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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2004
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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
May 11, 2004 was 4,214,060 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
March 31, 2004 (unaudited) and June 30, 2003
CONSOLIDATED STATEMENT OF INCOME (unaudited) 5
for the three months and nine months ended March 31, 2004 and 2003
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) 6
for the nine months ended March 31, 2004 and 2003
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 19
CONDITION AND RESULTS OF OPERATIONS
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 34
MARKET RISK
ITEM 4 - CONTROLS AND PROCEDURES 34
PART II - OTHER INFORMATION 35
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ITEM 1 - LEGAL PROCEEDINGS 35
ITEM 2 - CHANGES IN SECURITIES AND, USE OF PROCEEDS AND 35
ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 36
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 36
ITEM 5 - OTHER INFORMATION 38
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 38
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, as amended, for the fiscal
year ended June 30, 2003, filed with the Securities and Exchange Commission on
February 17, 2004.
PART I - FINANCIAL INFORMATION
Item 1 - CONDENSED FINANCIAL STATEMENTS
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($ in thousands)
March 31, June 30,
2004 2003
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(Unaudited)
Assets
Current:
Cash and cash equivalents (including cash equivalent investments of $1,190
and $1,189, respectively) $29,884 $5,222
Restricted cash 1,638 2,383
Accounts receivable, less allowance for doubtful accounts of $2,862 and $2,014,
respectively 65,697 52,022
Rebates receivable 29,346 24,584
Inventory 1,949 -
Due from affiliates 8 4,165
Deferred tax asset 2,110 2,065
Other current assets 2,442 1,714
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Total current assets 133,074 92,155
Property, equipment and software development costs, net 10,047 8,239
Intangible assets, net of accumulated amortization of $1,860 and $1,210,
respectively 2,233 2,291
Goodwill 58,574 53,669
Other assets 323 386
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Total Assets $ 204,251 $ 156,740
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Liabilities, Redeemable Preferred Equity, and Common Stockholders' (Deficiency)
Equity
Current Liabilities:
Accounts payable and accrued expenses $ 136,155 $ 106,675
Revolving credit facility and loans payable-current 36 15,683
Current portion of capital lease obligations 436 481
Due to officer/stockholder - 1,117
Income taxes payable 3,232 629
Other current liabilities 39 137
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Total current liabilities 139,898 124,722
Capital lease obligations, less current portion 13 327
Long term loans payable and other liabilities 2,030 1,020
Deferred tax liability 1,890 2,245
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Total liabilities 143,831 128,314
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Commitments and Contingencies
Redeemable Preferred Equity:
Redeemable, convertible preferred stock $.10 par value; 15,000,000 and
10,000,000 shares authorized, 6,956,522 and none issued and outstanding, 75,279 -
respectively
Common Stockholders' (Deficiency) Equity:
Common stock, $.001 par value, 35,000,000 and 25,000,000 shares authorized,
8,224,011 and 7,812,907 shares issued, 3,584,111 and 7,621,907 outstanding,
respectively 4 8
Additional paid-in-capital 97,663 15,027
Retained earnings (60,652) 14,135
Treasury stock at cost, 4,639,900 and 191,000 shares, respectively (51,874) (744)
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Total common stockholders' (deficiency) equity (14,859) 28,426
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Total Liabilities, Redeemable Preferred Equity, and Common
Stockholders' (Deficiency) Equity $ 204,251 $ 156,740
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See accompanying condensed notes to consolidated financial statements
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
Three months ended Nine months ended
March 31, March 31,
2004 2003 2004 2003
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Revenue (includes co-payments collected of $901, $0, $1,061 and $0,
respectively; and excludes co-payments retained by the pharmacies
of $52,651, $46,000, $150,171 and $120,333, respectively) $159,725 $126,538 $474,450 $424,869
Cost of claims (excludes co-payments retained by the
pharmacies of $52,651, $46,000, $150,171 and $120,333,
respectively) $142,909 $114,713 $428,441 $390,509
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Gross Profit 16,816 11,825 46,009 34,360
Selling, general and administrative expenses 14,182 8,672 36,551 25,690
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Operating income 2,634 3,153 9,458 8,670
Other income (expense):
Interest expense (114) (310) (519) (941)
Interest income 111 60 173 187
Other income, net 10 38 90 115
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7 (212) (256) (639)
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Income before provision for income taxes 2,641 2,941 9,202 8,031
Provision for income taxes 1,077 1,206 3,773 3,293
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Net income $ 1,564 $ 1,735 $ 5,429 $ 4,738
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Beneficial conversion feature 80,000 - 80,000 -
Preferred stock cash dividend 199 - 199 -
Accretion of transaction expenses 17 - 17 -
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Net (loss) income available to common shareholders $(78,652) $ 1,735 $(74,787) $ 4,738
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(Loss) earnings per common share:
Basic (11.17) $ 0.23 $ (9.99) $ 0.62
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Diluted (11.17) $ 0.22 $ (9.99) $ 0.59
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Weighted average number of common shares outstanding:
Basic 7,044 7,611 7,485 7,582
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Diluted 7,044 8,067 7,485 8,024
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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)
Nine months ended
March 31,
2004 2003
Cash flows from operating activities: ---- ----
Net income $ 5,429 $ 4,738
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,135 3,258
Amortization of deferred gain (333) (102)
Net gain on disposal of capital assets 316 (13)
Provision for doubtful accounts 847 257
Compensation expense accrued to officer/stockholder 37 418
Deferred income taxes (400) -
Interest accrued on stockholders'/affiliate's loans - (84)
Changes in assets and liabilities, net of effect from acquisitions:
Restricted cash 745 153
Accounts receivable (13,633) 6,258
Rebates receivable (4,762) (4,426)
Inventory (1,410) -
Other current assets (727) (1,028)
Due to/from affiliates 235 (380)
Other assets (81) (19)
Accounts payable and accrued expenses 26,172 (1,579)
Income taxes payable and other current liabilities 2,502 (377)
Other long term liabilities 1,343 279
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Net cash provided by operating activities 20,415 7,353
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Cash flows from investing activities:
Capital expenditures (5,550) (1,349)
Repayment of loan from affiliate 2,660 -
Repayment of loan from officer 107 -
Proceeds from disposal of capital assets - 22
Acquisition of Integrail (13) (1,472)
Acquisition of PAI - (1,000)
Acquisition of PPP, net of cash acquired (3,658) -
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Net cash used in investing activities (6,454) (3,799)
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Cash flows from financing activities:
Proceeds from exercise of stock options 2,632 418
Proceeds from issuance of preferred stock, net of offering costs 75,262 -
Purchase of treasury stock in tender offer including related costs (51,130) -
Repayment of convertible note offering - (8,000)
Proceeds from revolving credit facility 624,095 512,150
Repayment of revolving credit facility (639,723) (504,459)
Payment of preferred stock dividends (199) -
Deferred financing costs 143 136
Repayment of debt and capital lease obligations (379) (628)
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Net cash provided by (used in) financing activities 10,701 (383)
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Net increase in cash and cash equivalents 24,662 3,171
Cash and cash equivalents at beginning of period 5,222 1,768
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Cash and cash equivalents at end of period $ 29,884 $ 4,939
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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 4) ("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 consolidation.
