSL as additional purchase price up to $4,000 over a period of
three (3) years if the acquired Centrus business achieves certain financial
performance targets during the two-year period following the Closing. HSL may
also be entitled to an additional incentive payment based on the financial
performance of the Centrus business during the one-year period following the
Closing. The financial performance targets were achieved during the first year
and $2,000 has been earned. Of this amount, $1,000 will be paid in each of May
2003 and May 2004. The additional incentive payment target was not achieved, and
thus there will be no pay out of this item.
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, and have been
granted stock options to purchase an aggregate of 300,000 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 $40,000 secured revolving credit facility (the "Facility") with HFG
Healthco-4 LLC, a specialty finance company. In connection with the Facility,
the Company and certain of its subsidiaries have agreed to transfer, on an
on-going basis, their accounts receivable to Funding. Funding utilizes those
receivables as collateral to secure borrowings under the facility. The Facility
has a three year term, provides for borrowing up to $40,000 at the London
InterBank Offered Rate (LIBOR) plus 2.40% (3.7% at March 31, 2003) and is
secured by receivables and other assets of the Company and certain of its
subsidiaries. Borrowings of $28,700 under the Facility were used to finance part
of the purchase price of the Acquisition and will also be used by the Company
and certain of its subsidiaries for working capital purposes and future
acquisitions in support of its business plan. The outstanding balance as of
March 31, 2003 was approximately $21,500, 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 March 31, 2003.
The summarized unaudited pro forma results of operations set forth below
for the three and nine months ended March 31, 2002 and 2003 assumes the Centrus
and Integrail acquisitions had occurred as of the beginning of these periods.
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2003
-------------- --------------
Revenues $ 168,679 $ 126,538
Net income $ 122 $ 1,735
Net income per common share:
Basic $ 0.02 $ 0.23
Diluted $ 0.02 $ 0.22
Pro forma weighted average number of
common shares outstanding:
Basic 7,209,052 7,610,907
Diluted 8,022,652 8,066,582
Nine Months Ended Nine Months Ended
March 31, 2002 March 31, 2003
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Revenues $ 473,362 $ 425,088
Net income $ 730 $ 3,151
Net income per common share:
Basic $ 0.10 $ 0.42
Diluted $ 0.09 $ 0.39
Pro forma weighted average number of
common shares outstanding:
Basic 7,178,539 7,581,874
Diluted 7,749,738 8,024,340
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. In particular, Integrail experienced significant
losses, which included the write-off of assets, prior to the acquisition by the
Company.
3. STOCK OPTIONS
During the nine months ended March 31, 2003, the Company granted 308,373
stock options and 132,712 stock options were cancelled for a net of 175,661
stock options under the 1999 Stock Option Plan (the "Plan"). The options granted
during this period are exercisable at prices ranging from $7.19 to $9.98 and
terminate five to seven years from the grant date. The total number of shares of
common stock reserved by the Company for issuance under the Plan is 2,850,000
plus an indeterminable number of shares of common stock issuable pursuant to the
anti-dilution provisions of the Plan or upon the exercise of "reload options."
There are no options outstanding that contain the "reload" provision. Shares
issuable pursuant to options granted under the Plan as of March 31, 2003 equal
1,903,012, net of 385,243 options exercised to date.
4. EARNINGS PER SHARE
A reconciliation of shares used in calculating basic and diluted earnings per
share follows:
Three Months Ended March 31,
-------------------------------------
2002 2003
---- ----
Basic 7,209,052 7,610,907
Effect of assumed exercise of employee stock options 771,933 455,675
Contingently issuable shares related to an acquisition 41,667 -
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Diluted weighted average number of shares outstanding 8,022,652 8,066,582
========= =========
Nine Months Ended March 31,
-------------------------------------
2002 2003
---- ----
Basic 7,178,539 7,581,874
Effect of assumed exercise of employee stock options 539,062 442,466
Contingently issuable shares related to an acquisition 32,137 -
---------- ---------
Diluted weighted average number of shares outstanding 7,749,738 8,024,340
========= =========
5. NON-GAAP FINANCIAL MEASURES
The Company has acquired four companies in the last three years. In
addition, the Company has made in prior years significant information technology
infrastructure investments in terms of purchased hardware and internally
developed software. Consequently, there is a significant amount of depreciation
and amortization that flows through the Company's current financial statements
related to these investments. Therefore, the Company believes that Earnings
Before Interest, Taxes, Depreciation and Amortization (EBITDA) is an important
measure of its current financial performance. EBITDA is presented as operating
income excluding depreciation and amortization. While EBITDA is not a measure of
financial performance under generally accepted accounting principles, it is
provided as information for certain investors for analysis purposes for two
reasons: 1) it excludes the impact of depreciation and amortization related to
prior investments and 2) these items are not controllable in the current period.
EBITDA is calculated as follows:
Three Months Ended
March 31,
--------------------------------------
------------------- ------------------
2002 2003
---- ----
Operating Income $ 2,137 $ 3,153
Depreciation 268 349
Amortization 585 777
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EBITDA $ 2,990 $ 4,279
======== ========
Nine Months Ended
March 31,
--------------------------------------
------------------ -------------------
2002 2003
---- ----
Operating Income $ 5,089 $ 8,670
Depreciation 754 1,024
Amortization 1,527 2,234
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EBITDA $ 7,370 $ 11,928
======== ==========
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30, March 31,
2002 2003
---- ----
Claims Payable $ 74,195 $ 69,335
Rebates Payable to Sponsors 16,921 23,521
Trade Payables 6,693 2,312
Other Payables 2,716 3,084
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$ 100,525 $ 98,252
======= ======
7. RELATED PARTY TRANSACTIONS
As of January 1, 2002, the Company has eliminated the majority of its
historical related party service transactions with the exception being rent and
some administrative services as described below. For the periods presented,
certain general, administrative and other expenses reflected in the financial
statements include allocations of certain corporate expenses from affiliates
which take into consideration personnel, estimates of the time spent to provide
services or other allocation methodologies. These allocations include services
and expenses for employee benefits administration, legal, communications and
other miscellaneous services.
Management believes the foregoing allocations were made on a reasonable
basis. Although these allocations do not necessarily represent the costs which
would have been or may be incurred by the Company on a stand-alone basis,
management believes that any variance in costs would not be material.
