NATIONAL MEDICAL HEALTH CARD SYSTEMS INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)

(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended June 30, 1999
-------------------------------------------------

( ) 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

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)

New York 11-2581812
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)

26 Harbor Park Drive, Port Washington, New York 11050
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code (516) 626-0007
----------------------------

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)

Indicate by check mark 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 No X .

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing: $17,222,091 as of August 2, 1999.

(APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No .

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of the registrant's common stock,
as of the latest practicable date: 6,912,496 shares outstanding as of August 31,
1999.

DOCUMENTS INCORPORATED BY REFERENCE
None

INTRODUCTORY STATEMENTS

Forward Looking Statements

When used herein, the words "believe," "anticipate," "think," "intend,"
"will be," "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 certain risks
and uncertainties discussed herein, which could cause actual results to differ
materially from those in the forward-looking statements. Readers are cautioned
not to place undue reliance on the forward-looking statements which speak only
as of the date hereof. Readers are also urged to carefully review and consider
the various disclosures made by National Medical Health Card Systems, Inc.
("Health Card") which attempt to advise interested parties of the factors which
affect Health Card's business, including, without limitation, the disclosures
made under the caption "Business" in Item 1 hereof and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Item 7 hereof.

Reverse Stock Split

Except as otherwise noted, all references in this Form 10-K to shares of
common stock of Health Card give retroactive effect to a .1278447-for-one
reverse stock split of Health Card's shares of common stock effectuated in May
1999.

PART I

Item 1. BUSINESS.

General

Health Card is an independent company, established in 1981, that provides
comprehensive prescription benefit management services. Health Card's programs
are designed to assist prescription benefit plan sponsors by:

o containing the cost of prescription drugs,
o monitoring the cost and quality of prescription services,
o providing sophisticated consulting services, and
o providing disease information services.

Sponsors of prescription benefit plans managed by Health Card include
managed care organizations, local governments, unions, corporations and third
party health care plan administrators. Health Card focuses its marketing efforts
on prospective sponsors with plans covering up to 100,000 participants, although
it seeks and services sponsors with plans covering less or significantly more
plan participants. As of June 30, 1999, plans managed by Health Card covered
over 521,000 eligible employees, retirees, members and their dependents.

Health Card provides sponsors with integrated prescription benefit
management services, including:

o electronic point-of-sale pharmacy claims management,
o retail pharmacy network management,
o mail pharmacy claims management,
o benefit design consultation,
o preferred drug management programs,
o drug review and analysis programs,
o consulting services,
o disease information services,
o data access, reporting and information analysis, and
o physician profiling.

Each of these services is described below under the heading "Services."

Each plan participant receives an identification card which may be used at
any pharmacy participating in Health Card's pharmacy network and the sponsor's
plan. The card entitles the plan participant to purchase prescription drugs and
certain other physician-prescribed items by paying a deductible and/or
"co-payment" amount as determined by the plan sponsor. As of June 30, 1999, the
pharmacy network included an aggregate of over 44,000 retail chain and
independent pharmacies as well as three mail order pharmacies. See "Services."

Health Card assists each sponsor to establish the deductible and
"co-payment" amounts and the availability of benefits under its plan. Plans
generally cover (i) prescriptions for legend drugs, which are drugs that cannot
be dispensed without a prescription, (ii) prescriptions requiring compounding of
ingredients, one of which is a legend drug, (iii) prescribed insulin and
prescribed insulin syringes, and (iv) needles and test strips. Items generally
excluded from coverage include diet supplements, over-the-counter drugs (whether
or not prescribed by a physician), medical appliances (such as glucometers and
blood pressure monitors), bandages, heat lamps, experimental drugs, drugs
furnished by a hospital to inpatients, and blood and blood plasma.

Health Card attempts to contain the cost of sponsors' plans by negotiating
favorable pricing arrangements with pharmacies participating in its pharmacy
network. Health Card also provides additional cost management through the
real-time electronic communication of claims data and plan criteria between
those pharmacies and Health Card. The claims submission, review and approval
generally occur in a matter of seconds. See "Information Systems." Claims are
processed through multiple reviews in order to:

o confirm plan conformity,
o verify plan participant eligibility,
o verify correct pharmacy payment, and
o conduct drug review and analysis.

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Concurrently, information is sent by Health Card's information systems to the
pharmacist about:

o drug interactions,
o premature refills of prescriptions,
o duration or duplication of therapy, and
o geriatric or pediatric precautions

based on Health Card's prescription claims history for the plan participant,
FDA-approved standards and Health Card's recommended drug and treatment
guidelines. These situations or circumstances are collectively referred to as
"contraindications."

The final claim approval or denial is immediately communicated by Health
Card to the pharmacy. If a claim is approved, the communication establishes the
claim for payment and indicates the co-payment or deductible to be charged to
the plan participant.

Drug manufacturers may issue rebates for the use of certain prescription
drugs. Pursuant to an agreement with Foundation Health Pharmaceutical Services
d/b/a Integrated Pharmaceutical Services ("Integrated"), a rebate administrator,
Health Card submits claims for rebates to Integrated. These rebates relate to
certain prescriptions filled under plans that Health Card administers.
Integrated submits these rebate claims, and may submit such claims along with
rebate claims of others, to the appropriate drug manufacturer, pursuant to
agreements Integrated has negotiated with various drug manufacturers. All, part
or none of the rebates received by Health Card may be remitted to certain of
Health Card's sponsors, depending upon the terms of Health Card's agreement with
each sponsor. Through rebates from drug manufacturers, Health Card has reduced
its cost of claims. See Item 7 hereof and "Services -- General -- Rebate
Administration."

Health Card's disease information services are designed to inform and
educate sponsors, plan participants, pharmacies and prescribing physicians about
drug and treatment guidelines for various diseases. Health Card prepares drug
and treatment guidelines for various diseases based on a review of
professionally prepared health care literature which is publicly available. In
compiling the drug and treatment guidelines, Health Card may also utilize
clinical guidelines that are issued by medical specialty boards and are
available to the public. The drug and treatment guidelines are reviewed by
medical and pharmacology experts and submitted to Health Card's Pharmacy &
Therapeutics Committee for review and approval. If approved, the drug and
treatment guidelines may be made available to interested sponsors and
physicians. Health Card believes that the use of disease information services
represents a market trend in the prescription benefit management industry. Its
use is designed to:

o meet sponsors' growing need for information to address cost
management pressures,
o enhance the quality, efficiency and cost-effectiveness of
pharmacy benefit utilization by plan participants, and
o reduce costs to sponsors.

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In providing these services, Health Card may utilize its drug review and
analysis programs. These programs include a series of on-line reviews which
examine a plan participant's claims history for a number of contraindicated
drugs or inappropriate dispensing patterns, among other things. Although Health
Card has only recently commenced disease information services and currently
offers such services to only one sponsor, Health Card believes that disease
information services will encourage plan participant compliance with
physician-recommended therapy and physician adherence to recommended drug and
treatment guidelines. In turn, this conformity should improve plan participant
health care while reducing costs.

Health Card began its business as a provider of computerized prescription
claims processing services to sponsors and subsequently increased its
capabilities to become a provider of comprehensive prescription benefit
management services. In 1995, Health Card's management began to redirect the
focus of its business, with the goal of becoming a leading national independent
company providing comprehensive prescription benefit management services. In
particular, Health Card concentrated on (i) attracting a management team with
significant industry experience, (ii) implementing a multi-state marketing
effort and (iii) enhancing its information systems. See Items 10 and 13 hereof.

Health Card's competitors include both independent prescription benefit
management companies and those that are affiliated either with drug
manufacturers or with retail pharmacy companies. Health Card has developed its
business by focusing on information systems and consulting services without many
of the restrictions that management believes are inherent in the relationships
of its affiliated competitors. Health Card therefore believes that its formulary
management and other business activities are more objective than certain of its
competitors. Health Card also believes that its information systems and
consulting services are superior to that of many of its competitors.
Accordingly, based on such beliefs, Health Card is well positioned to take
advantage of the increasing information and cost management needs of the
prescription benefit management services market.

Industry Background

In response to escalating health care costs, cost containment efforts in
the health care industry have led to rapid growth in managed care and other
containment efforts. Despite these efforts, continued advances in medical
technology, new drug development and increasing drug utilization have led to
significant increases in health care costs. This has created a need for more
efficient, cost-effective drug delivery mechanisms. Prescription benefit
management companies evolved to address this need. These companies created an
opportunity for plan sponsors to provide prescription drug benefits to their
plan members in a cost-effective manner through:

o mail pharmacy services,
o formulary management,
o claims management, and
o drug review and analysis

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while often improving patient compliance with recommended drug and treatment
guidelines. An industry source estimates that 1997 U.S. purchases for
prescription drugs totaled approximately $83 billion, of which purchases from
retail outlets were approximately $53 billion and purchases from mail order were
approximately $9 billion. Such industry source indicates that prescriptions
managed by prescription benefit management companies represent an increasing
proportion of such purchases.

Traditionally, prescription benefit management companies focused primarily
on cost containment by:

o managing prescription claims to reduce or eliminate duplication
of treatment (i.e., redundant drug therapies and other
treatments),
o encouraging substitution of generics for branded medications,
o obtaining price discounts from participating pharmacies through a
pharmacy network, and
o obtaining rebates from drug manufacturers.

Over the last several years, in response to increasing sponsor demand,
prescription benefit management companies have begun to develop sophisticated
computerized information systems which (i) help sponsors manage their
formularies and (ii) provide data, analysis and detailed reporting, which allow
sponsors to make informed decisions about drug use and costs. Health Card
believes that sponsors have also increasingly focused on the quality and
efficiency of care, emphasizing disease prevention and health enhancement.
Health Card and its competitors have addressed these demands by combining
traditional prescription benefit management services with consulting services
and disease information programs that exploit the sophisticated information
systems.

Services

General

Sponsors retain Health Card to manage the prescription drug plans that they
maintain for the benefit of their plan participants. Health Card consults with
sponsors to assist them in customizing their prescription drug plans to meet the
particular sponsor's needs. Health Card has also developed and is continuing to
expand its consulting and disease information services to meet (i) the growing
needs of sponsors to address cost management pressures, and (ii) the increasing
needs of plan participants, particularly those requiring costly long-term and
recurring therapies.

Health Card's claims management services are rendered through its on-line
real time computerized claims management system, which is sometimes referred to
in this Form 10-K as the "on-line claims management system." This on-line claims
management system reduces the administrative burdens of processing claims and
managing plan benefits for sponsors, plan participants and pharmacies. Claims
are typically submitted electronically to Health Card by pharmacies
participating in the pharmacy network. They are processed for plan participant
eligibility, plan coverage, any deductible limitations, co-payment amounts,
payment schedules and pharmacy eligibility. Using its on-line claims management
system, Health Card is able to provide

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an accurate benefit payment to the pharmacy or plan participant.

The on-line claims management system manages the cost of the plan at the
point of service by confirming that:

o the submitted claim is in conformity with plan terms and
conditions,
o the plan participant is eligible for benefits, and pays any
applicable deductible and/or co-payment amounts, and
o only the negotiated discounts on prescription items will be paid
to participating pharmacies.

The data collected during the claims management process provides a basis
for reporting and analyses upon which recommendations are made to sponsors.
These recommendations are intended to assist them in lowering the costs of their
plans while improving quality and service. See "Services -- Data Access,
Reporting and Information Analysis."