The unaudited consolidated financial statements have been prepared by the
Company in accordance with accounting principles generally accepted in the
United States for interim financial information and substantially in the form
prescribed by the Securities and Exchange Commission in instructions to Form
10-Q and in Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by such accounting principles for
complete financial statements. In the opinion of the Company's management, the
March 31, 2004 and 2003 unaudited interim financial statements include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of results for these interim periods. In the opinion of the
Company's management, the disclosures contained in this Form 10-Q are adequate
to make the information presented not misleading when read in conjunction with
the Notes to Consolidated Financial Statements included in the Company's Form
10-K, as amended, for the year ended June 30, 2003. The results of operations
for the three and nine month periods ended March 31, 2004 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, as amended, for
the year ended June 30, 2003 (the "Annual Report").
2. STOCK-BASED COMPENSATION
Pro forma information regarding net loss applicable to common stockholders
is required by SFAS 123, "Accounting for Stock-Based Compensation," which also
requires that the information be determined as if the Company has accounted for
its stock options under the fair value method of that statement. For purposes of
pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period. The fair value for these options was
estimated using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for all grants in the nine months ended March
31, 2003 and 2004: no dividend yield, weighted-average expected life of the
option of five years, risk-free interest rate ranges of 2.81% to 2.83% and a
volatility of 83.2%, and 76.5%, respectively for all grants. The
weighted-average value of options granted is $8.32, and $13.21 for the nine
months ended March 31, 2003 and 2004, respectively.
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 March 31,
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2004 2003
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Reported net (loss) income available to
common shareholders $ (78,652) $ 1,735
Stock compensation expense included in net
(loss) income available to common
shareholders 200 -
Pro forma compensation expense (652) (423)
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Pro forma net (loss) income available to
common shareholders $ (79,104) $ 1,312
Pro forma (loss) earnings per share:
Basic $ (11.23) $ 0.17
Diluted $ (11.23) $ 0.16
Nine Months Ended March 31,
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2004 2003
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Reported net (loss) income available to
common shareholders $ (74,787) $ 4,738
Stock compensation expense included in net
(loss) income available to common shareholders 200 -
Pro forma compensation expense (1,636) (1,215)
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Pro forma net (loss) income available
to common shareholders $ (76,223) $ 3,523
Pro forma (loss) earnings per share:
Basic $ (10.18) $ 0.46
Diluted $ (10.18) $ 0.44
3. NEW MOUNTAIN TRANSACTION
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. On March 19, 2004, the
Company completed the sale of the series A preferred stock to New Mountain
Partners and used approximately $49,000 of the proceeds of the sale of the
series A preferred stock to fund the purchase price for a tender offer of
4,448,900 shares of the Company's outstanding common stock at $11.00 per share
(collectively, the "New Mountain Transaction"). Prior to the closing of the New
Mountain Transaction, Bert E. Brodsky, the former chairman of the board of
directors, and certain stockholders related to him, held (assuming the exercise
of 300,000 options held by Mr. Brodsky, which occurred in April 2004), in the
aggregate, approximately 59% of the Company's outstanding common stock and had
agreed to tender 4,448,900 shares, or approximately 54% of the Company's
outstanding common stock, held by them, into the tender offer. No other
shareholders tendered shares in the offer.
Following the completion of the tender offer, and assuming the exercise of
300,000 options held by Mr. Brodsky, which occurred in April 2004, New Mountain
Partners owned securities at March 19, 2004 that were initially convertible into
approximately 64% of the Company's issued and outstanding common stock and prior
to conversion of the series A preferred stock were entitled to cast that number
of votes that is equal to approximately 60% of the Company's aggregate voting
power. Following the closing of the New Mountain Transaction, New Mountain
Partners were entitled to and did nominate and elect 60% of the members of the
Company's board of directors.
The Company used the remaining proceeds from the issuance and sale of the
series A preferred stock of approximately $24,000, excluding expenses related to
the closing of the New Mountain Transaction, for the PBM acquisition described
in Note 12 - Subsequent Events and for working capital purposes.
The preferred stock provides 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 is 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.
Upon the closing of the New Mountain Transaction, the Company recorded a
non-recurring, non-cash charge to net income available to holders of the
Company's common stock for a beneficial conversion feature related to the series
A preferred stock, which is convertible into the Company's common stock at
$11.50 per share. Such non-cash charge reflects the difference between the fair
market value of the Company's common stock on the date of the closing of the New
Mountain Transaction and the effective conversion price of $11.29 (after
deducting the closing payment of $1,450 payable to New Mountain Partners)
multiplied by 6,956,552, the number of shares of the Company's common stock into
which the series A preferred stock held by New Mountain Partners is convertible.
The maximum amount of the beneficial conversion feature is $80,000, which is the
purchase price of the series A preferred stock.
4. 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 $2,986, which
consists of the following components: (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 $2,391, 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, $499 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 two years and $4,000 has been earned. Of this amount, $1,000
was paid in May 2003, $2,000 was paid in May 2004, and another $1,000 will be
paid 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% (3.49% at March 31, 2004) 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 March 31, 2004 was approximately $34, 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 March 31, 2004.
The summarized unaudited pro forma results of operations set forth below
for the three and nine months ended March 31, 2004 and 2003 assumes the
Integrail and PPP acquisitions had occurred as of the beginning of these
periods.
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
-------------- --------------
Revenue $ 159,725 $ 131,184
Net (loss) income available to common
shareholders $ (78,652) $ 1,734
(Loss) earnings per common share:
Basic $ (11.17) $ 0.23
Diluted $ (11.17) $ 0.21
Pro forma weighted-average number of common shares outstanding:
Basic 7,044 7,611
Diluted 7,044 8,067
Nine Months Ended Nine Months Ended
March 31, 2004 March 31, 2003
-------------- --------------
Revenue $ 475,789 $ 436,684
Net (loss) income available to common
shareholders $ (74,811) $ 3,036
(Loss) earnings per common share:
Basic $ (9.99) $ 0.40
Diluted $ (9.99) $ 0.38
Pro forma weighted-average number of
common shares outstanding:
Basic 7,485 7,582
Diluted 7,485 8,024
This pro forma financial information is presented for information purposes
only. Pro forma adjusted net (loss) 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 nine months ended
March 31, 2004 is as follows:
Balance as of July 1, 2003 $ 53,669
PPP acquisition 2,391
PPP additional consideration earned 499
Centrus additional consideration earned 2,000
Integrail final valuation 15
-------------
Balance as of March 31, 2004 $ 58,574
========
Approximately $50,701 of the Company's March 31, 2004 goodwill is
deductible for income tax purposes on a straight-line basis over 15 years.
