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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 December 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 of (IRS Employer Identification No.)
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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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
--- ---
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
February 6, 2004 was 7,965,327 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
December 31, 2003 (unaudited) and June 30, 2003
CONSOLIDATED STATEMENT OF INCOME (unaudited) 5
for the three months and six months ended December 31, 2003 and 2002
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) 6
for the six months ended December 31, 2003 and 2002
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 17
CONDITION AND RESULTS OF OPERATIONS
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 29
MARKET RISK
ITEM 4 - CONTROLS AND PROCEDURES 29
PART II - OTHER INFORMATION 31
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ITEM 1 - LEGAL PROCEEDINGS 31
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS 31
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 31
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 32
ITEM 5 - OTHER INFORMATION 32
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 32
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)
December 31, June 30,
Assets 2003 2003
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Current: (Unaudited)
Cash and cash equivalents (including cash equivalent investments of $1,189 $ 7,019 $5,222
in each period)
Restricted cash
2,088 2,383
Accounts receivable, less allowance for doubtful accounts of $2,366 65,727 52,022
and $2,014, respectively
Rebates receivable 20,508 24,584
Inventory 1,814 -
Due from affiliates 274 4,165
Deferred tax asset 2,065 2,065
Other current assets 1,983 1,714
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Total current assets 101,478 92,155
Property, equipment and software development costs, net 9,683 8,239
Intangible assets, net of accumulated amortization of $1,655 and 2,438 2,291
$1,210, respectively
Goodwill 57,385 53,669
Other assets 369 386
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Total Assets $ 171,353 $ 156,740
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Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 121,523 $ 106,675
Revolving credit facility and loans payable-current 8,778 15,683
Current portion of capital lease obligations 468 481
Due to officer/stockholder - 1,117
Income taxes payable 2,015 629
Other current liabilities 155 137
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Total current liabilities 132,939 124,722
Capital lease obligations, less current portion 101 327
Long term loans payable and other liabilities 2,207 1,020
Deferred tax liability 2,245 2,245
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Total liabilities 137,492 128,314
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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, 8,099,997 and
7,812,907 shares issued, 7,908,997 and 7,621,907 outstanding, respectively 8 8
Additional paid-in-capital 16,597 15,027
Retained earnings 18,000 14,135
Treasury stock at cost, 191,000 shares (744) (744)
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Total stockholders' equity 33,861 28,426
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Total Liabilities and Stockholders' Equity $ 171,353 $ 156,740
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See accompanying condensed notes to consolidated financial statements
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
Three months ended Six months ended
December 31, December 31,
2003 2002 2003 2002
---- ---- ---- ----
Revenue (includes co-payments collected of $125, $0, $161 and $ 163,896 $ 150,964 $ 314,725 $ 298,331
$0, respectively. Excludes co-payments retained by the
pharmacies of $50,950, $49,384, $97,519 and $74,332,
respectively)
Cost of claims (excludes co-payments retained by the 148,219 139,308 285,533 275,796
pharmacies of $50,950, $49,384, $97,519 and $74,332,
respectively)
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Gross Profit 15,677 11,656 29,192 22,535
Selling, general and administrative expenses 11,821 8,677 22,369 17,018
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Operating income 3,856 2,979 6,823 5,517
Other income (expense):
Interest expense (160) (311) (405) (631)
Interest income 31 71 62 127
Other income, net 42 38 81 77
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(87) (202) (262) (427)
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Income before provision for income taxes 3,769 2,777 6,561 5,090
Provision for income taxes 1,551 1,139 2,696 2,087
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Net income 2,218 $ 1,638 $ 3,865 $ 3,003
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Earning per common share:
Basic 0.29 $ 0.22 $ 0.50 $ 0.40
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Diluted 0.25 $ 0.20 $ 0.45 $ 0.38
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Weighted average number of common shares outstanding:
Basic 7,764 7,611 7,703 7,568
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Diluted 8,888 8,088 8,681 8,004
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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
(Amounts in thousands)
(Unaudited)
Six months ended
December 31,
2003 2002
Cash flows from operating activities:
Net income $ 3,865 $ 3,003
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,722 2,123
Amortization of deferred gain (212)
(77)
Net gain on disposal of capital assets 269 -
Provision for doubtful accounts 352 418
Compensation expense accrued to officer/stockholder 37 278
Interest accrued on stockholders'/affiliate's loans - (84)
Changes in assets and liabilities, net of effect from acquisitions:
Restricted cash 295 664
Accounts receivable (13,168) 703
Rebates receivable 4,076 (7,455)
Inventory (1,275) -
Other current assets (267) (936)
Due to/from affiliates (32) (273)
Other assets (79) 5
Accounts payable and accrued expenses 12,716 5,595
Income taxes payable and other current liabilities 1,401 (462)
Other long term liabilities 1,398 275
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Net cash provided by operating activities 12,098 3,777
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Cash flows from investing activities:
Capital expenditures (3,928) (768)
Repayment of loan from affiliate 2,660 -
Repayment of loan from officer 107 -
Proceeds from disposal of capital assets - 22
Acquisition of Integrail (16) (1,449)
Acquisition of PAI - (1,000)
Acquisition of Centrus - (3)
Acquisition of PPP, net of cash acquired (3,646) -
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Net cash used in investing activities (4,823) (3,198)
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Cash flows from financing activities:
Proceeds from exercise of stock options 1,571 418
Repayment of convertible note offering - (8,000)
Proceeds from revolving credit facility 400,838 335,650
Repayment of revolving credit facility (407,726) (328,542)
Deferred financing costs 95 94
Repayment of debt and capital lease obligations (256) (509)
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Net cash used in financing activities (5,478) (889)
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Net increase (decrease) in cash and cash equivalents 1,797 (310)
Cash and cash equivalents at beginning of period 5,222 1,768
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Cash and cash equivalents at end of period $ 7,019 $ 1,458
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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"), 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
December 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 for the year ended June 30, 2003. The results of operations for the three
and six month periods ended December 31, 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 December 31,
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2003 2002
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Reported net income $ 2,218 $ 1,638
Stock compensation expense included in net - -
income
Pro forma compensation expense (499) (413)
Pro forma net income $ 1,719 $ 1,225
Pro forma earnings per share:
Basic $ 0.22 $ 0.16
Diluted $ 0.19 $ 0.15
Six Months Ended December 31,
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2003 2002
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Reported net income $ 3,865 $ 3,003
Stock compensation expense included in net - -
income
Pro forma compensation expense (985) (792)
Pro forma net income $ 2,880 $ 2,211
Pro forma earnings per share:
Basic $ 0.37 $ 0.29
Diluted $ 0.33 $ 0.28
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 $2,973, which
consists of the following components (subject to a final formal valuation of the
assets): (i) customer relationships valued at $295, which will be amortized over
seven (7) years; (ii) employment and non-compete agreements valued at $100 each,
which will be amortized over four (4) years; (iii) the Portland Professional
Pharmacy trade name valued at $100 which will be amortized over four (4) years;
and (iv) goodwill of $2,378, 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. To date, $322 has
been earned and accrued.
