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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 September 30, 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 of
Incorporation or Organization) (IRS Employer Identification No.)
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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Not Applicable
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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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Indicate by check whether the registration is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes No x
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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
November 6, 2003 was 7,652,967 shares.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
INDEX Page
FORWARD-LOOKING STATEMENTS 3
PART I - FINANCIAL INFORMATION 4
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ITEM 1 - CONDENSED FINANCIAL STATEMENTS: 4
CONSOLIDATED BALANCE SHEET as of 4
September 30, 2003 (unaudited) and June 30, 2003
CONSOLIDATED STATEMENT OF INCOME (unaudited) 5
for the three months ended September 30, 2003 and 2002
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) 6
for the three months ended September 30, 2003 and 2002
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 15
CONDITION AND RESULTS OF OPERATIONS
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 23
MARKET RISK
ITEM 4 - CONTROLS AND PROCEDURES 23
PART II - OTHER INFORMATION 24
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ITEM 1 - LEGAL PROCEEDINGS 24
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS 24
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 5 - OTHER INFORMATION 25
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 25
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
Forward Looking Statements
When used herein, the words "may," "could," "estimate," "believe,"
"anticipate," "think," "intend," "expect" and similar expressions identify
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are not guarantees of future
performance and involve known and unknown risks and uncertainties, and other
factors, which could cause actual results to differ materially from those in the
forward-looking statements. Readers are cautioned not to place undue reliance on
such statements, which speak only as of the date hereof. For a discussion of
such risks and uncertainties, including risks relating to pricing, competition
in the bidding and proposal process, our ability to consummate contract
negotiations with prospective clients, dependence on key members of management,
government regulation, acquisitions and affiliations, the market for PBM
services, and other factors, readers are urged to carefully review and consider
various disclosures made by National Medical Health Card Systems, Inc. ("Health
Card" or the "Company") which attempt to advise interested parties of the
factors which affect Health Card's business, including, without limitation, the
disclosures made under the caption "Business" in Item 1 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2003, filed with the Securities and Exchange Commission on September
29, 2003.
PART I - FINANCIAL INFORMATION
Item 1 - CONDENSED FINANCIAL STATEMENTS
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($ in thousands)
September 30, June 30,
Assets 2003 2003
Current: ------------- -----------
(Unaudited)
Cash and cash equivalents (including cash equivalent investments of $1,189 $ 4,881 $ 5,222
in each period)
Restricted cash 2,274 2,383
Accounts receivable, less allowance for doubtful accounts of $2,244 60,236 52,022
and $2,014, respectively
Rebates receivable 21,446 24,584
Inventory 1,315 -
Due from affiliates 29 4,165
Deferred tax asset 2,065 2,065
Other current assets 1,825 1,714
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Total current assets 94,071 92,155
Property, equipment and software development costs, net 9,178 8,239
Intangible assets, net of accumulated amortization of $1,447 and 2,554 2,291
$1,210, respectively
Goodwill 57,262 53,669
Other assets 339 386
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Total Assets $ 163,404 $ 156,740
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Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 116,591 $ 106,675
Revolving credit facility and loans payable-current 10,579 15,683
Current portion of capital lease obligations 476 481
Due to officer/stockholder - 1,117
Income taxes payable 816 629
Other current liabilities 348 137
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Total current liabilities 128,810 124,722
Capital lease obligations, less current portion 215 327
Long term loans payable and other liabilities 1,939 1,020
Deferred tax liability 2,245 2,245
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Total liabilities 133,209 128,314
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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, 7,836,694 and 8 8
7,812,907 shares issued, 7,645,694 and 7,621,907 outstanding, respectively
Additional paid-in-capital 15,150 15,027
Retained earnings 15,781 14,135
Treasury stock at cost, 191,000 shares (744) (744)
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Total stockholders' equity 30,195 28,426
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Total Liabilities and Stockholders' Equity $ 163,404 $ 156,740
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See accompanying condensed notes to consolidated financial statements
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
September 30,
2003 2002
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Revenues $ 150,830 $ 147,367
Cost of claims 137,314 136,488
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Gross Profit 13,516 10,879
Selling, general and administrative expenses 10,550 8,340
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Operating income 2,966 2,539
Other income (expense):
Interest expense (245) (320)
Interest income 31 56
Other income, net 38 38
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(176) (226)
Income before provision for income taxes 2,790 2,313
Provision for income taxes 1,144 948
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Net Income $ 1,646 $ 1,365
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Earnings per common share:
Basic $ 0.22 $ 0.18
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Diluted $ 0.19 $ 0.17
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Weighted average number of common shares outstanding:
Basic 7,641 7,524
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Diluted 8,473 7,919
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See accompanying condensed notes to consolidated financial statements
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
Three months ended
September 30,
2003 2002
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Cash flows from operating activities:
Net income $ 1,646 $ 1,365
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,381 1,043
Amortization of deferred gain (38) (39)
Provision for doubtful accounts 230 153
Compensation expense accrued to officer/stockholder 37 (261)
Changes in assets and liabilities, net of effect from acquisitions:
Restricted cash 109 243
Accounts receivable (7,555) (1,808)
Rebates receivable 3,138 (2,061)
Inventory (777) -
Other current assets (111) 128
Due to/from affiliates 214 (392)
Other assets (2) -
Accounts payable and accrued expenses 7,991 1,510
Income taxes payable and other current liabilities 394 (654)
Other long term liabilities 958 286
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Net cash provided by (used in) operating activities 7,615 (487)
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Cash flows from investing activities:
Capital expenditures (2,022) (580)
Repayment of loan from affiliate 2,660 -
Repayment of loan from officer 107 -
Acquisition of Integrail (13) -
Acquisition of PAI - (1,000)
Acquisition of PPP, net of cash acquired (3,639) -
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Net cash used in investing activities (2,907) (1,580)
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Cash flows from financing activities:
Proceeds from exercise of stock options 123 418
Repayment of convertible note offering - (8,000)
Proceeds from revolving credit facility 183,500 170,950
Repayment of revolving credit facility (188,594) (160,408)
Deferred financing costs 49 47
Repayment of debt and capital lease obligations (127) (88)
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Net cash (used in) provided by financing activities (5,049) 2,919
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Net (decrease) increase in cash and cash equivalents (341) 852
Cash and cash equivalents at beginning of period 5,222 1,768
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Cash and cash equivalents at end of period $ 4,881 $ 2,620
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See accompanying condensed notes to consolidated financial statements
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 ("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"), Ascend Specialty Pharmacy
Services, Inc. (See Note 3) ("Ascend") and PBM Technology Inc. ("PBM Tech").