The Health Card and Claims Processing. Each sponsor's plan participant is
issued a health card which identifies the plan participant and the sponsor. The
card may be utilized at any one of the pharmacies participating in Health Card's
multi-state pharmacy network and the sponsor's plan. The health card allows the
plan participant to purchase approved prescription drugs and other physician-
prescribed items, with the plan participant paying a deductible and/or
co-payment amount, if any, to the pharmacy. Each time a new sponsor is added,
Health Card provides pharmacies in the pharmacy network that serve the area in
which the new sponsor is located with documentation describing the use of the
health card, the sponsor and the summarized terms of the plan.

Plan participants present their health card together with a physician's
prescription to a participating pharmacy. The pharmacist, using standard
industry software, enters each claim on the pharmacy's computer; the claim is
electronically communicated to Health Card for on-line real time processing and
resolution. In the ordinary case where the prescription is for a drug listed on
the sponsor's formulary, the pharmacist is advised of the appropriate co-payment
and deductible, if any, to be collected from the plan participant and of the
payment the pharmacy will receive from Health Card. Health Card's on-line claims
management system sends appropriate messages regarding preferred drugs and
contraindications, based upon plan participants' existing claims history with
Health Card. The prescription is then dispensed by the pharmacist to the plan
participant, who pays the appropriate co-payment and/or deductible amount and
signs a signature log maintained by the participating pharmacy.

Plan participants are provided with a list of pharmacies participating in
Health Card's pharmacy network. Plan participants may alternatively choose to
fill prescriptions at a non-participating pharmacy. However, plan participants
who utilize non-participating pharmacies pay the full prescription amount, i.e.,
an amount generally in excess of the negotiated discount offered by pharmacies
in the pharmacy network. Both the plan participant and the pharmacy then
complete a direct payment claim form, which is mailed to Health Card for the
allowable payment amount to be paid to the plan participant. Alternatively, the
non-participating pharmacy may elect to immediately enroll in Health Card's
pharmacy network and participate in the on-line claims

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management system. See "Services--Pharmacy Network."

Occasionally a plan participant's claim is rejected, based on plan
parameters, in which case the participant may be referred to the plan's sponsor
or to Health Card's customer service department. Also, on occasion a claim is
presented and the pharmacist is notified, during the course of processing the
claim, that prior authorization from the sponsor is needed before the claim can
be approved. In addition, mail order claims processing sometimes results in a
message to the pharmacist that a preferred drug is available for use in place of
the one prescribed. In such an event, the pharmacist must contact the physician
directly for permission to substitute the preferred drug; if such permission is
obtained, the pharmacist then contacts the plan participant to obtain his or her
permission to make such substitution. Although preferred drug messages are also
capable of being sent by Health Card's on-line claims management system to
retail pharmacists, to date no sponsor has asked Health Card to do so.

Invoicing and Payments. Often, sponsors are charged an agreed fee for each
prescription filled plus an administrative and/or dispensing fee for managing
each claim. Sometimes sponsors are charged an adjustable monthly fee or
projected maximum fee based on the number of plan participants, utilization,
costs of drugs or other criteria. Health Card provides flexibility of invoicing
for its sponsors. Sponsors pay Health Card; Health Card pays an individually
negotiated amount to its participating independent and chain pharmacies. Plan
participants filing for direct payment receive an allowable payment which is
usually specified by the sponsor. See " Services -- Pharmacy Network."

Rebate Administration. Pursuant to an agreement, dated January 1, 1996,
with Integrated, Health Card submits to Integrated claims for rebates from drug
manufacturers relating to certain prescriptions filled under plans that Health
Card administers. Integrated submits Health Card's rebate claims, and may submit
such claims along with rebate claims of others, to the appropriate drug
manufacturer. Health Card receives a percentage of the total rebates received by
Integrated from drug manufacturers regarding products dispensed to Health Card's
sponsors' plan participants, with Integrated retaining a portion of the total
rebates as an administrative fee. This agreement is terminable by either party
with or without cause on 90 days' prior written notice. These claims are
submitted quarterly. As of the date of this Form 10-K, the volume of claims
processed by Health Card may not be sufficient to enable it to obtain rebates
directly from drug manufacturers in the same aggregate amounts that could be
obtained under the Integrated agreement. See Item 7 hereof.

Rebates accounted for reductions of cost of claims of 1.4%, 1.6% and 2.1%
for the years ended June 30, 1997, 1998 and 1999, respectively, but contributed
approximately 12%, 17% and 20% of total gross profit for the years ended June
30, 1997, 1998 and 1999, respectively. Rebates accounted for approximately 68%,
105% and 87% of income before taxes for the years ended June 30, 1997, 1998 and
1999, respectively. All, part or none of the rebates received by Health Card may
be required to be remitted to certain of Health Card's sponsors, including Vytra
Health Plans Long Island, Inc. (formerly known as ChoiceCare Long Island, Inc.)
("Vytra"), a health maintenance organization, and Suffolk County, New York,
depending upon the terms of Health Card's

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arrangement with each sponsor. Termination of the agreement with Integrated
could have an adverse effect on Health Card's business, operating results and
financial condition. See Item 7 hereof.

Pharmacy Network

Retail Pharmacy Network Management. A comprehensive multi-state network of
participating pharmacies is an essential element of Health Card's business
operations. Furthermore, certain of Health Card's sponsors, including Vytra and
Suffolk County, require Health Card to maintain a pharmacy network with
specified numbers of pharmacies in various locations to serve plan participants.
As of June 30, 1999, Health Card had a multi-state network of over 44,000
pharmacies. In addition, as of June 30, 1999, three mail order pharmacies
participated in the pharmacy network. See "Services -- Pharmacy Network -- Mail
Pharmacy Distribution and Management."

As part of Health Card's cost containment efforts, Health Card contacts
selected participating pharmacies and plan participants by mail to audit the
validity of claims. The information requested includes:

o copies of original prescriptions from participating pharmacies,
and
o written confirmation from plan participants of their receipt of
prescribed drugs.

Health Card also performs on-site audits of records of participating
pharmacies. Pharmacies are selected for an audit based upon parameters designed
into Health Card's computer programs. Additionally, Health Card may audit a
pharmacy in response to, among other things, a complaint from a plan participant
or sponsor, or comments from customer service representatives of drug
manufacturers.

Both the retail and mail order components of the pharmacy network are
managed by Health Card's on-line claims management system. See "Services --
Electronic Point-of-Sale Pharmacy Claims Management."

Mail Pharmacy Claims Management. Mail pharmacy service is generally used by
plan participants as a cost effective means of minimizing the inconvenience
resulting from repeated trips to retail pharmacies to fill prescriptions; this
is especially common when a plan participant with a chronic condition receives
long-term drug therapy. In addition, the plan participant generally saves money
through a reduction in the number of co-payments he would have paid had the
prescriptions been filled repeatedly at a retail pharmacy. Further, with mail
pharmacy service, the sponsor is charged a lower dispensing fee for prescription
ingredients compared to those charged by a retail pharmacy.

Health Card presently has a non-exclusive relationship with Eckerd Health
Services d/b/a/ Express Pharmacy Services ("Express Pharmacy") pursuant to which
Express Pharmacy acts as a participating pharmacy and dispenses drugs to plan
participants by mail. The agreement between

8

Health Card and Express Pharmacy expires on June 30, 2000; however, the
agreement is automatically renewable for successive 12 month terms. Either party
has the right to terminate the agreement as of June 30, 2000 and at the end of
any successive term, in each case on 90 days prior written notice. The agreement
provides that Express Pharmacy will:

o provide the covered drugs by mail to plan participants,
o collect the appropriate co-payment, and
o if required by the plan, collect any additional payment if a
brand drug is dispensed when a generic drug is available.

This agreement further provides that Health Card will pay Express Pharmacy
for approved claims within 45 days after the two week processing cycle in which
the claim occurs.

As of June 30, 1999, three mail order pharmacies were participating in
Health Card's pharmacy network. Plan participants using a mail order pharmacy
mail in their prescriptions to the pharmacy. Claims submitted by mail order
pharmacies are managed using Health Card's on-line claims management system and
are subject to the same review and verification as those claims submitted by
retail pharmacies. If the claim is deemed eligible under the terms of the
appropriate plan, the participating mail order pharmacy mails the prescription
item to the plan participant. The mail order pharmacy typically covers the plan
participant's mailing costs through the use of prepaid envelopes (used by a plan
participant to submit his/her prescription) and typically pays to ship the
prescribed item to the plan participant.

Pharmacy Relations. Health Card's agreements with many pharmacies do not
require it to make payments within a specified period. However, Health Card
knows from experience that they expect timely payment. Health Card endeavors to
process claims promptly and obtain funds from sponsors prior to making payments
to participating pharmacies; still, there can be no assurance that sponsors will
pay Health Card on time.

No assurances can be made that pharmacies in Health Card's network will not
demand faster payment in the future. In particular, in May 1996, Health Card
restructured $900,000 of outstanding overdue claims payable to Genovese into a
promissory note obligating Health Card to pay such amount over 18 months. That
note has been repaid in full. Health Card believes that there has been no
material negative effect on its business resulting from its payment schedule and
it believes that its relationships with pharmacies are generally good.

Health Card may be required to pay participating pharmacies whether or not
it has been paid by its sponsors. The loss of a substantial portion of the
pharmacies in the pharmacy network could have a material adverse effect on
Health Card's business, operating results and financial condition. See Item 7
hereof.

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Benefit Design Consultation

Health Card has a sales and marketing staff and pharmacists experienced in
prescription drug benefit plan design. Health Card assists sponsors in defining
their financial and employee-benefit objectives for their prescription drug
benefit plans and in developing a program to meet such objectives. Using both
sponsor-specific and general claims experience data, the sales and marketing
staff makes recommendations of benefit features such as:

o levels of co-payments,
o covered and excluded drugs,
o generic substitution guidelines,
o number of days supply of medication per prescription,
o maximum benefit cost,
o maximum plan participant out-of-pocket cost, and
o coverage for prescription drugs dispensed by non-participating
pharmacies.

The clinical services staff, with occasional assistance from the operations
staff, produces customized periodic reports, and disseminates publicly
available, peer reviewed, nationally recommended treatment data regarding
generic substitution guidelines. Once a plan design has been implemented, the
sales and marketing staff monitors plan performance periodically and may
recommend changes to the plan.

Preferred Drug Management

Through its preferred drug programs, Health Card encourages physicians and
plan participants to use drugs that are preferred by plan sponsors, usually for
lower cost but sometimes for efficacy. Health Card does this, typically, through
contacts with physicians. Almost all of Health Card's sponsors use its preferred
drug management and generic substitution programs. In administering preferred
drug programs, Health Card may recommend that a sponsor offer incentives so that
the lower cost brand name drug listed on its formulary is prescribed rather than
a more expensive therapeutically equivalent drug. With such a therapeutic
interchange program, typically the savings are distributed, for the first year
of the program, among the sponsor, the pharmacy, and Health Card; starting with
the second year, all of the savings are received by the sponsor. This type of
program is most frequently used in connection with long-term therapies. Through
a generic substitution program, a plan participant pays a lower co-payment than
he would otherwise, and thereby benefits directly from the savings. Health Card
believes there are substantial savings to be realized by encouraging plan
participants to use generic instead of brand name drugs, since the cost of a
generic prescription drug can be as much as 91% (typically 30% to 55%) lower
than the cost of the therapeutically equivalent brand name prescription drug.

Plan participants are encouraged by Health Card to use generic drugs by a
variety of methods. These methods include:

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o utilizing differential co-payments (that is, allowing a plan
participant accepting a generic drug to pay a lower co-payment
than if the same prescription were filled with the brand name
drug),
o requiring the plan participant to pay the difference between the
brand and generic price, and
o offering a financial incentive to pharmacists to fill
prescriptions using generic drugs, when permitted by law,
therapeutically permissible and in all cases subject to the
physician's prior approval.