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")
acquired 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 (the "Escrowed Amount") 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 $1,719, which consists of the
following components: (i) software and company know how valued at $797, which
will be amortized over three (3) years; and (ii) goodwill of $922, 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. With the
achievement of certain operational milestones for the first 12 months specified
in the Agreement, the entire Escrowed Amount was 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 "Centrus
Acquisition"). The aggregate purchase price of the Centrus Acquisition was
$40,000 in cash. 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 Centrus 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. 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. As of the current
date, it appears, subject to final adjustments, that the minimum performance
targets for the second year will be achieved during the second year which would
obligate the Company to pay up to a maximum of an additional $1,000 in May 2004
and $1,000 in May 2005.
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 borrowings of up to $40,000 at the London
InterBank Offered Rate (LIBOR) plus 2.40% (3.52% at December 31, 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 Centrus Acquisition and will also be
used by the Company and certain of its subsidiaries for working capital purposes
and future acquisitions in support of its business plan. The outstanding balance
as of December 31, 2003 was approximately $8,774, which was all classified as
short term debt. The Facility requires the Company to remain in compliance with
certain financial and other covenants. The financial maintenance covenants
include: 1) consolidated net worth (total assets less total liabilities), 2)
consolidated tangible net worth (consolidated net worth less intangible assets),
3) quarterly EBITDA, 4) accounts receivable turnover (revenue divided by
accounts receivable), 5) debt to consolidated net worth, 6) current assets to
current liabilities, 7) consolidated interest coverage ratio (EBITDA less
capital expenditures divided by interest expense, 8) annual capital
expenditures, and 9) debt service coverage (EBITDA divided by interest expense
plus short term debt excluding borrowings under the Facility). Other covenants
under the Facility restrict the Company's ability to pay dividends, incur senior
debt, and sell assets other than in the ordinary course. The Company was in
compliance with all covenants at December 31, 2003.
The summarized unaudited pro forma results of operations set forth below for the
three and six months ended December 31, 2003 and 2002 assumes the Integrail and
PPP acquisitions had occurred as of the beginning of these periods.
Three Months Ended Three Months Ended
December 31, 2003 December 31, 2002
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Revenue $ 163,896 $ 154,881
Net income (loss) $ 2,218 $ 1,325
Net income per common share:
Basic $ 0.29 $ 0.17
Diluted $ 0.25 $ 0.16
Pro forma weighted-average number of
common shares outstanding:
Basic 7,764 7,611
Diluted 8,888 8,088
Six Months Ended Six Months Ended
December 31, 2003 December 31, 2002
----------------- -----------------
Revenue $ 316,064 $ 305,499
Net income (loss) $ 3,840 $ 1,292
Net income per common share:
Basic $ 0.50 $ 0.17
Diluted $ 0.44 $ 0.16
Pro forma weighted-average number of
common shares outstanding:
Basic 7,703 7,568
Diluted 8,681 8,004
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.
The change in the carrying amount of goodwill for the six months ended
December 31, 2003 is as follows:
Balance as of July 1, 2003 $ 53,669
PPP acquisition 2,378
PPP additional consideration earned 322
Centrus additional consideration earned 1,000
Integrail final valuation 16
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-----------------
Balance as of December 31, 2003 $ 57,385
Approximately $49,512 of the Company's December 31, 2003 goodwill is deductible
for income tax purposes on a straight-line basis over 15 years.
4. STOCK OPTIONS
During the six months ended December 31, 2003, the Company granted 494,671
stock options and 83,739 stock options were cancelled for a net of 410,932 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 $21.13 and
terminate five to ten 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 December 31, 2003
equal 2,149,736, net of 619,226 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 December 31,
-------------------------------------
2003 2002
---- ----
Basic 7,764,485 7,610,907
Effect of assumed exercise of employee stock options 1,083,754 476,908
Effect of assumed exercise of warrants 40,154 -
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Diluted weighted average number of shares outstanding 8,888,393 8,087,815
========== =========
Six Months Ended December 31,
-------------------------------------
2003 2002
---- ----
Basic 7,702,690 7,567,673
Effect of assumed exercise of employee stock options 935,378 435,862
Effect of assumed exercise of warrants 42,558 -
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Diluted weighted average number of shares outstanding 8,680,626 8,003,535
========== =========
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
December 31, June 30,
2003 2003
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Claims payable $ 82,966 $ 76,195
Rebates payable to sponsors 31,228 24,082
Trade payables, accrued expenses and other payables 7,329 6,398
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$ 121,523 $ 106,675
======= =======
7. RELATED PARTY TRANSACTIONS
As of January 1, 2002, the Company had 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 $235 for the three months ended
December 31, 2003 and $223 for the three months ended December 31, 2002.
Included in the statement of income for the six months ended December 31, 2003
and 2002 were general and administrative expenses related to transactions with
affiliates of $478 and $520, respectively.
Due from affiliates at June 30, 2003 included a note from a company
affiliated by common ownership. As of December 31, 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, including accrued interest
has been satisfied through a set-off from the bonus paid to the President in
July 2003 as part of his annual compensation.
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 loaned him $250 as
an advance against the potential bonus. The loan was evidenced by a promissory
note made in favor of the Company. The loan bore an interest rate of 9% and was
due and payable on September 30, 2003 in the event the bonus was not earned. A
bonus has been paid and the loan repaid as of January 2004.
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 for a purchase price of
$1. 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 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. In addition, the Company has early
termination rights which it may exercise by delivery of a notice to the landlord
60 days prior to the end of the December 31, 2008 lease year. In consideration
of such early termination rights, the Company would pay to the Affiliate the
rent that would otherwise be payable by the Company to the Affiliate for the
succeeding 30 months, subject to adjustments if the Affiliate is able to lease
the Leased Premises to another party during said 30 month period. Leasehold
improvements made to this facility were $1,214 during the six months ended
December 31, 2003.