Also included on a consolidated basis are the accounts of NMHC Funding, LLC
("Funding"), a limited liability company of which the Company and its
subsidiaries are the owners of all of the membership interests. Unless the
context otherwise requires, references herein to the "Company" or "Health Card"
refer to the Company and its subsidiaries, on a consolidated basis. All material
inter-company balances and transactions have been eliminated in the
consolidation.
The unaudited consolidated financial statements have been prepared by the
Company in accordance with accounting principles generally accepted in the
United States for interim financial information and substantially in the form
prescribed by the Securities and Exchange Commission in instructions to Form
10-Q and in Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by such accounting principles for
complete financial statements. In the opinion of the Company's management, the
September 30, 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 for the year ended June 30, 2003. The results of operations for the three
month period ended September 30, 2003 are not necessarily indicative of the
operating results to be expected for the full year.
For information concerning the Company's significant accounting policies,
reference is made to the Company's Annual Report on Form 10-K for the year ended
June 30, 2003 (the "Annual Report").
2. STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 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. While SFAS No. 148
does not amend SFAS No. 123 to require companies to account for employee stock
options using the fair value method, the disclosure provisions of SFAS No. 148
are applicable to all companies with stock-based employee compensation,
regardless of whether they account for that compensation using the fair value
method of SFAS No. 123 or the intrinsic value method of APB No. 25. The Company
adopted SFAS No. 148 effective December 31, 2002.
The following table illustrates the effect on net income if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
compensation:
Three Months Ended September 30,
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2003 2002
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Reported net income $ 1,646 $ 1,365
Stock compensation expense included in net - -
income
Pro forma compensation expense (442) (394)
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Pro forma net income $ 1,204 $ 971
Pro forma earnings per share:
Basic $ 0.16 $ 0.13
Diluted $ 0.14 $ 0.12
3. BUSINESS ACQUISITIONS
On July 31, 2003, the Company entered into a Stock Purchase Agreement with
Portland Professional Pharmacy ("PPRX"), Portland Professional Pharmacy
Associates ("PRXA", and together with PPRX, "PPP") and the individual
shareholders (the "PPP Shareholders") to purchase all of the shares of PPP for
$3,150 (the "PPP Acquisition"). PPP provides specialty-pharmacy services in a
broad range of areas, including women's health, pediatric care, men's health and
transplant. Funds for the PPP Acquisition were supplied by the Company's
revolving credit facility that was put in place in January 2002 (see below). The
Company intends to position PPP as a preferred provider with PPP's target
markets while focusing on the extension of their specialty services to the
Company's PBM division.
The purchase price for the stock of PPP was $3,150. At the time of
acquisition, PPP had approximately $1,664 of assets which included $177 of cash,
$889 of accounts receivable, $539 of inventory and $59 of property and
equipment. PPP also had approximately $1,423 of liabilities which included $609
of bank debt, which was paid off at closing, and $814 of miscellaneous payables.
The acquisition was accounted for under the purchase method of accounting and
the results of PPP'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 $2,946, which
consists of the following components (subject to a formal valuation of the
assets): (i) customer relationships valued at $300, which will be amortized over
five (5) years; (ii) employment and non-compete agreements valued at $100 each,
which will be amortized over three (3) years, and (iii) goodwill of $2,446,
which will not be amortized for book purposes per SFAS 142. For tax purposes,
the Company has made an election which will allow it to amortize the goodwill
and other intangibles over fifteen years. In addition, the Company agreed to pay
to the PPP Shareholders up to $7,000 over a three-year period if the PPP
business achieved certain financial targets.
In connection with the PPP Acquisition, several members of PPP's management
team have joined the Company as employees, and have been granted stock options
to purchase an aggregate of 150,000 shares of Common Stock, under the Company's
1999 Stock Option Plan, as amended. As of August 1, 2003, the Company's
wholly-owned subsidiary, Ascend Specialty Pharmacy Services, Inc. ("Ascend")
assumed all of the shares of PPP. Each of PRXA and PPRX continues to operate
under their respective names, as subsidiaries of Ascend, in the state of Maine.
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"), a New York corporation, 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, $75 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 $1,482, 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 $907, which will not be
amortized for book purposes per SFAS 142. For tax purposes, the goodwill and
other intangibles will be amortized over fifteen years. Funds for this
transaction were supplied by the Company's revolving credit facility. The
Agreement provides that if certain operational milestones are achieved over the
first 12 months, certain amounts will be released from the escrow to the
Sellers. All operational milestones were met and all escrowed dollars were
released to the Sellers in November 2003.