The differential co-payment is the method most commonly used by Health Card
to encourage acceptance of generic substitutes for brand name drugs.

If a physician prescribes a specific drug and the prescription includes a
"dispense as written" ("DAW") notation, a pharmacist is not permitted to
substitute a generic drug without the physician's consent. In such event, the
pharmacist must contact the physician directly for permission to substitute a
generic equivalent or a less expensive brand name drug. Depending on state law,
if no DAW notation is made, the pharmacist must obtain the consent of only the
plan participant to dispense a generic substitute. In New York, if no DAW
notation is made and the physician does not prohibit substitution, the
pharmacist is required to dispense the generic equivalent if it is available.
Other states may have different laws, rules and regulations. Health Card's
detailed quarterly reports to sponsors assist in determining if this program is
being utilized effectively. See "Services -- Data Access, Reporting Information
and Analysis."

Health Card also provides therapeutic interchange and formulary management.
These programs are based upon the effectiveness, quality and cost of specific
drugs. Programs of interchange or formulary inclusion are implemented to give
sponsors lower cost with equal quality. All chosen drugs are reviewed by Health
Card's Pharmacy & Therapeutics Committee in terms of their efficacy, quality
(including side effects) and cost. See "Services -- Consulting Services and
Disease Information Services."

Drug Review and Analysis

Health Card's drug review and analysis services include prospective reviews
of potential claims and concurrent and retrospective reviews of submitted
claims. These include a series of on-line reviews which permit a pharmacist
filling a prescription to examine the plan participant's claims history for:

o drug interactions,
o premature refills of prescriptions,
o duration or duplication of therapy,
o pregnancy and breast feeding precautions,
o geriatric or pediatric precautions,
o compliance with prescriptions, both as to dosage and timing, and
o other contraindications.

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Health Card transmits such information to the dispensing pharmacist for
information purposes only -- not to replace the prescribing physician's or the
dispensing pharmacist's professional judgment. Health Card's consulting
department retrospectively analyzes the drug utilization patterns of plan
participants for each sponsor. Health Card may then recommend changes in the
sponsor's plan design, preferred drug management, and disease information
systems initiatives to contain costs or to better serve the plan participants.

Consulting Services and Disease Information Services

Prescription Benefit Plan Consulting. Health Card's consulting services are
designed to enable sponsors to enhance the quality of plan participants' care
while reducing related costs. Using data relating to the progression and
treatment of diseases, Health Card disseminates information regarding therapies
that are aimed at treating a disease in a cost-effective manner. Health Card's
information systems, which include a comprehensive database, allow Health Card
to provide (i) drug review and analysis, (ii) appropriate reports and
information, and (iii) disease information services. Health Card believes that
technology and information systems advances will allow for future integration of
health care claims information, including hospital, laboratory and clinical
costs. Health Card further believes that integration will enable it to assess
outcomes on a statistical basis and based on such statistical assessments to
make recommendations regarding effective prescribing practices. Health Card
believes this should allow for improved patient care while controlling therapy
costs.

Health Card has established a Pharmacy & Therapeutics Committee (the "P&T
Committee") currently comprised of physicians and pharmacists. The P&T
Committee's primary responsibility is to assist sponsors in designing a well
managed, therapeutically appropriate, cost-effective preferred drug listing or
"formulary." The goal of the P&T Committee is to enable sponsors to optimize
plan participant care through drug policy development and education. The P&T
Committee meets quarterly and performs the following functions:

o provides information to sponsors to ensure that the covered drugs
of each plan reflect the current standard of medical practice and
pharmacology,
o evaluates drugs for inclusion in a plan as a preferred drug,
o analyzes current literature for safety, efficacy and
cost-effectiveness of covered drugs,
o provides recommendations on drug therapy and utilization,
o evaluates drug review and analysis programs and criteria,
o determines those drugs which require prior authorization from the
sponsor, and
o reviews the associated guidelines for those drugs' proper use.

The P&T Committee currently consists of six members: Martin Edelstein, M.D.
and Paul Cohen, M.D., each of whom is a practicing physician and medical school
professor, Jack M. Rosenberg, a university professor of clinical pharmacy and
pharmacology, Joseph B. Laudano, a manager of medical affairs of a major drug
company, Howard G. Levine, a pharmacist who is the

12

Chairman of the Board of an independent pharmacy group, and John Ciufo, who is
Health Card's Vice President of Clinical Services and its liaison with the P&T
Committee. Mr. Ciufo is the only member of the P&T Committee otherwise
affiliated with Health Card. Vytra has the right to designate one member of the
P&T Committee, but has not exercised its right. Each Committee member is
requested to disclose his or her affiliation with any drug company. Mr. Laudano
and Mr. Rosenberg have disclosed a current affiliation with drug companies.

Disease Information Services. Through its disease information services,
Health Card provides information to sponsors that is intended to enable them to
enhance their prescription benefit plans and to improve the treatment of plan
participants with certain medical conditions. In providing disease information
services, based upon recommended drug and treatment guidelines, Health Card:

o reviews and analyzes drugs prescribed and prescriptions
dispensed,
o recommends plan guidelines, and
o conducts plan participant and physician profiling.

By analyzing plan participants' pharmacy claims patterns, Health Card can
provide information to sponsors and health care providers, assisting in the
early identification of patients whose care might be improved through additional
or alternative treatment or medication. Health Card has developed disease
information systems covering cardiovascular and gastrointestinal conditions,
migraines, diabetes, and asthma, among others.

Health Card's disease information services utilize the recommended drug and
treatment guidelines, changes in the drug and treatment guidelines, current
medical literature and its own assessments to identify plan participants
"at-risk" for a particular disease. If the disease information services identify
participants "at-risk" for particular diseases, Health Card may provide the
recommended drug and treatment guidelines to sponsors, treating physicians and
plan participants. If requested by the sponsor, Health Card monitors a
participant's compliance with the recommended drug and treatment guidelines,
including prescription usage. If it appears, based upon Health Card's analysis
of the participant's claims history, that the recommended drug and treatment
guidelines are not being applied, Health Card may, if requested by the sponsor,
contact the physician, via either telephone or letter, suggesting additional
options. Physician performance and adherence to the recommended drug and
treatment guidelines are monitored by using Health Card's information systems.

Health Card is currently marketing its disease information programs on a
very limited basis, and is actually providing this service to only one sponsor
presently but anticipates that it will be providing these services to another
sponsor in the near future. Health Card believes that sponsors' demand for these
services will grow as their needs for information to address cost containment
increase.

13

Data Access, Reporting and Information Analysis

Data Access. Health Card's computerized information systems allow each
sponsor to access on-line data relating to the sponsor's plan. With this
capability, the sponsor is able to maintain and update plan participant
eligibility information and override denials of claims if it so chooses.

Reports. Sponsors receive quarterly executive reports and ad-hoc reports,
in addition to the executive and billing reports which accompany invoices. Based
on these reports, Health Card representatives provide information and assist
sponsors regarding benefit design, cost containment initiatives, disease
information initiatives and formulary management.

Decision Support Systems. Health Card's proprietary computerized HCFocus
decision support tool is part of Health Card's report generation system and
utilizes Health Card's proprietary database. Sponsors can use HCFocus to analyze
particular information, including, among other things:

o comparison of physician prescription practices compared to a
selected peer group,
o analysis and review of a plan participant's drug history,
o analysis of the top drugs dispensed by number or dollar value,
o analysis of generic drug for brand name drug substitution rates,
and
o analysis of the dispensing patterns of particular pharmacies.

Physician Profiling

Health Card will, at the request of either a physician or a sponsor,
analyze (i.e., profile) a physician's prescription history and consult with
either the physician or the sponsor about the physician's prescribing pattern.
Health Card might, for example, discuss alternatives to therapies that the
physician regularly prescribes based on the drug and treatment guidelines. This
practice is designed to enhance the therapeutic benefits received by the plan
participant and, where possible, to achieve cost savings. It is also designed to
promote conformity with plan benefits and the recommended drug and treatment
guidelines. Presently, Vytra is the only Health Card sponsor using the physician
profiling services, although one more sponsor has expressed interest in using
this service later in 1999 or 2000. Health Card believes that other sponsors may
be interested in this service in the future.

Sponsors

Sponsors include managed care organizations, local governments, unions,
employers and third party health care plan administrators of prescription drug
programs. As of June 30, 1999, Health Card was servicing 73 sponsors of benefits
plans covering over 521,000 participants (such number of sponsors includes each
third party administrator client as one sponsor), with concentrations in the
Northeast, Southeast and West Coast. For the fiscal year ended June 30, 1999, 29
new sponsors began utilizing Health Card's services.

14

Health Card's sponsors are typically asked to sign a standard form of
managerial agreement that governs Health Card's relationship with that sponsor.
Pursuant to this standard agreement, Health Card pays claims and furnishes other
related services through a network of pharmacies. The sponsor provides the
details of the plan to be managed, along with a list of all covered participants
and eligibility updates. The sponsor is liable for all charges incurred by
unauthorized people unless Health Card was notified in writing of ineligibility.
If the participant receives prescription drugs from a non-member pharmacy, and
the plan provides for reimbursement of some or all of the cost of prescription
drugs purchased from a non-member pharmacy, a claim for direct reimbursement
must be made. Health Card is obligated to ensure that an adequate number of
member pharmacies are available, furnish a description of the plan to the
pharmacies, require such pharmacies to comply with the member pharmacy
agreement, process claims and determine whether claims qualify for payment.
Health Card is also obligated to furnish the sponsor with a bi-weekly account
statement which sets forth a summary of claims costs in the preceding period,
and a description of the drugs which are included and excluded from the plan.

Pursuant to the standard agreement, the sponsor is obligated to reimburse
Health Card the cost of claims to Health Card (less any cash advances paid) as
the bi-weekly statements are received by the sponsor. The bi-weekly account
statement will also include an amount due to Health Card for the auditing,
approval and payment of claims processed during the preceding period. The
contracting party agrees to make all payments within five business days from
receipt of the bi-weekly account statement, except that any additional charges
for which a separate fee is agreed to by the parties will be remitted by the
contracting party within 30 days after receipt of billing from Health Card.
Health Card agrees to maintain, in electronic form, current and complete files
of all claims received, and records to establish the cost of drugs to each
sponsor. The sponsor can review these records. While most of Health Card's
larger sponsors negotiate other agreements with Health Card, many sponsors sign
the standard form or a modified version of the standard form. The specific terms
of each managerial agreement, including any incentive arrangements, are
negotiated by Health Card on a case by case basis. While Health Card may take
into account factors such as the number of plan participants, margins and
economies of scale, among others, in determining the terms of its arrangements
with sponsors, Health Card generally does not use set guidelines when
determining these terms. See Item 7 hereof.

Significant Sponsors

Health Card depends on a limited number of sponsors for a significant
portion of its revenue.

For the fiscal years ended June 30, 1998 and 1997, Vytra and Suffolk County
were the only sponsors that accounted for 10% or more of Health Card's revenues.
For the fiscal year ended June 30, 1999, Vytra, Suffolk County and Operating
Engineers Trust Funds were the only sponsors that accounted for 10% or more of
Health Card's revenues. The loss of any one of these sponsors would have a
material adverse effect on Health Card's business, operating results and
financial condition. The business relationship with each of these sponsors is
detailed in the immediately following sections.

15

Vytra

Vytra is a particularly significant sponsor, as the following table
indicates:

Percent of
Health Card's Number of
Year Ended June 30, Revenues Participants
------------------- -------- ------------

1997 45% 128,404
1998 44% 166,840
1999 37% 150,061

Health Card has been providing services to Vytra since 1990.