8. MAJOR CUSTOMERS AND PHARMACIES
For the three and six months ended December 31, 2003, approximately 39% and
40%, respectively, of the consolidated revenue of the Company was from two plan
sponsors, MVP Health Plan, Inc. and Boston Medical Center HealthNet,
administering multiple plans. For the three and six months ended December 31,
2002 approximately 46% and 42%, respectively, of the consolidated revenue of the
Company was from two plan sponsors administering multiple plans. Amounts due
from these sponsors as of December 31, 2003 approximated $11.4 million.
For the three months ended December 31, 2003 approximately 46% of cost of
claims was from three pharmacy chains. For the three months ended December 31,
2002, approximately 50% of the cost of claims were from three pharmacy chains.
For the six months ended December 31, 2003 approximately 33% of cost of claims
was from three pharmacy chains. For the six months ended December 31, 2002,
approximately 49% of the cost of claims were from three pharmacy chains. Amounts
payable to the three pharmacy chains at December 31, 2003 were approximately
$23.2 million.
9. SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended December 31, 2003 and December 31, 2002, the
Company paid $405 and $631 in interest and $1,308 and $1,506 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.
10. LITIGATION
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 is currently
scheduled to be heard in February, 2004. The court has not set a trial date.
Discovery closed September 30, 2003. The Company intends to vigorously defend
the action. The Company is unable to provide an estimate of any particular loss,
if any, which may be associated with the MHP claims.
11. RECENT DEVELOPMENTS
The Company entered into an amended and restated preferred stock purchase
agreement, dated as of November 26, 2003, with New Mountain Partners, L.P. (the
"purchase agreement"). Pursuant to the purchase agreement, the Company agreed,
subject to various conditions, to issue to New Mountain Partners a total of
6,956,522 shares of series A preferred stock at a purchase price of $11.50 per
share, for aggregate proceeds of approximately $80,000. Once certain conditions
have been met or waived, including receipt of certain stockholder approvals
sought by a definitive proxy statement to be distributed to the Company's
stockholders, the Company will be obligated to complete the sale of the series A
preferred stock to New Mountain Partners and to use approximately $50,000 of the
proceeds of the sale of the series A preferred stock to fund the purchase price
for a tender offer for up to 4,545,455 shares of the Company's outstanding
common stock at $11.00 per share. Bert Brodsky, the chairman of the board of
directors, and certain stockholders related to him, currently hold (assuming the
exercise of 330,000 options and warrants held by Mr. Brodsky), in the aggregate,
approximately 60% of the Company's outstanding common stock and have agreed to
tender 4,448,900 shares, or approximately 54% of the Company's outstanding
common stock, held by them, into the tender offer.
If the tender offer is fully subscribed by the Company's stockholders and
assuming the exercise of 330,000 options and warrants held by Mr. Brodsky, after
the tender offer is completed, New Mountain Partners will own securities that
are initially convertible into approximately 65% of the Company's issued and
outstanding common stock and prior to conversion of the series A preferred stock
will be entitled to cast that number of votes that is equal to approximately 61%
of the Company's aggregate voting power. Following the closing of the sale of
the series A preferred stock and the tender offer (collectively, the
"Contemplated Transactions"), New Mountain Partners will initially be entitled
to nominate and elect 60% of the members of the Company's board of directors.
The Company will primarily use the remaining proceeds from the issuance and
sale of the series A preferred stock of approximately $22 million, excluding
expenses related to the closing of the Contemplated Transactions, for potential
acquisitions and working capital purposes. However, except under certain
circumstances, the Company will be prohibited from using such proceeds to pay
any outstanding amounts due under the Company's outstanding credit facility for
six months following the closing of the Contemplated Transactions.
The preferred stock will provide for an initial annual cash dividend equal
to 7% of the investment amount, which decreases to 3.5% after the fifth
anniversary of issuance. The preferred stock will be convertible into common
stock at a price of $11.50 per share of common stock, or an aggregate of
approximately 7 million shares of the Company's common stock.
The series A preferred stock may be redeemed at the Company's option
subsequent to the fourth anniversary of its issuance, subject to certain
conditions. After the tenth anniversary of the issuance of the series A
preferred stock, each holder of shares of series A preferred stock may require
the Company to redeem all or a part of that holder's shares of series A
preferred stock.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended December 31, 2003
Compared to Three Months Ended December 31, 2002
Revenue increased $12.9 million, or approximately 9%, from $151.0 million
for the three months ended December 31, 2002, to $163.9 million for the three
months ended December 31, 2003. Revenue recognized for contracts recorded on a
gross revenue basis was $150.7 million for the three months ended December 31,
2002 and $163.4 million for the three months ended December 31, 2003. Revenue
recognized for contracts recorded on a net revenue basis was $0.3 million for
the three months ended December 31, 2002 and $0.5 million for the three months
ended December 31, 2003. 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 prescription revenue nor the related costs of the
prescriptions is recorded. Health Card includes in revenue only those
co-payments collected in its mail order facility in Miramar, Florida. For the
three months ended December 31, 2003, there was approximately $125,000 of
co-payments included in revenue versus zero for the three months ended December
31, 2002. Co-payments retained by pharmacies on prescriptions filled for Health
Card's members and not included in Health Card's revenue were $51.0 million and
$49.4 million, for the three months ended December 31, 2003 and 2002,
respectively.
Of the $12.9 million increase in revenue in the three months ended December
31, 2003, $4.5 million was due to the inclusion of PPP which was included in the
revenue for the quarter ended December 31, 2003, but not in the quarter ended
December 31, 2002. Another approximate $28.3 million of the increase was due to
revenue related to new sponsors or new services offered during the quarter ended
December 31, 2003 excluding contracts recorded on a net revenue basis. An
additional increase of approximately $23.6 million was attributable to other
existing sponsors related to, among other things, higher costs for
pharmaceuticals, availability of new drugs, plan participant growth and an
increase in the average number of claims per plan participant, as well as
changes in the amount of rebates retained and other miscellaneous revenue items.
These revenue increases were offset by revenue decreases related to: 1) the
termination of existing customer contracts including a major sponsor, which
terminated its contract with Health Card effective December 31, 2002, leading to
a reduction in revenue of approximately $41.1 million, and 2) the Company
recognized on a net revenue basis one contract during the three months ended
December 31, 2003 that was recognized on a gross revenue basis for one month
during the three months ended December 31, 2002. Due to a change in contract
terms effective November 1, 2002, this customer's revenue was recognized on a
net basis from that point. The revenue impact of this change was a reduction in
gross revenue of approximately $2.4 million.