General and administrative expenses related to transactions with affiliates
included in the statement of income are:
Three Months Ended
March 31,
------------------------------
------------------------------
2002 2003
---- ----
Software maintenance and related services $ 14 $ 47
Management and consulting fees 57 12
Administrative, accounting services and supplies 72 49
Rent and utilities 101 161
--- ---
$ 244 $ 269
=== ===
Nine Months Ended
March 31,
-------------------------------
2002 2003
---- ----
Software maintenance and related services $ 495 $ 47
Management and consulting fees 256 65
Administrative, accounting services and supplies 502 158
Rent and utilities 389 514
----- ---
$ 1,642 $ 784
===== ===
Due from affiliates includes a note from another company affiliated by
common ownership. As of March 31, 2003, the balance due from this affiliate,
including accrued interest, was $3,742.6. Such amount bore interest at 8.5% per
annum, payable quarterly. The note was collateralized by 1,022,758 shares of
$.001 par value common stock of the Company registered in the name of the
Company's Chairman of the Board and was secured by his personal guarantee. The
original note was replaced by a new non-recourse promissory note dated July 31,
2000, payable to the Company in the amount of $3,890.9. The note is payable in
annual installments of $400, consisting of principal and interest at the rate of
8.5% per annum on each of the first and second anniversary dates, with the total
remaining balance of principal and interest due and payable on July 31, 2003.
The note is collateralized by 1,000,000 shares of $.001 par value common stock
of the Company registered in the name of the Company's Chairman of the Board and
is secured by his personal guarantee. The first two $400 payments due under the
note as of July 31, 2001 and 2002 were satisfied by offsetting an equal amount
owed by the Company to the Chairman of the Board. Effective July 31, 2001, the
interest rate on the note was changed to the prime rate in effect from time to
time (4.25% at March 31, 2003).
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 (3.7% at March 31, 2003). The President's repayment
obligation under the Promissory Note has been absolved by the Company. The
Company will set-off from the bonus to be paid to the President as part of his
annual compensation, the amount that was otherwise to be payable by the
President under the Promissory Note.
In connection with a potential bonus, to be earned pursuant to an
employment agreement dated September 30, 2002, between the President of the
Company's mail order operations and the Company, the Company has loaned him $250
as an advance against the potential bonus. The loan is evidenced by a promissory
note executed by the Mail Order President in favor of the Company. The loan
bears an interest rate of 9% and is due and payable on September 30, 2003 in the
event the bonus is not earned.
The Company currently occupies approximately 26,500 square feet of office
space at 26 Harbor Park Drive, Port Washington, New York 11050 (the "Leased
Premises"). The Company subleases the Leased Premises from BFS Realty, LLC, an
affiliate of the Chairman of the Board (the "Affiliate"). The Affiliate leases
the Leased Premises from the Nassau County Industrial Development Agency,
pursuant to a lease which was entered into by the agency and the Affiliate in
July 1994, and which expires in March 2005. The Affiliate has the right to
become the owner of the Leased Premises upon expiration of this lease. The
Affiliate subleases a portion of the Leased Premises to the Company (the
"Lease"). As of November 1, 2001, the Company and the Affiliate amended the
Lease. The Lease provides that, effective August 1, 2001, the rent payable by
the Company shall be an aggregate annual rent of $308. While formerly the
Company made estimated monthly real estate tax, utilities and maintenance
expense payments to the Affiliate, the Lease now provides that the Company will
pay its pro-rata share of such expenses directly to the entities to whom payment
must be made. The Company estimates that such monthly expenses will approximate
an aggregate of $336 per year. The annual rent will increase by 5% per year
during the term of the Lease. The annual expenses are also expected to increase,
although the Company cannot estimate by how much. The Lease expires in July,
2010. The Company believes that the Leased Premises are adequate for current
purposes.
8. MAJOR CUSTOMERS AND PHARMACIES
For the three months ended March 31, 2002, approximately 37% of the
consolidated revenues of the Company were from two plan sponsors administering
multiple plans. For the three months ended March 31, 2003 approximately 32% of
the consolidated revenues of the Company were from one plan sponsor
administering multiple plans. For the nine months ended March 31, 2002,
approximately 22% of the consolidated revenues of the Company were from two plan
sponsors administering multiple plans. For the nine months ended March 31, 2003,
approximately 39% of revenues were from two plan sponsors administering multiple
plans. Amounts due from these sponsors as of March 31, 2003 approximated $7.3
million.
For the three months ended March 31, 2002 and March 31, 2003, approximately
19% and 18%, respectively, of the cost of claims were from one pharmacy chain.
For the nine months ended March 31, 2002 and March 31, 2003, approximately 20%
and 21%, respectively, of the cost of claims were from one pharmacy chain.
Amounts payable to this pharmacy chain at March 31, 2003 were approximately
$15.7 million.
9. RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
Nos. 141 and 142, Business Combinations and Goodwill and Other Intangibles,
respectively. SFAS 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill
is no longer subject to amortization over its estimated useful life. Rather,
goodwill is subject to at least an annual assessment for impairment by applying
a fair-value based test. Additionally, an acquired intangible asset should be
separately recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented or exchanged, regardless of the acquirer's intent
to do so. The Company has adopted these SFAS's as of July 1, 2001 and has
performed the requisite impairment testing. As of June 30, 2002 there is no
impairment to the goodwill recorded on the accompanying balance sheet.
SFAS 142 requires the disclosure of net income and earnings per share
computed on a pro forma basis by reversing the goodwill amortized in the periods
presented. Such pro forma disclosures are required in the period of adoption and
thereafter until all periods presented reflect goodwill accounted for in
accordance with SFAS 142. No pro forma is required as all periods presented have
now been accounted for in accordance with SFAS 142.
In October 2001, the FASB issued SFAS No.. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001, with
transition provisions for certain matters. FASB's new rules on asset impairment
supersede SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of, and provide a single accounting model
for long-lived assets to be disposed of. Although retaining many of the
fundamental recognition and measurement provisions of SFAS No. 121, the new
rules significantly change the criteria that would have to be met to classify an
asset as held-for-sale. The new rules supersede the provisions of Accounting
Principals Board Opinion No. 30 ("APB No. 30") with regard to reporting the
effects of a disposal of a segment of a business, and require expected future
operating losses from discontinued operations to be displayed in discontinued
operations in the period in which the losses are incurred rather than as of the
measurement date as presently required by APB No. 30. In addition, more
dispositions will qualify for discontinued operations treatment in the income
statement. The Company does not believe that the implementation of SFAS No. 144
will have any impact on its financial statements as of and for the year ending
June 30, 2003.