A. Prescription Arrangement

Health Card provides prescription benefit management services to Vytra
under two separate arrangements. Pursuant to a series of letters and
conversations, Health Card provides services to Vytra under an arrangement that
began under a written agreement that, as amended, expires in December 1999.
Under this arrangement, as amended (the "Prescription Arrangement"), National
Medical Health Card IPA, Inc. ("Health Card IPA"), Health Card's wholly-owned
subsidiary, has agreed to provide services to Vytra through Health Card. Health
Card is in the process of negotiating a more formal amendment to the
Prescription Arrangement. Health Card cannot be certain that a more formal
amendment with Vytra will be signed, or that any agreement that is signed will
contain terms as favorable to it as the current arrangement.

Under the Prescription Arrangement, Health Card provides prescription
benefit management services and charges a preset amount based on the number of
plan participants covered at the beginning of each month. The amount payable
under this arrangement is adjusted retrospectively to take into account actual
utilization and cost of claims. The party that benefitted from any difference in
such amount pays an adjustment to the other party. Vytra pays Health Card
additional fees for certain information services, claims processed and other
services.

The Prescription Arrangement accounted for the approximate percentage of
Health Card's revenues indicated in the following table:

Percent of
Health Card's
Year Ended June 30, Revenues
------------------- --------

1997 34%
1998 34%
1999 30%

16

Pursuant to the Prescription Arrangement, Health Card is Vytra's primary
provider of prescription benefit management services. Vytra has the right to
place a percentage of its claims with other prescription benefit management
companies, individual physicians or groups of physicians associated with Vytra.
If Vytra processes more than such percentage of its claims with other parties,
Health Card can terminate the Prescription Arrangement or renegotiate the
present amount charged to Vytra based on the number of plan participants. Under
the Prescription Arrangement, should Health Card offer rates more favorable than
those offered to Vytra to a competing sponsor whose plan design and
demographics, service area and services received from Health Card are
substantially similar to those of Vytra, Health Card must promptly notify Vytra.
Vytra then may:

o terminate the Prescription Arrangement, if the competing sponsor
has more participants (but less than twice more) than Vytra and
Health Card does not offer the same rates to Vytra; and

o receive the more favorable rates, retroactive to the date the
more favorable rates were offered to the competing sponsor, if
the number of the competing sponsor's participants is equal to or
less than the number of Vytra's participants.

As a result of adoption of new contract drafting guidelines for HMOs and
independent practice associations ("IPAs") in New York, Health Card IPA will not
be permitted to offer this same contract benefit.

The Prescription Arrangement requires Health Card to arrange for and
maintain an adequate and accessible pharmacy network for Vytra plan participants
(i.e., a specified number of pharmacies). Health Card meets this standard if one
or more participating pharmacies are located in each zip code in the Vytra
service area, which as of this date includes Queens, Nassau and Suffolk County,
in the State of New York, unless either (i) no pharmacy exists within a zip
code, or (ii) a pharmacy will not participate and such non-participation is
beyond the reasonable control of Health Card. In addition, Health Card must
exercise its best efforts to maintain pharmacy network participation in
accordance with certain historical levels. Health Card is not responsible if the
number of pharmacies in the network declines because of pharmacy closings,
consolidations or changes in the pharmacy payment schedule. Health Card has
agreed with Vytra that it will not terminate a major chain of participating
pharmacies during the term of the Prescription Arrangement without Vytra's
consent. However, if Vytra does not consent and the inclusion of such chain
results in higher actual costs to Health Card, then Vytra will be required to
pay such increase on a quarterly basis. In addition, Vytra may require Health
Card to add specific pharmacies to the pharmacy network. Similarly, if the
inclusion of such pharmacies results in higher actual costs to Health Card,
Vytra will be responsible for the increase.

The Prescription Arrangement sets forth certain guarantees that Health Card
must meet. These include:

o processing certain percentages of claims within certain periods,
o making all reasonable efforts to process all claims within a
maximum period,

17

o answering all calls within a specified average time,
o ensuring that a certain percentage of mail order prescriptions
which do not require pharmacy or physician intervention are
dispensed within certain periods,
o making all reasonable efforts to make sure all mail order
prescriptions are dispensed within a maximum time period,
o reaching certain generic substitution rates, and
o maintaining a certain level of rebates per claim.

Health Card is required to pay a penalty for failing to meet certain guarantees.

Health Card must maintain a Pharmacy & Therapeutics Committee. Vytra has
the right to designate one representative to serve on the Pharmacy &
Therapeutics Committee, but has not exercised that right. See "Services --
Clinical Consulting and Disease Information." Until recently, Vytra received all
of the rebates received by Health Card in connection with the Prescription
Arrangement. Health Card currently retains a portion of such rebates. See
"Services -- General -- Rebate Administration."

Pursuant to the Prescription Arrangement, a portion of certain financial
risks is shifted from Vytra to Health Card. Vytra is an HMO established under
the laws of the State of New York. Under New York law, an HMO may share risk
only with reinsurers or, pursuant to a written agreement which complies with
certain drafting guidelines issued by the Department of Health ("DOH"), with
"providers" and IPAs. Recently, Health Card acquired Health Card IPA, which is
an IPA under the laws of New York State. Pursuant to a letter agreement signed
in March 1999, Vytra has agreed that the Prescription Arrangement will govern
its relationship with Health Card and Health Card IPA. As of the date of this
Form 10-K, Health Card is performing the services under this arrangement with
Vytra. While the letter agreement does not comply with the DOH drafting
guidelines, the parties have discussed a more formal amendment, and Health Card
anticipates that, if such an amendment is executed, it will comply fully with
the DOH drafting guidelines.

As of September 25, 1998, Health Card executed a letter agreement with
Vytra which extended the term of the original Prescription Arrangement until
December 31, 1998. This letter agreement also listed new and additional terms
which were to be included in a formal amendment to the Prescription Arrangement.
Among other things, the March 1999 letter agreement extends the term of the
September letter to December 31, 1999. Even though Health Card, Health Card IPA
and Vytra signed the March 1999 letter agreement, Health Card anticipates that a
more formal amendment will be signed and govern the parties' relationship from
January 1 to December 31, 1999, and will include, among other things, the terms
of a proposal issued by Health Card in response to a request for proposal which
was issued by Vytra, as contemplated to be modified by the September 25, 1998
letter. As of the date of this Form 10-K, the more formal amendment has not been
entered into. Although negotiations are continuing and Health Card expects a
more formal amendment to be executed by both parties, no assurances can be given
that a more formal amendment will be executed, or that it will be executed on
terms favorable to Health Card. If Health Card were to lose Vytra as a sponsor,
or lose a significant portion of Vytra's business, it would have a material
adverse effect on Health Card's business, operating results and financial
condition.

18

B. Fee for Service Agreement

Health Card also provides prescription benefit management services to Vytra
under an agreement that commenced March 15, 1990 (the "Fee for Service
Agreement") with an initial term ended on March 31, 1991. The Fee for Service
Agreement renews annually from year to year, unless terminated by either party.
Under this agreement, Health Card performs prescription benefit management
services and charges a fee based on the number of claims processed and paid.

The Fee for Service Agreement accounted for the approximate percentage of
Health Card's revenues indicated in the following table:

Percent of
Health Card's
Year Ended June 30, Revenues
------------------- --------

1997 11%
1998 10%
1999 7%

Suffolk County

Health Card has been providing prescription benefit management services to
Suffolk County, a municipal corporation of the State of New York, since 1992.
Health Card is currently providing services to Suffolk County under an oral
agreement, terminable by either party, the economic terms of which are otherwise
substantially similar to those of a written agreement that expired on December
31, 1998.

In March 1999, Suffolk County provided Health Card with a proposed
amendment to the written agreement which Health Card has signed but Suffolk
County has not. Health Card cannot be certain that the proposed amendment to the
agreement with Suffolk County will be signed.

Suffolk County has accounted for a substantial portion of Health Card's
business, as indicated in the following table:

Percent of
Health Card's Number of
Year ended June 30, Revenues Participants
------------------- -------- ------------

1997 18% 37,833
1998 16% 38,893
1999 14% 39,688

Health Card guarantees an effective blended average wholesale price
discount per

19

prescription and an average blended dispensing fee per prescription. Health Card
is required to pay certain percentages of rebates to Suffolk County pursuant to
a complex formula and maintain a pharmacy network at a specified level. Health
Card offers Suffolk County a minimum initial rebate guarantee for each paid
claim, which applies until the rebate per claim equals a threshold amount. The
percentage rebate to which Suffolk County is entitled increases based on a
formula tied to the per claim rebate amount.

Operating Engineers

On December 1, 1997, Health Card began providing prescription benefit
management services to Operating Engineers Trust Funds, IUOE Local 12
("Operating Engineers"), a construction workers' union in Southern California.
As of June 30, 1999, Operating Engineers covered approximately 42,000 plan
participants. As of the date of this Form 10-K, Health Card is providing
services pursuant to an oral agreement but is negotiating for a written
agreement. No assurances can be given that a formal agreement will be executed,
or that it will be executed on terms favorable to Health Card. Pursuant to such
oral agreement, Health Card is required to pay a certain percentage of rebates
to Operating Engineers. For the fiscal year ended June 30, 1999, Operating
Engineers accounted for approximately 12% of Health Card's revenues.

In the event that any of these sponsors choose to discontinue using Health
Card's services, or if the terms of Health Card's arrangements with these
sponsors unfavorably change, Health Card's business, operating results and
financial condition will be materially adversely affected. In the event of the
loss of any of these sponsors, there can be no assurance that Health Card will
be able to replace such sponsors.

Sales and Marketing

Health Card markets its services through a sales and marketing department
led by the Executive Vice President of Sales and Marketing. The sales and
marketing department includes a marketing manager, marketing assistant, a
proposal writer, one regional sales manager, six sales executives, and one sales
coordinator. Health Card's sales executives target the following geographic
sales regions -- Eastern, Mid-Atlantic, Southeast, Southwest, Midwest, West and
the New York Metro area. In addition, Health Card contracts with brokers who are
retained to market Health Card's services to prospective sponsors for agreed
upon fees based on the number of plan participants enrolled in a Health
Card-supported plan and/or the number of claims processed under such plan.

Health Card attends numerous trade shows and utilizes advertising, public
relations and marketing literature for sales support. Additionally, Health Card
employs the services of a public relations and media firm for exposure and
publication in newspapers, periodicals and journals which are targeted to
employee benefit and managed care specialists.

Further, Health Card is continuing to expand its World Wide Web site.
Currently, the Web site describes Health Card's products and services and lists
frequently asked questions, among other things. It is anticipated that the Web
site will have a page dedicated to on-line services which will

20

allow plan participants to fill out customer service surveys and direct payment
claims forms, and to access the pharmacy network listings. The Web site is
anticipated to be available for physician access to the Health Card formulary
drug listing. Security firewalls have been developed and implemented to protect
patient confidentiality.

Competition

Health Card competes with numerous companies which provide the same or
similar services. Many of Health Card's competitors have been in existence for
longer periods of time and are far better established than Health Card. Many of
them also have:

o broader public recognition,
o financial and marketing resources substantially greater than
Health Card,
o more experienced management, and
o far more extensive facilities than those available to Health
Card.

In addition, some of Health Card's sponsors and potential sponsors may find it
desirable to perform for themselves those services now being rendered by Health
Card.

Health Card's ability to attract and retain sponsors is substantially
dependent on its capability to provide efficient and accurate claims management,
prescription drug program management and related reporting, auditing and
consulting services. Health Card believes that the following factors help Health
Card successfully compete:

o a broad base of experience in the information technology and
pharmacy benefit management industries,
o flexible and sophisticated on-line computerized information
systems, and
o a focus on customer service.