Cost of claims increased $8.9 million, or approximately 6%, from $139.3
million for the three months ended December 31, 2002, to $148.2 million for the
three months ended December 31, 2003. PPP accounted for $3.7 million of the
increase. Increases in cost of claims totaling approximately $48.3 million
related to the activity of new sponsors as well as the growth in existing
sponsors were offset by the factors described in the previous paragraph, namely,
the loss of sponsors which reduced cost of claims by approximately $39.4 million
and the recognizing of a certain contract on a net revenue basis which reduced
cost of claims by approximately $2.4 million. In addition, cost of claims was
reduced by the fact that there was an increase of $1.3 million in gross rebates
received, which is treated as a reduction in cost of claims. As a percentage of
revenue, cost of claims decreased from 92.3% to 90.4% for the three months ended
December 31, 2002 and December 31, 2003, respectively. These same 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 decreased 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
an impact in reducing the cost of claims as specialty pharmacy distribution
typically generates lower cost of claims than a PBM.
Gross profit increased from $11.7 million for the three months ended
December 31, 2002 to $15.7 million for the three months ended December 31, 2003;
a $4.0 million, or 34.5%, increase. In addition to PPP adding approximately
$800,000 to gross profit, the replacement of the terminated major sponsor with
new greater margin business led to greater gross profits for the Company,. Gross
profit, as a percentage of revenue, increased from 7.7% to 9.6% for the three
months ended December 31, 2002 and December 31, 2003, respectively. The
contracts the Company recognizes on a net revenue basis have the effect of
improving the Company's gross margin as a percentage of revenue due to the fact
that recorded revenue and cost is lower since only the administrative fees
related to these contracts are recorded. Competitive pressures which have led to
a decline in some prices that the Company charges its sponsors, have had the
effect of partially offsetting the increases in gross margin described above.
Selling, general, and administrative expenses increased $3.1 million, or
approximately 36%, from $8.7 million for the three months ended December 31,
2002 to $11.8 million for the three months ended December 31, 2003.
Approximately $2.1 million, or 71%, of this increase in selling, general, and
administrative expenses is related to new entities which were part of the
Company in the three months ended December 31, 2003 which were not part of the
Company during all of the three months ended December 31, 2002. The services
provided by these entities include specialty pharmacy distribution through the
Company's acquisition of PPP as of July 31, 2003 (see Note 3 of Item 1),
predictive modeling and consulting services through the Company's acquisition of
Integrail as of November 1, 2002 (see Note 3 of Item 1), and mail order
distribution through the Company's owned facility in Miramar, Florida as of
July, 2003. The major components of the $2.1 million increase in expenses
related to new services was: 1) salaries and benefits - approximately $822,000,
2) postage and supplies - approximately $174,000, 3) equipment rental -
approximately $165,000, and 4) depreciation and amortization - approximately
$152,000.
General and administrative expenses charged by affiliates increased
approximately $12,000, or 5%, year-over-year from approximately $223,000 to
approximately $235,000 for the three months ended December 31, 2002 and December
31, 2003, respectively. The increase reflects escalations on existing rental
properties rather than an increase in services provided.
Selling, general, and administrative expenses as a percent of revenue
increased from 5.7% for the three months ended December 31, 2002 to 7.2% for the
three months ended December 31, 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 which led to an increase of 0.7% due to the
fact that resources were required to be hired in advance of the revenue.
For the three months ended December 31, 2002 and December 31, 2003, the
Company recognized other expense, net, of approximately $202,000 and $87,000,
respectively. The components of the approximate $115,000 decrease in net expense
were an approximate $151,000 decrease in interest expense incurred on the
Company's revolving credit facility (See Note 3 of Item 1) and an approximate
$4,000 increase in other income related to the amortization of a deferred gain
on a sale leaseback. These increases were partially offset by an approximate
$40,000 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 $1.0
million, or 36%, from approximately $2.8 million, for the quarter ended December
31, 2002, to approximately $3.8 million for the quarter ended December 31, 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 related to the new activities.
The effective tax rate was approximately 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 December 31, 2003 was approximately $2.2
million as compared to approximately $1.6 million for the quarter ended December
31, 2002; a 35% increase. Earnings per diluted share increased by $0.05, to
$0.25 for the quarter ended December 31, 2003.
Six Months Ended December 31, 2003
Compared to Six Months Ended December 31, 2002
Revenue increased $16.4 million, or approximately 6%, from $298.3 million
for the six months ended December 31, 2002, to $314.7 million for the six months
ended December 31, 2003. Revenue recognized for contracts recorded on a gross
revenue basis was $297.8 million for the six months ended December 31, 2002 and
$313.6 million for the six months ended December 31, 2003. Revenue recognized
for contracts recorded on a net revenue basis was $0.5 million for the six
months ended December 31, 2002 and $1.1 million for the six months ended
December 31, 2003. 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 prescription revenue nor the related costs of the
prescriptions is recorded. Health Card includes in revenue only those
co-payments collected in its mail order facility. For the six months ended
December 31, 2003, there was approximately $161,000 of co-payments included in
revenue versus zero for the six months ended December 31, 2002. Co-payments
retained by pharmacies on prescriptions filled for Health Card's members and not
included in Health Card's revenue were $97.5 million and $74.3 million, for the
six months ended December 31, 2003 and 2002, respectively.
Of the $16.4 million increase in revenue in the six months ended December
31, 2003, $7.3 million was due to the inclusion of PPP which was included in the
revenue for the six months ended December 31, 2003, but not in the six months
ended December 31, 2002. Another approximate $51.2 million of the increase was
due to revenue related to new sponsors or new services offered during the six
months ended December 31, 2003 excluding contracts recorded on a net revenue
basis. An additional increase of approximately $67.7 million was attributable to
other existing sponsors related to, among other things, higher costs for
pharmaceuticals, availability of new drugs, plan participant growth and an
increase in the average number of claims per plan participant, as well as
changes in other miscellaneous revenue items. These revenue increases were
offset by revenue decreases related to: 1) the termination of existing customer
contracts including a major sponsor, which terminated its contract with Health
Card effective December 31, 2002, leading to a reduction in revenue of
approximately $97.3 million, 2) the Company recognized on a net revenue basis
one contract during the six months ended December 31, 2003 that was recognized
on a gross revenue basis for four months during the six months ended December
31, 2002. Due to a change in contract terms effective November 1, 2002, this
customer's revenue was recognized on a net basis from that point. The revenue
impact of this change was a reduction in gross revenue of approximately $9.2
million, and 3) rebates payable to the Company's sponsors increased by $3.3
million for the six months ended December 31, 2003 as compared to the six months
ended December 31, 2002. Since these rebates are treated as a reduction in
revenue, this led to a reduction in the overall year-over-year revenue increase.