The Company entered into an Asset Purchase Agreement (the "Asset Purchase
Agreement"), dated as of January 29, 2002, with 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. 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 was paid in May 2003 and another $1,000 will be
paid in 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 currently serves as President
of PBM Services for the Company. Additionally, several members of the 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% (3.5% at September 30, 2003) and is
secured by receivables and other assets of the Company and certain of its
subsidiaries as defined. 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 September 30, 2003 was approximately $10,568, which was all classified as
short term. The Facility requires the Company to remain in compliance with
certain financial and other covenants. The Company was in compliance with all
covenants at September 30, 2003.
The summarized unaudited pro forma results of operations set forth below
for the three months ended September 30, 2003 and 2002 assumes the Integrail and
PPP acquisitions had occurred as of the beginning of these periods.
Three Months Ended Three Months Ended
September 30, 2003 September 30, 2002
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Revenues $ 152,169 $ 150,618
Net income (loss) $ 1,621 $ (33)
Net income per common share:
Basic $ 0.21 $ -
Diluted $ 0.19 $ -
Pro forma weighted-average number of common shares outstanding:
Basic 7,641 7,524
Diluted 8,473 7,919
This pro forma financial information is presented for information purposes
only. 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.
4. STOCK OPTIONS
During the three months ended September 30, 2003, the Company granted
306,456 stock options and 4,803 stock options were cancelled for a net of
301,653 stock options under the 1999 Stock Option Plan (the "Plan"). The options
granted during this period are exercisable at prices ranging from $9.75 to
$13.50 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
September 30, 2003 equal 2,237,653, net of 420,030 options exercised to date.
5. EARNINGS PER SHARE
A reconciliation of shares used in calculating basic and diluted earnings
per share follows:
Three Months Ended
September 30,
-------------------------------------
2003 2002
---- ----
Basic 7,640,894 7,524,438
Effect of assumed exercise of employee stock options 787,002 394,815
Effect of assumed exercise of warrants 44,961 -
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Diluted weighted average number of shares outstanding 8,472,857 7,919,253
========= =========
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
September 30, June 30,
2003 2003
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Claims payable $ 81,722 $ 76,195
Rebates payable to sponsors 26,622 24,082
Trade payables, accrued expenses and other payables 8,247 6,398
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$ 116,591 $ 106,675
======= =======
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. For the periods presented, certain general,
administrative and other expenses reflected in the financial statements include
allocations of certain corporate expenses from affiliates, which management
believes were made on a reasonable basis.
General and administrative expenses related to transactions with affiliates
included in the statement of income were $244 for the three months ended
September 30, 2003 and $297 for the three months ended September 30, 2002.
Due from affiliates at June 30, 2003 included a note from a company
affiliated by common ownership. As of September 30, 2003, the entire balance due
from this affiliate, including accrued interest, was paid. This note 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.
On February 8, 2001, the President gave to the Company his Promissory Note
in the amount of $34 as evidence of the loan. On April 12, 2002, the Promissory
Note was amended and the Company agreed to increase the loan to $100. The loan
bears interest at 8%, and was due on April 25, 2003. The interest rate was
lowered effective July 1, 2002 to the rate at which the Company borrows money.
The repayment obligation under the Promissory Note has been satisfied through a
set-off from the bonus paid to the President in July 2003 as part of his annual
compensation, the amount that was otherwise to be payable by the President under
the Promissory Note including accrued interest.
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 was due and payable on September 30, 2003 in
the event the bonus is not earned. The Company is currently negotiating a
settlement which will resolve all monies due to both parties.
The Company currently occupies office space at 26 Harbor Park Drive, Port
Washington, New York 11050 (the "Leased Premises"). The Company subleases the
Leased Premises from an affiliate of the Chairman of the Board (the
"Affiliate"). The Affiliate has the right to purchase the Leased Premises from
the landlord upon expiration of this lease in March 2005. The Affiliate
subleases a portion of the Leased Premises to the Company (the "Lease").
Additional space is currently being built in the Leased Premises which will
allow the Company to reconfigure its existing space and to move all of its
employees in Port Washington into contiguous space. As of October 23, 2003, the
Company and the Affiliate amended the Lease. Effective the later of January 1,
2004 or when the space is ready for occupancy, the Company will lease additional
square footage in the Leased Premises. The total square footage leased by the
Company at that time will be 34,270. The annual rent will then be $531 per annum
plus expenses related to real estate taxes, utilities and maintenance which are
paid directly to the entities to whom payment must be made. Annual rent
increases will be based upon the Consumer Price Index plus 2.5% subject to a
maximum annual cap of 3.5%. The lease expires on December 31, 2013.
8. MAJOR CUSTOMERS AND PHARMACIES
For the three months ended September 30, 2003, approximately 41% of the
consolidated revenues of the Company were from two plan sponsors administering
multiple plans. For the three months ended September 30, 2002 approximately 38%
of the consolidated revenues of the Company were from two plan sponsors
administering multiple plans. Amounts due from these sponsors as of September
30, 2003 approximated $10.3 million.
For the three months ended September 30, 2003 approximately 11% of cost of
claims was from one pharmacy chain. For the three months ended September 30,
2002, approximately 48% of the cost of claims were from three pharmacy chains.
Amounts payable to these pharmacy chains at September 30, 2003 were
approximately $13.7 million.
9. SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended September 30, 2003 and September 30, 2002,
the Company paid $245 and $320 in interest and $958 and $636 in income taxes,
respectively. In a non-cash transaction, the Company issued 41,668 shares of its
common stock, valued at $250, as additional compensation to the shareholders of
PAI in August 2002, respectively.
10. LITIGATION
See Item 1 of Part II of this Quarterly Report on Form 10-Q.