There can be no assurance that Health Card will remain competitive or
successfully market integrated prescription benefit management services and
disease information services to existing and new sponsors. Furthermore, there is
a distinct possibility that consolidation and alliances within the industry will
adversely impact the operations and prospects for independent prescription
benefit management companies such as Health Card.

Employees

As of June 30, 1999, Health Card had 93 employees. Health Card's employees
are not subject to collective bargaining agreements and Health Card considers
its relations with its staff to be satisfactory. See Item 13 hereof.

21

Information Systems

Health Card's information systems integrate all of the:

o data input,
o reporting,
o analysis, and
o access functions

provided by Health Card, and Health Card believes that its information systems
provide it with a competitive advantage. See Item 7 hereof.

Health Card's on-line claims management system depends in large part on
software licensed from Prospective Health Incorporated ("PHI"). By a license
agreement dated February 18, 1998, Health Card was granted a non-exclusive and
nontransferable perpetual license to use PHI's claims adjudication software
system. This system is an integral part of Health Card's on-line claims
management system. The agreement required Health Card to pay an initial license
fee of $400,000, of which $100,000 was paid upon execution of the agreement and
$25,000 paid monthly through March 1999. In addition, if certain milestones are
met, based on the number of processed claims, as defined, the initial license
fee increases incrementally by up to an additional $500,000 over the term of the
license. A milestone has been met which has increased the initial license fee by
$150,000 due to increased annualized volume of claims processed. The agreement
also provides for the monthly payment of a fee for maintenance and updating
services, aggregating annually to 18% of the initial license fee, as defined.

In addition, Health Card entered into a non-exclusive licensing agreement
on March 16, 1998 with Medi-Span, Inc. for a three-year term. This agreement
permits Health Card to use Medi-Span's master drug database, certain drug
utilization review databases, price-checking software and state claims-review
programs for New York and Virginia. Health Card pays license fees annually,
which increase as the number of claims processed and number of dedicated users
of Medi-Span's software increases. Health Card pays an annual license fee of a
minimum of $302,200. On June 1, 1998, Health Card entered into an agreement with
Sandata, Inc., of which Bert E. Brodsky, Chairman of the Board and Chief
Executive Officer of the Company, is the Chairman of the Board, President,
Treasurer and a principal stockholder. This agreement, which was amended on the
same date, relates to the hiring of 11 Sandata employees by Health Card to
provide development, enhancement and maintenance of Health Card's information
systems internally. Health Card paid Sandata $208,000 in consideration for
Sandata's assigning to Health Card certain rights relative to such employees.
Health Card also assumed a liability of $86,000 relating to these employees.
Sandata is expected to continue to provide, through its subsidiaries, consulting
services related to Health Card's information systems on such terms and
conditions as may be agreed to between the parties from time to time. Also,
Sandata confirmed Health Card's proprietary rights in certain software developed
by Sandata for Health Card, among other things. See Item 10 hereof.

A significant portion of Health Card's information systems has historically
been developed,

22

enhanced, modified and maintained by Sandsport Data Services, Inc., a
wholly-owned subsidiary of Sandata. Furthermore, Health Card leases computer
hardware for its data processing center at a monthly cost of approximately
$33,000 (as of the date of this Form 10-K) from Sandsport pursuant to an oral
agreement. See Item 13 hereof.

Government Regulation

The activities of prescription benefit management companies such as Health
Card are subject to regulation at the federal, state and local levels. While
Health Card may not have complied in the past, it has recently reviewed its
operations for areas of non-compliance and believes that it substantially
complies with the laws and regulations material to the operation of its business
or is taking steps to identify and comply with such laws and regulations. The
laws that implement this regulation include, but are not limited to, the federal
Anti-Kickback, FDA, anti-trust and ERISA laws and the laws of various states
relating to health, insurance and utilization review, and the licensing and
regulation of professionals, including physicians, nurses, pharmacists,
pharmacies and independent practice associations. Health Card is also subject to
laws and regulations relating to business corporations in general.

Regulatory authorities have very broad discretion to interpret and enforce
these laws and to promulgate corresponding rules and regulations. Violations of
these laws and regulations may result in criminal and/or civil fines and
penalties, injunctive relief to prevent future violations, other sanctions, loss
of professional licensure and exclusion from participation in federal and state
health care programs, including Medicare and Medicaid.

The interpretation and applicability of some of the laws and regulations
applicable to Health Card's business are unclear. Health Card's business
activities and relationships with sponsors, pharmacies, Integrated, plan
participants, its IPA and brokers have not been the subject of regulatory
investigation or review on either the state or the federal level. Health Card
has not obtained or applied for any opinion of any regulatory or judicial
authority that its business operations and relationships with sponsors,
pharmacies, Integrated, its IPA, plan participants or brokers are in compliance
with applicable laws and regulations. There can be no assurance that Health Card
will be successful, that it will interpret the applicable laws and regulations
in the same way as regulatory or judicial authorities, or that the laws and
regulations and/or the interpretation thereof will not change.

A more detailed analysis of certain specific laws and regulations affecting
the business, operations and relationships of Health Card is set forth below.

Anti-Kickback Regulations

The federal Anti-Kickback Statute prohibits knowingly paying or receiving
remuneration in return for referring an individual for the furnishing of an item
or service, or for the purchasing, ordering or arranging for any item or service
for which payment may be made in whole or in part under a federal health care
program, including Medicare or Medicaid. The term "remuneration" in

23

the statute expressly includes any kickback, bribe or rebate. Violation of this
law is a felony, punishable by fines up to $25,000 per violation and
imprisonment for up to five years. Violation may also give rise to civil
penalties of up to $50,000 per violation and exclusion from the Medicare and
Medicaid programs.

Safe harbor regulations have been adopted under the Anti-Kickback Statute
which immunize certain remuneration arrangements which might otherwise violate
that statute. Failure to fall within a safe harbor, however, does not mean that
such practice constitutes a violation of the law.

Health Card believes that it is not in violation of the Anti-Kickback
Statute because (i) it does not receive any remuneration directly from Medicare,
Medicaid or any other government sponsored health care program, and (ii) it does
not believe the payments to it from any of its sponsors, other than Vytra, are
derived from funds from Medicare, Medicaid or other federal government sponsored
health care programs. Health Card believes that its arrangement with Vytra falls
within the HMO safe harbor exemption to the Anti-Kickback Statute because that
safe harbor applies to any written risk sharing arrangement with an HMO. Health
Card cannot be sure, however, that a government regulatory agency or judicial
tribunal would not view the receipt and sharing of rebates as a violation of the
federal Anti-Kickback Statute.

With respect to other sponsors, although Health Card does not have any
knowledge to the contrary, it cannot be sure that no portion of a sponsor's
payment is derived from a government health care program source, thereby
implicating the Anti-Kickback Statute. However, even if Health Card were found
to receive indirectly a benefit from such a government sponsored health care
program in the form of a rebate from Integrated or otherwise, Health Card
believes that its conduct does not violate the Anti-Kickback Statute because it
receives and shares rebates with its sponsors and participates in the
therapeutic interchange program, only to share cost savings and reduce the cost
of prescription benefit services and not to induce referrals.

The Anti-Kickback Statute and related regulations have been broadly
interpreted by the federal courts to prohibit the payment or receipt of any form
of remuneration, even if only one purpose of such remuneration is to obtain a
referral for any item or service that is covered by a federal health care
program. Certain states other than New York have similar statutes that may
extend the prohibitions to items or services that are paid for by
non-governmental third-party payors, as well as individuals who pay directly for
their own health care.

Health Card is not aware of any instance in which the Anti-Kickback Statute
has been applied (i) to prohibit independent prescription benefit management
companies from receiving rebates from drug manufacturers based on drug sales by
pharmacies to plan participants, formulary management programs, or therapeutic
substitution programs, or (ii) to the contractual relationships between
independent prescription benefit management companies and their sponsors and
participating pharmacies.

In the last few years, private citizens have commenced litigation, known as
Qui Tam actions,

24

against health care providers and suppliers on behalf of the federal government
alleging that such providers and suppliers filed false claims with the Medicare
and/or Medicaid programs. While the law on the issue is still unsettled, if
Health Card's activities with respect to its receipt and sharing of rebates were
challenged as a kickback in such a Qui Tam proceeding and determined to form the
basis for a false claim under the Anti-Kickback Statute, Health Card could be
subject to substantial penalties and treble damages in addition to the
punishments described above. Health Card's exposure to litigation and
enforcement actions is increased because of the availability of such Qui Tam
actions to a broader class of plaintiffs.

State Insurance Regulations

One of Health Card's arrangements with Vytra involves the shifting of some
of the financial risk of providing prescription benefits from Vytra to Health
Card. Under New York law, financial risk sharing arrangements may constitute
engaging in the business of insurance which requires a license from the state.
Health Card recently acquired Health Card IPA, an independent practice
association licensed in New York State. Health Card, Health Card IPA and Vytra
entered into a letter agreement in March 1999 which contemplates that services
to Vytra will be performed by Health Card IPA through Health Card. As of the
date of this Form 10-K, Health Card is performing the services under this
arrangement with Vytra. Health Card IPA is also expected to be the contracting
party to the more formal amendment or any new agreement with Vytra. To the
extent it enters into risk sharing agreements with HMOs or providers in the
future, Health Card intends that Health Card IPA will be the contracting party.

In negotiating the terms of the formal amendment or new agreement, Vytra
and Health Card plan to follow the DOH drafting guidelines. However, the
existing agreement with Vytra does not follow those guidelines. Health Card
cannot be sure that its arrangement with Vytra will not be subject to a claim
that it is engaged in the unlicensed business of insurance. Health Card has not
determined, and does not believe that it could determine with any degree of
accuracy, the nature or extent of any sanctions that might be imposed on it as a
result of such a claim.

Independent Practice Association Regulations

Health Card IPA is an independent practice association under the laws of
New York. Under New York law, an HMO may share risk only with reinsurers or,
pursuant to a written agreement which complies with certain drafting guidelines
issued by the DOH, with "providers" and independent practice associations.
Health Card intends that the IPA will be the contracting party with respect to
any contracts with HMOs or providers containing financial risk sharing
provisions. Health Card IPA is subject to the regulatory authority of the DOH
and the laws, rules and regulations applicable to independent practice
associations in New York. Under such laws, rules and regulations, Health Card
IPA's contracts with HMOs and providers will be subject to the DOH's contract
drafting guidelines and must be reviewed and approved by the DOH.

In July 1998, the DOH issued new HMO and contract drafting guidelines.
These guidelines are to be used in connection with the approval process for HMO
and IPA contracts. Health Card has

25

negotiated with Vytra to incorporate into their anticipated more formal
amendment the provisions required by the drafting guidelines. Health Card cannot
be sure that Vytra will sign the more formal amendment, which failure would have
a material adverse effect on its business, operating results and financial
condition. While Health Card does not believe that the implementation of the
contract drafting guidelines will have a material adverse effect on its
business, operating results and financial condition, it cannot be sure that DOH,
in the exercise of its discretion, will not withhold or delay its approval of
the more formal amendment with Vytra, which could have such a material adverse
effect.

Pharmacy Regulations

New York prohibits unlicensed persons from engaging in the practice of
pharmacy. The practice of pharmacy is defined as "the preparing, compounding,
preserving, or the dispensing of drugs, medicines and therapeutic devices on the
basis of prescriptions or other legal authority." Health Card believes that it
is engaging in the business of providing management and administrative services
for prescription benefit plans and not in the practice of pharmacy.