On December 31, 2002, the Financial Accounting Standards Board issued FASB
Statement No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure. Statement 148 amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition to the
fair value method of accounting for stock-based employee compensation. In
addition, Statement 148 amends the disclosure provisions of Statement 123 to
require disclosure in the summary of significant accounting policies of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. Statement 148 does not amend Statement 123 to require
companies to account for their employee stock-based awards using the fair value
method. However, the disclosure provisions are required for all companies with
stock-based employee compensation, regardless of whether they utilize the fair
method of accounting described in Statement 123 or the intrinsic value method
described in APB Opinion No. 25, Accounting for Stock Issued to Employees. The
Company is required to comply with the requirements of FASB No. 148 for their
quarter ended March 31, 2003 interim financial statements. See Note 10.
10. STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation" ("SFAS 123"). The provisions of
SFAS 123 allow companies to either expense the estimated value of stock options
or to continue to follow the intrinsic value method set forth in Accounting
Principles Bulletin Opinion No. 25, "Accounting for Stock Issued to Employee"
("APB 25"), but disclose the pro forma effects on net income (loss) had the fair
value of the options been expensed. The Company has elected to continue to apply
APB 25 in accounting for its employee stock option incentive plans. Under APB
25, where the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation is
recognized.
If compensation expense for the Company's stock-based compensation plans
had been determined consistent with SFAS 123, the Company's net income per share
including pro forma results would have been the amounts indicated below:
Three Months Ended March 31,
----------------------------
2002 2003
---- ----
Net Income:
As reported $ 1,103 $ 1,735
Total stock based employee compensation
expense determined under fair value
based method for all awards, net of related
tax effects (195) (284)
----- ------
Pro forma $ 908 $ 1,451
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All $ in thousands, except per share amounts)
(Unaudited)
Net Income per share:
As reported:
Basic $ 0.15 $ 0.23
Diluted $ 0.14 $ 0.22
Pro forma:
Basic $ 0.13 $ 0.19
Diluted $ 0.11 $ 0.18
Nine Months Ended March 31,
---------------------------
2002 2003
---- ----
Net Income:
As reported $ 3,140 $ 4,738
Total stock based employee compensation
expense determined under fair value
based method for all awards, net of related
tax effects (405) (853)
------ ------
Pro forma $ 2,735 $ 3,885
Net Income per share:
As reported:
Basic $ 0.44 $ 0.62
Diluted $ 0.41 $ 0.59
Pro forma:
Basic $ 0.38 $ 0.51
Diluted $ 0.35 $ 0.48
11. SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended March 31, 2002 and March 31, 2003, the Company
paid $541 and $887 in interest and $2,072 and $2,611 in income taxes,
respectively. In non-cash transactions, the Company issued 62,500 shares and
41,668 shares of its common stock, each issue valued at $250, as additional
compensation to the shareholders of PAI in August 2001 and August 2002,
respectively.
12. LITIGATION
See Item 1 of Part II of this Quarterly Report on Form 10-Q.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Revenues decreased $19.1 million, or approximately 13%, from $145.7 million
for the three months ended March 31, 2002, to $126.6 million for the three
months ended March 31, 2003. There were two factors which primarily led to the
decrease in revenues: 1) two major sponsors terminated their contracts with
Health Card, one effective June 30, 2002 and one effective December 31, 2002
leading to a reduction in revenue of approximately $32 million, and 2) there
were certain contracts during the quarter ended March 31, 2003 that the Company
recognized on a net revenue basis versus no contracts during the three months
ended March 31, 2002 that the Company recognized on a net revenue basis. The
impact of recognizing these contracts on a net revenue basis was a reduction of
revenue of approximately $26 million. The specific terms of the contracts that
Health Card enters into with its sponsors will determine whether Health Card
recognizes the gross revenue related to the cost of the prescriptions filled.
For those contracts that Health Card recognizes net revenue, there is no impact
on gross profit since neither the revenue nor the related costs of the
prescriptions is recorded. These decreases were partially offset by $26.7
million of revenues related to new sponsors or new services offered during the
three months ended March 31, 2003. In addition, there was an increase of
approximately $12 million due primarily to increased revenues from other
existing sponsors as a result of several factors including higher charges
relating to increased cost of pharmaceuticals, new drugs, plan participant
growth and an increase in the average number of claims per plan participant.
Cost of claims decreased $21.5 million, or approximately 16%, from $136.2
million for the three months ended March 31, 2002, to $114.7 million for the
three months ended March 31, 2003. The primary reasons for the decrease were the
two factors described in the previous paragraph, namely, the loss of two major
sponsors and the recognizing of certain contracts on a net revenue basis. As a
percentage of revenues, cost of claims decreased from 93.5% to 90.7% for the
three months ended March 31, 2002 and March 31, 2003, respectively. These same
two factors contributed to the declining costs as a percentage of revenue. The
two major sponsors are managed care organizations. 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. While not all of the revenue
associated with these two sponsors was replaced by new business, the new
business, for the most part was not managed care, so consequently the cost of
claims on the new business was lower than on the business it replaced. In
addition, the contracts recognized on a net revenue basis decrease the overall
Company costs as a percentage of revenue due to the cost not being recognized on
the contracts recorded on the net revenue basis.
Gross profit increased from $9.4 million for the three months ended March
31, 2002 to $11.8 million for the three months ended March 31, 2003; a $2.4
million, or 25%, increase. For the reasons described above, the impact on the
Company of these two factors was to have lower revenues year over year, but to
have greater gross profits, due to the fact that the cost of claims declined by
more than the revenue. Gross profit, as a percentage of revenue, increased from
6.5% to 9.3% for the three months ended March 31, 2002 and March 31, 2003,
respectively. This increase is net of the fact that the Company has seen some
decline in profit margins due to competitive pressures.
Selling, general, and administrative expenses, which include amounts
charged by affiliates, increased $1.4 million, or approximately 19%, from $7.3
million for the three months ended March 31, 2002 to $8.7 million for the three
months ended March 31, 2003. This increase is primarily related to the
acquisition of Centrus on January 29, 2002. Centrus expenses were $1.1 million
greater in the three months ended March 31, 2003 as compared to the two months
after the Company acquired Centrus, in the quarter ended March 31, 2002. In
addition, selling, general, and administrative expenses also increased in the
quarter ended March 31, 2003 due to the start-up during the quarter ended
December 31, 2002 of two new activities. The Company acquired Integrail as of
November 1, 2002 (See Note 2 of Item 1). Approximately $491,000 of expenses were
incurred primarily related to salary and benefits and depreciation and
amortization during the quarter ended March 31, 2003. The other activity was the
start-up of the build out of a mail order facility in Miramar Florida.