5. STOCK OPTIONS
During the nine months ended March 31, 2004, the Company granted 552,029
stock options and 90,614 stock options were cancelled for a net of 461,415 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 $26.84 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 4,850,000
(the Company's shareholders approved on March 18, 2004 the increase in options
under the Plan from 2,850,000 to 4,850,000 - See Part II - Item 4 - No. 4) plus
an indeterminable number of shares of common stock issuable pursuant to the
anti-dilution provisions of the Plan or upon the exercise of "reload options."
There are no options outstanding that contain the "reload" provision. Shares
issuable pursuant to options granted under the Plan as of March 31, 2004 equal
2,076,192, net of 743,253 options exercised to date.
6. EARNINGS PER SHARE
A reconciliation of shares used in calculating basic and diluted earnings per
share follows:
Three Months Ended March 31,
-------------------------------------
-------------------------------------
2004 2003
---- ----
Basic 7,043,809 7,610,907
Effect of assumed exercise of employee stock options - 455,675
Effect of assumed exercise of warrants - -
---------- ----------
-
Diluted weighted average number of shares outstanding 7,043,809 8,066,582
========= =========
Nine Months Ended March 31,
-------------------------------------
-------------------------------------
2004 2003
---- ----
Basic 7,484,757 7,581,874
Effect of assumed exercise of employee stock options - 442,466
Effect of assumed exercise of warrants - -
---------- ---------
Diluted weighted average number of shares outstanding 7,484,757 8,024,340
========= =========
Basic net income (loss) per common share is computed using the
weighted-average number of common shares outstanding during the period. Diluted
net income (loss) per share is computed using the weighted-average number of
common and dilutive common equivalent shares (consisting of employee stock
options, warrants and preferred stock) outstanding during the period. Diluted
net loss per common share for the three and nine months ended March 31, 2004 is
computed using the weighted average number of common shares and excludes
dilutive potential common shares outstanding of approximately 2,316,582 and
1,340,654, respectively, as their effect is anti-dilutive.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
March 31, June 30,
2004 2003
------- -------
Claims payable $ 92,773 $ 76,195
Rebates payable to sponsors 32,819 24,082
Trade payables, accrued expenses and other payables 10,563 6,398
-------- ---------
$ 136,155 $ 106,675
======== ========
8. 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 $190 for the three months ended March
31, 2004 and $269 for the three months ended March 31, 2003. Included in the
statement of income for the nine months ended March 31, 2004 and 2003 were
general and administrative expenses related to transactions with affiliates of
$668 and $789, respectively.
Amounts due from affiliates at June 30, 2003 included a note from a company
affiliated by common ownership. As of March 31, 2004, 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 former 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
bore 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 former 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 former 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
37,108. The annual rent will then be $580 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 ten years from the occupancy date. 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 $1,421 during the nine
months ended March 31, 2004.
9. MAJOR CUSTOMERS AND PHARMACIES
For the three and nine months ended March 31, 2004, approximately 42% and
41%, 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 months ended March 31, 2003,
approximately 32% of the consolidated revenue of the Company was from one plan
sponsor administering multiple plans. For the nine months ended March 31, 2003
approximately 39% of the consolidated revenue of the Company was from two plan
sponsors administering multiple plans. Amounts due from the two sponsors as of
March 31, 2004 approximated $12.3 million.
For the three months ended March 31, 2004 approximately 23% of cost of
claims was from two pharmacy chains. For the three months ended March 31, 2003,
approximately 18% of the cost of claims was from one pharmacy chain. For the
nine months ended March 31, 2004 and March 31, 2003, approximately 17% and 21%,
respectively, of cost of claims were from one pharmacy chain. Amounts payable to
the two pharmacy chains at March 31, 2004 were approximately $16.9 million.
10. SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended March 31, 2004 and March 31, 2003, the Company
paid $519 and $887 in interest and $1,566 and $2,611 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.
11. LITIGATION
An action was commenced against the Company on April 30, 2002 by Midwest
Health Plan Inc. ("MHP" or "Midwest") 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 argued its motion for partial summary judgment and motion to dismiss the
fiduciary duty claim in February, 2004 and is currently awaiting the court's
decision on such motions. The court has not set a trial date. 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.
12. SUBSEQUENT EVENTS
On April 1, 2004, the Company entered into an Asset Purchase Agreement with
Inteq PBM, LP, a Texas limited partnership (the "Purchaser"), The INTEQ-RX
Group, LLP and certain other owners named therein (together with The INTEQ-RX
Group, LLP, the "The Inteq Group"), pursuant to which the Company agreed to
acquire certain assets of the The Inteq Group relating to the pharmacy benefit
management business (the "Inteq Acquisition"). The aggregate purchase price of
the Inteq Acquisition was $31,500 in cash. In addition, the Company has agreed
to pay The Inteq Group as additional purchase price up to $4,200 over a period
of one year if the acquired PBM business achieves certain financial performance
targets during the one-year period following the closing. Funds for the Inteq
Acquisition were supplied from proceeds from the New Mountain Transaction and
from the Company's revolving credit facility (See Note 4).
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
Revenue increased $33.2 million, or approximately 26%, from $126.5 million
for the three months ended March 31, 2003, to $159.7 million for the three
months ended March 31, 2004. Revenue recognized for contracts recorded on a
gross revenue basis was $126.1 million for the three months ended March 31, 2003
and $158.9 million for the three months ended March 31, 2004. Revenue recognized
for contracts recorded on a net revenue basis was $0.4 million for the three
months ended March 31, 2003 and $0.8 million for the three months ended March
31, 2004. 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 March 31, 2004,
there was approximately $901,000 of co-payments included in revenue versus zero
for the three months ended March 31, 2003. Co-payments retained by pharmacies on
prescriptions filled for Health Card's members and not included in Health Card's
revenue were $52.7 million and $46.0 million, for the three months ended March
31, 2004 and 2003, respectively.
Of the $33.2 million increase in revenue in the three months ended March
31, 2004, $4.6 million was due to the inclusion of PPP which was included in the
revenue for the quarter ended March 31, 2004, but not in the quarter ended March
31, 2003. Another approximate $24.7 million of the increase was due to revenue
related to new sponsors or new services offered during the quarter ended March
31, 2004 excluding contracts recorded on a net revenue basis. An additional
increase of approximately $27.9 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 the termination of existing customer contracts leading to a
reduction in revenue of approximately $21.6 million. In addition, there was an
approximate $2.4 million increase in the amount of rebates paid out to the
Company's customers which has the effect of reducing revenue.