As a precautionary measure, in order to preclude any possible finding that
it is engaged in the unauthorized practice of pharmacy, Health Card became a
licensed pharmacy in New York in March 1999. Health Card cannot be sure that the
New York Department of Education will not claim that Health Card had been
engaged in the practice of pharmacy without a license prior to that date. Health
Card has not determined, and does not believe that it could determine with any
degree of accuracy, the nature or extent of any sanctions that might be imposed
on it as a result of such claim.

As a licensed pharmacy, Health Card is subject to all of the laws and
regulations governing pharmacies including those regarding professional
misconduct. Professional misconduct for a pharmacy is defined to include, among
other things, (i) splitting fees in connection with the furnishing of
professional care or services, including the sale of drugs, (ii) receiving
valuable consideration as a commission, discount or gratuity in connection with
the sale of drugs, and (iii) paying or receiving any consideration to or from a
third party for referring a patient, or in connection with the performance of a
professional service.

Health Card is not aware of any interpretation by any court or governmental
agency of the laws and regulations regarding fee splitting or referral fees by
licensed professionals to any arrangements similar to those engaged in by Health
Card nor has Health Card obtained or applied for any opinion of any regulatory
or judicial authority that its business operations or relationships are or will
be in compliance with such laws and regulations. The following aspects of Health
Card's business should be considered in light of these laws and regulations.

Health Card receives rebates from Integrated through contracts between
Integrated and pharmaceutical companies to which Health Card has agreed to be
joined. While Health Card shares the proceeds of those rebates with its
sponsors, it does not share any rebates with pharmacies.

In connection with its formulary management program, the P&T Committee
considers the net cost of various drugs as one factor in determining which drugs
should be included in the Health

26

Card formulary. While the determination to include or exclude drugs from the
formulary is primarily based on the quality and efficacy of the drugs, their net
cost after any available rebate is also considered. If Health Card chooses to
include certain drugs in its formulary for which it receives rebates, it may be
required under the terms of its agreements with Integrated and the joinder
agreements with pharmaceutical companies to exclude certain other drugs from its
formulary in order to receive those rebates.

Under its therapeutic interchange program, Health Card shares savings
realized as a result of participating pharmacies' dispensing lower cost drugs
instead of more expensive prescribed drugs. Health Card also has agreements to
pay brokers to market its plan administration services to other potential
sponsors.

Although it is licensed as a pharmacy, Health Card does not believe that
its activities as a prescription benefit manager constitute the rendering of
pharmacy services that would subject it to the professional misconduct
regulations for its prescription benefit management activities. Even if it were
determined that Health Card's activities constitute the practice of pharmacy,
Health Card does not believe that any of its activities are of the type
prohibited by the pharmacy law or the rules of professional misconduct
applicable to pharmacies. Health Card cannot be sure, however, that the New York
Department of Education would not come to a different conclusion and commence a
regulatory investigation or seek to impose sanctions on it for such conduct.

Regulations Regarding Certain Rights of Privacy and Confidentiality

It is also professional misconduct in New York for a pharmacy to
disseminate personally identifiable health information about a patient without
the patient's prior written authorization. Improper dissemination of such
information may subject a pharmacist to fines, penalties, other sanctions,
injunctive relief, professional disciplinary actions and loss of license.

In the course of its business, Health Card receives data regarding each
plan participant's prescription drug utilization history. Under some
circumstances, Health Card may also receive other medical information regarding
a plan participant. The availability of such information to Health Card may
enable it to draw certain conclusions about a plan participant's health. For
example, a plan participant receiving long-term insulin therapy may be
identified as a diabetic. Health Card calls these identifications "inferred
disease states."

Based on the information Health Card obtains regarding a plan participant's
inferred disease state, Health Card may make recommendations to sponsors on how
to reduce costs and improve the plan to better serve plan participants. Health
Card routinely shares such information with its sponsors through its computer
network. Under the terms of most plans, Health Card also may be required to
provide patient specific information directly to sponsors, including drug
history information that may suggest an inferred disease state. In utilizing the
data received by Health Card in this manner, it is possible that Health Card
could be found to have violated the privacy rights of plan participants under
the laws of New York and other states in which it does business. Such a
determination could have a material adverse effect on Health Card's ability to
provide disease information services, an

27

area of its business that Health Card believes gives it a competitive advantage
and is anticipated to be an important element of its future success.

The Secretary of Health and Human Services has circulated recommendations
regarding legislation intended to protect the privacy of personally identifiable
health information. Several legislative bills on the subject have also been
introduced in the U.S. Senate. While none of these measures have been adopted
into law, Health Card cannot be sure that the subject will not be addressed in
one manner or another at the federal level. If federal legislation regulating
access to and dissemination of personally identifiable health information is
adopted, it could have an adverse effect on the business operations of Health
Card as currently conducted.

Regulations Applicable to Health Care Professionals

All states, including New York, regulate the practice of medicine, nursing
and other licensed health professions. Activities deemed by a state's regulatory
authority to constitute the practice of medicine, nursing, or any other licensed
health profession without the proper license would subject the actor to the
penalties provided under such state's laws.

In the course of its business, Health Card provides disease information
services, drug usage monitoring programs, preferred drug management, and
consulting services. Health Card does not believe that these or any of its other
activities as a prescription benefit management company, constitute the practice
of medicine, nursing or any other licensed health profession. Health Card cannot
assure that a regulatory authority in New York, or any other state in which it
engages in such activities, would not assert a contrary position and subject it
to the sanctions described above.

Utilization Review Regulations

Under the Insurance Law and Article 49 of the Public Health Law, the State
of New York regulates utilization review. Utilization review is defined as the
review to determine whether health care services that have been, are being or
will be provided are medically necessary. Health care services, for purposes of
the utilization review law, are defined to include the provision of
pharmaceutical products. In some of the contracts to which it is a party, Health
Card agrees to provide "drug utilization review" and "drug utilization
management." However, Health Card believes that the drug review and analysis
services it provides to its sponsors do not involve making determinations as to
the medical necessity of the pharmaceutical products provided that would subject
it to regulation under the utilization review laws.

FDA Regulation

The United States Food and Drug Administration has asserted general
authority to regulate promotional activities of, and materials disseminated by,
prescription benefit management companies that are owned or influenced by or
subject to contractual relationships with drug companies. In January 1998, the
FDA published a draft guidance concerning certain promotional

28

practices performed by such prescription benefit management companies. Among the
practices discussed in the FDA's commentary to the draft guidance were the use
of product-specific financial incentives to influence drug selection and
prescribing decisions, disease information programs, and the use of specified or
preferred drug formularies.

Since Health Card is neither owned, nor directly controlled or influenced
by a drug company, it believes that the existing regulations and draft
guidelines do not apply to it. However, due to its contractual relationship with
Integrated and its joinder in agreements between Integrated and various drug
companies, there can be no assurance that some of Health Card's activities may
not be subject to FDA review and regulation as set forth in the draft guidance.
In such event, some of Health Card's activities and Integrated's rebate program
may require modification or elimination.

Regulation in Other States

Health Card is in the process of evaluating its involvement with sponsors
and plan participants located in states other than New York. Health Card is
conducting that review systematically, focusing its attention initially on those
states where it has the most sponsors and/or plan participants. As a result of
that review, Health Card has determined that it is required to become licensed
as a third party administrator of insurance benefits in several states,
including Ohio, Florida, Tennessee, Kentucky and Michigan. Health Card has
applied to become a third party administrator or is in the process of completing
such application in each of these states and has received a license in Ohio.

Health Card intends to apply for a third party administrator's license in
each state in which it determines that its business operations require it. Prior
to September 1998, Health Card conducted its activities without applying for any
such licenses. While Health Card is in the process of seeking to comply with all
such laws that are in effect in the states in which it conducts its business,
Health Card cannot be sure that it will be granted such licenses at this time or
at all, or that it will not be subject to fines and other penalties including
injunctive relief, as a result of its past non-compliance. Health Card has not
determined, and does not believe that it could determine with any degree of
accuracy, the nature or extent of any punishment that might be imposed on it as
a result of such historical non-compliance.

New York does not regulate prescription benefit management companies.
Health Card cannot be sure that New York or any other state will not assert
regulatory authority over it or its activities as a prescription benefit
management company or otherwise, now or at any time in the future. If a state
does assert such regulatory authority, Health Card will seek to comply with all
applicable regulations; however, Health Card cannot be sure compliance will be
achieved. If Health Card is unable to comply, it may not be permitted to conduct
its activities in those states as it currently conducts them, or at all.

Health Card has retained special counsel to advise it about insurance,
health, licensure and certain other regulatory matters governed by New York
State laws and federal laws. Health Card has

29

not retained counsel, or obtained any advisory opinion from any state
administrative or regulatory agency, regarding the laws of any other state.
Health Card cannot be sure that its activities in such other states are in
compliance with all applicable laws and regulations of such states, and thus,
its activities in those other states may subject it to judicial and regulatory
review and such sanctions and/or punishments as may be provided under the laws
and regulations of such states.

Item 2. PROPERTIES.

Health Card occupies approximately 14,600 square feet of space at 26 Harbor
Park Drive, Port Washington, New York under an amended lease at a monthly cost
of $31,000 (including utilities). The lessor is BFS Realty, LLC, which is
affiliated with Mr. Brodsky. The lease expires as of March 30, 2004. Rent under
the lease increases by 5% annually. The BFS lease was assigned by Sandata to BFS
in November 1996. Mr. Brodsky is the Operating Manager and holder of a majority
of the membership interests of BFS. Health Card believes that the terms of this
lease are as fair to it as those which could be obtained from an unaffiliated
third party. Pursuant to an oral agreement entered into in 1994 with BFS, Health
Card paid $700,000 in June 1995 in connection with certain allocated leasehold
improvements. Health Card began occupying space at 26 Harbor Park Drive in
October 1994 and began making rental payments for such space in December 1994.
See Item 13 hereof.

Health Card has completed a new customer service center at its
headquarters. It has initially been equipped with approximately 30 service
representatives' desks, and there is space for an additional 30 service
representative work areas. The customer service center opened on May 14, 1999,
and the additional 30 service representative work areas will be equipped and
become operational as needed. Management believes that Health Card's current
offices will be adequate for Health Card's purposes for the foreseeable future,
without giving effect to any significant increase in need due to possible
acquisitions. In addition, Health Card is considering the possibility of leasing
approximately 10,000 to 15,000 square feet of additional offsite space to house
a disaster recovery center.

Pursuant to a lease dated August 10, 1998 and expiring on August 31, 2005,
Health Card occupies approximately 1,500 square feet at 63 Manorhaven Boulevard,
Port Washington, New York, which will be used as a pharmacy. The landlord for
these premises is 61 Manorhaven Boulevard, LLC. Bert Brodsky is the sole member.
The rent for the 12 month period ended August 31, 1999 was $1,500 per month; the
annual rent increases by 5% per year. Additional rent, in the form of certain
expenses, is also payable.

Pursuant to a lease commencing December 15, 1998, and expiring on December
14, 1999, Health Card leases an apartment, for use by two members of its
management, at premises located at 77 Juniper Road, Port Washington, New York.
The annual rent is $20,400. Utilities and maintenance service (if any
maintenance service is contracted for) are payable by Health Card as additional
rent.

30

Item 3. LEGAL PROCEEDINGS.

Health Card is involved in various legal proceedings, including the one
described in the following paragraph, incidental to the conduct of its business.
While there can be no assurance, Health Card does not expect that any such
proceedings will have a material adverse effect on its business, operations and
financial condition.