11. SUBSEQUENT EVENTS
On October 31, 2003, the Company announced that it had entered into a
preferred stock purchase agreement dated as of October 30, 2003 with New
Mountain Partners L.P. ("NMP") under which NMP agreed to purchase $80 million of
10-year convertible preferred stock. Cash dividends will be 7% for the first
five years and 3.5% for the last five years. The preferred shares will be
convertible into the Company's common stock at $11.50 per share, as described in
the Stock Purchase Agreement, dated as of October 30, 2003, between the Company
and NMP. The Company will use approximately $50 million of the proceeds to
self-tender for 4.5 million common shares at $11 per share. The Company's self
tender will be available to all shareholders on a pro-rata basis. Bert E.
Brodsky, the Company's largest stockholder, and certain related stockholders,
have agreed to tender up to 4.5 million shares and to vote in support of the
transaction. The remaining invested funds, after the self-tender, net of
transaction costs, are estimated at $22 million and are expected to be used for
growth opportunities. The closing of the transactions is subject to the
satisfaction of certain conditions, including the receipt of required regulatory
approvals.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002
Revenues increased $3.5 million, or approximately 2%, from $147.3 million
for the three months ended September 30, 2002, to $150.8 million for the three
months ended September 30, 2003. Of this increase, $2.9 million was due to the
inclusion of PPP and Integrail which were included in the revenues for the
quarter ended September 30, 2003, but not in the quarter ended September 30,
2002. Another approximate $14 million of the increase was due to revenues
related to new sponsors or new services offered during the quarter ended
September 30, 2003. These increases were offset by a revenue decrease related to
two factors: 1) a major sponsor terminated its contract with Health Card
effective December 31, 2002 leading to a reduction in revenue of approximately
$22 million, and 2) the Company recognized on a net revenue basis certain
contracts during the three months ended September 30, 2003 versus fewer
contracts that the Company recognized on a net revenue basis during the three
months ended September 30, 2002. 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 as compared to gross, there is
no impact on gross profit since neither the revenue nor the related costs of the
prescriptions is recorded. In addition, there was an increase of approximately
$9 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 increased $0.8 million, or approximately 1%, from $136.5
million for the three months ended September 30, 2002, to $137.3 million for the
three months ended September 30, 2003. PPP and Integrail accounted for $2.3
million of the increase. Increases related to the activity of new sponsors as
well as existing sponsors were offset by the two factors described in the
previous paragraph, namely, the loss of a major sponsor and the recognizing of
certain contracts on a net revenue basis. As a percentage of revenues, cost of
claims decreased from 92.6% to 91.0% for the three months ended September 30,
2002 and September 30, 2003, respectively. These same two factors contributed to
the declining costs as a percentage of revenue. The terminated major sponsor is
a managed care organization. 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 this
sponsor 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. The acquisition of PPP in July 2003 also had a minor impact
in reducing the cost of claims as specialty pharmacy distribution typically
generates lower cost of claims than a PBM.
Gross profit increased from $10.9 million for the three months ended
September 30, 2002 to $13.5 million for the three months ended September 30,
2003; a $2.6 million, or 24%, increase. In addition to PPP and Integrail leading
to a small increase in gross profit, the impact on the Company of replacing the
terminated major sponsor with new business was to have lower revenues 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
7.4% to 9.0% for the three months ended September 30, 2002 and September 30,
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 and cost base. Partially offsetting this impact, the Company has
seen some decline in profit margins due to competitive pressures.
Selling, general, and administrative expenses increased $2.2 million, or
approximately 27%, from $8.3 million for the three months ended September 30,
2002 to $10.5 million for the three months ended September 30, 2003.
Approximately $2.0 million, or 88%, of this increase is related to new services
provided by the Company in the three months ended September 30, 2003 which were
not provided by the Company in the three months ended September 30, 2002. These
services include specialty pharmacy distribution through the Company's
acquisition of PPP, predicative modeling and consulting services through the
Company's acquisition of Integrail, and mail order distribution through the
Company's owned facility in Miramar Florida. The Company acquired PPP as of July
31, 2003 (See Note 3 of Item 1). Approximately $642,000 of expenses were
incurred by PPP primarily related to salary and benefits and postage and
supplies during the quarter ended September 30, 2003. The Company acquired
Integrail as of November 1, 2002 (See Note 3 of Item 1). Approximately $461,000
of expenses were incurred by Integrail primarily related to salary and benefits
and depreciation and amortization during the quarter ended September 30, 2003.
Previously, the Company out-sourced the actual fulfillment of prescriptions that
are ordered by mail. By bringing these services in-house the Company believes it
will be better able to control service and cost for its customers. The facility
was operational as of July 2003. For the quarter ended September 30, 2003,
approximately $853,000 of expenses primarily related to salaries and benefits,
shipping costs and insurance were incurred in this endeavor.
General and administrative expenses charged by affiliates decreased
approximately $53,000, or 18%, year-over-year from approximately $297,000 to
approximately $244,000 for the three months ended September 30, 2002 and
September 30, 2003, respectively. The decrease reflects the fact that these
related party services are continuing to be replaced by Company employees.
Selling, general, and administrative expenses as a percent of revenue
increased from 5.7% for the three months ended September 30, 2002 to 7.0% for
the three months ended September 30, 2003. The main reason for the increase is
the impact of recognizing more contracts on a net revenue basis, as that has the
effect of dividing these same expenses over a smaller gross revenue base. In
addition, the three new services described above also led to an increase in this
percentage particularly mail order where resources were required to be hired in
advance of the revenue.
