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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
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(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, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from to
Commission file number 000-26749
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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 11-2581812
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
26 Harbor Park Drive, Port Washington, NY 11050
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (516) 626-0007
Not Applicable
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's Common Stock, as of May
10, 2005 was 4,752,139 shares.
INDEX Page
FORWARD-LOOKING STATEMENTS 3
PART I - FINANCIAL INFORMATION 4
ITEM 1 - CONDENSED FINANCIAL STATEMENTS: 4
CONSOLIDATED BALANCE SHEET as of 4
March 31, 2005 (unaudited) and June 30, 2004
CONSOLIDATED STATEMENT OF INCOME (unaudited) 5
for the three months and nine months ended March 31, 2005 and 2004
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) 6
for the nine months ended March 31, 2005 and 2004
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 21
CONDITION AND RESULTS OF OPERATIONS
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 37
MARKET RISK
ITEM 4 - CONTROLS AND PROCEDURES 37
PART II - OTHER INFORMATION 38
ITEM 1 - LEGAL PROCEEDINGS 38
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE 38
OF PROCEEDS
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 38
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 38
ITEM 5 - OTHER INFORMATION 38
ITEM 6 - EXHIBITS 39
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 pharmacy
benefit management ("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
"Description of Business" in Item 1 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 of Health Card's Annual
Report on Form 10-K, for the fiscal year ended June 30, 2004, filed with the
U.S. Securities and Exchange Commission on September 28, 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,
2005 2004
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(Unaudited)
Assets
Current:
Cash and cash equivalents (including cash equivalent investments of $187
and $1,191, respectively) $ 4,498 $ 3,388
Restricted cash 3,847 1,695
Accounts receivable, less allowance for doubtful accounts of $2,186 and $2,312, 100,184 73,162
respectively
Rebates receivable 42,923
34,764
Inventory 6,320 3,252
Due from affiliates 17 18
Deferred tax assets 3,260 2,711
Other current assets 3,370
2,093
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Total current assets 164,419 121,083
Property, equipment and software development costs, net 12,014 10,597
Intangible assets, net of accumulated amortization of $2,992 and $2,106, 4,232 3,788
respectively
Goodwill 99,997 86,964
Other assets 757 3,717
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Total Assets $ 281,419 $ 226,149
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Liabilities, Redeemable Preferred Equity, and Common Stockholders' Equity (Deficit)
Current Liabilities:
Accounts payable and accrued expenses $ 187,534 $ 147,572
Revolving credit facility and loans payable-current 1,875 53
Current portion of capital lease obligations 27 327
Income taxes payable 1,948 837
Other current liabilities 1,458 -
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Total current liabilities 192,842 148,789
Capital lease obligations, less current portion 47 13
Long term loans payable and other liabilities 1,000 3,877
Deferred tax liability 5,363 4,704
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Total liabilities 199,252 157,383
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Commitments and Contingencies
Redeemable Preferred Equity:
Redeemable convertible preferred stock $.10 par value; 15,000,000 shares
authorized, 6,956,522 issued and outstanding 75,745 75,389
Common Stockholders' Equity (Deficit):
Common stock, $.001 par value, 35,000,000 shares authorized, 9,355,249 and
8,969,694 shares issued, 4,715,349 and 4,329,794 outstanding, respectively 9 9
Additional paid-in-capital 112,760 104,890
Accumulated deficit (54,468) (59,643)
Treasury stock at cost, 4,639,900 shares (51,879) (51,879)
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Total common stockholders' equity (deficit) 6,422 (6,623)
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Total Liabilities, Redeemable Preferred Equity, and Common
Stockholders' Equity (Deficit) $ 281,419 $ 226,149
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See accompanying condensed notes to consolidated financial statements
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
Three months ended March Nine months ended
March 31, March 31,
2005 2004 2005 2004
Revenue (includes co-payments collected of $4,322, $901, $10,772
and $1,061, respectively; and excludes co-payments retained by
the pharmacies of $74,932, $52,651, $203,623 and $152,491, $ 199,342 $ 159,725 $ 584,734 $ 474,450
respectively)
Cost of claims (excludes co-payments retained by the pharmacies of
$74,932, $52,651, $203,623 and $152,491, respectively) 177,150 142,909 520,940 428,441
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- -------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
Gross Profit 22,192 16,816 63,794 46,009
Selling, general and administrative expenses 16,629 14,182 48,699 36,551
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- -------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
Operating income 5,563 2,634 15,095 9,458
Other income (expense):
Interest expense (167) (114) (534) (519)
Interest income 123 111 161 173
Other income, net 16 10 1,777 90
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- -------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
(28) 7 1,404 (256)
- -------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
- -------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
Income before provision for income taxes 5,535 2,641 16,499 9,202
Provision for income taxes 2,270 1,077 6,765 3,773
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Net income 3,265 1,564 9,734 5,429
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Beneficial conversion feature - 80,000 - 80,000
Preferred stock cash dividend 1,380 199 4,204 199
Accretion of transaction expenses 117 17 356 17
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Net income (loss) available to common stockholders $ 1,768 $ (78,652) $ 5,174 $ (74,787)
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Earnings (loss) per common share:
Basic $ 0.39 $ (11.17) $ 1.16 $ (9.99)
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Diluted * $ 0.27 $ (11.17) $ 0.81 $ (9.99)
- -------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
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Weighted average number of common shares outstanding:
Basic 4,584 7,044 4,468 7,485
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- -------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
Diluted * 12,123 7,044 12,090 7,485
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- -------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
See accompanying condensed notes to consolidated financial statements
* = For the three months and nine months ended March 31, 2005, the number
of weighted average diluted shares was calculated using the "as if converted"
method for the redeemable preferred stock.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine months ended
March 31,
2005 2004
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Cash flows from operating activities:
Net income $ 9,734 $ 5,429
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,682 4,135
Amortization of deferred gain (92) (333)
Net gain on disposal of capital assets - 316
Provision for doubtful accounts 756 847
Compensation expense accrued to officer/stockholder - 37
Deferred income taxes 901 (400)
Changes in assets and liabilities, net of effect from acquisitions:
Restricted cash 582 745
Accounts receivable (24,585) (13,633)
Rebates receivable (2,058) (4,762)
Inventory (3,068) (1,410)
Other current assets (1,954) (727)
Due to/from affiliates 1 235
Other assets 3,327 (81)
Accounts payable and accrued expenses 10,321 26,172
Income taxes payable and other current liabilities 6,828 2,502
Other long term liabilities (925) 1,343
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Net cash provided by operating activities 4,450 20,415
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Cash flows from investing activities:
Capital expenditures (4,295) (5,550)
Repayment of loan from affiliate - 2,660
Repayment of loan from officer - 107
Acquisition of PCN, net of cash acquired 3,153 -
Acquisition of Integrail - (13)
Acquisition of Inteq (139) -
Acquisition of PPP, net of cash acquired (358) (3,658)
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Net cash used in investing activities (1,639) (6,454)
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Cash flows from financing activities:
Proceeds from exercise of stock options 3,251 2,632
Proceeds from issuance of preferred stock, net of offering costs 75,262
Purchase of treasury stock in tender offer including related costs (51,130)
Proceeds from revolving credit facility 695,758 624,095
Repayment of revolving credit facility (695,796) (639,723)
Payment of preferred stock dividends (4,204) (199)
Deferred financing costs (367) 143
Repayment of debt and capital lease obligations (343) (379)
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Net cash (used in) provided by financing activities (1,701) 10,701
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Net increase in cash and cash equivalents 1,110 24,662
Cash and cash equivalents at beginning of period 3,388 5,222
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Cash and cash equivalents at end of period $ 4,498 $ 29,884
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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 share and per share amounts)
(Unaudited)
28
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"), Portland Professional Pharmacy and Portland Professional Pharmacy
Associates (collectively, "PPP" or "Ascend"), Inteq Corp. and Inteq TX Corp.