Cost of claims increased $28.2 million, or approximately 25%, from $114.7
million for the three months ended March 31, 2003, to $142.9 million for the
three months ended March 31, 2004. PPP accounted for $3.9 million of the
increase. Increases in cost of claims totaling approximately $47.7 million
related to the activity of new sponsors as well as the growth in existing
sponsors were partially offset by the loss of sponsors which reduced cost of
claims by approximately $19.6 million. In addition, cost of claims was reduced
by the fact that there was an increase of $3.8 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 90.7% to 89.5% for the three months ended
March 31, 2003 and March 31, 2004, respectively. The contracts the Company
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 Company's overall cost of claims as a percent of
revenue as specialty pharmacy distribution typically generates lower cost of
claims than a PBM.
Gross profit increased from $11.8 million for the three months ended March
31, 2003 to $16.8 million for the three months ended March 31, 2004; a $5.0
million, or 42.2%, increase. In addition to increases in gross profit related to
the increases in revenue, PPP added approximately $700,000 to gross profit and
the Company's mail order distribution facility in Miramar, Florida added
approximately $600,000 to gross profit. Net rebates retained by the Company
added another approximate $1,500,000 to gross profit. Gross profit, as a
percentage of revenue, increased from 9.3% to 10.5% for the three months ended
March 31, 2003 and March 31, 2004, 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 $5.5 million, or
approximately 64%, from $8.7 million for the three months ended March 31, 2003
to $14.2 million for the three months ended March 31, 2004. Approximately $2.0
million, or 36%, 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 March 31, 2004 but were not part of the Company during all of the
three months ended March 31, 2003. 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), and mail order distribution through
the Company's owned facility in Miramar, Florida as of July 2003. The major
components of the $2.0 million increase in expenses related to new services was:
1) salaries and benefits - approximately $826,000, 2) postage and supplies -
approximately $158,000, 3) equipment rental - approximately $141,000, and 4)
depreciation and amortization - approximately $130,000.
Included in selling, general and administrative expenses for the three
months ended March 31, 2004 were approximately $1,881,500 of non-recurring
expenses related to the New Mountain Transaction including: 1) transaction
bonuses and a severance payment totaling $1,542,500, and 2) a non-cash
compensation charge of approximately $339,000 related to the acceleration of
stock options for two directors who resigned upon the closing of the New
Mountain Transaction.
General and administrative expenses charged by affiliates decreased
approximately $79,000, or 29%, year-over-year from approximately $269,000 to
approximately $190,000 for the three months ended March 31, 2003 and March 31,
2004, respectively. The decrease reflects the Company's continuing efforts to
reduce services provided by affiliates.
Selling, general, and administrative expenses as a percent of revenue
increased from 6.9% for the three months ended March 31, 2003 to 8.9% for the
three months ended March 31, 2004.
The approximate $1.9 million in non-recurring expenses related to the New
Mountain Transaction, as described above, led to 1.2% of the increase in
expenses as a percent of revenue. In addition, the new services described above
also led to an increase in expenses as a percent of revenue, particularly mail
order which led to an increase of 0.8% due to the fact that resources were
required to be hired in advance of the revenue.
For the three months ended March 31, 2003, the Company recognized other
expense, net, of approximately $212,000. For the three months ended March 31,
2004, the Company recognized other income, net of approximately $7,000. The
components of the approximate $219,000 increase in other income were an
approximate $196,000 decrease in interest expense incurred on the Company's
revolving credit facility (See Note 4 to the Financial Statements comprising
Item 1 of Part 1 of this Form 10-Q), an approximate $51,000 increase in interest
income, and an approximate $28,000 decrease in other income related to the
disposal of certain assets upon the move into a new facility in Portland, Maine
for the Company's specialty pharmacy operations. 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 decreased approximately $0.3
million, or 10%, from approximately $2.9 million, for the quarter ended March
31, 2003, to approximately $2.6 million for the quarter ended March 31, 2004.
The main factor leading to the decrease in income was the $1.9 million of
non-recurring expenses related to the New Mountain Transaction. Excluding the
New Mountain transaction expenses, the primary factors from on-going operations
leading to the increase in income 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 current estimated tax rate for the
full fiscal year.
Net income for the quarter ended March 31, 2004 was approximately $1.6
million as compared to approximately $1.7 million for the quarter ended March
31, 2003; a 10% decrease. The decline in net income is primarily attributable to
the non-recurring expenses related to the New Mountain Transaction. The $1.9
million of New Mountain expenses less an income tax benefit of $0.8 million led
to the decline in net income year-over-year.
There were three other charges against income (loss) available to common
shareholders related to the New Mountain Transaction. These include: (i)
preferred stock cash dividends - approximately $199,000. The preferred stock
provides for an initial cash dividend equal to 7% of the investment amount
(currently $80 million), which decreases to 3.5% after the fifth anniversary of
issuance (See Note 3 of Part 1, Item 1). The dividend of approximately $199,000
represents the amount accrued and paid for the thirteen days from the closing of
the New Mountain Transaction to March 31, 2004, (ii) beneficial conversion
feature - $80 million. This non-recurring, non-cash charge represents the
difference between the fair market value of the Company's common stock on the
date of the closing of the New Mountain Transaction and the effective conversion
price of $11.29, and which is limited to the $80 million purchase price for the
preferred stock, and (iii) accretion of transaction expenses - approximately
$17,000. Certain transaction costs related to the New Mountain preferred stock
investment of approximately $4.7 million are deducted from net proceeds and the
carrying value of the preferred stock. These transaction costs are accreted to
the preferred stock carrying value over the ten-year life of the preferred stock
investment. The approximate $17,000 charge for the three months ended March 31,
2004 represents accretion for thirteen days.
After deducting these three charges from net income there was a net loss
available to common shareholders of approximately $78.7 million for the three
months ended March 31, 2004. Since there was a loss, diluted EPS for the three
months ended March 31, 2004 equals basic EPS of ($11.17).
While net income available to common shareholders excluding non-recurring
New Mountain transaction items is not a measure of financial performance under
accounting principles generally accepted in the United States, it is provided as
information for investors for analysis purposes in evaluating the effect of the
New Mountain transaction on net (loss) income available to common shareholders.