For the three months ended September 30, 2002 and September 30, 2003, the
Company recognized other expense, net, of approximately $226,000 and $176,000,
respectively. The components of the approximate $50,000 decrease in net expense
were an approximate $75,000 decrease in interest expense incurred on the
Company's revolving credit facility (See Note 3 of Item 1), partially offset by
an approximate $25,000 decrease in interest income due to the affiliated company
note being repaid as of July 31, 2003 (See Note 7 of Item 1). The decrease in
interest expense is primarily due to the Company's increased cash generated from
operations 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 $0.5
million, or 21%, from approximately $2.3 million, for the quarter ended
September 30, 2002, to approximately $2.8 million for the quarter ended
September 30, 2003. The primary factors leading to the increase were the gross
profit increase described above and the reduction in interest expense offset by
the increase in selling, general and administrative expenses.
EBITDA (earnings before interest, taxes, depreciation and amortization)
increased by approximately $0.8 million or 21%, from $3.6 million for the three
months ended September 30, 2002 to $4.4 million for the three months ended
September 30, 2003. The primary factor for the increase was the approximate $0.4
million, or 17%, increase in operating income described above. In addition,
there was an approximate $269,000 increase in depreciation and amortization, and
an approximate $68,000 increase in other intangibles amortization related to the
Company's acquisitions. A reconciliation of net income to EBITDA is provided
below.
The effective tax rate was 41% for both periods presented. The tax rate of
41% represents the Company's estimated tax rate for the full fiscal year.
Net income for the quarter ended September 30, 2003 was approximately $1.6
million as compared to approximately $1.4 million for the quarter ended
September 30, 2002; a 21% increase. Earnings per diluted share increased by
$0.02, to $0.19 for the quarter ended September 30, 2003.
The Company has acquired five companies in the last three plus 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
EBITDA is an important measure of its current financial performance. EBITDA is
presented as net income plus the provision for income taxes, other expenses,
net, and 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 not meant to be considered a substitute or replacement for net
income as prepared in accordance with accounting principles generally accepted
in the United States. EBITDA is calculated as follows:
Three Months Ended September 30,
--------------------------------
2003 2002
------------------------- --------------------------
Net income $ 1,646 $ 1,365
Provision for income taxes 1,144 948
Other (income) expense, net 176 226
Depreciation 465 347
Amortization 916 696
------------------------- --------------------------
------------------------- --------------------------
EBITDA $ 4,347 $ 3,582
========================= ==========================
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. Effective July 2003, the
Company also requires cash to carry inventory in its mail order and specialty
pharmacy facilities. The Company also requires cash to execute its strategy of
pursuing acquisitions of other PBM companies or of companies providing related
services. As of September 30, 2003, the Company had a working capital deficit of
$34.7 million as compared to a working capital deficit of $32.6 million as of
June 30, 2003. The primary reasons for the decline in working capital over these
two periods were the cash paid for the acquisition of PPP and the current
liability incurred for consideration to be paid in connection with the Centrus
acquisition. These transactions increased goodwill and other intangible assets
which are long-term assets, while decreasing current assets and inreasing
current liabilities. The Company has now acquired five 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. In addition, the Company's revolving credit
facility is treated all as a short-term liability per generally accepted
accounting principles even though its terms do not expire until January 2005.
Net cash provided by operating activities was $7.6 million for the three
months ended September 30, 2003. Net cash used in operating activities was $0.5
million for the three months ended September 30, 2002. The main factor that led
to the $8.1 million increase in cash provided by operations was the $6.5 million
increase in the change in accounts payables and accrued expenses.
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 $2.9 million for the three months
ended September 30, 2003, as compared to $1.6 million for the three months ended
September 30, 2002. The primary differences in the two periods were the
acquisition of PPP and the repayment of affiliate loans in the period ended
September 30, 2003, and a $1.4 million increase in capital expenditures for the
three months ended September 30, 2003 as compared to the three months ended
September 30, 2002. The net cash outlay for PPP was $3,639,188, representing the
initial payment of $3,150,000 to the Sellers, $608,873 to pay off PPP's bank
debt plus $57,116 of related expenses. Cash in the amount of approximately
$176,801 was assumed in the acquisition. In addition, $114,540 has been accrued
as additional purchase price related to an earn out provision.
During the three months ended September 30, 2003 the Company repaid a net
of approximately $5.1 million under its revolving credit facility. The repayment
of the affiliated note enabled the Company to borrow less during the quarter.
The Company has entered into various capital lease transactions for
hardware and software. The Company has also assumed various capital leases
through its acquisitions. The principal balance of all capital leases as of
September 30, 2003 was approximately $691,000.
The Company has entered into various real estate operating leases with both
related and unrelated parties. The Company has entered into various operating
leases with unrelated third parties for office equipment. These leases have
different payment terms and expiration dates. The Company also entered into a
sale-leaseback operating lease of certain fixed assets (principally computer
hardware and externally developed software) with an affiliate of the Company's
Vice Chairman. See Note 9 to the Consolidated Financial Statements comprising
Item 8 of Form 10 -K, for the year ended June 30, 2003 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 3 to
the financial statements in Part 1. Borrowings of $28.7 million under the
Facility were used to finance part of the purchase price of the Company's
acquisition of Centrus. The Facility contains various covenants that, among
other things, require the Company to maintain certain financial ratios. As of
November 6, 2003 approximately $16.6 million was outstanding under the Facility,
and the Company was in compliance with its financial covenants.