(collectively, "Inteq"), PCN DE Corp. and Pharmaceutical Care Network
(collectively, "PCN") and PBM Technology Inc. ("PBM Tech") (See Note 4). 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 U.S. Securities and Exchange Commission (the "SEC") in
instructions to Form 10-Q and in Article 10 of Regulation S-X. Accordingly, the
interim financial information does 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, 2005 and
2004 unaudited interim financial statements include all adjustments consisting
of normal recurring adjustments, necessary for a fair presentation of results
for these interim periods. In the opinion of the Company's management, the
disclosures contained in this Form 10-Q are adequate to make the information
presented not misleading when read in conjunction with the Notes to Consolidated
Financial Statements included in the Company's Form 10-K for the year ended June
30, 2004. The results of operations for the nine month period ended March 31,
2005 are not necessarily indicative of the operating results to be expected for
the full year.
For information concerning the Company's significant accounting policies,
reference is made to the Company's Annual Report on Form 10-K for the year ended
June 30, 2004 (the "Annual Report") filed with the SEC.
2. STOCK-BASED COMPENSATION
Pro forma information regarding net income 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, 2005 and 2004: no dividend yield, weighted-average
expected life of the option of between three and seven years, risk-free interest
rate of between 3.40% and 4.46% and between 2.81% and 2.83% respectively, and a
volatility of between 72.2% and 75%, and 83.2%, respectively, for all grants.
The weighted-average value of options granted is $14.71 and $8.75 for the nine
months ended March 31, 2005 and 2004, respectively.
The Company follows the provisions of 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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2005 2004
Reported net income (loss) available to
common stockholders $ 1,768 $ (78,652)
Stock compensation expense included in net
income available to common - 200
stockholders
Pro forma compensation expense (1,092) (652)
Pro forma net income (loss) available to
common stockholders $ 676 $ (79,104)
Pro forma earnings (loss) per share:
Basic $ 0.15 $ (11.23)
Diluted $ 0.13 $ (11.23)
Nine Months Ended March 31,
----------------------------------------------------
-------------------------- -------------------------
2005 2004
Reported net income (loss) available to
common stockholders $ 5,174 $ (74,787)
Stock compensation expense included in net
income available to common - 200
stockholders
Pro forma compensation expense (3,492) (1,636)
Pro forma net income (loss) available to
common stockholders $ 1,682 $ (76,223)
Pro forma earnings (loss) per share:
Basic $ 0.38 $ (10.18)
Diluted $ 0.33 $ (10.18)
On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a
revision of FASB Statement No. 123, Accounting for Stock-Based Compensation.
Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally,
the approach in Statement 123(R) is similar to the approach described in
Statement 123. However, Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure is no longer
an alternative.
Statement 123(R) must be adopted by the Company no later than July 1, 2005.
Early adoption will be permitted in periods in which financial statements have
not yet been issued. The Company expects to adopt Statement 123(R) on July 1,
2005.
Statement 123(R) permits public companies to adopt its requirements using
one of two methods:
A "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of Statement
123(R) for all share-based payments granted after the effective date and (b)
based on the requirements of Statement 123 for all awards granted to employees
prior to the effective date of Statement 123(R) that remain unvested on the
effective date.
A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under Statement 123 for
purposes of pro forma disclosures either (a) all prior periods presented or (b)
prior interim periods of the year of adoption.
The Company is currently evaluating these two methods to determine which
method will be adopted and its effect on the financial statements.
As permitted by Statement 123, the Company currently accounts for
share-based payments to employees using Opinion 25's intrinsic value method and,
as such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of Statement 123(R)'s fair value method will have a
significant impact on our result of operations, although it will have no impact
on our overall financial position. The impact of adoption of Statement 123(R)
cannot be determined at this time because it will depend on levels of
share-based payments granted in the future. However, had we adopted Statement
123(R) in prior periods, the impact of that standard would have approximated the
impact of Statement 123 as described in the disclosure of pro forma net income
and earnings per share in this Note to our consolidated financial statements.
Statement 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. The Company cannot estimate what those amounts
will be in the future, because they depend on, among other things, when
employees exercise stock options and the fair value of the Company's stock on
the date of exercise.
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 7% convertible preferred stock (the "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 purchase, pursuant to a tender offer, 4,448,900 shares of the Company's
issued and outstanding common stock (the "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 330,000 options and warrants held by Mr. Brodsky, which occurred in April
2004), in the aggregate, approximately 59% of the common stock and had agreed to
tender 4,448,900 shares, or approximately 54% of the common stock, held by them,
into the tender offer. No other stockholders tendered shares in the offer.
Following the completion of the tender offer, and assuming the exercise of
330,000 options and warrants 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 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 was 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 Inteq Acquisition described
in Note 4 - Business Acquisitions 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 the Company's common stock
at a price of $11.50 per share of common stock, or an aggregate of approximately
7,000,000 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 6,956,522, 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 was limited to $80,000,
which is the purchase price of the series A preferred stock.
4. BUSINESS ACQUISITIONS
On March 7, 2005, the Company acquired all of the outstanding stock of
Pharmaceutical Care Network, a California corporation, from the California
Pharmacists Association (the "PCN Acquisition"). The aggregate purchase price of
the PCN Acquisition was $13,000 in cash. In addition, the Company has agreed to
pay the California Pharmacists Association ("CphA") earn-outs, as additional
purchase price, up to $30,000 over a period of three years if certain financial
and performance targets are achieved. The funds for the payment of the purchase
price in connection with the PCN Acquisition were obtained out of the Company's
working capital and revolving credit facility (See Note 5). The PCN operations
complement the Company's business while strengthening the Company's presence in
the California marketplace as well as in the Medicaid managed care market.
In addition to the $13,000 purchase price for the PCN Acquisition, there
were $558 of acquisition related expenses incurred by the Company. Of the
$13,000, $10,500 was paid to CPhA and certain of PCN's current and former
employees who participated in its Long Term Incentive Plan, and $2,500 was
deposited into escrow to secure CPhA's obligations under the purchase agreement.
At the time of the acquisition, PCN had approximately $30,942 of assets which
included $16,711 of cash, $2,734 of restricted cash, $3,204 of accounts
receivable, $6,090 of rebates receivable, $1,139 of other assets, and $1,064 of
property and equipment. They also had approximately $27,040 of liabilities which
included $26,848 of claims and accounts payable, $97 of other current
liabilities and $95 of other long-term liabilities. As a result of the PCN
Acquisition, $2,747 of severance and exit costs have been accrued as of March
31, 2005 and recorded as additional goodwill. The acquisition was accounted for
under the purchase method of accounting and the results of PCN's operations were
included in the consolidated financial statements commencing as of the closing
date of the PCN Acquisition. The excess of the acquisition costs over the fair
value of identifiable net assets acquired was $12,402. An independent valuation
of intangible assets relating to the PCN Acquisition is not yet complete. The
preliminary estimate of the components of this excess are customer relationships
valued at $1,200, which is being amortized over ten (10) years and goodwill of
$11,202, which will not be amortized for book purposes per SFAS 142. As of March
31, 2005, the financial and performance targets have not yet been met.
Therefore, no additional earn-outs have been accrued.
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 their 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 (See
Note 3 - New Mountain Transaction) and from the Company's revolving credit
facility (See Note 5). In connection with the Inteq Acquisition, several members
of Inteq's management have remained with the Company as consultants during the
transition period. The Inteq business complements the Company's business while
strengthening the Company's presence in the Texas marketplace.