Net income available to common shareholders excluding non-recurring transaction
items is not meant to be considered a substitute or replacement for net income
or net (loss) income available to common shareholders as prepared in accordance
with accounting principles generally accepted in the United States. The
reconciliation from net (loss) income available to common shareholders to net
income available to common shareholders excluding non-recurring transaction
items related to the New Mountain transaction, is as follows (all amounts are in
thousands):
Three Months Ended
-----------------------------------------
-----------------------------------------
March 31, 2004 March 31, 2003
------------------- -------------------
Net (loss) income available to
common shareholders $ (78,652) $ 1,735
Add back:
Beneficial conversion feature 80,000 -
Transaction bonuses and
severance payment, net of
income tax benefit 910 -
Compensation charge related to
the acceleration of directors
options, net of income tax
benefit 200 -
---------------- ----------------
---------------- ----------------
Net income available to common
shareholders excluding
non-recurring New Mountain
transaction items $ 2,458 $ 1,735
=========== ===========
Net income per common share excluding non-recurring New Mountain transaction
items:
Basic $ 0.35 $ 0.23
Diluted $ 0.29 $ 0.22
Weighted average number of common shares outstanding:
Basic 7,044 7,611
Diluted 8,366 8,067
Nine Months Ended March 31, 2004 Compared to Nine Months Ended March 31, 2003
Revenue increased $49.6 million, or approximately 12%, from $424.9 million
for the nine months ended March 31, 2003, to $474.5 million for the nine months
ended March 31, 2004. Revenue recognized for contracts recorded on a gross
revenue basis was $424.0 million for the nine months ended March 31, 2003 and
$472.6 million for the nine months ended March 31, 2004. Revenue recognized for
contracts recorded on a net revenue basis was $0.9 million for the nine months
ended March 31, 2003 and $1.9 million for the nine months ended March 31, 2004.
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 nine months ended March 31, 2004, there was
approximately $1,061,000 of co-payments included in revenue versus zero for the
nine months ended March 31, 2003. Co-payments retained by pharmacies on
prescriptions filled for Health Card's members and not included in Health Card's
revenue were $150.2 million and $120.3 million, for the nine months ended March
31, 2004 and 2003, respectively.
Of the $49.6 million increase in revenue in the nine months ended March 31,
2004, $11.9 million was due to the inclusion of PPP which was included in the
revenue for the nine months ended March 31, 2004, but not in the nine months
ended March 31, 2003. Another approximate $57.1 million of the increase was due
to revenue related to new sponsors or new services offered during the nine
months ended March 31, 2004 excluding contracts recorded on a net revenue basis.
An additional increase of approximately $53.9 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
partially 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 $58.3 million, 2) the Company recognized on a net revenue basis
one contract during the nine months ended March 31, 2004 that was recognized on
a gross revenue basis for four months during the nine months ended March 31,
2003. 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 $9.1
million, and 3) rebates payable to the Company's sponsors increased by $5.9
million for the nine months ended March 31, 2004 as compared to the nine months
ended March 31, 2003. 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 $37.9 million, or approximately 10%, from $390.5
million for the nine months ended March 31, 2003, to $428.4 million for the nine
months ended March 31, 2004. PPP accounted for $9.9 million of the increase.
Increases in cost of claims totaling approximately $102.7 million related to the
activity of new sponsors as well as the growth in existing sponsors were
partially offset by the factors described in the previous paragraph, namely, the
loss of sponsors which reduced cost of claims by approximately $57.2 million and
the recognizing of a certain contract on a net revenue basis which reduced cost
of claims by approximately $9.1 million. In addition, cost of claims was reduced
by the fact that there was an increase of $8.4 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 91.9% to 90.3% for the nine months ended
March 31, 2003 and March 31, 2004, 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 a percent of revenue as specialty pharmacy
distribution typically generates lower cost of claims than a PBM.
Gross profit increased from $34.4 million for the nine months ended March
31, 2003 to $46.0 million for the nine months ended March 31, 2004, an $11.6
million, or 33.9%, increase. In addition to increases in gross profit related to
the increases in revenue, PPP added $2.0 million to gross profit and the
Company's mail order distribution facility added approximately $0.8 million to
gross profit. Net rebates retained by the Company added another approximate $2.8
million to gross profit. The replacement of the terminated major sponsor with
new greater margin business also led to greater gross profits for the Company.
Gross profit, as a percentage of revenue, increased from 8.1% to 9.7% for the
nine months ended March 31, 2003 and March 31, 2004, 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 $10.9 million, or
approximately 42%, from $25.7 million for the nine months ended March 31, 2003
to $36.6 million for the nine months ended March 31, 2004. Approximately $4.1
million, or 55%, of this increase in selling, general, and administrative
expenses is related to new entities which were part of the Company in the nine
months ended March 31, 2004 which were not part of the Company during all of the
nine months ended March 31, 2003. 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 $2,107,000, 2) postage and supplies - approximately $467,000, 3)
equipment rental - approximately $320,000, 4) insurance - approximately
$232,000, 5) marketing - approximately $195,000 and 6) depreciation and
amortization - approximately $323,000.
Included in selling, general and administrative expenses for the nine
months ended March 31, 2004 were approximately $1,881,500 of non-recurring
expenses related to the New Mountain Transaction including: 1) transaction
bonuses and a severance payment totaling $1,542,500, and 2) a non-cash
compensation charge of approximately $339,000 related to the acceleration of
stock options for two directors who resigned upon the closing of the New
Mountain Transaction.
Of the remaining approximate $4.9 million increase in selling, general and
administrative expenses during the nine months ended March 31, 2004, 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 $121,000, or 15%, year-over-year from approximately $789,000 to
approximately $668,000 for the nine months ended March 31, 2003 and March 31,
2004, 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 6.0% for the nine months ended March 31, 2003 to 7.7% for the
nine months ended March 31, 2004. The approximate $1.9 million in non-recurring
expenses related to the New Mountain Transaction, as described above, led to
0.4% of the increase in expenses as a percent of revenue. In addition, the three
new services described above also accounted for 0.9% of the increase in expenses
as a percentage of revenue particularly mail order due to the fact that
resources were required to be hired in advance of the revenue.
For the nine months ended March 31, 2003 and March 31, 2004, the Company
recognized other expense, net, of approximately $639,000 and $256,000,
respectively. The main component of the approximate $383,000 decrease in other
expense was an approximate $422,000 decrease in interest expense incurred on the
Company's revolving credit facility (See Note 4 of Part 1, Item 1). This
decrease was partially offset by an approximate $14,000 decrease in interest
income due to the affiliated company note being repaid as of July 31, 2003 (See
Note 8 of Part 1, Item 1) and an approximate $25,000 decrease in other income
related to the disposal of certain assets upon the move into a new facility in
Portland, Maine for the Company's specialty pharmacy operations. 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 $1.2
million, or 15%, from approximately $8.0 million, for the nine months ended
March 31, 2003, to approximately $9.2 million for the nine months ended March
31, 2004. Excluding the New Mountain transaction expenses, the primary factors
from on-going operations leading to the increase in income 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 current estimated tax rate for the
full fiscal year.