The total future payments under these contractual obligations as of
September 30, 2003, is as follows:
Contractual Obligations Payments Due by Period
($ in thousands)
Total Less than 1-3 Years 4-5 After
1 Year Years 5 Years
----------- -------------- ---------- ---------- ----------
----------- -------------- ---------- ---------- ----------
Long Term Debt $ 10,579 $ 10,579 $ - $ - $ -
Capital Lease Obligations 691 476 215 - -
Operating Leases 11,535 2,641 4,383 1,148 3,363
Sale-leaseback 481 444 37 - -
----------- -------------- ---------- ---------- ----------
----------- -------------- ---------- ---------- ----------
Total Contractual Cash
Obligations $ 23,286 $ 14,140 $ 4,635 $ 1,148 $ 3,363
=========== ============== ========== ========== ==========
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 two years so no
additional consideration was due and payable. It is the Company's expectation
that these amounts will not be earned in the third year 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 after acquisition. The
financial performance targets were achieved during the first year and $2 million
has been earned. Of this amount, $1 million was paid in May 2003 and another $1
million will be paid in 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 after acquisition. These milestones were achieved and all escrowed
funds were released in November 2003.
The shareholders of PPP are eligible to receive additional consideration of
up to $7,000,000, if certain financial targets are met over the first three
years. Such amounts earned are payable within 45 days after the first, second,
and third anniversary of the date of acquisition. In the sole discretion of the
Company, up to 50% of any amounts earned can be paid in the Company's stock in
lieu of cash.
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 five
acquisitions 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. Depending on the Company's evaluation
of future acquisitions, additional cash may be required to complete these
acquisitions. In addition, the Company will require cash to acquire inventory
for its mail order and specialty distribution operations. 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. (See Subsequent Events Note 11 of Item 1). 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, for
the year ended June 30, 2003), 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 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 management in order to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of management, chiefly the
Company's principal executive officer and the Company's 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, the Company's principal executive
officer and the Company's principal financial officer have concluded that these
controls and procedures are effective. There have been no significant changes in
the Company's 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
The legal proceeding described below should be read in conjunction with the
legal proceeding disclosure in the following earlier reports: Part I, Item 3 and
Note 9 to the consolidated financial statements of Health Card's Annual Report
on From 10-K for the year ended June 30, 2003 and Part II, Item 1 of Health
Card's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
An action was commenced against the Company on April 30, 2002 by Midwest
Health Plan Inc. ("MHP") in the United States District Court for the Eastern
District of Michigan. The amended 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 and
breached its fiduciary duties by making a profit. MHP is seeking $3 million
dollars in damages. The Company filed an answer and counterclaim on June 12,
2002. In the counterclaim, the Company claimed damages in excess of $2.8 million
based on Midwest's failure to pay under a contract. In late June 2002, Midwest
agreed to make two payments in the amount of $1.34 million and $1.36 million to
partially settle the Company's claims against Midwest. Midwest has now added a
fiduciary duty claim. The Company continues to have counterclaims totaling over
$200,000 against Midwest for Midwest's failure to pay the amounts it had agreed
to pay Health Card for goods and services. The Company's motion for partial
summary judgment and motion to dismiss the fiduciary duty claim scheduled to be
heard on November 6, 2003 was cancelled. The court has not rescheduled a hearing
date for the partial summary judgment and motion to dismiss. In addition, the
court has not set a trial date. Discovery closed September 30, 2003. The Company
intends to vigorously defend the action.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
For information concerning the Company's 1999 Stock Option Plan, and the
options currently issued and outstanding thereunder, see Note 4 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
2.1 Asset Purchase Agreement dated as of November 1, 2002, by and between Health Card, Integrail Acquisition Corp.,
Health Solutions, Ltd., and certain security holders of Health Solutions, Ltd. (10)
2.2 Assignment Agreement dated as of November 1, 2002, by and between Health Card, Integrail Acquisition Corp., and
Health Solutions, Ltd. (10)
2.3 Stock Purchase Agreement dated July 31, 2003, among Health Card and Portland Professional Pharmacy, Portland Professional
Pharmacy Associates and the individuals listed on Schedule I thereto (12)
3.1 Certificate of Incorporation of Health Card (7)
3.4 By-Laws of Health Card (7)
4.1 Form of Specimen Common Stock Certificate (9)
4.2 Form of Warrant Agreement, including form of Representatives' Warrants (1)
10.1 Mail Service Provider Agreement, dated July 1, 1996, between Health Card and Thrift Drug, Inc. d/b/a
Express Pharmacy Services (1)