The purchase price for the acquired assets of The Inteq Group was $31,500
of which $29,640 was paid in cash at closing and $1,860 was paid in the form of
a promissory note. In addition, there were $572 of acquisition related expenses
incurred by the Company. Of the $29,640, $24,900 was paid to The Inteq Group,
and $4,740 was deposited into escrow to secure The Inteq Group's obligations
under the purchase agreement. In addition, another $3,000, out of the $4,200
potential to be paid to The Inteq Group, was placed in escrow to secure the
Company's obligations to pay The Inteq Group additional purchase price if
certain targets are achieved during the first year, and such escrowed amount is
included in other assets in the consolidated balance sheet. The promissory note
plus accrued interest at four percent (4%) per annum is due and payable in full
on October 1, 2005. At the time of the acquisition, The Inteq Group had
approximately $14,200 of assets which included $4,134 of cash, $7,938 of
accounts receivable, $2,041 of rebates receivable, $47 of other assets, and $40
of property and equipment. They also had approximately $11,151 of liabilities
which included $11,138 of claims and accounts payable and $13 of miscellaneous
payables. The acquisition was accounted for under the purchase method of
accounting and the results of Inteq'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 $29,023, which consists of the following components: customer
relationships valued at $1,800, which is being amortized over ten (10) years and
goodwill of $27,223, which will not be amortized for book purposes per SFAS 142.
In addition, the $3,000 placed in escrow will be released quarterly if earned
and will be recorded as additional goodwill. To date, $1,024 out of a total
potential of $4,200, of additional consideration has been earned, of which $957
was released from escrow on October 5, 2004, with an additional $67 released in
January 2005. For tax purposes, the Company will amortize the goodwill and other
intangibles over fifteen years.
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" or "Ascend") 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
Note 5). The Company has positioned 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 is being amortized over seven (7) years; (ii) employment and non-compete
agreements valued at $100 each, which are being amortized over four (4) years;
(iii) the Portland Professional Pharmacy trade name valued at $100 which is
being 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, $1,333 has been earned and accrued,
of which $358 has been paid in cash and $358 has been settled by the issuance of
12,650 shares of common stock, and the remaining $617 will be settled in
September 2005.
Each of PRXA and PPRX continues to operate under their respective names,
and also does business under the name NMHC Ascend.
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 is
being 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 (see Note
5). 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
is being amortized over five (5) years; (ii) an employment agreement valued at
$83, which was amortized over two (2) years: (iii) non-compete contracts valued
at $76, which is being 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 is payable
in May 2005.
The summarized unaudited pro forma results of operations set forth below
for the three and nine months ended March 31, 2005 and 2004 assumes the PCN,
Inteq and PPP Acquisitions had occurred as of the beginning of these periods.
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
------------------ ------------------
Revenue $ 212,965 $ 201,430
Net income $ 2,486 $ 1,475
Net income (loss) available to common
Stockholders $ 989 $ (78,741)
Earnings (loss) per common share:
Basic $ 0.22 $ (11.18)
Diluted $ 0.21 $ (11.18)
Pro forma weighted-average number of common shares outstanding:
Basic 4,584 7,044
Diluted 12,123 7,044
Nine Months Ended Nine Months Ended
March 31, 2005 March 31, 2004
Revenue $ 628,672 $ 599,819
Net income $ 8,664 $ 5,906
Net income (loss) available to common
Stockholders $ 4,104 $ (74,310)
Earnings (loss) per common share:
Basic $ 0.92 $ (9.93)
Diluted $ 0.72 $ (9.93)
Pro forma weighted-average number of common shares outstanding:
Basic 4,468 7,485
Diluted 12,090 7,485
This pro forma financial information is presented for information purposes
only. Pro forma adjusted net income per common share, including acquisitions,
may not be indicative of actual results, primarily because pro forma earnings
include historical results of operations of the acquired entity and do not
reflect any cost savings or potential sales erosion that may result from the
Company's integration efforts. In addition, while PCN has traditionally recorded
all revenue on a gross basis, we have adjusted the historical amounts to reflect
certain contracts on a revenue basis consistent with NMHC's policies.
The change in the carrying amount of goodwill for the nine months ended
March 31, 2005 is as follows:
Balance as of June 30, 2004 $ 86,964
PCN acquisition 11,202
Inteq acquisition 139
Inteq additional consideration earned 1,024
PPP additional consideration earned 668
---------
Balance as of March 31, 2005 $ 99,997
Approximately $80,922 of the Company's March 31, 2005 goodwill is deductible for
income tax purposes on a straight-line basis over 15 years.
Acquired intangible assets subject to amortization consisted of the following:
March 31, 2005 June 30, 2004
======================================= ========================================
Asset Class Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
Customer
relationships $ 6,146 $ 2,232 $ 4,816 $ 1,564
Non-compete agreements
220 143 220 105
Employment agreements
186 127 186 109
Trade name 100 29 100 10
Company know how
572 461 572 318
------------- --------------- --------------- ---------------
------------- --------------- --------------- ---------------
$ 7,224 $ 2,992 $ 5,894 $ 2,106
============= =============== =============== ===============
5. DEBT
On January 29, 2002, the Company and certain of its subsidiaries entered
into a $40,000 secured revolving credit facility (the "revolving credit
facility") with HFG Healthco-4 LLC, a specialty finance company. The term of the
revolving credit facility expired on January 28, 2005 and there is no remaining
obligation outstanding.
On January 28, 2005, the Company and certain of its subsidiaries entered
into a new five-year $65,000 cash flow based, line of credit with a syndicate of
commercial banks led by JPMorgan Chase Bank, N.A. ("JPMorgan"). Subject to
certain conditions including the consent of the existing lenders, the new line
of credit may be increased by an aggregate of $35,000.
Depending on the timing and dollar amount of each loan request, the Company
will either borrow at a spread above LIBOR, the overnight Federal Funds rate or
JPMorgan's prime rate. The initial spread will be 1.75% for LIBOR and Federal
Funds loans and 0.75% for prime rate loans. After receipt of the Company's
financial statements for the period ended June 30, 2005, the spreads will
increase or decrease based on an interest rate grid that is tied to a ratio of
debt to annual EBITDA.
The new line of credit is secured by the Company's consolidated assets. The
new facility requires the Company to be in compliance with financial and other
covenants. The three defined financial covenants include: consolidated net
worth; consolidated fixed charge ratio; and consolidated debt to EBITDA ratio.
The Company was in compliance with all covenants at March 31, 2005.
6. STOCK OPTIONS
During the nine months ended March 31, 2005, the Company granted 443,245
stock options and 141,381 stock options were cancelled for a net of 301,864
stock options under the 1999 Stock Option Plan, as amended (the "Plan"). The
options granted during this period are exercisable at prices ranging from $19.80
to $29.06 and terminate five to ten years from the grant date. The total number
of shares of common stock of the Company reserved by the Company for issuance
under the Plan is 4,850,000 plus an indeterminable number of shares of common
stock of the Company 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. There are 1,519,310 shares issuable
pursuant to options granted under the Plan as of March 31, 2005.
7. EARNINGS PER SHARE
A reconciliation of shares used in calculating basic and diluted earnings
per share follows:
Three Months Ended March 31,
-----------------------------------
2005 2004
------------ -----------
Basic 4,583,773 7,043,809
Effect of assumed exercise of employee stock options 583,197 -
Effect of assumed exercise of warrants - -
Effect of assumed conversion of redeemable convertible preferred stock
6,956,522
-
Diluted weighted average number of shares outstanding 12,123,492 7,043,809
Nine Months Ended March 31,
-------------------------------------
2005 2004
------------------ -------------
Basic 4,468,227 7,484,757
Effect of assumed exercise of employee stock options 664,938 -
Effect of assumed exercise of warrants - -
Effect of assumed conversion of redeemable convertible preferred stock 6,956,522 -
---------- ----------
Diluted weighted average number of shares outstanding 12,089,687 7,484,757
Basic net income per common share is computed by dividing the net income
available to common stockholders by the weighted-average number of common shares
outstanding during the period. For the three and nine months ended March 31,
2005, diluted net income per share is computed by dividing the net income by the
weighted-average number of common and dilutive common equivalent shares
(consisting of employee stock options, warrants and redeemable preferred stock
as if converted) outstanding during the period. For the three and nine months
ended March 31, 2004, the diluted net loss per share is computed by dividing the
net loss available to common stockholders by 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.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
March 31, June 30,
2005 2004
----------- --------
Claims payable 110,576 $ 102,259
Rebates payable to sponsors 55,287 33,451
Trade and other payables and accrued expenses 21,671 11,862
----------- --------
$ 187,534 $ 147,572
9. RELATED PARTY TRANSACTIONS
The Company receives certain general, administrative and other services
from an affiliate. The financial statements include allocations of these
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 $316 for the three
months ended March 31, 2005 and $190 for the three months ended March 31, 2004.