Net income for the nine months ended March 31, 2004 was approximately $5.4
million as compared to approximately $4.7 million for the nine months ended
March 31, 2003; a 15% increase. This overall increase in net income was impacted
by the $1.9 million non-recurring expenses less an income tax benefit of $0.8
million related to the New Mountain Transaction.
There were three other charges against income (loss) available to common
shareholders related to the New Mountain Transaction. These include: (i)
preferred stock cash dividends - approximately $199,000. The preferred stock
provides for an initial cash dividend equal to 7% of the investment amount
(currently $80 million), which decreases to 3.5% after the fifth anniversary of
issuance (See Note 3 of Part 1, Item 1). The dividend of approximately $199,000
represents the amount accrued and paid for the thirteen days from the closing of
the New Mountain Transaction to March 31, 2004, (ii) beneficial conversion
feature - $80 million. This non-recurring, non-cash charge represents the
difference between the fair market value of the Company's common stock on the
date of the closing of the New Mountain Transaction and the effective conversion
price of $11.29, and which is limited to the $80 million purchase price for the
preferred stock, and (iii) accretion of transaction expenses - approximately
$17,000. Certain transaction costs related to the New Mountain preferred stock
investment of approximately $4.7 million are deducted from net proceeds and the
carrying value of the preferred stock. These transaction costs are accreted to
the preferred stock carrying value over the ten-year life of the preferred stock
investment. The approximate $17,000 charge for the three months ended March 31,
2004 represents accretion for thirteen days.
After deducting these three charges from net income there was a net loss
available to common shareholders of approximately $74.8 million for the nine
months ended March 31, 2004. Since there was a loss, diluted EPS for the nine
months ended March 31, 2004 equals basic EPS of ($9.99).
While net income available to common shareholders excluding non-recurring
New Mountain transaction items is not a measure of financial performance under
accounting principles generally accepted in the United States, it is provided as
information for investors for analysis purposes in evaluating the effect of the
New Mountain transaction on net (loss) income available to common shareholders.
Net income available to common shareholders excluding non-recurring transaction
items is not meant to be considered a substitute or replacement for net income
or net (loss) income available to common shareholders as prepared in accordance
with accounting principles generally accepted in the United States. The
reconciliation from net (loss) income available to common shareholders to net
income available to common shareholders excluding non-recurring transaction
items related to the New Mountain transaction, is as follows (all amounts are in
thousands):
Nine Months Ended
-----------------------------------------
------------------- -------------------
March 31, 2004 March 31, 2003
------------------- -------------------
Net (loss) income available to
common shareholders $ (74,787) $ 4,738
Add back:
Beneficial conversion feature 80,000 -
Transaction bonuses and
severance payment, net of
income tax benefit 910 -
Compensation charge related to
the acceleration of directors
options, net of income tax
benefit 200 -
------------------- -------------------
------------------- -------------------
Net income available to common
shareholders excluding
non-recurring New Mountain
transaction items $ 6,323 $ 4,738
=========== ===========
Net income per common share excluding non-recurring New Mountain transaction
items:
Basic $ 0.84 $ 0.62
Diluted $ 0.74 $ 0.59
Weighted average number of common shares outstanding:
Basic 7,485 7,582
Diluted 8,578 8,024
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 requires cash to carry inventory in its mail order and specialty
pharmacy facilities. Also, the Company requires cash to execute its strategy of
pursuing acquisitions of other PBM companies or of companies providing related
services. As of March 31, 2004, the Company had a working capital deficit of
$6.8 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 during
the three months ended March 31, 2004 was the remaining proceeds from the
issuance and sale of the series A preferred stock to New Mountain Partners, LP
of approximately $24 million (See Note 3 of Item 1). These funds were used on
April 1, 2004 to complete the Inteq acquisition (See Note 12 of Item 1) and
consequently working capital has declined immediately after the acquisition. In
addition, the profitability generated by the Company during the nine months
ended March 31, 2004 is the other reason for the improvement in working capital.
This improvement was achieved even after the $3.7 million in cash paid for the
acquisition of PPP and the $2.5 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 six companies since July 2000 utilizing primarily cash. This has
had the effect of increasing the Company's working capital deficits until
sufficient profitability is generated to pay back the cost of the acquisitions.
Net cash provided by operating activities was $20.4 million for the nine
months ended March 31, 2004. Net cash provided by operating activities was $7.4
million for the nine months ended March 31, 2003. The main factor that led to
the $13.0 million increase in cash provided by operations was the $27.8 million
increase in the change in accounts payables and accrued expenses which was
partially offset by the $16.6 million increase in accounts and rebates
receivables.
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 $6.5 million for the nine months
ended March 31, 2004, as compared to $3.8 million for the nine months ended
March 31, 2003. The primary differences in the two periods were the acquisition
of PPP and the repayment of affiliate loans in the period ended March 31, 2004,
and a $4.2 million increase in capital expenditures for the nine months ended
March 31, 2004 as compared to the nine months ended March 31, 2003. The net cash
outlay for PPP was $3.7 million, representing the initial payment of $3.2
million to the Sellers, $609,000 to pay off PPP's bank debt plus $77,000 of
related expenses. Cash in the amount of approximately $177,000 was assumed in
the acquisition. In addition, approximately $499,000 has been accrued through
March 31, 2004 as additional purchase price related to an earn-out provision.
During the nine months ended March 31, 2004, the Company repaid a net of
approximately $15.6 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 nine months. The issuance of the
Company's series A preferred stock net of the purchase of the Company's shares
in the tender offer provided net cash of approximately $24 million (See Note 3
of Part 1, Item 1). In addition employees of the Company exercised stock options
which generated $2.6 million of cash for the Company during the nine months
ended March 31, 2004.
On January 29, 2002, the Company entered into a $40 million revolving
credit facility (the "Facility"), details of which are set forth in Note 4 to
the financial statements in Part 1. Borrowings of $28.7 million under the
Facility were used to finance part of the purchase price of the Company's
acquisition of Centrus. The Facility contains various covenants that, among
other things, require the Company to maintain certain financial ratios. As of
May 3, 2004 approximately $4.6 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, including the $1.9 million of non-recurring expenses
related to the New Mountain Transaction, which increased by approximately $1.7
million or 14%, from $12.0 million for the nine months ended March 31, 2003 to
$13.7 million for the nine months ended March 31, 2004, is calculated as follows
(see Consolidated Statement of Cash Flows comprising Item 1 hereof for more
details):
Nine Months Ended March 31,
2004 2003
------------------------- --------------------------
------------------------- --------------------------
Cash flow from operations $ 20,415 $ 7,353
Provision for income taxes 3,773 3,293
Interest (income) expense, net 346 754
Net change in assets and
liabilities (10,384) 1,119
Non-cash items to reconcile
net cash from operations to
net income (467) (476)
------------------------- --------------------------
------------------------- --------------------------
EBITDA $ 13,683 $ 12,043
========================= ==========================
The Company has entered into various capital lease transactions for
hardware and software. The Company has also assumed various capital leases
through its acquisitions. The principal balance of all capital leases as of
March 31, 2004 was approximately $449,000.