10.2 Amendment to Mail Service Provider Agreement, dated January 1, 1997, between Health Card and Thrift Drug, Inc.
d/b/a Express Pharmacy Services (1)
10.3 Software License Agreement and Professional Service Agreement, dated February 18, 1998, between Health Card and
Prospective Health, Inc. (1)
10.4 1999 Stock Option Plan (1)
10.5 Employee Covenant Agreement, dated June 15, 1998, between Health Card and Mary Casale (1)
10.6 Employee Covenant Agreement, dated June 16, 1998, between Health Card and Ken Hammond (1)
10.7 Stock Option Agreement, dated August 3, 1999, between Health Card and Ken Hammond (4)
10.8 Employment Agreement, dated March 27, 2000, between Health Card and David Gershen (4)
10.9 Stock Option Agreement, dated May 1, 2000, between Health Card and David Gershen (4)
10.10 Employment Agreement, dated May 3, 2000, between Health Card and James Bigl (4)
10.11 Stock Option Agreement, dated June 12, 2000, between Health Card and James Bigl (4)
10.12 Stock Option Agreement, dated August 3, 1999, between Health Card and Kenneth J. Daley (4)
10.13 Stock Option Agreement, dated August 3, 1999, between Health Card and Gerald Angowitz (4)
10.14 Assignment, dated November 1, 1996, from Sandata, Inc., to BFS Realty, LLC (1)
10.15 Lease, dated August 10, 1998, between 61 Manorhaven Boulevard, LLC and Health Card (1)
10.16 Letter, dated June 3, 1999, from Bert Brodsky to Health Card (1)
10.17 Letter, dated June 3, 1999, from Gerald Shapiro to Health Card (1)
10.18 Agreement of Guaranty, dated June 1, 1998, by Bert E. Brodsky in favor of Health Card (1)
10.19 Promissory Note, dated July 31, 2000, made payable by P.W. Capital, LLC to the order of Health Card, in the
amount of $3,890,940 (4)
10.20 Letter, dated June 8, 1999, from P.W. Capital Corp. to Health Card (1)
10.21 Letter, dated June 9, 1999, from Bert E. Brodsky to Health Card (1)
10.22 Letter, dated June 8, 1999, from the Bert E. Brodsky Revocable Trust to Health Card (1)
10.23 Letter Agreement, dated June 30, 1999, between the Bert E. Brodsky Revocable Trust and Health Card (1)
10.24 Employment Agreement, dated July 1, 1999, between Health Card and Bert E. Brodsky (1)
10.25 Letter, dated June 8, 1999, from Bert E. Brodsky to Health Card (1)
10.26 Form of Lock-Up Agreement (1)
10.27 Acquisition and Merger Agreement, dated as of June 27, 2000, between Health Card and Pharmacy Associates, Inc. (3)
10.28 Lease Agreement, dated March 4, 1996, between Pharmacy Associates, Inc. and Executive Park Partnership (4)
10.29 Amendment to Lease, dated November 2, 1998, between Pharmacy Associates, Inc. and Executive Park Partnership (4)
10.30 Amendment to Lease, dated November 19, 1998, between Pharmacy Associates, Inc. and Executive Park Partnership (4)
10.31 Lease Agreement, dated July 8, 1999, between Pharmacy Associates, Inc. and Executive Park Partnership (4)
10.32 Asset Purchase Agreement dated as of March 5, 2001 among National Medical Health Card Systems, Inc.,
PMP Acquisition Corp., Provider Medical Pharmaceutical, LLC and members of PMP (5)
10.33 Employment Agreement, dated June 4, 2001, between National Medical Health Card Systems, Inc. and Tery Baskin (6)
10.34 Stock Option Agreement, dated June 4, 2001, between National Medical Health Card Systems, Inc. and Tery Baskin (6)
10.35 Stock Option Agreement, dated June 12, 2001, between National Medical Health Card Systems, Inc. and James Bigl (6)
10.36 Asset Purchase Agreement dated January 29, 2002 by and among the Company, Health Solutions Limited ("HSL"),
HSL Acquisition Corp., a wholly-owned subsidiary of the Company, and the security holders of HSL (8)
10.37 Receivables Purchase and Transfer Agreement dated January 29, 2002 by and among the Company and certain of its
subsidiaries and NMHC Funding, LLC (8)
10.38 Loan and Security Agreement dated January 29, 2002, by and between NMHC Funding, LLC and HFC Healthco-4, LLC, an
affiliate of Healthcare Finance Group, Inc. (8)
10.39 Lease Agreement dated as of August 1, 2001, between National Medical Health Card Systems, Inc. and BFS Realty, LLC (6)
10.40 Amended Lease Agreement dated as of August 1, 2001, between National Medical Health Card Systems, Inc. and
BFS Realty, LLC (6)
10.41 2003 Employee Stock Purchase Plan (11)
10.42 Amendment No. 2 dated April 15, 2002 to Employment Agreement between Health Card and James Bigl (12)
10.43 Amendment No. 3 dated October 14, 2002 to Employment Agreement between Health Card and James Bigl (12)
10.44 Amendment No. 4 dated November 6, 2002 to Employment Agreement between Health Card and James Bigl (12)
10.45 Stock Option Agreement between Health Card and James Bigl dated February 20, 2001 (12)
10.46 Stock Option Agreement between Health Card and James Bigl dated April 30,. 2002 (12)
10.47 Stock Option Agreement between Health Card and James Bigl dated June 26, 2002 (12)
10.48 Stock Option Agreement between Health Card and James Bigl dated July 22, 2003 (12)
10.49 Employment Agreement dated October 14, 2002 between Health Card and Bert Brodsky (12)
10.50 Employment Agreement dated November 20, 2002 between Health Card and Agnes Hall (12)
10.51 Stock Option Agreement between Health Card and Agnes Hall dated January 8, 2001 (12)
10.52 Amendment to Stock Option Agreement between Health Card and Agnes Hall dated January 8, 2001 (12)
10.53 Stock Option Agreement between Health Card and Agnes Hall dated August 10, 2001 (12)
10.54 Amendment to Stock Option Agreement between Health Card and Agnes Hall dated August 10, 2001 (12)
10.55 Stock Option Agreement between Health Card and Agnes Hall dated January 4, 2001
10.56 Amendment to Stock Option Agreement between Health Card and Agnes Hall dated December 4, 2001
10.57 Stock Option Agreement between Health Card and Agnes Hall dated July 31, 2002 (12)
10.58 Amendment to Stock Option Agreement between Health Card and Agnes Hall dated July 31, 2002 (12)
10.59 Stock Option Agreement between Health Card and Agnes Hall dated August 1, 2003 (12)