Cost of claims increased $9.7 million, or approximately 4%, from $275.8
million for the six months ended December 31, 2002, to $285.5 million for the
six months ended December 31, 2003. PPP accounted for $6.0 million of the
increase. Increases in cost of claims totaling approximately $110.1 million
related to the activity of new sponsors as well as the growth in existing
sponsors were offset by the factors described in the previous paragraph, namely,
the loss of sponsors which reduced cost of claims by approximately $92.6 million
and the recognizing of a certain contract on a net revenue basis which reduced
cost of claims by approximately $9.2 million. In addition, cost of claims was
reduced by the fact that there was an increase of $4.6 million in gross rebates
received, which is treated as a reduction in cost of claims. As a percentage of
revenues, cost of claims decreased from 92.4% to 90.7% for the six months ended
December 31, 2002 and December 31, 2003, respectively. These same 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
an impact in reducing the cost of claims as specialty pharmacy distribution
typically generates lower cost of claims than a PBM.
Gross profit increased from $22.5 million for the six months ended December
31, 2002 to $29.2 million for the six months ended December 31, 2003, a $6.7
million, or 29.5%, increase. In addition to PPP adding $1.3 million to gross
profit, the replacement of the terminated major sponsor with new greater margin
business led to greater gross profits for the Company. Gross profit, as a
percentage of revenue, increased from 7.6% to 9.3% for the six months ended
December 31, 2002 and December 31, 2003, respectively. The contracts the Company
recognizes on a net revenue basis have the effect of improving the Company's
gross margin as a percentage of revenue due to the fact that recorded revenue
and cost is lower since only the administrative fees related to these contracts
are recorded. Competitive pressures which have led to a decline in some prices
that the Company charges its sponsors has had the effect of partially offsetting
the increases in gross margin described above.
Selling, general, and administrative expenses increased $5.4 million, or
approximately 31%, from $17.0 million for the six months ended December 31, 2002
to $22.4 million for the six months ended December 31, 2003. Approximately $4.1
million, or 78%, of this increase in selling, general, and administrative
expenses is related to new entities which were part of the Company in the six
months ended December 31, 2003 which were not part of the Company during all of
the six months ended December 31, 2002. The services provided by these entities
include specialty pharmacy distribution through the Company's acquisition of
PPP, predictive 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 major components of the $4.1 million
increase in expenses related to new services was: 1) salaries and benefits -
approximately $1,643,000, 2) postage and supplies - approximately $315,000, 3)
equipment rental - approximately $184,000, 4) travel and entertainment -
approximately $184,000, and 5) depreciation and amortization - approximately
$227,000.
Of the remaining approximate 22% increase in selling, general and
administrative expenses during the six months ended December 31, 2003, the
majority of the increase is related to the increased revenue and volume in the
PBM. Salary and benefits related to new hires, temporary help, travel and
entertainment, and commissions to internal sales people as well as external
brokers have all increased year over year due to the increased volume of
activity.
General and administrative expenses charged by affiliates decreased
approximately $42,000, or 8%, year-over-year from approximately $520,000 to
approximately $478,000 for the six months ended December 31, 2002 and December
31, 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 six months ended December 31, 2002 to 7.1% for the
six months ended December 31, 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 which led to an increase of 0.6% due to the
fact that resources were required to be hired in advance of the revenue.
For the six months ended December 31, 2002 and December 31, 2003, the
Company recognized other expense, net, of approximately $427,000 and $262,000,
respectively. The components of the approximate $165,000 decrease in net expense
were an approximate $226,000 decrease in interest expense incurred on the
Company's revolving credit facility (See Note 3 of Item 1) and an approximate
$4,000 increase in other income related to the amortization of a deferred gain
on a sale leaseback. These increases were partially offset by an approximate
$65,000 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 $1.5
million, or 29%, from approximately $5.1 million, for the six months ended
December 31, 2002, to approximately $6.6 million for the six months ended
December 31, 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 related to the new
activities.
The effective tax rate was approximately 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 six months ended December 31, 2003 was approximately
$3.9 million as compared to approximately $3.0 million for the six months ended
December 31, 2002; a 29% increase. Earnings per diluted share increased by
$0.07, to $0.45 for the six months ended December 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. 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 December 31, 2003, the Company had a working capital deficit of
$31.5 million as compared to a working capital deficit of $32.6 million as of
June 30, 2003. The primary reason for the improvement in working capital was the
profitability generated by the Company during the six months ended December 31,
2003. This improvement was achieved even after the $3.6 million in cash paid for
the acquisition of PPP and the $1.3 million current liability incurred for
additional consideration to be paid in connection with the Centrus and PPP
acquisitions. These transactions increased goodwill and other intangible assets
which are long-term assets, while decreasing working capital. 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 $12.1 million for the six
months ended December 31, 2003. Net cash provided by operating activities was
$3.8 million for the six months ended December 31, 2002. The main factor that
led to the $8.3 million increase in cash provided by operations was the $7.1
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 $4.8 million for the six months
ended December 31, 2003, as compared to $3.2 million for the six months ended
December 31, 2002. The primary differences in the two periods were the
acquisition of PPP and the repayment of affiliate loans in the period ended
December 31, 2003, and a $3.2 million increase in capital expenditures for the
six months ended December 31, 2003 as compared to the six months ended December
31, 2002. The net cash outlay for PPP was $3.6 million, representing the initial
payment of $3.2 million to the Sellers, $609,000 to pay off PPP's bank debt plus
$64,000 of related expenses. Cash in the amount of approximately $177,000 was
assumed in the acquisition. In addition, $322,000 has been accrued as additional
purchase price related to an earn-out provision.
During the six months ended December 31, 2003 the Company repaid a net of
approximately $6.9 million under its revolving credit facility. The repayment of
the affiliated note plus the increased profitability and related cash flow
enabled the Company to borrow less during the six months.
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
February 4, 2004, approximately $7.2 million was outstanding under the Facility,
and the Company was in compliance with its financial covenants.
Three of these financial covenants are based upon the EBITDA (earnings
before interest, taxes, depreciation and amortization) generated by the Company
over specified periods of time. These covenants, EBITDA for the current fiscal
quarter, interest coverage ratio, and debt service coverage for the previous
twelve months, are evaluated by the Lender as a measure of the Company's
liquidity and its ability to meet all of its obligations under the Facility.