The Company has entered into various real estate operating leases with both
related and unrelated parties. The Company has entered into various operating
leases and a sale-leaseback with unrelated third parties for office equipment.
These leases have different payment terms and expiration dates. The Company also
entered into a sale-leaseback operating lease of certain fixed assets
(principally computer hardware and externally developed software) with an
affiliate of the Company's former Vice Chairman. See Note 9 to the Consolidated
Financial Statements comprising Item 8 of Form 10-K, as amended, for the year
ended June 30, 2003 for a further description of these various leases.
The total future payments under these contractual obligations as of March
31, 2004, are as follows:
Contractual Obligations Payments Due by Period
($ in thousands)
Total Less than 1-3 Years 3-5 After
1 Year Years 5 Years
----------- -------------- ---------- ---------- ----------
----------- -------------- ---------- ---------- ----------
Long Term Debt $ 36 $ 36 $ - $ - -
Capital Lease Obligations 449 436 13 - -
Operating Leases 16,928 4,302 7,908 2,704 2,014
Sale-leasebacks 644 399 245 - -
----------- -------------- ---------- ---------- ----------
----------- -------------- ---------- ---------- ----------
Total Contractual Cash
Obligations $ 18,057 $ 5,173 $ 8,166 $ 2,704 2,014
=========== ============== ========== ========== ==========
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 two years and
$4,000,000 has been earned. Of this amount, $1,000,000 was paid in May 2003,
$2,000,000 was paid in May 2004, and another $1,000,000 will be paid 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, $498,663 has been earned and accrued as additional
purchase price.
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 million. On March 19, 2004,
the Company completed the sale of the series A preferred stock to New Mountain
Partners and used approximately $49 million of the proceeds of the sale of the
series A preferred stock to fund the purchase price for a tender offer of
4,448,900 shares of the Company's outstanding common stock at $11.00 per share.
Prior to the closing of the New Mountain Transaction, Bert E. Brodsky, the
former chairman of the board of directors, and certain stockholders related to
him, held (assuming the exercise of 300,000 options held by Mr. Brodsky which
occurred in April 2004), in the aggregate, approximately 59% of the Company's
outstanding common stock and had agreed to tender 4,448,900 shares, or
approximately 54% of the Company's outstanding common stock, held by them, into
the tender offer. No other shareholders tendered shares in the offer.
Following the completion of the tender offer, and assuming the exercise of
300,000 options held by Mr. Brodsky which occurred in April 2004, New Mountain
Partners owned securities at March 19, 2004 that were initially convertible into
approximately 64% of the Company's issued and outstanding common stock and prior
to conversion of the series A preferred stock were entitled to cast that number
of votes that is equal to approximately 60% of the Company's aggregate voting
power. Following the closing of the New Mountain Transaction, New Mountain
Partners were entitled to and did nominate and elect 60% of the members of the
Company's board of directors.
The Company used the remaining proceeds from the issuance and sale of the
series A preferred stock of approximately $24 million, excluding expenses
related to the closing of the New Mountain Transaction, for the Inteq
Acquisition. (See Note 12 of Part 1, Item 1) and working capital purposes.
The preferred stock provides 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 is 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 six
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 New Mountain Transaction 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 affect related disclosures of contingent assets and
liabilities. On an on-going basis, Health Card evaluates its estimates and
judgments, including those related to revenue recognition, bad debt, intangible
assets, income taxes, and financing operations. Health Card bases its estimates
on experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes that of its significant accounting policies (See Note
1 to the Consolidated Financial Statements comprising Item 8 of Form 10-K, as
amended, for the year ended June 30, 2003), the following may involve a higher
degree of judgment and complexity than others:
Revenue Recognition
(a) The Company has historically entered into two types of arrangements for
the payment of administrative fees: fee for service (per claim charges) and
capitation (per member per month charges). Under the fee for service
arrangement, the Company is paid by its sponsors for the Company's contractually
agreed upon rates based upon actual claims adjudicated, plus a fixed transaction
fee. Under the capitation arrangement, the fee is based on the number of
participants per month; the Company pays for the cost of prescriptions filled
and thus shares the risk of operating profit or loss with these plans. Since
January 1, 2000, all services have been provided on a fee for service basis
only.
Revenue under the fee for service arrangement is recognized when the claims
are adjudicated. Included as revenue are the Company's administrative fees and
charges relating to pharmaceuticals dispensed by the Company's network of
pharmacies. Revenue is reduced by the amount of rebates paid to the Company's
sponsors.
(b) The specific terms of the contracts that Health Card enters into with
its sponsors will determine whether Health Card recognizes the gross revenue
related to the cost of the prescriptions filled. 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.
(c) 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.
(d) 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, as amended, 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 December
31, 2004.
An action was commenced against the Company on April 30, 2002 by Midwest
Health Plan Inc. ("MHP" or "Midwest") 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 argued its motion for partial summary judgment and motion to dismiss the
fiduciary duty claim in February, 2004 and is currently awaiting the court's
decision on such motions. The court has not set a trial date. 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 AND ISSUER
PURCHASES OF EQUITY SECURITIES
For information concerning the Company's 1999 Stock Option Plan, and the
options currently issued and outstanding thereunder, see Note 5 to the Financial
Statements comprising Item 1 of Part I of this Form 10-Q.
Issuer Sale of Securities
On March 19, 2004, the Company entered into a transaction in which it sold
a total of 6,956,522 shares of series A 7% convertible preferred stock of the
Company to New Mountain Partners, L.P. and New Mountain Affiliated Investors,
L.P., at a price of $11.50 per share, for aggregate proceeds of approximately
$80 million. The transaction was intended to be exempt from the registration
requirements of the Securities Act of 1933, as amended, by virtue of Section
4(2) under the Securities Act because the securities were not offered to the
public. No underwriters were involved in connection with the sale of these
securities. The Company used approximately $49 million of the proceeds of the
sale of these securities to fund the purchase price for a tender offer of
4,448,900 shares of the Company's outstanding common stock at $11.00 per share.
The tender offer closed and the 4,448,900 shares of the Company's common stock
were purchased on March 19, 2004. For additional information concerning the sale
of securities by the Company, see Note 3 to the Financial Statements comprising
Item 1 of Part I of this Form 10-Q.