Currently, the Company out sources the actual fulfillment of prescriptions that
are ordered by mail. By bringing these services in- house the Company will be
better able to control service and cost for its customers. For the quarter ended
March 31, 2003, approximately $116,000 of expenses were incurred on this
endeavor. It is the Company's expectation that the facility will be up and
running as of July 1, 2003.
General and administrative expenses charged by affiliates increased
approximately $25,000, or 10%, year-over-year from approximately $244,000 to
approximately $269,000 for the three months ended March 31, 2002 and March 31,
2003, respectively. The majority of the increase relates to contractual
escalations for real estate rented from affiliates.
For the three months ended March 31, 2002 and March 31, 2003, the Company
recognized other expense, net, of approximately $298,000 and $212,000,
respectively. The components of the approximate $86,000 decrease in net expense
were an approximate $121,000 decrease in interest expense, partially offset by
an approximate $35,000 decrease in interest income. The decrease in interest
expense is primarily due to the retirement in June 2002 of the convertible notes
put in place to partially finance the acquisition of Centrus and the fact that
interest rates on the Company's revolving credit facility have declined year
over year.
Income before the provision for income taxes increased approximately $1.1
million, or 60%, from approximately $1.8 million, for the quarter ended March
31, 2002, to approximately $2.9 million for the quarter ended March 31, 2003.
The primary factors leading to the increase were the gross profit increase
described above and the reduction in interest expense.
EBITDA (earnings before interest, taxes, depreciation and amortization)
increased by approximately $1.3 million or 43%, from $3.0 million for the three
months ended March 31, 2002 to $4.3 million for the three months ended March 31,
2003. The primary factor for the increase was the approximate $1.0 million, or
48%, increase in operating income described above. In addition, there was an
approximate $181,000 increase in depreciation and amortization, and an
approximate $93,000 increase in other intangibles amortization. The effective
tax rate increased from 40.0% for the quarter ended March 31, 2002 to 41.0% for
the quarter ended March 31, 2003. The tax rate of 41% represents the Company's
estimated tax rate for the full fiscal year.
Net income for the quarter ended March 31, 2003 was approximately $1.7
million as compared to approximately $1.1 million for the quarter ended March
31, 2002; a 57% increase. Earnings per diluted share increased by $0.08, to
$0.22 for the quarter ended March 31, 2003.
Nine Months Ended March 31, 2003 Compared to Nine Months Ended March 31, 2002
Revenues increased $111.0 million, or approximately 35%, from $313.8
million for the nine months ended March 31, 2002, to $424.8 million for the nine
months ended March 31, 2003. Of the increase, $159.2 million was due to the
inclusion of revenues from Centrus, which was included in the revenues for the
nine months ended March 31, 2003, but only two months in the nine months ended
March 31, 2002. Another $33.6 million of the increase was due to revenues
related to new sponsors or new services offered during the nine months ended
March 31, 2003. These increases were partially offset by a $110 million decrease
related to two factors: 1) two major sponsors terminated their contracts with
Health Card, one effective June 30, 2002 and one effective December 31, 2002
leading to a reduction in revenue of approximately $55 million, and 2) there
were certain contracts during the nine months ended March 31, 2003 that the
Company recognized on a net revenue basis versus no contracts during the nine
months ended March 31, 2002 that the Company recognized on a net revenue basis.
The impact of recognizing these contracts on a net revenue basis was a reduction
of revenue of approximately $55 million. The specific terms of the contracts
that Health Card enters into with its sponsors will determine whether Health
Card recognizes the gross revenue related to the cost of the prescriptions
filled. For those contracts that Health Card recognizes net revenue, there is no
impact on gross profit since neither the revenue nor the related costs of the
prescriptions is recorded. The majority of the balance of the increase, or
approximately $28 million, was due primarily to increased revenues from other
existing sponsors as a result of several factors including higher charges
relating to increased cost of pharmaceuticals, new drugs, plan participant
growth and an increase in the average number of claims per plan participant.
Cost of claims increased $101.1 million, or approximately 35%, from $289.4
million for the nine months ended March 31, 2002, to $390.5 million for the nine
months ended March 31, 2003. Centrus accounted for $155.1 million of the
increase. This increase was partially offset by the two factors described in the
previous paragraph, namely, the loss of two major sponsors and the recognizing
of certain contracts on a net revenue basis. As a percentage of revenues, cost
of claims decreased from 92.2% to 91.9% for the nine months ended March 31, 2002
and March 31, 2003, respectively. These same two factors contributed to the
declining costs as a percentage of revenue. The two major sponsors are managed
care organizations. 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. While not all of the revenue associated with these two
sponsors was replaced by new business, the new business, for the most part was
not managed care, so consequently the cost of claims on the new business was
lower than on the business it replaced. In addition, the contracts recognized on
a net revenue basis decrease the overall Company costs as a percentage of
revenue due to the cost not being recognized on the contracts recorded on the
net revenue basis.
Gross profit increased from $24.4 million for the nine months ended March
31, 2002 to $34.3 million for the nine months ended March 31, 2003; a $9.9
million, or 41%, increase. Centrus accounted for $4.1 million, or 41%, of the
gross profit increase. Gross profit, as a percentage of revenue, increased from
7.8% to 8.1% for the nine months ended March 31, 2002 and March 31, 2003,
respectively. The contracts the Company recognizes on a net revenue basis have
the effect of improving the gross margin as a percent of revenue due to the
lower revenue base. The Company has also seen some decline in profit margins due
to competitive pressures.
Selling, general, and administrative expenses, which include amounts
charged by affiliates, increased $6.4 million, or approximately 33%, from $19.3
million for the nine months ended March 31, 2002 to $25.7 million for the nine
months ended March 31, 2003. This increase is primarily related to the
acquisition of Centrus. While the expenses specifically related to Centrus were
$7.2 million greater in the nine months ended March 31, 2003 as compared to the
two months since the acquisition in the nine months ended March 31, 2002, this
was partially offset by reductions in other areas of the Company related to the
full integration of Centrus. The Company analyzed every department in the
Company and made decisions concerning the most efficient way to operate
regardless of location. This evaluation has led to synergies across the Company
and has allowed the Company to maximize the utilization of its resources. It is
anticipated that this kind of analysis and deployment of resources will continue
as the Company grows.
Selling, general, and administrative expenses also increased in the nine
months ended March 31, 2003 due to the start-up of two new activities in the
quarter ended December 31, 2002. The Company acquired Integrail as of November
1, 2002 (See Note 2 of Item 1). In the months since the Company acquired
Integrail, approximately $827,000 of expenses were incurred primarily related to
salary and benefits and depreciation and amortization. The other activity was
the start-up of the build out of a mail order facility in Miramar Florida.