Included in the statement of income for the nine months ended March 31, 2005 and
2004 were general and administrative expenses related to transactions with
affiliates of $914 and $668, respectively.
The Company occupied approximately 26,500 square feet of office space
located at 26 Harbor Park Drive, Port Washington, New York 11050 until April 30,
2004 (the "Leased Premises"). The Company subleases a portion of the Leased
Premises (the "Lease") from BFS Realty, LLC, an affiliate of the Company's
former chairman and director (the "Affiliate"). As of November 1, 2001, the
Company and the Affiliate amended the Lease. The Lease provided that, effective
August 1, 2001, the rent payable by the Company would be an aggregate annual
rent of $308. The Company makes monthly real estate tax, utilities and
maintenance-expense payments to the Affiliate. The annual rent would increase by
5% per year during the term of the Lease.
Additional space was built in the Leased Premises which allowed the Company
to reconfigure its existing space and to move all of its employees in Port
Washington into contiguous space. The Company and the Affiliate amended the
Lease for the space on October 23, 2003 and April 26, 2004. Effective on the
occupancy date of the new space, as of May 1, 2004, the Affiliate leased
additional square footage in the Leased Premises to the Company. The total space
leased by the Company is currently 37,108 square feet. The Lease provides that,
effective May 1, 2004, the rent payable by the Company shall be an aggregate
annual rent of $580 over a ten year term, plus expenses related to real estate
taxes, utilities and maintenance. 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 of May 1, 2004. In addition, the
Company has early termination rights which it may exercise by delivery of a
notice to the Affiliate 60 days prior to the end of the April 30, 2009 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 and 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 space during the nine months
ended March 31, 2005 were approximately $419.
10. MAJOR CUSTOMERS AND PHARMACIES
For the three and nine months ended March 31, 2005, approximately 18% and
19%, respectively, of the consolidated revenue of the Company was from one plan
sponsor, MVP Health Plan, Inc., administering multiple plans. 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 administering
multiple plans. Amounts due from the sponsor as of March 31, 2005 approximated
$9.6 million.
For the three and nine months ended March 31, 2005 approximately 11% of the
cost of claims was from one pharmacy chain. Amounts payable to the pharmacy
chain at March 31, 2005 were approximately $5.6 million. For the three months
ended March 31, 2004, approximately 23% of the cost of claims was from two
pharmacy chains. For the nine months ended March 31, 2004, approximately 17% of
the cost of claims was from one pharmacy chain.
11. SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended March 31, 2005 and March 31, 2004, the Company
paid $492 and $519 in interest, and $1,543 and $1,566 in income taxes,
respectively.
12. LITIGATION
An action was commenced against the Company on April 30, 2002 by Midwest
Health Plan Inc. ("MHP") in the United States District Court for the Eastern
District of Michigan. The amended complaint alleges, among other things, that
the parties entered into a contract dated July 1999 (the "Agreement"), and
further alleges that the Company has overcharged MHP for the administration of
prescription benefit services in contravention to the terms of the Agreement and
breached its fiduciary duties by making a profit. MHP is seeking $3,000 dollars
in damages. The Company filed an answer and counterclaim on June 12, 2002. In
the counterclaim, the Company claimed damages in excess of $2,800 based on MHP's
failure to pay under a contract. On July 5, 2002, MHP agreed to make two
payments in the amount of $1,340 and $1,360 to partially settle the Company's
claims against MHP. MHP added a fiduciary duty claim, with respect to which the
Company's motion to dismiss was denied. The Company continues to have
counterclaims totaling over $200 against MHP for MHP's failure to pay the
amounts it had agreed to pay the Company for goods and services. The Company
argued its motion for partial summary judgment in February 2004, and is
currently awaiting the court's decision on such motion. The Company intends to
continue to vigorously defend the action. The Company is unable to provide an
estimate of any particular loss, if any, which may be associated with the MHP
claims.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OPERATING INCOME
($ in thousands)
Three months ended March 31,
Increase/
2005 (Decrease) 2004
-------------------- ------------------- --------------------
--------------------
Revenue $199,342 24.8% $159,725
Cost of Claims 177,150 24.0% 142,909
-------------------- --------------------
-------------------- --------------------
Gross profit 22,192 32.0% 16,816
Selling, general, and
administrative expense 16,629 17.3% 14,182
-------------------- --------------------
-------------------- --------------------
Operating Income $5,563 111.2% $2,634
OPERATING INCOME
($ in thousands)
Nine months ended March 31,
Increase/
2005 (Decrease) 2004
-------------------- ------------------- --------------------
--------------------
Revenue $584,734 23.2% $474,450
Cost of Claims 520,940 21.6% 428,441
-------------------- --------------------
-------------------- --------------------
Gross profit 63,794 38.7% 46,009
Selling, general, and
administrative expense 48,699 33.2% 36,551
-------------------- --------------------
-------------------- --------------------
Operating Income $15,095 59.6% $9,458
Results of Operations
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
Revenue increased $39.6 million, or approximately 24.8%, from $159.7
million for the three months ended March 31, 2004, to $199.3 million for the
three months ended March 31, 2005. Revenue recognized for contracts recorded on
a gross revenue basis was $158.9 million for the three months ended March 31,
2004 and $197.6 million for the three months ended March 31, 2005. Revenue
recognized for contracts recorded on a net revenue basis was $0.8 million for
the three months ended March 31, 2004 and $1.7 million for the three months
ended March 31, 2005. 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 (see Critical
Accounting Policies and Estimates - Revenue Recognition). 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, 2005, there was approximately $4.3 million of
co-payments included in revenue versus $0.9 million for the three months ended
March 31, 2004. Co-payments retained by pharmacies on prescriptions filled for
Health Card's members and not included in Health Card's revenue were $74.9
million and $52.7 million, for the three months ended March 31, 2005 and 2004,
respectively.
Of the $39.6 million increase in revenue in the three months ended March
31, 2005, $12.3 million was attributable to the inclusion of revenue generated
by Inteq which was included in the revenue for the quarter ended March 31, 2005,
but not in the quarter ended March 31, 2004 and $5.5 million was attributable to
the inclusion of revenue generated by PCN that was not included in the quarter
ended March 31, 2004. Co-payments received from the Mail Order operations
accounted for $3.4 million of the increase. Another approximately $31.2 million
of the increase was due to revenue related to new sponsors or new services
offered during the quarter ended March 31, 2005 excluding contracts recorded on
a net revenue basis. An additional increase of approximately $8.9 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 $21.7 million.
Cost of claims increased $34.2 million, or approximately 24.0%, from $142.9
million for the three months ended March 31, 2004 to $177.2 million for the
three months ended March 31, 2005. Inteq accounted for $10.6 million of this
increase, and PCN accounted for another $4.8 million. Increases in cost of
claims totaling approximately $39.5 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 $20.7 million
(including a $1.1 million adjustment for previous pharmacy claims). As a
percentage of revenue, cost of claims decreased from 89.5% to 88.9% for the
three months ended March 31, 2004 and March 31, 2005, 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. In addition, the receipt of an
additional $3.4 million in co-payments for the Mail Order operations resulted in
a lower cost of claims as a percent of revenue, since no additional cost of
claims are incurred related to these fees.
Gross profit increased from $16.8 million for the three months ended March
31, 2004 to $22.2 million for the three months ended March 31, 2005; a $5.4
million, or 32.0%, increase. In addition to increases in gross profit related to
the increases in revenue, Inteq added $1.7 million to gross profit and PCN added
$0.7 million. The gross profit also increased by approximately $2.6 million from
the expanding mail order and specialty operations. Net rebates retained by the
Company added another approximately $0.4 million to gross profit. Gross profit,
as a percentage of revenue, increased from 10.5% to 11.1% for the three months
ended March 31, 2004 and March 31, 2005, 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 to its sponsors have had the effect of partially
offsetting the increases in gross margin described above.