Issuer Purchases of Equity Securities
The following table provides information about purchases by the Company
during the quarter ended March 31, 2004 of equity securities that are registered
by the Company pursuant to Section 12 of the Exchange Act:
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
(a) (b) (c) (d)
Maximum Number (or
Approximate Dollar
Total Number of Value) of Shares (or
Shares (or Units) Units) that May Yet
Total Number of Purchased as Part of Be Purchased Under
Shares (or Units) Average Price Paid Publicly Announced the Plans or
Period Purchased (1) per share (or Unit) Plans or Programs (2) Programs
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
01/01/04- -- $ -- -- --
01/31/04
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
02/01/04- -- -- -- --
02/29/04
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
03/01/04- 4,448,900 11.00 4,448,900 --
03/31/04
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Total: 4,448,900 $11.00 4,448,900 --
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
(1) The Company repurchased an aggregate of 4,448,900 shares of the
Company's outstanding common stock pursuant to a tender offer that the Company
publicly announced on February 19, 2004 (the "Tender Offer").
(2) The Company's board of directors approved the repurchase by the Company
of up to an aggregate of 4,545,455 shares of the Company's common stock having a
value of approximately $50 million in the aggregate pursuant to the Tender
Offer. The Tender Offer expired on March 19, 2004.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 2004 annual meeting of stockholders on March 18, 2004. Each
of the matters described below were voted upon and approved at the annual
meeting.
1) The issuance and sale of the Company's newly created series A preferred
stock, par value $0.10 per share.
Votes For Votes Against Abstention Not Voted
--------- ------------- ---------- ---------
5,855,915 123,420 168,300 1,680,375
2) An amendment to the Company's certificate of incorporation to among
other actions:
(i) increase the authorized number of shares of common stock
to 35,000,000 shares:
Votes For Votes Against Abstention Not Voted
--------- ------------- ---------- ---------
6,051,765 38,270 57,600 1,680,375
(ii) increase the authorized number of shares of preferred stock to
15,000,000 shares:
Votes For Votes Against Abstention Not Voted
--------- ------------- ---------- ---------
5,784,460 144,675 218,500 1,680,375
(iii) eliminate the classified structure of the Company's board of
directors:
Votes For Votes Against Abstention Not Voted
--------- ------------- ---------- ---------
5,908,995 181,040 57,600 1,680,375
(iv) enable the holders of Series A preferred stock to appoint a majority
of the members of the Company's board of directors in the event that the Company
fails to pay the redemption price upon redemption of the series A preferred
stock made at the request of the holders of series A preferred stock:
Votes For Votes Against Abstention Not Voted
--------- ------------- ---------- ---------
5,960,355 129,780 57,500 1,680,375
(v) provide that the terms of the series A preferred stock set forth in the
Company's Certificate of Incorporation (including the Certificate of
Designations relating to such series of preferred stock) may be amended solely
by a vote of a majority of the holders of the outstanding series A preferred
stock, and not the holders of common stock, provided that such amendment is
approved by a majority of the independent directors then in office:
Votes For Votes Against Abstention Not Voted
--------- ------------- ---------- ---------
5,959,255 130,780 57,600 1,680,375
(vi) enable the authorized shares of the Company's common stock to be
increased or decreased by the holders of a majority of our voting power, without
requiring a separate common stock class vote:
Votes For Votes Against Abstention Not Voted
--------- ------------- ---------- ---------
5,959,375 130,560 57,700 1,680,375
3) The election of two Class II directors:
Name Votes For Votes Withheld
---- --------- --------------
Gerald Angowitz 7,544,634 283,376
Kenneth J. Daley 7,538,334 289,676
4) To approve an amendment to the Company's 1999 Stock Option Plan to (i)
increase the number of shares of common stock available for issuance pursuant to
the Plan by 2,000,000 and (ii) limit the number of shares of common stock with
respect to which options and stock appreciation rights may be granted pursuant
to the Plan to any employee during any fiscal year to 600,000.
Votes For Votes Against Abstention Not Voted
--------- ------------- ---------- ---------
5,894,543 195,292 57,800 1,680,375
A detailed description of the matters voted upon at the Company's 2003
annual meeting of shareholders has been previously reported in the Company's
Definitive Proxy Statement as filed with the SEC on March 8, 2004.
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 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)
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 Acquisition and Merger Agreement, dated as of June 27, 2000, between
Health Card and Pharmacy Associates, Inc. (3)
2.5 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)
2.6 Stock Purchase Agreement dated October 30, 2003 by and between Health Card and New
Mountain Partners, L.P. (13)
2.7 Asset Purchase Agreement among Health Card, Inteq PBM, LP, Inteq-RX Group,
LLP, and the individuals named therein dated April 1, 2004 (15)
3.1 Certificate of Incorporation of Health Card (7)
3.2 Certificate of Amendment to the Certificate of Incorporation of Health Card
3.3 Amended and Restated By-Laws of Health Card
3.4 Amended and Restated Audit Committee Charter
4.1 Form of Warrant Agreement, including form of Representatives' Warrants (1)
4.2 Certificate of Designation, Preferences and Rights of Series A 7% Convertible Preferred
Stock of Health Card
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, as amended (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)
10.16 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 Assignment Agreement dated as of November 1, 2002, by and between Health Card,
Integrail Acquisition Corp., and Health
Solutions, Ltd. (10)
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)
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 and incorporated herein by
reference.
(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 and incorporated herein by reference.
(5) Denotes document filed as an Exhibit to Health Card's Form 8-K for an
event dated March 5, 2001 and incorporated herein by reference.
(6) Denotes document filed as an Exhibit to Health Card's Report on Form
10-K for the year ended June 30, 2001 and incorporated herein by reference.
(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 and incorporated herein by reference.
(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 and incorporated
herein by reference.
(15) Denotes document filed as an Exhibit to Health Card's Form 8-K filed
on April 14, 2004 and incorporated herein by reference.
(b) Reports on Form 8-K
1. A Current Report on Form 8-K was filed with the Securities and Exchange
Commission on February 2, 2004 reporting the Company's Press Release of February
2, 2004.
2. A Current Report on Form 8-K was filed with the Securities and Exchange
Commission on February 4, 2004 reporting a transcript of a conference call made
on February 3, 2004.
3. A Current Report on Form 8-K was filed with the Securities and Exchange
Commission on March 15, 2004 reporting the Company's Press Release of March 12,
2004.
4. A Current Report on Form 8-K was filed with the Securities and Exchange
Commission on March 23, 2004 reporting the Company's Press Release of March 19,
2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
(Registrant)
Date: May 14, 2004 By: /s/ James J. Bigl
James J. Bigl,
Chief Executive Officer
By: /s/ Stuart F. Fleischer
Stuart F. Fleischer
Chief Financial Officer