EBITDA is presented as cash flow from operations plus or minus the net changes
in assets and liabilities and the changes in certain non-cash reconciling items
from net cash from operations to net income over the reported periods. While
EBITDA is not a measure of financial performance nor liquidity under generally
accepted accounting principles, it is provided as information for investors for
analysis purposes in light of the financial covenants referred to above. 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, which increased by approximately $1.9 million or 25%,
from $7.6 million for the six months ended December 31, 2002 to $9.5 million for
the six months ended December 31, 2003, is calculated as follows (see
Consolidated Statement of Cash Flows comprising Item 1 hereof for more details):
Six Months Ended December 31,
2003 2002
------------------------- --------------------------
------------------------- --------------------------
Cash flow from operations $ 12,098 $ 3,777
Provision for income taxes 2,696 2,087
Other (income) expense, net 262 427
Net change in assets and liabilities (5,064) 1,884
Non-cash items to reconcile net cash (446) (535)
from operations to net income
------------------------- --------------------------
------------------------- --------------------------
EBITDA $ 9,546 $ 7,640
========================= ==========================
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
December 31, 2003 was approximately $569,000.
The Company has entered into various real estate operating leases with both
related and unrelated parties. The Company has entered into various operating
leases and a sale-leaseback with unrelated third parties for office equipment.
These leases have different payment terms and expiration dates. The Company also
entered into a sale-leaseback operating lease of certain fixed assets
(principally computer hardware and externally developed software) with an
affiliate of the Company's Vice Chairman. See Note 9 to the Consolidated
Financial Statements comprising Item 8 of Form 10 -K, for the year ended June
30, 2003 for a further description of these various leases.
The total future payments under these contractual obligations as of December 31,
2003, is as follows:
Contractual Obligations Payments Due by Period
($ in thousands)
Total Less than 1-3 Years 3-5 After
1 Year Years 5 Years
----------- -------------- ---------- ---------- ----------
----------- -------------- ---------- ---------- ----------
Long Term Debt $ 8,778 $ 8,778 $ - $ - $ -
Capital Lease Obligations 569 468 101 - -
Operating Leases 12,495 3,040 4,812 2,424 2,219
Sale-leasebacks 790 510 280 - -
----------- -------------- ---------- ---------- ----------
----------- -------------- ---------- ---------- ----------
Total Contractual Cash
Obligations $ 22,632 $ 12,796 $ 5,193 $ 2,424 $ 2,219
=========== ============== ========== ========== ==========
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. As of the current date, it appears, subject to
final adjustments, that the minimum performance targets for the second year will
be achieved during the second year which would obligate the Company to pay up to
a maximum of an additional $1,000 in May 2004 and $1,000 in May 2005.
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. To date, $321,988 has been earned and accrued as additional
purchase price.
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. If the remaining milestone is reached, the cash outlay by the Company
would be $100,000.
The Company entered into an amended and restated preferred stock purchase
agreement, dated as of November 26, 2003, with New Mountain Partners, L.P. (the
"purchase agreement"). Pursuant to the purchase agreement, the Company agreed,
subject to various conditions, to issue to New Mountain Partners a total of
6,956,522 shares of series A preferred stock at a purchase price of $11.50 per
share, for aggregate proceeds of $80,000,003. Once certain conditions have been
met or waived, including receipt of certain stockholder approvals sought by a
definitive proxy statement to be distributed to the Company's stockholders, the
Company will be obligated to complete the sale of the series A preferred stock
to New Mountain Partners and to use approximately $50 million of the proceeds of
the sale of the series A preferred stock to fund the purchase price for a tender
offer for up to 4,545,455 shares of the Company's outstanding common stock at
$11.00 per share. Bert Brodsky, the chairman of the board of directors, and
certain stockholders related to him, currently hold, in the aggregate,
approximately 60% of the Company's outstanding common stock and have agreed to
tender 4,448,900 shares, or approximately 54% of the Company's outstanding
common stock, held by them, into the tender offer.
If the tender offer is fully subscribed by the Company's stockholders,
after the tender offer is completed, New Mountain Partners will own securities
that are initially convertible into approximately 65% of the Company's issued
and outstanding common stock and prior to conversion of the series A preferred
stock will be entitled to cast that number of votes that is equal to
approximately 61% of the Company's aggregate voting power. Following the closing
of the sale of the series A preferred stock and the tender offer (collectively,
the "Contemplated Transactions"), New Mountain Partners will initially be
entitled to nominate and elect 60% of the members of the Company's board of
directors.
The Company will primarily use the remaining proceeds from the issuance and
sale of the series A preferred stock of approximately $22 million, excluding
expenses related to the closing of the Contemplated Transactions, for potential
acquisitions and working capital purposes. However, except under certain
circumstances, the Company will be prohibited from using such proceeds to pay
any outstanding amounts due under the Company's outstanding credit facility for
six months following the closing of the Contemplated Transactions.
The preferred stock will provide for an initial annual cash dividend equal
to 7% of the investment amount, which decreases to 3.5% after the fifth
anniversary of issuance. The preferred stock will be convertible into common
stock at a price of $11.50 per share of common stock, or an aggregate of
approximately 7 million shares of the Company's common stock.
The series A preferred stock may be redeemed at the Company's option
subsequent to the fourth anniversary of its issuance, subject to certain
conditions. After the tenth anniversary of the issuance of the series A
preferred stock, each holder of shares of series A preferred stock may require
the Company to redeem all or a part of that holder's shares of series A
preferred stock.
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 and the Contemplated Transactions 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, revenue 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
(b) prescriptions filled and thus shares the risk of operating profit
or loss with these plans. Since January 1, 2000, all services have been
provided on a fee for service basis only.
Revenue under the fee for service arrangement is recognized when the
claims are adjudicated. Included as revenue are the Company's
administrative fees and charges relating to pharmaceuticals dispensed by
the Company's network of pharmacies. Revenue is reduced by the amount of
rebates paid to the Company's sponsors.
(c) 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. There are several
factors from EITF 99-19 that leads the Company to recognize the majority of
its revenue on a gross basis. These include: the Company acts as a
principal and not an agent and is the primary obligor in the relationship
among the pharmacies, the sponsors and the Company, the Company has credit
risk, the Company has certain latitude in establishing price, and the
Company has discretion in supplier selection. In certain cases, primarily
because the amount the Company earns is fixed, 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 prescription revenue nor the related cost of the prescriptions
is recorded.
(d) Health Card includes in revenue only those co-payments collected
from individual members by its mail order facility in Miramar, Florida.