By letter dated February 9, 1999, Health Card was informed by counsel for
the West Contra Costa Unified School District that it and an individual
plaintiff had filed suit in the Superior Court of Contra Costa, in the State of
California, against Health Card. The complaint was filed with the Superior Court
on December 8, 1998, and enumerates six grounds for its claim to damages. The
case has been removed to Federal Court. The complaint alleges, among other
things, that the parties entered into a contract effective in November of 1996,
and that on December 11, 1996, Health Card unilaterally terminated that
contract, effective December 16, 1996. The complaint further alleges that this
termination was in violation of the terms of the contract and of one or more
statutory provisions; that the termination resulted in the School District
incurring approximately $150,000 in additional costs due to its having to enter
then into a fee for service arrangement with Health Card in order to continue
providing prescription benefits to its plan members; and that, due to the
wrongful termination of the contract, the school district was forced to secure a
replacement for the benefits and services that were to have been provided under
the contract with Health Card. The complaint alleges, in connection with this
last circumstance, that the School District incurred roughly $400,000 in
additional expenses as a result. The complaint also seeks treble damages. If
treble damages were allowable in this case, and a judgment were to be entered
against Health Card, Health Card could be liable for damages in excess of $1.5
million. Health Card denies the allegations set forth in the complaint, and
intends to vigorously defend against the allegations made in the complaint, and
has engaged local counsel in Los Angeles to assist it in such defense.
Notwithstanding the foregoing, because of the uncertainties of litigation, no
assurances can be given as to the outcome of this litigation. In the event that
Health Card were not to prevail in this litigation, Health Card could be
required to pay significant damages to the School District, which could in turn
have a material adverse effect on Health Card's business, operating results and
financial condition.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

At an Annual Meeting of Shareholders of Health Card held on May 10, 1999,
the shareholders of Health Card (i) elected a Board of five directors consisting
of Bert E. Brodsky, Gerald Shapiro, Gerald Angowitz, Richard J. Strauss and
Kenneth J. Daley, (ii) approved the adoption of a Restated Certificate of
Incorporation (which included certain elections by Health Card to be governed by
various provisions of the Business Corporation Law of the State of New York),
(iii) approved the adoption of a Certificate of Amendment to the Certificate of
Incorporation of Health Card pursuant to which the number of shares of Common
Stock that Health Card is authorized to issue was reduced from 200,000,000 from
25,000,000 and the number of issued and outstanding shares of common stock of
Health Card was reduced by virtue of .1278447-for-one reverse stock split of
Health Card's shares of common stock from 41,554,302 to 5,312,497, (iv)

31

approved the adoption of new By-Laws, (v) approved the adoption of Health Card's
1999 Stock Option Plan and (vi) approved and ratified the making of certain
loans and guarantees by Health Card to and on behalf of certain persons as
described in Item 13 hereof. The number of affirmative votes and negative votes
with regard to the foregoing was as follows:

(i) Election of Directors:

Nominee Vote for Election
------- -----------------

Bert E. Brodsky 39,951,253
Gerald Shapiro 39,951,253
Gerald Angowitz 39,951,253
Richard J. Strauss 39,951,253
Kenneth J. Daley 39,951,253

(ii) Approval of Restated Certificate of Incorporation:

For: 39,951,253 Against: 0 Abstain: 0

(iii) Approval of Certificate of Amendment to Certificate of Incorporation:

For: 39,951,253 Against: 0 Abstain: 0

(iv) Approval of New By-Laws:

For: 39,951,253 Against: 0 Abstain: 0

(v) Approval of 1999 Stock Option Plan:

For: 39,951,253 Against: 0 Abstain: 0

(vi) Approval of Loans and Guarantees:

For: 39,951,253 Against: 0 Abstain: 0

32

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.

Upon completion of Health Card's public offering of shares of common stock
on July 28, 1999 (the "Public Offering"), Health Card's common stock began
trading under the symbol "NMHC" on the Nasdaq National Market. Prior to July 28,
1999, there was no public trading market for Health Card's securities.

Holders

The Company has been advised by its transfer agent (Continental Stock
Transfer & Trust Company) that the approximate number of record holders of its
common stock as of September 23, 1999 was 45.

Dividend Policy

Health Card has not declared or paid any cash dividends in the past and
does not anticipate doing so in the foreseeable future. Health Card intends to
retain any earnings to finance its growth. Any future payments of dividends will
be at the discretion of the Board of Directors and will depend upon such factors
as the Board of Directors deems relevant. No assurance can be given that Health
Card will pay dividends in the foreseeable future.

Recent Sales of Unregistered Securities

Health Card sold the following unregistered securities during the fiscal
year ended June 30, 1999:

On October 30, 1998, Bert E. Brodsky purchased 340,919 shares of common
stock of Health Card for $2,000,000 cash. The funds used for this purchase were
borrowed from Marine Midland Bank. The indebtedness of $2,000,000 to Marine
Midland Bank was secured by 340,919 shares of common stock of Health Card owned
by Mr. Brodsky on October 30, 1998. Health Card also executed an unlimited
continuing Guaranty Agreement for the indebtedness of Mr. Brodsky to Marine
Midland Bank. In January 1999, Mr. Brodsky paid such promissory note in full. On
April 8, 1999, HSBC (formerly Marine Midland Bank) advised Health Card that its
unlimited guaranty of Mr. Brodsky's $2,000,000 loan was released.

The foregoing transaction was a private transaction not involving a public
offering and was exempt from the registration provisions of the Securities Act
of 1933, as amended (the "Act"), pursuant to Section 4(2) thereof. The sales of
the shares of common stock was without the use of an underwriter, and the
certificate evidencing the shares of common stock relating to the foregoing
transaction bears a restrictive legend permitting the transfer thereof only upon
registration of such

33

securities or an exemption under the Act.

Item 6. SELECTED FINANCIAL DATA.

The following tables summarize certain selected financial information for
each of the years in the five year period ended June 30, 1999 and provide
certain supplemental data. The selected consolidated income statement data for
the years ended June 30, 1997, 1998 and 1999 and the selected consolidated
balance sheet data as of June 30, 1998 and 1999 have been derived from the
audited consolidated financial statements of Health Card included in Item 8
hereof. The selected consolidated income statement data for the year ended June
30, 1996 and the selected consolidated balance sheet data as of June 30, 1996
have been derived from the audited consolidated financial statements of Health
Card which are not included in this Form 10-K. The selected consolidated income
statement data for the year ended June 30, 1995 and the selected consolidated
balance sheet data as of June 30, 1995 have been derived from unaudited
financial statements of Health Card which are not included in this Form 10-K.
The information contained in this table should be read in conjunction with
Health Card's consolidated financial statements and the notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 hereof.

Year Ended June 30,
1995 1996 1997 1998 1999
----------- ---------- ----------- ---------- --------------
(unaudited)
Income Statement Data:

Revenues.......................... $45,230,912 $54,308,872 $70,405,168 $98,528,384 $134,031,026
Cost of claims.................... 42,316,738 48,843,261 63,293,699 89,770,402 121,536,733
Gross profit...................... 2,914,174 5,465,611 7,111,469 8,757,982 12,494,293
Selling, general and
administrative expenses*........ 3,394,577 4,216,259 5,855,282 7,192,027 10,171,314
---------- ---------- ---------- ---------- -----------
Operating income (loss)........... (480,403) 1,249,352 1,256,187 1,565,955 2,322,979
Other income (expense)............ 17,723 21,530 42,595 (180,507) 592,032
---------- ---------- ---------- ---------- -----------
Income before income taxes
(loss).......................... (462,680) 1,270,882 1,298,782 1,385,448 2,915,011
Provision for income taxes
(benefit)....................... 850 (185,275) (189,984) 569,000 976,000
---------- ---------- ---------- ---------- -----------
Net income (loss)................. $ (463,530) $ 1,456,157 $ 1,488,766 $ 816,448 $ 1,939,011
=========== ========== ========== ========== ===========

Earnings (loss) per common share:
Basic......................... $ (0.19) $ 0.47 $ 0.46 $ 0.16 $ 0.37
=========== ========== ========== ========== ===========
Diluted....................... $ (0.19) $ 0.35 $ 0.37 $ 0.16 $ 0.37
=========== ========== ========== ========== ===========

Weighted average number of common
shares outstanding:
Basic.......................... 2,447,057 3,093,085 3,258,459 4,966,885 5,205,084
Diluted........................ 2,447,057 4,182,909 4,008,481 4,969,166 5,205,084
- ------------------------
*Includes amounts charged by
affiliates aggregating........... $ 2,342,352 $ 2,868,974 $ 4,511,144 $ 4,904,514 $ 2,816,982

34

As of
As of June 30, June 30,
1995 1996 1997 1998 1999 1999
-------------- ----------- ---------- ---------- ---------- -------------
(unaudited) (Pro forma)(1)
Balance Sheet Data:

Cash and cash equivalents......... $ 30,629 $ 11,137 $ 1,782,597 $ 1,305,792 $ 2,815,863 $15,698,963
Working capital (deficit)......... (5,760,534) (7,530,351) (7,436,095) (8,658,324) (6,680,593) 6,202,507
Total assets...................... 3,975,483 8,531,507 11,871,820 18,343,900 30,846,011 40,572,833
Long-term debt (including
current portion)................ 25,346 869,437 263,648 9,742 1,950 1,950
Total stockholders' equity
(deficit)....................... (4,527,246) (3,663,125) (2,343,671) (2,006,282) 1,998,315 11,725,137

As of June 30,
1995 1996 1997 1998 1999
----------- ---------- ------------- ---------- ----------
Supplemental Data(2):
Retail pharmacy claims

processed....................... 1,463,247 1,675,490 1,990,976 2,405,627 3,066,098
Mail pharmacy processed
claims.......................... 17,889 28,238 62,413 131,611 171,295
Estimated plan participants
(at period end)................. 230,000 271,784 291,446 401,226 521,150
- ------------

(1) Gives retroactive effect to (a) the consummation by Health Card of a public
offering of its shares of common stock on August 2, 1999 pursuant to which
it received net proceeds of $10,890,200 and (b) the receipt by Health Card
of $1,992,900, in partial satisfaction of certain debt owed by affiliates
of Health Card, in connection with a contemporaneous public offering by a
selling stockholder of shares of common stock of Health Card. See Items 7
and 13 hereof.
(2) This data has not been audited. See Items 1 and 7 hereof.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

Overview

Health Card derives its revenue from the provision of comprehensive
prescription benefit management services to sponsors of prescription benefit
plans. Sponsors of such plans managed by Health Card include managed care
organizations, local governments, unions, corporations and third party health
care plan administrators. Health Card's prescription benefit management services
include electronic point-of-sale pharmacy claims management, retail pharmacy
network management, mail pharmacy claims management, benefit design
consultation, preferred drug management programs, drug review and analysis,
consulting services, disease information programs, data access, reporting and
analysis and physician profiling. As of June 30, 1999, Health Card had
approximately 521,000 plan participants and a pharmacy network of approximately
44,000

35

participating pharmacies.

Significant revenues currently include:

o administrative fees (which may be per claim or per plan
participant per month), and
o charges relating to pharmaceuticals dispensed by pharmacies
participating in Health Card's pharmacy network, including mail
service pharmacies.

Revenue from each sponsor is comprised of one or a combination of both of
the components identified above. Health Card prices services in some combination
of these revenue sources, taking into consideration the cost of claims which can
vary according to Health Card's arrangements, including those relating to
rebates, with each sponsor. The balancing of these components of revenue and
cost of claims is part of the contract negotiation and/or quote process -- for
some sponsors the process is through a negotiation as the contract is finalized
and for others the process is a bid in response to a request for proposal.

Revenue is earned when Health Card provides services. Substantially all of
the services that Health Card provides to its sponsors are related to the
adjudication of the drug claims at the point of service. At this time, the plan
participant is checked for eligibility of coverage, the prescription is compared
to the plan parameters established with the sponsor, the particular drug is
reviewed for contraindications based upon the plan participant's drug history,
age and sex, and the information is placed into a database available for
reporting and query. Accordingly, Health Card recognizes administrative fees at
the time of claims adjudication.