Selling, general, and administrative expenses increased $2.4 million, or
approximately 17.3%, from $14.2 million for the three months ended March 31,
2004 to $16.6 million for the three months ended March 31, 2005. 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.
Excluding these non-recurring items, the increase in selling, general and
administrative expenses was $4.3 million. Approximately $1.9 million of this
increase in selling, general, and administrative expenses is related to the
acquisition of Inteq and PCN. The major components of the $1.9 million increase
in expenses related to the acquisitions: 1) salaries and benefits -
approximately $0.9 million, 2) postage and supplies - approximately $0.1
million, 3) telephone and travel - approximately $0.1 million, 4) equipment and
office rental - approximately $0.2 million, 5) depreciation and amortization -
approximately $0.2 million, 6) license and support agreements - approximately
$0.1 million, and 7) broker commissions - approximately $0.3 million. Another
$0.5 million relates to costs incurred as a result of compliance with the
Sarbanes-Oxley Act. In addition, salaries and benefits increased by $1.1 million
over the prior year primarily due to increased headcount.
General and administrative expenses charged by affiliates increased
approximately $126,000, or 66%, year-over-year from approximately $190,000 to
approximately $316,000 for the three months ended March 31, 2004 and March 31,
2005, respectively. The increase is the result of higher rent costs due to the
expanded space in the Company's Port Washington, NY offices.
Selling, general, and administrative expenses as a percent of revenue
decreased from 8.9% for the three months ended March 31, 2004 to 8.3% for the
three months ended March 31, 2005.
For the three months ended March 31, 2004, the Company recognized other
income, net, of approximately $7,000. For the three months ended March 31, 2005,
the Company recognized other expense, net, of approximately $28,000. This
increase in other expense was primarily due to a $53,000 increase in interest
expense, offset by an increase in interest income, both of which were driven by
higher interest rates.
Income before the provision for income taxes increased approximately $2.9
million, or 110%, from approximately $2.6 million, for the quarter ended March
31, 2004, to approximately $5.5 million for the quarter ended March 31, 2005.
The primary factor leading to this increase in income before income taxes was
the rise in gross profit, offset by the increase in selling, general and
administrative expenses related to the new acquisitions.
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, 2005 was approximately $3.3
million as compared to approximately $1.6 million for the quarter ended March
31, 2004, which is a 109% increase for such period. The increase in net income
is attributable to the same factors causing the increase in income before income
taxes.
In addition, there were three charges against income (loss) available to
common shareholders related to the New Mountain Transaction (See Note 3 of Part
1, Item 1). The first of these charges relates to preferred stock cash
dividends, which amounted to approximately $1.4 million for the three months
ended March 31, 2005 and $0.2 million for the three months ended March 31, 2004.
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. The dividends of approximately $1.4 million and
$0.2 million represent the amount accrued and paid for the three months ended
March 31, 2005 and March 31, 2004, respectively. The second charge is for the
accretion of transaction expenses which were approximately $117,000 for the
three months ended March 31, 2005, and $17,000 for the three months ended March
31, 2004. Certain transaction costs related to the New Mountain preferred stock
investment of approximately $4.7 million were 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 third charge is for the beneficial conversion feature and
affects the quarter ended March 31, 2004. This $80 million, 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.
After deducting these three charges from net income there remained net
income available to common stockholders of approximately $1.8 million for the
three months ended March 31, 2005, as compared to a net loss available to common
stockholders of approximately $78.7 million for the three months ended March 31,
2004.
While net income and net income available to common stockholders excluding
non-recurring New Mountain Transaction items are not measures of financial
performance under U.S. generally accepted accounting principles, they are
provided as information for investors for analysis purposes in evaluating the
effect of the New Mountain Transaction on net income and net income available to
common stockholders. Net income and net income available to common stockholders
excluding non-recurring New Mountain Transaction items are not meant to be
considered a substitute or replacement for net income or net income (loss)
available to common stockholders as prepared in accordance with U.S. generally
accepted accounting principles. The reconciliation from net income to net income
available to common stockholders excluding non-recurring New Mountain
Transaction items, is as follows (all amounts are in thousands, except per share
amounts):
Three Months Ended
-----------------------------------------------------------------
------------------------------ ---- -----------------------------
March 31, 2005 March 31, 2004
------------------------------ -----------------------------
Net income, as reported $ 3,265 $ 1,564
Add back:
Transaction bonuses and severance payment,
net of income tax benefit - 910
Compensation charge related to the
acceleration of directors options, net of - 200
income tax benefit ------------------------------ -----------------------------
Net income excluding non-recurring
New Mountain Transaction items ( C ) $ 3,265 $ 2,674
Less:
Preferred dividends 1,380 199
Accretion of transaction expenses 117 17
------------------------------ -----------------------------
Net income available to common
shareholders excluding non-recurring New $ 1,768 $ 2,458
Mountain Transaction items ( A )
Earnings per share excluding non-recurring New Mountain Transaction items:
Basic ( ( A ) / ( B ) ) $ 0.39 $ 0.35
Diluted ( ( C ) / ( D ) ) $ 0.27 $ 0.29
Weighted average number of shares outstanding:
Basic ( B ) 4,584 7,044
Diluted ( D ) 12,123 * 8,366
* For the three months ended March 31, 2005, the number of weighted average
diluted shares was calculated using the "as if converted" method for the
redeemable preferred stock.
Nine Months Ended March 31, 2005 Compared to Nine Months Ended March 31, 2004
Revenue increased $110.3 million, or approximately 23.2%, from $474.5
million for the nine months ended March 31, 2004, to $584.7 million for the nine
months ended March 31, 2005. Revenue recognized for contracts recorded on a
gross revenue basis was $472.6 million for the nine months ended March 31, 2004
and $580.5 million for the nine months ended March 31, 2005. Revenue recognized
for contracts recorded on a net revenue basis was $1.9 million for the nine
months ended March 31, 2004 and $4.2 million for the nine months ended March 31,
2005. 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 nine months ended March 31, 2005,
there was approximately $10.8 million of co-payments included in revenue versus
$1.1 million for the nine months ended March 31, 2004. Co-payments retained by
pharmacies on prescriptions filled for Health Card's members and not included in
Health Card's revenue were $203.6 million and $150.2 million, for the nine
months ended March 31, 2005 and 2004, respectively.
Of the $110.3 million increase in revenue in the nine months ended March
31, 2005, $44.8 million was attributable to the inclusion of revenue generated
by Inteq and another $5.5 million generated by PCN, which were included in the
revenue for the nine months ended March 31, 2005, but not in the nine months
ended March 31, 2004. In addition, $1.8 million of the increase was attributable
to the PPP Acquisition, which took place on July 31, 2003 and therefore was only
included in the revenue for eight of the nine months ended March 31, 2004.
Co-payments received from the Mail Order operations accounted for $9.7 million
of the increase. Another approximately $60.0 million of the increase was due to
revenue related to new sponsors or new services offered during the nine months
ended March 31, 2005 excluding contracts recorded on a net revenue basis. An
additional increase of approximately $49.9 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 $61.4 million.
Cost of claims increased $92.5 million, or approximately 21.6%, from $428.4
million for the nine months ended March 31, 2004 to $520.9 million for the nine
months ended March 31, 2005. Inteq accounted for $39.3 million, PCN accounted
for $4.8 million and PPP accounted for another $1.4 million of the increase.
Increases in cost of claims totaling approximately $105.0 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 $58.0 million (including a $1.1 million adjustment for previous
pharmacy claims). As a percentage of revenue, cost of claims decreased from
90.3% to 89.1% for the nine months ended March 31, 2004 and March 31, 2005,
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. In
addition, the receipt of an additional $9.7 million in co-payments for the Mail
Order operations resulted in a lower cost of claims as a percent of revenue,
since no additional cost of claims are incurred related to these fees.