Currently, the Company out sources the actual fulfillment of prescriptions that
are ordered by mail. By bringing these services in-house the Company will be
better able to control service and cost for its customers. For the nine months
ended March 31, 2003, approximately $228,000 of expenses were incurred on this
endeavor. It is the Company's expectation that the facility will be up and
running by July 1, 2003.
In addition, there were three one-time expenses that the Company incurred
in the nine months ended March 31, 2003. These included; 1) approximately
$400,000 of expenses incurred related to two acquisitions which the company did
not complete, 2) approximately $127,000 related to a settlement of a New York
State sales tax audit, and 3) the payment of $100,000 related to a terminated
consulting agreement.
General and administrative expenses charged by affiliates decreased
approximately $858,000, or 52%, year-over-year from approximately $1,642,000 to
approximately $784,000 for the nine months ended March 31, 2002 and March 31,
2003, respectively. The majority of the decrease related to the hiring of
employees which allowed the Company to bring in-house certain services which
historically had been obtained from related parties.
Selling, general, and administrative expenses as a percent of revenue
improved from 6.2% for the nine months ended March 31, 2002 to 6.0% for the nine
months ended March 31, 2003. This improvement stems from the continued growth of
the Company due to improving efficiencies with scale.
For the nine months ended March 31, 2002, the Company incurred other
expense, net, of approximately $45,000. For the nine months ended March 31,
2003, the Company incurred other expense, net, of approximately $639,000. The
components of the approximate $594,000 increase in net expense, were an
approximate $400,000 increase in interest expense, and an approximate $246,000
decrease in interest income, and an approximate $52,000 increase in amortized
gain on assets sold during the fiscal year ended June 30, 2002. The primary
reasons for the net increase in expense were the interest expense incurred on
the Company's revolving credit facility and convertible notes during the nine
months ended March 31, 2003 to finance the acquisition of Centrus and Integrail
(see Note 2 of Item 1), and the reduction in interest income since all balances
go towards paying off the revolving credit facility. Partially offsetting the
increase in interest expense was an approximate $52,000 increase in deferred
gain on the sale of assets related to a sale/leaseback transaction, which gain
of approximately $459,000 was recorded as deferred revenue and is being
recognized over the life of the lease, which is thirty-six (36) months.
Income before the provision for income taxes increased approximately $3.0
million, or 59%, from approximately $5.0 million, for the nine months ended
March 31, 2002, to approximately $8.0 million for the nine months ended March
31, 2003. The primary reason for the increase was the improving efficiencies
that come with scale arising from the integration of the acquisitions the
Company has completed. As mentioned previously, the acquisition of Integrail and
the start-up of the mail order facility had the impact of reducing profitability
in the nine months ended March 31, 2003.
EBITDA increased by approximately $4.6 million or 62%, from $7.4 million
for the nine months ended March 31, 2002 to $11.9 million for the nine months
ended March 31, 2003. The primary factor for the increase was the approximate
$3.6 million, or 70%, increase in operating income described above. In addition,
there was an approximate $586,000 increase in depreciation and amortization, and
an approximate $391,000 increase in other intangibles amortization.
The effective tax rate increased from 37.7% for the nine months ended March
31, 2002 to 41.0% for the nine months ended March 31, 2003. The tax rate of 41%
represents the Company's estimated tax rate for the full fiscal year.
Net income for the nine months ended March 31, 2003 was approximately $4.7
million as compared to approximately $3.1 million for the nine months ended
March 31, 2002; a 51% increase. Earnings per diluted share increased by $0.19,
to $0.59 for the nine months ended March 31, 2003.
Liquidity and Capital Resources
The Company's primary cash requirements are for capital expenditures and
operating expenses, including cost of pharmaceuticals, software and hardware
upgrades and the funding of accounts receivable. The Company also requires cash
for potential acquisitions of other PBM companies or of companies providing
related services. As of March 31, 2003, the Company had a working capital
deficit of $33.6 million as compared to a working capital deficit of $42.7
million as of June 30, 2002. The primary reason for the improvement in working
capital was the profitability generated by the Company during the nine months
ended March 31, 2003. In addition, there was a $3.7 million reclassification of
a long-term loan receivable to short term since it is now due within one year,
(See Note 7 - Related Party Transactions of Item 1). The Company has now
acquired four 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 $12.5 million for the nine
months ended March 31, 2002. Net cash provided by operating activities was $7.4
million for the nine months ended March 31, 2003. The acquisition of Centrus had
a significant impact on the cash provided by operating activities in the nine
months ended March 31, 2002, as accounts payable increased by $43.0 million
while receivables increased by $34.6 million, providing $8.4 million of cash.
For the nine months ended March 31, 2003, accounts payable decreased by $1.6
million while receivables decreased by $1.8 million generating only $0.2 million
of cash.
Historically, the timing of the Company's accounts receivable and accounts
payable has generally been a net source of cash from operating activities. This
is the result of the terms of trade in place with plan sponsors on the one hand,
and the Company's pharmacy network on the other hand. These terms generally lead
to the Company's payments to participating pharmacies being slower than its
corresponding collections from plan sponsors. The Company believes that this
situation is not unusual in the pharmacy benefit management industry and expects
to operate on similar terms for the foreseeable future. However, there can be no
assurance that such terms of trade will continue in the future and, if they were
to change materially, the Company could require additional working capital
financing. Furthermore, if such terms of trade were to change materially, and/or
if the Company were unable to obtain additional working capital financing, there
could be a material adverse effect on the Company's business, financial
condition, or results of operations.
Net cash used in investing activities was $3.8 million for the nine months
ended March 31, 2003, as compared to $41.0 million for the nine months ended
March 31, 2002. The primary differences in the two periods were the acquisition
of Centrus for $40 million in the period ended March 31, 2002, and the
acquisition of Integrail in the nine months ended March 31, 2003. The net cash
outlay for Integrail was $1,472,425, representing the initial payment of
$1,400,000 plus $72,425 of related expenses. No cash was assumed in the
acquisition.
During the nine months ended March 31, 2003 the Company borrowed a net of
approximately $7.7 million under its revolving credit facility. These funds were
primarily utilized to repay the principal balance of the Convertible Notes,
which had been put in place to acquire Centrus, which has had the effect of
significantly reducing the interest expense that the Company incurs.