Co-payments retained by pharmacies on the remainder of the prescriptions
filled for Health Card's members are not included in Health Card's reported
revenue. Health Card discloses these amounts parenthetically on the face of
its Consolidated Statement of Income.
(e) 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 including those controls over financial
reporting in this period, 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 September 30, 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 is currently
scheduled to be heard in February, 2004. The court has not set a trial date.
Discovery closed September 30, 2003. The Company intends to vigorously defend
the action. The Company is unable to provide an estimate of any particular loss,
if any, which may be associated with the MHP claims.
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.
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)
2.4 Stock Purchase Agreement dated October 30, 2003 by and between Health Card and New
Mountain Partners, L.P. (13)
3.1 Certificate of Incorporation of Health Card (7)
3.2 By-Laws of Health Card (7)
4.1 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 16, 1998, between Health Card and Ken Hammond (1)
10.6 Stock Option Agreement, dated August 3, 1999, between Health Card and Ken Hammond (4)
10.7 Employment Agreement, dated March 27, 2000, between Health Card and David Gershen (4)
10.8 Stock Option Agreement, dated May 1, 2000, between Health Card and David Gershen (4)
10.9 Employment Agreement, dated May 3, 2000, between Health Card and James Bigl (4)
10.10 Stock Option Agreement, dated June 12, 2000, between Health Card and James Bigl (4)
10.11 Stock Option Agreement, dated August 3, 1999, between Health Card and Kenneth J. Daley (4)
10.12 Stock Option Agreement, dated August 3, 1999, between Health Card and Gerald Angowitz (4)
10.13 Lease, dated August 10, 1998, between 61 Manorhaven Boulevard, LLC and Health Card (1)
10.14 Acquisition and Merger Agreement, dated as of June 27, 2000, between Health Card
and Pharmacy Associates, Inc. (3)
10.15 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)
10.16 Employment Agreement, dated June 4, 2001, between National Medical Health Card
Systems, Inc. and Tery Baskin (6)
10.17 Stock Option Agreement, dated June 4, 2001, between National Medical Health Card
Systems, Inc. and Tery Baskin (6)
10.18 Stock Option Agreement, dated June 12, 2001, between National Medical Health Card
Systems, Inc. and James Bigl (6)
10.19 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)
10.20 Receivables Purchase and Transfer Agreement dated January 29, 2002 by and
among the Company and certain of its subsidiaries and NMHC Funding, LLC (8)
10.21 Amendment No. 1 dated September 25, 2002 to Receivables Purchase and Transfer
Agreement by and among the Company and certain of its subsidiaries and NMHC Funding, LLC (14)
10.22 Amendment No. 2 dated June 30, 2003 to Receivables Purchase and Transfer
Agreement by and among the Company and certain of its subsidiaries and NMHC Funding, LLC (14)
10.23 Amendment No. 3 dated October 30, 2003 to Receivables Purchase and Transfer
Agreement by and among the Company and certain of its subsidiaries and NMHC Funding, LLC (14)
10.24 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)
10.25 Lease Agreement dated as of August 1, 2001, between National Medical Health Card
Systems, Inc. and BFS Realty, LLC (6)
10.26 Amended Lease Agreement dated as of August 1, 2001, between National Medical Health Card
Systems, Inc. and BFS Realty, LLC (6)
10.27 2003 Employee Stock Purchase Plan (11)
10.28 Amendment No. 2 dated April 15, 2002 to Employment Agreement between Health Card and James Bigl (12)
10.29 Amendment No. 3 dated October 14, 2002 to Employment Agreement between Health Card and James Bigl (12)
10.30 Amendment No. 4 dated November 6, 2002 to Employment Agreement between Health Card and James Bigl (12)
10.31 Stock Option Agreement between Health Card and James Bigl dated February 20, 2001 (12)
10.32 Stock Option Agreement between Health Card and James Bigl dated April 30. 2002 (12)
10.33 Stock Option Agreement between Health Card and James Bigl dated June 26, 2002 (12)
10.34 Stock Option Agreement between Health Card and James Bigl dated July 22, 2003 (12)
10.35 Employment Agreement dated October 14, 2002 between Health Card and Bert Brodsky (12)
10.36 Employment Agreement dated November 20, 2002 between Health Card and Agnes Hall (12)
10.37 Stock Option Agreement between Health Card and Agnes Hall dated January 8, 2001 (12)
10.38 Amendment to Stock Option Agreement between Health Card and Agnes Hall dated January 8, 2001 (12)
10.39 Stock Option Agreement between Health Card and Agnes Hall dated August 10, 2001 (12)
10.40 Amendment to Stock Option Agreement between Health Card and Agnes Hall dated August 10, 2001 (12)
10.41 Stock Option Agreement between Health Card and Agnes Hall dated December 4, 2001 (12)
10.42 Amendment to Stock Option Agreement between Health Card and Agnes Hall dated December 4, 2001 (12)
10.43 Stock Option Agreement between Health Card and Agnes Hall dated July 31, 2002 (12)
10.44 Amendment to Stock Option Agreement between Health Card and Agnes Hall dated July 31, 2002 (12)
10.45 Stock Option Agreement between Health Card and Agnes Hall dated August 1, 2003 (12)
10.46 First Amendment dated November 6, 2002 to Employment Agreement between Health Card and David Gershen (12)
10.47 Stock Option Agreement between Health Card and David Gershen dated February 20, 2001 (12)
10.48 Stock Option Agreement between Health Card and David Gershen dated September 24, 2001 (12)
10.49 Stock Option Agreement between Health Card and David Gershen dated August 1, 2002 (12)
10.50 Stock Option Agreement between Health Card and David Gershen dated August 1, 2003 (12)
10.51 First Amendment dated November 6, 2002 to Employment Agreement between Health Card and Tery Baskin (12)
10.52 Stock Option Agreement between Health Card and Tery Baskin dated July 20, 2000 (12)
10.53 Stock Option Agreement between Health Card and Tery Baskin dated August 10, 2001 (12)
10.54 Stock Option Agreement between Health Card and Tery Baskin dated August 1, 2002 (12)
10.55 Stock Option Agreement between Health Card and Tery Baskin dated September 19, 2002 (12)
10.56 Stock Option Agreement between Health Card and Tery Baskin dated August 1, 2003 (12)
10.57 Employment Agreement between Health Card and Patrick McLaughlin dated January 29, 2002 (12)
10.58 Stock Option Agreement between Health Card and Patrick McLaughlin dated January 29, 2002 (12)
10.59 Stock Option Agreement between Health Card and Patrick McLaughlin dated August 1, 2003 (12)
10.60 Amendment to Stock Option Agreement dated January 29, 2002 between Health Card and Patrick McLaughlin (12)
10.61 Stock Option Agreement between Health Card and Gerald Angowitz dated November 20, 2000 (12)
10.62 Stock Option Agreement between Health Card and Gerald Angowitz dated February 20, 2001 (12)
10.63 Stock Option Agreement between Health Card and Gerald Angowitz dated April 9, 2003 (12)
10.64 Stock Option Agreement between Health Card and Kenneth J. Daley dated November 20, 2000 (12)