Gross profit increased from $46.0 million for the nine months ended March
31, 2004 to $63.8 million for the nine months ended March 31, 2005, which is a
$17.8 million, or 38.7%, increase for such period. In addition to increases in
gross profit related to the increases in revenue, Inteq added $5.6 million to
gross profit and PCN added $0.7 million. The gross profit also increased by
approximately $8.1 million from the expanding mail order and specialty
operations. Net rebates retained by the Company added another approximately $3.4
million to gross profit. Gross profit, as a percentage of revenue, increased
from 9.7% to 10.9% for the nine months ended March 31, 2004 and March 31, 2005,
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 to
its sponsors have had the effect of partially offsetting the increases in gross
margin described above.
Selling, general, and administrative expenses increased $12.1 million, or
approximately 33.2%, from $36.6 million for the nine months ended March 31, 2004
to $48.7 million for the nine months ended March 31, 2005. 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. Excluding these
non-recurring items, the increase in selling, general and administrative
expenses was $14.0 million. Approximately $8.4 million of this increase in
selling, general, and administrative expenses is related to the new acquisitions
and expanding mail order operations. The major components of the $8.4 million
increase in expenses related to new services were: 1) salaries and benefits -
approximately $3.4 million, 2) postage and supplies - approximately $0.8
million, 3) telephone and travel - approximately $0.3 million, 4) equipment and
office rental - approximately $1.1 million, 5) depreciation and amortization -
approximately $0.9 million, 6) license and support agreements - approximately
$0.4 million, and 7) broker commissions - approximately $1.5 million. Another
$0.6 million relates to costs incurred as a result of compliance with the
Sarbanes-Oxley Act. In addition, salaries and benefits increased by $2.1 million
over the prior year primarily due to increased headcount.
General and administrative expenses charged by affiliates increased
approximately $246,000, or 37%, year-over-year from approximately $668,000 to
approximately $914,000 for the nine months ended March 31, 2004 and March 31,
2005, respectively. The increase is the result of higher rent costs due to the
expanded space in the Company's Port Washington, NY offices.
Selling, general, and administrative expenses as a percent of revenue
increased from 7.7% for the nine months ended March 31, 2004 to 8.3% for the
nine months ended March 31, 2005.
For the nine months ended March 31, 2004, the Company recognized other
expense, net, of approximately $0.3 million. For the nine months ended March 31,
2005, the Company recognized other income, net, of approximately $1.4 million.
The primary component of the approximately $1.7 million increase in other income
was the realization of a non-recurring $1.7 million gain from an insurance claim
which represented the excess of the insurance proceeds over the carrying value
of the assets covered by the claim.
Income before the provision for income taxes increased approximately $7.3
million, or 79%, from approximately $9.2 million, for the nine months ended
March 31, 2004, to approximately $16.5 million for the nine months ended March
31, 2005. The primary factors leading to this increase in income before income
taxes were the rises in gross profit and other income, 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 $9.7 million for the nine months ended
March 31, 2005; a 79% increase. The increase in net income is attributable to
the same factors causing the increase in income before income taxes.
In addition, there were three charges against income (loss) available to
common shareholders related to the New Mountain Transaction (See Note 3 of Part
1, Item 1). The first of these charges relates to preferred stock cash
dividends, which amounted to approximately $4.2 million for the nine months
ended March 31, 2005 and $0.2 million for the nine months ended March 31, 2004.
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. The dividends of approximately $4.2 million and
$0.2 million represent the amount accrued and paid for the nine months ended
March 31, 2005 and March 31, 2004, respectively. The second charge is for the
accretion of transaction expenses which were approximately $356,000 for the nine
months ended March 31, 2005 and $17,000 for the nine months ended March 31,
2004. Certain transaction costs related to the New Mountain preferred stock
investment of approximately $4.7 million were 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.
After deducting these three charges from net income there remained net
income (loss) available to common stockholders of approximately $5.2 million for
the nine months ended March 31, 2005, as compared to a net loss of approximately
$74.8 million for the nine months ended March 31, 2004.
While net income and net income available to common stockholders excluding
non-recurring New Mountain Transaction items are not measures of financial
performance under U.S. generally accepted accounting principles, they are
provided as information for investors for analysis purposes in evaluating the
effect of the New Mountain Transaction on net income and net income available to
common stockholders. Net income and net income available to common stockholders
excluding non-recurring New Mountain Transaction items are not meant to be
considered a substitute or replacement for net income or net income (loss)
available to common stockholders as prepared in accordance with U.S. generally
accepted accounting principles. The reconciliation from net income to net income
available to common stockholders excluding non-recurring New Mountain
Transaction items, is as follows (all amounts are in thousands, except per share
amounts):
Nine Months Ended
-----------------------------------------------------------------
------------------------------ ---- -----------------------------
March 31, 2005 March 31, 2004
------------------------------ -----------------------------
------------------------------
Net income, as reported $ 9,734 $ 5,429
Add back:
Transaction bonuses and severance payment,
net of income tax benefit - 910
Compensation charge related to the
acceleration of directors options, net of - 200
income tax benefit
------------------------------ -----------------------------
Net income excluding non-recurring
New Mountain Transaction items ( C ) $ 9,734 $ 6,539
Less:
Preferred dividends 4,204 199
Accretion of transaction expenses 356 17
------------------------------ -----------------------------
Net income available to common
shareholders excluding non-recurring New $ 5,174 $ 6,323
Mountain Transaction items ( A )
Earnings per share excluding non-recurring New Mountain Transaction items:
Basic ( ( A ) / ( B ) ) $ 1.16 $ 0.84
Diluted ( ( C ) / ( D ) ) $ 0.81 $ 0.74
Weighted average number of shares outstanding:
Basic ( B ) 4,468 7,485
Diluted ( D ) 12,090 * 8,578
* For the nine months ended March 31, 2005, the number of weighted average
diluted shares was calculated using the "as if converted" method for the
redeemable preferred stock.
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, 2005, the Company had a working capital deficit of
$28.4 million as compared to a working capital deficit of $27.7 million as of
June 30, 2004. The primary reason for the reduction in working capital was the
PCN Acquisition, offset by the profit generated by the Company during the nine
months ended March 31, 2005. The Company has now acquired seven companies since
July 2000 utilizing primarily cash. This has had the effect of increasing the
Company's working capital deficits until sufficient profitability is earned to
offset these deficits.
Net cash provided by operating activities was $4.5 million for the nine
months ended March 31, 2005, compared to $20.4 million for the nine months ended
March 31, 2004. Cash flows from operating activities were impacted negatively in
the fiscal 2005 period, and cash provided by investing activities was positively
impacted, as a result of the timing of the closing of the PCN Acquisition, which
occurred on March 7, 2005.
A component of cash provided by operating activities is the net change in
assets and liabilities from the beginning to the end of the reporting period.
The effect of changes in assets and liabilities acquired in a business
combination are included in the statement of cash flows as of the acquisition
date through the end of the reporting period.
In calculating the Company's cash flows for the nine months ended March 31,
2005, the Company included the acquired balances of PCN as of March 7, 2005 in
measuring cash provided by operating activities. The PCN Acquisition closing
date occurred at a time during PCN's billing and paying cycle when accounts
receivable had decreased significantly following collection of a large portion
of its February 28, 2005 receivables. This resulted in a large cash balance, the
majority of which was earmarked for payment within the next few days to the
various dispensing pharmacies. Since PCN accounts receivable was significantly
higher at March 31, 2005 compared to March 7, 2005 (relative to accounts
payable), the timing of the PCN Acquisition negatively impacted the Company's
consolidated cash from operations by approximately $12.6 million for the nine
months ended March 31, 2005. The Company's cash flows from operations for the
nine months ended March 31, 2005, without giving effect to the PCN Acquisition,
would have been $17.1 million.