The Company has entered into various capital lease transactions for
hardware and software. The Company has also assumed various capital leases
through its acquisitions. The principal balance of all capital leases as of
March 31, 2003 was approximately $923,000.
The Company has entered into various real estate operating leases with both
related and unrelated parties. The Company has entered into various operating
leases with unrelated third parties for office equipment. These leases have
different payment terms and expiration dates. The Company also entered into a
sale-leaseback operating lease of certain fixed assets (principally computer
hardware and externally developed software) with an affiliate of the Company's
Vice Chairman. See Note 9 to the Consolidated Financial Statements comprising
Item 8 of Form 10 -K, as amended, for the year ended June 30, 2002 for a further
description of these various leases.
On January 29, 2002, the Company entered into a $40 million revolving
credit facility (the "Facility"), details of which are set forth in Note 2 to
the financial statements in Part 1. Borrowings of $28.7 million under the
Facility were used to finance part of the purchase price of the Company's
acquisition of Centrus. The Facility contains various covenants that, among
other things, require the Company to maintain certain financial ratios. As of
May 5, 2003 approximately $25.0 million was outstanding under the Facility, and
the Company was in compliance with its financial ratios covenants.
The total future payments under these contractual obligations as of March
31, 2003, is as follows:
Contractual Obligations Payments Due by Period
($ in thousands)
Total Less than 1-3 Years 4-5 After
1 Year Years 5 Years
----------- -------------- ---------- ---------- ----------
----------- -------------- ---------- ---------- ----------
Long Term Debt $ 21,532 $ 21,531 $ 1 $ - $ -
Capital Lease Obligations 923 466 457 - -
Operating Leases 10,914 2,189 4,355 963 3,407
Sale-leaseback 1,227 635 592 - -
----------- -------------- ---------- ---------- ----------
----------- -------------- ---------- ---------- ----------
Total Contractual Cash $ 34,596 $ 24,821 $ 5,405 $ 963 $ 3,407
Obligations
PAI stockholders were eligible to receive up to $2,000,000 in additional
consideration payable in combination of cash and common stock if certain
financial targets of PAI were met for the fiscal years ended June 30, 2001 and
2002. These targets have been achieved and the $2 million has been earned and
paid. At the end of August 2001, $750,000 in cash was paid, and 62,500 shares of
the Company's Common Stock valued at $4.00 per share were issued to the PAI
stockholders.
At the end of August 2002, $750,000 in cash was paid, and 41,668 shares of
the Company's Common Stock valued at $6.00 per share were issued to the PAI
stockholders.
The members of PMP are eligible to receive additional consideration of up
to $1,000,000 if certain PMP clients are retained over the first three years
after acquisition. These targets were not met in the first year so no additional
consideration was due and payable. It is the Company's expectation that these
amounts will not be earned in the second and third years either as the
identified clients were not generally retained directly, although they were
replaced.
The shareholders of Centrus are eligible to receive additional
consideration of up to $4,000,000, payable over three years, if certain
financial targets are met over the first two years. The financial performance
targets were achieved during the first year and $2 million has been earned. Of
this amount, $1 million will be paid in each of May 2003 and May 2004.
The Sellers of Integrail are eligible to receive from monies put in escrow
up to $700,000 if certain operational milestones are achieved over the first
twelve months.
In February 1998, the Company entered into an agreement with an
unaffiliated party for computer software products and professional services. The
agreement required the Company to pay an initial license fee. In addition, if
certain milestones are met based on the number of processed claims, as defined
in the agreement, the initial license fee increases in specified increments. To
date, four such milestones have been met, resulting in a 100% increase in the
license fee. The agreement also provides for the annual payment of a fee for
maintenance and updating services equal to 18% of the initial license fee, as
defined. It is anticipated, based on internal growth and the Centrus
acquisition, that the last milestone will be met. If the remaining milestone is
reached, the cash outlay by the Company would be $100,000.
The Company anticipates that current cash positions, after its four
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 and
companies providing related services, evidenced by the four acquired since July
2000. This will require cash and depending on the Company's evaluation of future
acquisitions, additional cash may be required. In addition, the Company is
building a mail order facility in Florida which will require cash to build out
the facility and acquire inventory. In the event that the Company's plans change
or its assumptions prove to be inaccurate, or the proceeds from the Facility
prove to be insufficient to fund operations and acquisitions, the Company could
be required to seek additional financing sooner than anticipated. There can be
no assurance that such financing could be obtained at rates or on terms
acceptable to the Company, if at all.
Other Matters
Inflation
Management does not believe that inflation has had a material adverse
impact on Health Card's net income.
Critical Accounting Policies and Estimates
General
Health Card's discussion and analysis of its financial condition and
results of operations are based upon Health Card's unaudited consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires Health Card to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses; these
estimates and judgments also effect related disclosures of contingent assets and
liabilities. On an on-going basis, Health Card evaluates its estimates and
judgments, including those related to revenue recognition, bad debt, intangible
assets, income taxes, and financing operations. Health Card bases its estimates
on experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes that of its significant accounting policies (See Note
1 to the Consolidated Financial Statements comprising Item 8 of Form 10-K, as
amended, for the year ended June 30, 2002), the following may involve a higher
degree of judgment and complexity than others:
Revenue Recognition
(a) The Company has historically entered into two types of arrangements for
the payment of administrative fees: fee for service (per claim charges) and
capitation (per member per month charges). Under the fee for service
arrangement, the Company is paid by its sponsors for the Company's contractually
agreed upon rates based upon actual claims adjudicated, plus a fixed transaction
fee. Under the capitation arrangement, the fee is based on the number of
participants per month; the Company pays for the cost of prescriptions filled
and thus shares the risk of operating profit or loss with these plans. Since
January 1, 2000, all services have been provided on a fee for service basis
only.
Revenue under the fee for service arrangement is recognized when the claims
are adjudicated. Included as revenue are the Company's administrative fees and
charges relating to pharmaceuticals dispensed by the Company's network of
pharmacies. Revenues are reduced by the amount of rebates paid to the Company's
sponsors.
(b) The specific terms of the contracts that Health Card enters into with
its sponsors will determine whether Health Card recognizes the gross revenue
related to the cost of the prescriptions filled. In certain limited cases, the
Company has not recognized the gross revenue or cost related to prescriptions
filled for a specific sponsor. This has no impact on the Company's gross profit
since neither the revenue nor the related cost of the prescriptions is recorded.