10.65 Stock Option Agreement between Health Card and Kenneth J. Daley dated February 20, 2001 (12)
10.66 Stock Option Agreement between Health Card and Kenneth J. Daley dated April 9, 2003 (12)
10.67 Stock Option Agreement between Health Card and Ronald L. Fish dated November 20, 2000 (12)
10.68 Stock Option Agreement between Health Card and Ronald L. Fish dated February 20, 2001 (12)
10.69 Stock Option Agreement between Health Card and Ronald L. Fish dated April 9, 2003 (12)
10.70 Stock Option Agreement between Health Card and Paul J. Konigsberg dated November 20, 2000 (12)
10.71 Stock Option Agreement between Health Card and Paul J. Konigsberg dated February 20, 2001 (12)
10.72 Stock Option Agreement between Health Card and Paul J. Konigsberg dated April 9, 2003 (12)
10.73 Stock Option Agreement between Health Card and Bert E. Brodsky dated February 20, 2001 (12)
10.74 Stock Option Agreement between Health Card and Gerald Shapiro dated February 20, 2001 (12)
10.75 Sixth Amendment to Employment Agreement, dated October 30, 2003, by and between National
Medical Health Card Systems, Inc. and James J. Bigl (14)
10.76 Lease dated November 1, 2002 between B/A Airport Park Solutions, LLC and Health Card (12)
10.77 Lease Addendum dated March 10, 2003 between B/A Airport Park Solutions, LLC and Health Card (12)
10.78 Lease Agreement dated November 18, 2002 between Sunbeam Development Corporation and
NMHCRx Mail Order, Inc. (12)
10.79 Lease Expansion and Modification Agreement dated July 31, 2003 between Sunbeam Development
Corporation and NMHCRx Mail Order, Inc. (12)
10.80 AmerisourceBergen Prime Vendor Agreement, dated July 21, 2003 between NMHCRx Mail Order, Inc.
d/b/a NMHCmail and AmerisourceBergen Drug Corporation (12)
10.81 Release, dated October 30, 2003, by Sandata Technologies, Inc. and Sandsport, Inc. (14)
10.82 Amendment to Lease Agreement, dated as of October 23, 2003, by and among BFS Realty, LLC
and National Medical Health Card Systems, Inc. (14)
10.83 Lease Agreement, dated August 1, 2001, between Brodsky Sibling Realty
Juniper Road, LLC and National Medical Health Card Systems, Inc. (14)
10.84 Lease Agreement (30 Sea Cliff), dated May 1, 2002, between Living in Style,
LLC and National Medical Health Card Systems, Inc. (14)
10.85 Amendment to Lease Agreement (30 Sea Cliff), dated as of October 30, 2003,
between Living in Style, LLC and National Medical Health Card Systems, Inc. (14)
10.86 Lease Agreement (32 Sea Cliff), dated May 1, 2002, between Living in Style, LLC
and National Medical Health Card Systems, Inc. (14)
10.87 Amendment to Lease Agreement (32 Sea Cliff), dated as of October 30, 2003,
between Living in Style, LLC and National Medical Health Card Systems, Inc. (14)
10.88 Second Amendment to Employment Agreement, dated October 30, 2003, by and between
National Medical Health Card Systems, Inc. and Bert E. Brodsky (14)
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 5, 2003(14)
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 August 31, 2003(14)
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 December 31, 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.
(13) Denotes document filed as an Exhibit to Health Card's Form 8-K filed on November 13, 2003
and incorporated herein by reference.
(14) Denotes document filed as an Exhibit to Health Card's Report on Form 10-K/A Amendment
Number 2 for the year ended June 30, 2003.
(b) Reports on Form 8-K
1. A Current Report on Form 8-K was filed with the Securities and Exchange
Commission on October 3, 2004 in connection with the appointment of a new Chief
Financial Officer.
2. A Current Report on Form 8-K was filed with the Securities and Exchange
Commission on November 13, 2003 in connection with the Stock Purchase Agreement
entered into between the Health Card and New Mountain Partners, L.P.
3. A Current Report on Form 8-K was filed with the Securities and Exchange
Commission on November 17, 2003 reporting results of the Company's Fiscal First
Quarter ended September 30, 2003.
4. A Current Report on Form 8-K was filed with the Securities and Exchange
Commission on November 18, 2003 reporting the transcript of a conference call
made on November 17, 2003.
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: February 17, 2004 By: /s/ James J. Bigl
----------------------------------------
James J. Bigl,
Chief Executive Officer
By: /s/Stuart F. Fleischer
---------------------------------------
Stuart F. Fleischer
Chief Financial Officer
EXHIBIT 31.1
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 (the
"Registrant");
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;
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 the
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-15(e) and 15d-15(e)) for the Registrant, and we have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, 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 and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any changes in the Registrant's
internal control over financial reporting that occurred during
the Registrant's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial
reporting.
5. The Registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, 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 and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonable likely to adversely affect the
Registrant's ability to record, process, summarize and report
financial information; 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 over financial reporting.
Date: February 17, 2004 /s/ James J. Bigl
--------------------------
James J. Bigl,
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, Stuart F. Fleischer, 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 (the
"Registrant");
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;
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 the
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-15(e) and 15d-15(e)) for the Registrant, and we have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, 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 and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any changes in the Registrant's
internal control over financial reporting that occurred during
the Registrant's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial
reporting.
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 and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; 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 over financial reporting.
Date: February 17, 2004 /s/ Stuart F. Fleischer
--------------------------
Stuart F. Fleischer
Chief Financial Officer
EXHIBIT 32.1
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 December 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, to my knowledge:
(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
February 17, 2004
EXHIBIT 32.2
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 December 31,
2003, as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Stuart F. Fleischer, 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, to my knowledge:
(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/ Stuart F. Fleischer
Stuart F. Fleischer
Chief Financial Officer
February 17, 2004