The large PCN cash balance at the closing date was reported as a $3.2
million source of cash, or cash provided by investing activities, calculated by
subtracting the $13.5 million acquisition price and related costs from the $16.7
million of cash acquired.
While cash flow from operating and investing activities excluding the
impact of the PCN acquisition are not measures of financial performance under
U.S. generally accepted accounting principles, they are provided as information
for investors for analysis purposes in evaluating the effect of the PCN
acquisition on cash flow from operating and investing activities. Cash flow from
operating and investing activities excluding the impact of the PCN acquisition
is not meant to be considered a substitute or replacement for cash flow from
operating and investing activities as prepared in accordance with U.S. generally
accepted accounting principles. The reconciliation from cash flow from operating
and investing activities to cash flow from operating and investing activities
excluding the impact of the PCN acquisition, is as follows:
For the nine months ended
March 31, 2005 March 31, 2004
(unaudited) (unaudited)
-------------- ---------------
Net cash provided by operating activities, as reported $ 4,450 $ 20,415
Impact of PCN on cash flow from operations
for the period March 7 - March 31, 2005 12,656 -
Net cash provided by operating activities, excluding the impact
of the PCN acquisition $ 17,106 $ 20,415
Net cash used in investing activities, as reported $ (1,639) $ (6,454)
Impact of PCN acquisition at March 7, 2005 on cash flow
from investing activities (3,104) -
Net cash used in investing activities, excluding the impact
of the PCN acquisition $ (4,743) $ (6,454)
Cash and cash equivalents at end of period, as reported $ 4,498 $ 29,884
Impact of PCN acquisition at March 7, 2005 and PCN's
operations for the period March 7 - March 31, 2005 9,552 -
Cash and cash equivalents at end of period, excluding
the impact of the PCN acquisition $ 14,050 $ 29,884
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 $1.6 million for the nine months
ended March 31, 2005, as compared to $6.5 million for the nine months ended
March 31, 2004. This decrease of $4.9 million in net cash used in investing
activities was the result of a decrease in capital expenditures of $1.3 million
along with a reduction in the cash paid for the PPP Acquisition of $3.3 million,
offset by the receipt of $2.7 million in the nine months ended March 31, 2004
relating to officer and affiliate loans less $3.2 million generated from the PCN
Acquisition. The cash payments of $358,000 during the nine months ended March
31, 2005 for the PPP Acquisition are for additional payments due under the
earn-out provision (See Note 4 of Part 1, Item 1). The Company has accrued
$617,000 through March 31, 2005 as additional purchase price related to the
earn-out provision, which will be paid in September 2005.
During the nine months ended March 31, 2005, the Company used $1.7 million
from financing activities compared to receiving $10.7 million in the nine months
ended March 31, 2004. This decrease of $12.4 million is the result of $75.3
million from the issuance of the Company's series A preferred stock net of $51.1
million for the purchase of the Company's shares in the tender offer (See Note 3
of Part 1, Item 1) in the nine months ended March 31, 2004. Further, in the nine
months ended March 31, 2004, cash was reduced by a $15.6 net repayment under the
revolving credit facility compared to no net activity in the nine months ended
March 31, 2005. Finally, an additional $4.0 million was paid for dividends on
the convertible preferred stock during the nine months ended March 31, 2005 as
compared to the nine months ended March 31, 2004 along with an increase in cash
paid for financing costs of $0.5 million, offset by an additional $0.7 million
in proceeds from the exercise of stock options compared to the prior year.
On January 28, 2005, the Company entered into a five-year $65.0 million
cash flow based, line of credit with a syndicate of commercial banks led by
JPMorgan Chase Bank, N.A. ("JPMorgan"). Subject to certain conditions, the new
line of credit may be increased by an aggregate of $35.0 million. The line of
credit facility contains various covenants that, among other things, require the
Company to maintain certain financial ratios, which are consolidated net worth,
consolidated fixed charge ratio and consolidated debt to EBITDA ratio. As of
March 31, 2005 there was no principal balance outstanding under the line of
credit facility, and the Company was in compliance with its financial covenants.
Two 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, consolidated fixed charge ratio and
consolidated debt to EBITDA ratio, are evaluated by the lender as a measure of
the Company's liquidity and its ability to meet all of its obligations under the
credit 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 or liquidity
under generally accepted accounting principles, it is provided as information
for investors for analytical purposes in light of the financial covenants
referred to above. EBITDA is not meant to be considered a substitute or
replacement for net income as prepared in accordance with accounting principles
generally accepted in the United States. EBITDA, which increased by
approximately $7.9 million or 58%, from $13.7 million for the nine months ended
March 31, 2004 to $21.6 million for the nine months ended March 31, 2005, is
calculated as follows (see Consolidated Statement of Cash Flows comprising Item
1 hereof for more details):
Nine Months Ended March 31,
2005 2004
---------------------- ---------------------
---------------------- ---------------------
Cash flow from operations $ 4,450 $ 20,415
Provision for income taxes 6,765 3,773
Interest expense, net 373 346
Net change in assets and
liabilities 11,531 (10,384)
Non-cash items to reconcile
net cash from operations to (1,565) (467)
net income
---------------------- ---------------------
---------------------- ---------------------
EBITDA $ 21,554 $ 13,683
====================== =====================
The Company has entered into various capital lease transactions for
hardware and software. The Company has also assumed various capital leases
through its acquisitions. In addition, three capital leases have been assumed as
a result of the PCN Acquisition.
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 chairman and director. See Note 11 to the
Consolidated Financial Statements comprising Item 8 of Form 10-K for the year
ended June 30, 2004 for a further description of these various leases.
The total future payments under these contractual obligations as of March
31, 2005, are as follows:
Contractual Obligations Payments Due by Period
($ in thousands)
More than
Total Less than 1-3 Years 3-5 5 Years
1 Year Years
----------- -------------- ---------- ---------- ----------
----------- -------------- ---------- ---------- ----------
Long Term Debt $ - $ - $ - $ - $ -
Capital Lease Obligations 74 27 47 - -
Operating Leases 22,763 6,647 8,437 4,390 3,289
Sale-leasebacks 245 140 105 - -
----------- -------------- ---------- ---------- ----------
----------- -------------- ---------- ---------- ----------
Total Contractual Cash
Obligations $ 23,082 $ 6,814 $ 8,589 $ 4,390 $ 3,289
=========== ============== ========== ========== ==========
The shareholders of the Inteq Group are eligible to receive additional
compensation of up to $4.2 million, if certain financial targets are met over
the first year. Of this potential amount, $3.0 million was deposited in escrow
at the time of closing. As of March 31, 2005, $1.0 million has been earned and
released from escrow.
The shareholders of PPP are eligible to receive additional consideration of
up to $7.0 million, 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. For the year ended July 31, 2004, $716,010 has been earned and was
paid on September 15, 2004. Of this amount, $358,005 was paid in cash and
$358,005 was satisfied by the issuance of 12,650 shares of common stock. For the
period of August 1, 2004 through March 31, 2005, an additional $617,000 has been
earned and accrued as additional purchase price that will be settled in
September 2005.
The shareholders of Centrus were eligible to receive additional
consideration of up to $4.0 million, payable over three years, if certain
financial targets were met over the first two years after acquisition. The
financial performance targets were achieved and $4 million has been earned. Of
this amount, $1.0 million was paid in May 2003, $2.0 million was paid in May
2004, and another $1.0 million will be paid in May 2005.
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 purchase, pursuant to a tender offer, 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 and member of the board of directors, and certain stockholders related
to him, held (assuming the exercise of 330,000 options and warrants 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
330,000 options and warrants 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 4 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 and available credit
facilities, after its seven 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 new revolving credit 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 for
the year ended June 30, 2004), the following may involve a higher degree of
judgment and complexity than others:
Revenue Recognition
(a) Since January 1, 2000, all services provided by the Company have
been on a fee for services basis. 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.