(c) Rebates are recognized when the Company is entitled to them in
accordance with the terms of its arrangements with drug manufacturers, third
party rebate administrators, and sponsors, and when the amount of the rebates is
determinable. The Company records the gross rebate receivable and the
appropriate payable to the sponsors based on estimates, which are subject to
final settlement. The estimates are based upon the claims submitted and the
Company's rebate experience, and are adjusted as additional information becomes
available.
Bad Debt
Health Card maintains allowances for doubtful accounts for estimated losses
resulting from the liability of its sponsors to make required payments. If the
financial condition of Health Card's sponsors were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
Goodwill and Intangible Asset Impairment
In assessing the recoverability of the Company's goodwill and other
intangibles, the Company must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets. If
these estimates or their related assumptions change in the future, the Company
may be required to record impairment charges for these assets not previously
recorded. On July 1, 2001 the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," and will be required
to analyze its goodwill for impairment issues on a periodic basis thereafter. To
date, the Company has not recorded any impairment losses related to goodwill and
other intangible assets.
Deferred Taxes
Health Card periodically considers whether or not it should record a
valuation allowance to reduce its deferred tax assets to the amount that is more
likely than not to be realized. While Health Card has considered future taxable
income and ongoing tax planning strategies in assessing the need for the
valuation allowance, in the event Health Card were to determine that it would be
able to realize its deferred tax assets in the future in excess of its net
recorded amount, an adjustment to the deferred tax asset would increase income
in the period such determination was made. Likewise, should Health Card
determine that it would not be able to realize all or part of its net deferred
tax asset in the future, an adjustment to the deferred tax asset would be
charged to income in the period such determination was made.
Capitalized Software
The costs of software developed for internal use incurred during the
preliminary project stage are expensed as incurred. Direct costs incurred during
the application development stage are capitalized. Costs incurred during the
post-implementation/operation stage are expensed as incurred. Capitalized
software development costs are amortized on a straight-line basis over their
estimated useful lives, commencing on the date the software is placed into use,
primarily three years.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 4 - CONTROLS AND PROCEDURES
Disclosure controls and procedures are the controls and procedures designed
to ensure that information that the Company is required to disclose in its
reports under the Exchange Act is recorded, processed, summarized and reported
within the time periods required. They include, without limitation, controls and
procedures designed to ensure that information is accumulated and communicated
to our management in order to allow timely decisions regarding required
disclosure.
Under the supervision and with the participation of management, chiefly our
principal executive officer and our principal financial officer, Health Card
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures within 90 days of the filing date of this quarterly
report. Based on that evaluation, our principal executive officer and our
principal financial officer have concluded that these controls and procedures
are effective. There have been no significant changes in our internal controls,
or in other factors that could significantly affect these controls, subsequent
to the date of the evaluation.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
An action was commenced against the Company on April 30, 2002 by Midwest
Health Plans Inc. ("MHP") in the United States District Court for the Eastern
District of Michigan. The complaint alleges, among other things, that the
parties entered into a contract dated July 1999 (the "Agreement"), and further
alleges that the Company has overcharged MHP for the administration of
prescription benefit services in contravention to the terms of the Agreement.
MHP is seeking $3 million dollars in damages. The Company filed an answer and
counterclaim on June 12, 2002. In the counterclaim, the Company claimed damages
in excess of $2.8 million based on MHP's failure to pay under a contract. In
late June 2002, MHP agreed to make two payments in the amount of $1.34 million
and $1.36 million to partially settle the Company's claims against MHP. As a
part of that payment, MHP dropped one of its two claims against the Company that
had sought to setoff or recoup alleged overcharges by the Company. The Company
continues to have counterclaims totaling over $500,000 against MHP for its
failure to pay the amounts it had agreed to pay Health Card for goods and
services. MHP has informed the Company that its expert is reviewing its claim
and that the amount of such claim may be modified.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
For information concerning the Company's 1999 Stock Option Plan, and the
options currently issued and outstanding thereunder, see Note 3 to the Financial
Statements comprising Item 1 of Part I of this Form 10-Q.
Pursuant to the terms of the PAI Agreement, in August 2001 and August 2002,
the Company issued 62,500 and 41,668 shares respectively, of unregistered Common
Stock of the Company to the PAI stockholders as additional consideration. These
issuances were valued at $250,000 each. The Company was advised in each case
that the issuance of such shares was exempt from registration under the
Securities Act by virtue of Section 4(2) thereof.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
3.1 Certificate of Incorporation of Health Card (7)
3.4 By-Laws of Health Card (7)
4.1 Form of Specimen Common Stock Certificate (9)
4.2 Form of Warrant Agreement, including form of Representatives' Warrants (1)
10.1 Mail Service Provider Agreement, dated July 1, 1996, between Health Card and
Thrift Drug, Inc. d/b/a Express Pharmacy Services (1)
10.2 Amendment to Mail Service Provider Agreement, dated January 1, 1997, between
Health Card and Thrift Drug, Inc. d/b/a Express Pharmacy Services (1)
10.3 Software License Agreement and Professional Service Agreement, dated
February 18, 1998, between Health Card and Prospective Health, Inc. (1)
10.4 1999 Stock Option Plan (1)
10.5 Employee Covenant Agreement, dated June 15, 1998, between Health Card and
Mary Casale (1)
10.6 Employee Covenant Agreement, dated June 16, 1998, between Health Card and
Ken Hammond (1)
10.7 Stock Option Agreement, dated August 3, 1999, between Health Card and
Ken Hammond (4)
10.8 Employment Agreement, dated March 27, 2000, between Health Card and
David Gershen (4)
10.9 Stock Option Agreement, dated May 1, 2000, between Health Card and
David Gershen (4)
10.10 Employment Agreement, dated May 3, 2000, between Health Card
and James Bigl (4)
10.11 Stock Option Agreement, dated June 12, 2000, between Health Card
and James Bigl (4)
10.12 Stock Option Agreement, dated August 3, 1999, between Health Card and
Kenneth J. Daley (4)
10.13 Stock Option Agreement, dated August 3, 1999, between Health Card and
Gerald Angowitz (4)
10.14 Assignment, dated November 1, 1996, from Sandata, Inc., to BFS Realty, LLC (1)
10.15 Lease, dated August 10, 1998, between 61 Manorhaven Boulevard, LLC and
Health Card (1)
10.16 Letter, dated June 3, 1999, from Bert Brodsky to Health Card (1)
10.17 Letter, dated June 3, 1999, from Gerald Shapiro to Health Card (1)
10.18 Agreement of Guaranty, dated June 1, 1998, by Bert E. Brodsky in favor of
Health Card (1)
10.19 Promissory Note, dated July 31, 2000, made payable by P.W. Capital, LLC to the order of
Health Card, in the amount of $3,890,940 (4)
10.20 Letter, dated June 8, 1999, from P.W. Capital Corp. to Health Card (1)
10.21 Letter, dated June 9, 1999, from Bert E. Brodsky to Health Card (1)
10.22 Letter, dated June 8, 1999, from the Bert E. Brodsky Revocable Trust to Health Card (1)
10.23 Letter Agreement, dated June 30, 1999, between the Bert E. Brodsky Revocable Trust
and Health Card (1)
10.24 Employment Agreement, dated July 1, 1999, between Health Card and Bert E. Brodsky (1)
10.25 Letter, dated June 8, 1999, from Bert E. Brodsky to Health Card (1)
10.26 Form of Lock-Up Agreement (1)
10.27 Acquisition and Merger Agreement, dated as of June 27, 2000, between Health Card
and Pharmacy Associates, Inc. (3)
10.28 Lease Agreement, dated March 4, 1996, between Pharmacy Associates, Inc. and
Executive Park Partnership (4)
10.29 Amendment to Lease, dated November 2, 1998, between Pharmacy Associates, Inc. and
Executive Park Partnership (4)