10.60 First Amendment dated November 6, 2002 to Employment Agreement between Health Card and David Gershen (12)
10.61 Stock Option Agreement between Health Card and David Gershen dated February 20, 2001 (12)
10.62 Stock Option Agreement between Health Card and David Gershen dated September 24, 2001 (12)
10.63 Stock Option Agreement between Health Card and David Gershen dated August 1, 2002 (12)
10.64 Stock Option Agreement between Health Card and David Gershen dated August 1, 2003 (12)
10.65 First Amendment dated November 6, 2002 to Employment Agreement between Health Card and Tery Baskin (12)
10.66 Stock Option Agreement between Health Card and Tery Baskin dated July 20, 2000
10.67 Stock Option Agreement between Health Card and Tery Baskin dated August 10, 2001
10.68 Stock Option Agreement between Health Card and Tery Baskin dated August 1, 2002 (12)
10.69 Stock Option Agreement between Health Card and Tery Baskin dated September 19, 2002 (12)
10.70 Stock Option Agreement between Health Card and Tery Baskin dated August 1, 2003 (12)
10.71 Employment Agreement between Health Card and Patrick McLaughlin dated January 29, 2002 (12)
10.72 Stock Option Agreement between Health Card and Patrick McLaughlin dated January 29, 2002 (12)
10.73 Stock Option Agreement between Health Card and Patrick McLaughlin dated August 1, 2003 (12)
10.74 Amendment to Stock Option Agreement dated January 29, 2002 between Health Card and Patrick McLaughlin (12)
10.75 Stock Option Agreement between Health Card and Gerald Angowitz dated November 20, 2000 (12)
10.76 Stock Option Agreement between Health Card and Gerald Angowitz dated February 20, 2001 (12)
10.77 Stock Option Agreement between Health Card and Gerald Angowitz dated April 9, 2003
10.78 Stock Option Agreement between Health Card and Kenneth J. Daley dated November 20, 2000 (12)
10.79 Stock Option Agreement between Health Card and Kenneth J. Daley dated February 20, 2001 (12)
10.80 Stock Option Agreement between Health Card and Kenneth J. Daley dated April 9, 2003
10.81 Stock Option Agreement between Health Card and Ronald L. Fish dated November 20, 2000 (12)
10.82 Stock Option Agreement between Health Card and Ronald L. Fish dated February 20, 2001(12)
10.83 Stock Option Agreement between Health Card and Ronald L. Fish dated April 9, 2003
10.84 Stock Option Agreement between Health Card and Paul J. Konigsberg dated November 20, 2000 (12)
10.85 Stock Option Agreement between Health Card and Paul J. Konigsberg dated February 20, 2001 (12)
10.86 Stock Option Agreement between Health Card and Paul J. Konigsberg dated April 9, 2003
10.87 Stock Option Agreement between Health Card and Bert E. Brodsky dated February 20, 2001 (12)
10.88 Stock Option Agreement between Health Card and Gerald Shapiro dated February 20, 2001 (12)
10.89 Lease dated November 1, 2002 between B/A Airport Park Solutions, LLC and Health Card (12)
10.90 Lease Addendum dated March 10, 2003 between B/A Airport Park Solutions, LLC and Health Card (12)
10.91 Lease Agreement dated November 18, 2002 between Sunbeam Development Corporation and NMHCRx Mail Order, Inc. (12)
10.92 Lease Expansion and Modification Agreement dated July 31, 2003 between Sunbeam Development Corporation and
NMHCRx Mail Order, Inc. (12)
10.93 AmerisourceBergen Prime Vendor Agreement, dated July 21, 2003 between NMHCRx Mail Order, Inc. d/b/a NMHCmail
and AmerisourceBergen Drug Corporation (12)
14. Code of Ethics (12) 21. List of Subsidiaries (12)
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 29, 2003 (12)
23.2 Consent of Goldstein Golub Kessler LLP to the incorporation by reference in the Registration Statement on
Form S-8 (File No. 333-8224) of its report dated September 29, 2003 (12)
31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act
31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act
32.1 Section 1350 Certification of CEO as adopted by Section 906 of the Sarbanes-Oxley Act
32.2 Section 1350 Certification of CFO as adopted by Section 906 of the Sarbanes-Oxley Act
(1) Denotes document filed as an Exhibit to Health Card's Registration Statement on Form S-1 (Registration Number: 333-72209) and
incorporated herein by reference.
(2) Denotes documentation filed as an Exhibit to Health Card's Report on Form 10-K for the fiscal year ended June 30, 1999.
(3) Denotes document filed as an Exhibit to Health Card's Form 8-K for an event dated July 20, 2000 and incorporated herein by
reference.
(4) Denotes documentation filed as an Exhibit to Health Card's Report on Form 10-K for the year ended June 30, 2000.
(5) Denotes document filed as an Exhibit to Health Card's Form 8-K for an event dated March 5, 2001.
(6) Denotes document filed as an Exhibit to Health Card's Report on Form 10-K for the year ended June 30, 2001.
(7) Denotes document filed as an Exhibit to Health Card's Definitive Proxy Statement on Schedule 14-A filed on December 21, 2001
and incorporated herein by reference.
(8) Denotes document filed as an Exhibit to Health Card's Current Report on Form 8-K for events dated January 29, 2002 and
incorporated herein by reference.
(9)Denotes document filed as an Exhibit to Health Card's Amendment number 1 on Form 8-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-Q for the quarter ended September 30, 2002 and incorporated
herein by reference.
(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.
(12)Denotes document filed as an Exhibit to Health Card's Report on Form 10-K for the year ended June 30, 2003.
(b) Reports on Form 8-K
A Form 8-K was filed with the Securities and Exchange Commission on
August 12, 2003 in connection with the acquisition of PPP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
(Registrant)
Date: November 14, 2003 By: /s/ James J. Bigl
--------------------------------------
James J. Bigl,
Chief Executive Officer
By: /s/Stuart F.Fleischer
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Stuart F. Fleischer
Chief Financial Officer