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 led 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, andsponsors, 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
submittedand 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 Securities Exchange Act of 1934, as amended ("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 (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act), as of March 31, 2005. 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 in alerting them to material information, on a timely basis,
required to be included in the Company's periodic Securities and Exchange
Commission filings. There have been no changes in the Company's internal
controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) that occurred in this period that have materially
affected, or are reasonably likely to materially affect, the Company's internal
controls over financial reporting.
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 11 to the consolidated financial statements of Health Card's Annual Report
on Form 10-K for the year ended June 30, 2004.
An action was commenced against the Company on April 30, 2002 by Midwest
Health Plan Inc. ("MHP") in the United States District Court for the Eastern
District of Michigan. The amended complaint alleges, among other things, that
the parties entered into a contract dated July 1999 (the "Agreement"), and
further alleges that the Company has overcharged MHP for the administration of
prescription benefit services in contravention to the terms of the Agreement and
breached its fiduciary duties by making a profit. MHP is seeking $3 million
dollars in damages. The Company filed an answer and counterclaim on June 12,
2002. In the counterclaim, the Company claimed damages in excess of $2.8 million
based on MHP's failure to pay under a contract. On July 5, 2002, MHP agreed to
make two payments in the amount of $1.34 million and $1.36 million to partially
settle the Company's claims against MHP. MHP added a fiduciary duty claim, with
respect to which the Company's motion to dismiss was denied. The Company
continues to have counterclaims totaling over $200,000 against MHP for MHP's
failure to pay the amounts it had agreed to pay the Company for goods and
services. The Company argued its motion for partial summary judgment in February
2004, and is currently awaiting the court's decision on such motion. The Company
intends to continue 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 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS
Exhibits
Exhibit
Number Description of Exhibit
2.1 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 (3)
2.2 Amended and Restated Stock Purchase Agreement dated November 26, 2003 by and
between Health Card and New Mountain Partners, L.P. (8)
2.3 Asset Purchase Agreement among Health Card, Inteq PBM, LP, Inteq-RX Group,
LLP, and the individuals named therein dated April 1, 2004 (6)
2.4 Stock Purchase Agreement dated March 7, 2005 among Health Card, PCN Acquisition Corp.,
Pharmaceutical Care Network and California Pharmacists Association (13)
3.1 Certificate of Incorporation of Health Card (2)
3.2 Certificate of Amendment to the Certificate of Incorporation of Health Card (7)
3.3 Amended and Restated By-Laws of Health Card (7)
3.4 Amended and Restated Audit Committee Charter (7)
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 (7)
10.1 Credit Agreement dated January 28, 2005 among Health Card, the Lenders party thereto and JPMorgan Chase, as Administrative
Agent (12)
10.2 Stock Option Agreement between Health Card and James Bigl dated July 22, 2003 (3)
10.3 Stock Option Agreement between Health Card and Agnes Hall dated August 1, 2003 (3)
10.4 Stock Option Agreement between Health Card and David Gershen dated August 1, 2003 (3)
10.5 Stock Option Agreement between Health Card and Tery Baskin dated August 1, 2003 (3)
10.6 Stock Option Agreement between Health Card and Patrick McLaughlin dated August 1, 2003 (3)
10.7 Sixth Amendment to Employment Agreement, dated October 30, 2003, by and between National Medical Health Card Systems, Inc.
and James J. Bigl (5)
10.8 Lease Expansion and Modification Agreement dated July 31, 2003 between Sunbeam Development Corporation and NMHCRx Mail
Order, Inc. (3)
10.9 AmerisourceBergen Prime Vendor Agreement, dated July 21, 2003 between NMHCRx Mail Order, Inc. d/b/a NMHCmail and
AmerisourceBergen Drug Corporation (3)
10.10 Release, dated October 30, 2003, by Sandata Technologies, Inc. and Sandsport, Inc. (5)
10.11 Amendment to Lease Agreement, dated as of October 23, 2003, by and among BFS Realty, LLC and National Medical Health Card
Systems, Inc. (5)
10.12 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. (5)
10.13 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. (5)
10.14 Second Amendment to Employment Agreement, dated October 30, 2003 by and between National Medical Health Card Systems, Inc.
and Bert E. Brodsky (5)
10.15 Amended and Restated Employment Agreement dated June 14, 2004 between National Medical Health Card Systems, Inc. and James
J. Bigl (9)
10.16 Form of Stock Option Agreement between National Medical Health Card Systems, Inc. and Non-Employee Directors dated May 4,
2004 for a grant of 15,000 shares of common stock (9)
10.17 Form of Stock Option Agreement between National Medical Health Card Systems, Inc. and Non-Employee Directors dated May 4,
2004 for a grant of 20,000 shares of common stock (9)
10.18 Employment Agreement dated August 30, 2004 between National Medical Health Card Systems, Inc. and James Smith (11)
10.19 Employment Agreement dated October 4, 2004 between National Medical Health Card Systems, Inc. and Bill Masters (11)
10.20 Stock Option Agreement dated August 31, 2004 between National Medical Health Card Systems, Inc. and James Smith (11)
10.21 Stock Option Agreement dated October 4, 2004 between National Medical Health Card Systems, Inc. and Bill Masters (11)
10.22 Form of Stock Option Agreement between National Medical Health Card Systems, Inc. and Senior Management dated December 20,
2004
10.23 Form of Stock Option Agreement between National Medical Health Card Systems, Inc. and Non-Employee Directors dated December
21, 2004
14. Amended and Restated Code of Ethics (10)
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 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.
(3) 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.
(4) Denotes document filed as an Exhibit to Health Card's Form 8-K filed on
November 13, 2003 and incorporated herein by reference.
(5) 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.
(6) Denotes document filed as an Exhibit to Health Card's Form 8-K filed on
April 14, 2004 and incorporated herein by reference.
(7) Denotes document filed as an Exhibit to Health Card's Form 10-Q for the
quarter ended March 31, 2004 and incorporated herein by reference.
(8) Denotes document filed as an exhibit to Health Card's Definitive Proxy
Statement on Schedule 14-A filed on February 19, 2004 and incorporated herein by
reference.
(9) Denotes document filed as an exhibit to Health Card's Form 10-K for the
fiscal year ended June 30, 2004 and incorporated herein by reference.
(10) Denotes document filed on October 28, 2004 as an exhibit to Health
Card's Definitive Proxy Statement on Schedule 14-A and incorporated herein by
reference.
(11) Denotes document filed as an exhibit to Health Card's Form 10-Q filed
on November 15, 2004 and incorporated herein by reference.
(12) Denotes document filed as an exhibit to Health Card's Form 8-K filed
on February 3, 2005 and incorporated herein by reference.
(13) Denotes document filed as an exhibit to Health Card's Form 8-K filed
on March 11, 2005 and incorporated herein by reference.
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 16, 2005 By: /s/James F. Smith
James F. Smith
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Stuart F. Fleischer
Stuart F. Fleischer
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULES 13a-14(a)
and 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, James F. Smith, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Medical
Health Card Systems, Inc. and its subsidiaries (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Registrant, and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the Registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's most
recent fiscal quarter (the Registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the Registrant's internal control over financial
reporting;
5. The Registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonable likely to adversely affect the Registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's internal
control over financial reporting.
Date: May 16, 2005
/s/ James F. Smith
James F. Smith
President and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULES 13a-14(a) and 15d-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Stuart F. Fleischer, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Medical
Health Card Systems, Inc. and its subsidiaries (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Registrant, and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the Registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's most
recent fiscal quarter (the Registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the Registrant's internal control over financial
reporting;
5. The Registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 16, 2005
/s/ Stuart F. Fleischer
Stuart F. Fleischer
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of National Medical Health Card
Systems, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2005
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, James F. Smith, President and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906
of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ James Smith
James F. Smith
President and Chief Executive Officer
(Principal Executive Officer)
May 16, 2005
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of National Medical Health Card
Systems, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2005,
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Stuart F. Fleischer, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Stuart F. Fleischer
Stuart F. Fleischer
Chief Financial Officer
(Principal Financial Officer)
May 16, 2005