10.30 Amendment to Lease, dated November 19, 1998, between Pharmacy Associates, Inc.
and Executive Park Partnership (4)
10.31 Lease Agreement, dated July 8, 1999, between Pharmacy Associates, Inc. and
Executive Park Partnership (4)
10.32 Asset Purchase Agreement dated as of March 5, 2001 among National Medical Health
Card Systems, Inc., PMP Acquisition Corp., Provider Medical Pharmaceutical, LLC and
members of PMP (3)
10.33 Employment Agreement, dated June 4, 2001, between National Medical Health Card
Systems, Inc. and Tery Baskin (6)
10.34 Stock Option Agreement, dated June 4, 2001, between National Medical Health
Card Systems, Inc. and Terry Baskin (6)
10.35 Stock Option Agreement, dated June 12, 2001, between National Medical Health Card
Systems, Inc. and James Bigl (6)
10.36 Asset Purchase Agreement dated January 29, 2002 by and among the Company, Health
Solutions Limited ("HSL"), HSL Acquisition Corp., a wholly-owned subsidiary of the
Company, and the security holders of HSL (8)
10.37 Receivables Purchase and Transfer Agreement dated January 29, 2002 by and among the
Company and certain of its subsidiaries and NMHC Funding, LLC (8)
10.38 Loan and Security Agreement dated January 29, 2002, by and between NMHC Funding,
LLC and HFC Healthco-4, LLC, an affiliate of Healthcare Finance Group, Inc. (8)
10.39 Lease Agreement dated as of August 1, 2001, between National Medical Health Card
Systems, Inc. and BFS Realty, LLC (6)
10.40 Amended Lease Agreement dated as of August 1, 2001, between National Medical Health
Card Systems, Inc. and BFS Realty, LLC
10.41 2003 Employee Stock Purchase Plan (11)
10.42 Asset Purchase Agreement dated as of November 1, 2002, by and between the Company,
Integrail Acquisition Corp., Health Solutions, Ltd., and certain security holders of Health
Solutions, Ltd.
10.43 Assignment Agreement dated as of November 1, 2002, by and between the Company,
Integrail Acquisition Corp., and Health Solutions, Ltd.
23.1 Consent of Ernst & Young LLP to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-8224) of its report dated September 30, 2002 (10)
23.2 Consent of Goldstein Golub Kessler LLP to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-82224) of its report dated August 31, 2001 (10)
23.3 Consent of BDO Seidman LLP to the incorporation by reference in the Registration Statement on
Form S-8 (File No. 333-82224) of its report dated September 19, 2000 (10)
99.1 Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act
99.2 Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act
--------------------
(1) Denotes document filed as an Exhibit to Health Card's Registration Statement on Form S-1
(Registration Number:333-72209) and incorporated herein by reference.
(2) Denotes documentation filed as an Exhibit to Health Card's Report on Form 10-K for the fiscal
year ended June 30, 1999.
(3) Denotes document filed as an Exhibit to Health Card's Form 8-K for an event dated July 20, 2000
and incorporated herein by reference.
(4) Denotes documentation filed as an Exhibit to Health Card's Report on Form 10-K for the year
ended June 30, 2000.
(5) Denotes document filed as an Exhibit to Health Card's Form 8-K for an event dated March 5, 2001.
(6) Denotes documentfiled as an Exhibit to Health Card's Report on Form 10-K for the year ended
June 30, 2001.
(7) Denotes document filed as an Exhibit to Health Card's Definitive Proxy Statement on Schedule
14-A filed on December 21, 2001 and incorporated herein by reference.
(8) Denotes document filed as an Exhibit to Health Card's Report on Form 8-K for events dated
January 29, 2002 and incorporated herein by reference.
(9) Denotes document filed as an Exhibit to Health Card's Amendment No. 1 on Form 8-K/A filed
with the Securities and Exchange Commission on May 21, 2002 and incorporated herein
by reference.
(10) Denotes document filed as an Exhibit to Health Card's Form 10-K for the fiscal year ended June
30, 2002.
(11) Denotes document filed as an Exhibit to Health Card's Definitive Proxy Statement on Schedule
14-A on October 25, 2002, and incorporated herein by reference.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
(Registrant)
Date: May 14, 2003 By: /s/ James J. Bigl
---------------------------------------
James J. Bigl,
Chief Executive Officer
By: /s/David J. Gershen
---------------------------------------
David J. Gershen,
Chief Financial Officer
and Treasurer
EXHIBIT 99.1
CERTIFICATION
I, James J. Bigl, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National
Medical Health Card Systems, Inc. and its Subsidiaries;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of registrant
as of, and for, the periods presented in this quarterly
report.
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant, and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data, and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003 /s/ James J. Bigl
--------------------------------
James J. Bigl,
Chief Executive Officer
CERTIFICATION
I, David Gershen, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National
Medical Health Card Systems, Inc. and its Subsidiaries;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of registrant
as of, and for, the periods presented in this quarterly
report.
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant, and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data, and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003 /s/ David Gershen
----------------------
David Gershen
Chief Financial Officer
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of National Medical Health Card
Systems, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, James J. Bigl, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ James J. Bigl
James J. Bigl
Chief Executive Officer
May 14, 2003
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of National Medical Health Card
Systems, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003,
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, David Gershen, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ David Gershen
David Gershen
Chief Financial Officer
May 14, 2003