Revenue is earned and recognized as follows: Administrative fees are either
per claim charges of an amount agreed upon with the sponsor or per plan
participant per month charges agreed upon with the sponsor. Per claim fees are
billed to sponsors for the claims adjudicated during the period. Per plan
participant per month fees are generally billed to sponsors at the beginning of
the month. The amount of revenue related to the drugs dispensed by pharmacies
participating in Health Card's pharmacy network is recognized at the time of
dispensing the drug, as the cost is incurred.

The following table sets forth the breakdown of Health Card's charges
relating to pharmaceuticals dispensed and administrative fees.

Years Ended June 30,
1997 1998 1999
---- ---- ----
Charges relating to
pharmaceuticals.............. $69,551,998 $97,558,390 $132,889,359
Administrative fees........... 853,170 969,994 1,141,667
---------- ---------- -----------
Total Revenues............. $70,405,168 $98,528,384 $134,031,026
========== ========== ===========

Health Card does not take possession or legal ownership of the
pharmaceutical drugs dispensed by the pharmacy network, although Health Card
assumes the legal responsibility and

36

financial risk of paying for dispensed pharmaceuticals whether or not Health
Card is paid by its sponsors.

Health Card utilizes a comprehensive prescription benefit database to
perform outcome studies and to develop disease information programs which are
used to reduce overall healthcare costs. These programs do not currently produce
significant revenue. Because Health Card believes that information-based
services are becoming a more important component of managed care, Health Card
believes that its disease information programs will provide an increasing source
of revenue in the future.

Three sponsors, Vytra, Suffolk County and Operating Engineers, accounted
for approximately 63% of revenues during the year ended June 30, 1999. As of
June 30, 1999, Vytra, Suffolk County and Operating Engineers accounted for an
aggregate of 44% of Health Card's plan participants. Effective May 1, 1999,
Health Card added two new sponsors, representing approximately 90,000 additional
plan participants, an increase in the aggregate number of plan participants of
more than 20%. The successful implementation of Health Card's acquisition and
growth strategy would likely further reduce Health Card's level of plan
participant concentration. However, no assurances can be made that such strategy
will be successful or such results achieved.

Health Card's arrangements with Vytra, Suffolk County and Operating
Engineers are either oral, short-term, terminable by the sponsor or subject to
continuing negotiation. For example, Health Card is currently negotiating a more
formal agreement with Vytra, which will be subject to review by the New York
Department of Health. Failure to gain DOH approval could lead to the significant
revision of its arrangements with Vytra or the loss of all or a portion of
Vytra's business. If Health Card were to lose Vytra, Suffolk County or Operating
Engineers as a sponsor, or lose a significant portion of any such sponsor's
business or if the terms of these arrangements were to adversely change, it
would have a material adverse effect on its business, operating results and
financial condition. As discussed above, Health Card believes that its sponsor
base is growing and diversifying and expects the percentage of total revenue
contributed by its largest current customers to continue to decline in the
future.

Under one of Health Card's arrangements with Vytra, the written agreement
sets forth a formula which determines Health Card's financial commitment with
respect to the price of covered drugs. Health Card has verbally advised Vytra
that it has been paying less than the amounts called for by such formula. In
management's opinion, the formula reflected in the agreement determines the
maximum prices payable to pharmacies, although this is not expressly stated.
Management believes that it would not be reasonable to conclude that such
formula determines minimum prices payable to pharmacies, because neither Vytra
nor Health Card would reasonably mandate minimum prices in a business
relationship intended to reduce sponsor cost. Based upon this assumption, and
the fact that Health Card verbally advised Vytra of this practice over one year
ago and Vytra has not objected, Health Card believes that the risk of refunding
any amounts to Vytra is remote. Although Vytra has not objected to Health Card's
paying less, Health Card cannot assure that Vytra will not object in the future,
nor can Health Card assure that its objection will not result in its losing the

37

relationship with Vytra under this arrangement, or all of its business.

Cost of claims includes:

o the amounts paid to network pharmacies, including mail service
pharmacies, for pharmaceutical claims; and
o reductions resulting from rebates from drug manufacturers.

Rebates accounted for reductions of cost of claims of 1.4%, 1.6% and 2.1%
for the years ended June 30, 1997, 1998 and 1999, respectively, but contributed
approximately 12%, 17% and 20% of total gross profit for the years ended June
30, 1997, 1998 and 1999, respectively. Rebates accounted for approximately 68%,
105% and 87% of income before taxes for the years ended June 30, 1997, 1998 and
1999, respectively. Due to the expected growth and diversification of the
business mentioned above, Health Card also expects rebates, as a percentage of
cost of claims, to increase and continue to account for a significant percentage
of total gross profit and income before taxes. Certain of Health Card's sponsors
are entitled to all or a portion of rebates received by Health Card, which
portion varies by sponsor. For example, until recently, Vytra received all of
the rebates received by Health Card in connection with the Prescription
Arrangement. Health Card currently retains a portion of such rebates. If such
rebate programs were to be discontinued or adversely altered by drug
manufacturers, or if the terms of Health Card's rebate sharing arrangements with
its sponsors were adversely altered, it would have a material adverse effect on
Health Card's business, operating results and financial condition. Health Card's
rebate administrator was recently acquired by one of its competitors and Health
Card is not sure what effect, if any, such acquisition will have on its
business.

Cost of claims are recognized as follows: The contractual obligation of
Health Card to pay for these drugs is recorded as cost of claims at the time of
dispensing of the drug by the pharmacy network. Cost of claims is reduced by the
rebates that Health Card retains net of amounts due to the sponsors and a 10%
fee retained by Integrated as an administrative fee. Rebates are earned from
drug manufacturers based on drugs utilized by plan participants at the time of
dispensing. Health Card's estimated portion of these rebates, which varies by
sponsor, is recorded monthly based upon the claims adjudicated in that month and
Health Card's historical experience as to its rebate per claim for the previous
quarter.

Health Card estimates rebates because it has contracted with a third party,
Integrated, as a rebate administrator, which enters into contracts directly with
the pharmaceutical manufacturers in connection with its arrangements with a
number of pharmacy benefit managers, HMOs and other plan sponsors. Pursuant to
Health Card's agreement with Integrated, Health Card has entered into agreements
which obligate it to the terms of Integrated's agreements with pharmaceutical
manufacturers. Health Card does not participate in the negotiation of such
agreements; therefore, Health Card cannot control the level of market share
minimums required and the amounts of rebates provided for in future contracts
between Integrated and drug manufacturers.

38

Because Integrated may combine rebate claims for drugs used by Health
Card's sponsor's plan participants with the claims of others, and the level of
rebates in some of the agreements with the drug manufacturers is computed based
on achieving market share minimums calculated on a quarterly basis, Health Card
does not have the information to calculate precisely the amount of rebates due
at the time quarterly or annual financial statements are prepared. Market share
is generally defined as the percentage of utilization of a certain drug or drugs
within its therapeutic class. Historically, this market share has been very
predictable and consistent with the prior quarter.

Health Card has been advised by its rebate administrator that none of the
rebate administrator's contracts with pharmaceutical companies contain any
contingencies based on annual performance. Based upon the foregoing, management
of Health Card believes that there are no known contingencies arising under the
agreement with Integrated that could result in a material forfeiture of revenue
previously recognized.

There may be a difference between the estimated rebate amount and the
ultimate amount paid because Health Card is not basing its accrual on the
individual contracts with pharmaceutical manufacturers, but rather on the number
of claims processed each period and Health Card's historical experience as to
Health Card's rebate per claim for the previous quarter. Historically, there
have been slight differences between the amount accrued and the amount
ultimately paid. The amount that Integrated estimates is based on its
calculations and submissions to the pharmaceutical manufacturers, but the
ultimate collections by it may also vary slightly, when it receives final
payment from the pharmaceutical manufacturers, based on further analysis or
differing national market share data, which is not calculated by Health Card.

Due to changing market conditions and competition, it is possible that the
percentage of rebates retained by Health Card based on its arrangements with the
sponsors may change when these arrangements expire and may be lower in
arrangements with new sponsors. Any such change in the percentage of rebates
retained and recorded as a reduction of cost of claims could have a material
adverse effect on Health Card's business, operating results and financial
condition.

Under the contract, Integrated remits to Health Card 80% of its estimate of
the total amount to be collected 120 days after the end of the quarter.
Management believes it is common industry practice for rebate administrators not
to advance funds until collected from the pharmaceutical manufacturers, which
can take significantly longer than 120 days. Integrated's estimate is compared
and reconciled to the Company's estimate. Historically this has resulted in
immaterial increases to the amount of rebates recognized. The remaining 20% is
collected over the next few quarters, and remitted to Health Card by Integrated
as it collects funds from the manufacturers.

Credit risk relating to the rebates receivable is evaluated based on the
financial strength of the rebate administrator and the drug manufacturers.
Health Card believes that most of the drug manufacturers are Fortune 500
companies. Health Card does not believe a credit risk reserve is necessary.

39

The prescription benefit management industry is intensely competitive,
generally resulting in continuous pressure on Health Card's gross profit as a
percentage of total revenue. In recent years, industry consolidation and
dramatic growth in managed healthcare have led to increasingly aggressive
pricing of prescription benefit management services. Given the pressure on all
parties to reduce healthcare costs, Health Card expects this competitive
environment to continue for the foreseeable future.

Health Card plans to continue its internal growth through increased
marketing of its services and by expanding the range of services offered,
particularly to include value added consulting and information-based services
which Health Card believes to be in growing demand within the healthcare
industry. In addition, Health Card intends to use a large portion of the
proceeds of the public offering described below to supplement its internal
growth by making acquisitions of other prescription benefit management service
providers. Health Card expects such acquisitions, if any, to result in increased
revenue and rebates in future periods.

Public Offering

On August 2, 1999, Health Card completed the sale of 1,600,000 shares of
its common stock in an underwritten public offering (the "Public Offering").
Pursuant to the Public Offering, Health Card received net proceeds of
approximately $10,890,200. Concurrently, the Bert E. Brodsky Revocable Trust
(the "Brodsky Trust") sold 400,000 shares of common stock of Health Card in an
underwritten offering. Of the proceeds received by the Brodsky Trust, it used
approximately $1,992,900 to repay to Health Card, in part, certain indebtedness
owed by certain affiliates of the Brodsky Trust to Health Card. See Item 13
hereof.

Results of Operations

Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998

Revenues increased $35.5 million, or approximately 36%, from $98.5 million
for the fiscal year ended June 30, 1998 to $134 million for the fiscal year
ended June 30, 1999. The increase resulted primarily from a $6.8 million
increase in fees related to the increase in the number of plan participants
under an arrangement with one of Health Card's major sponsors and includes
approximately $500,000 in additional revenue recorded in September 1998 when the
amount of the adjustment became determinable, upon Health Card receiving verbal
acceptance of the calculation under the provisions of the arrangement to adjust
for the increased cost of drugs primarily related to the prior year. Claims
under the plan of another major sponsor increased by 190,190 claims which
resulted in an increase in revenues of approximately $8.3 million. The remaining
increase of approximately $20.4 million was due primarily to other existing
sponsors as a result of higher charges relating to pharmaceuticals, new drugs,
plan participant growth and an increase in the average number of claims per plan
participant. New business, as a percentage of revenue growth, increased
throughout the fiscal year ended June 30, 1999. Health Card anticipates that
revenue increases which may occur in the future will more likely be due to the
addition of new sponsors as opposed to increased utilization by existing
sponsors.

40

Cost of claims increased $31.8 million, or approximately 35%, from $89.8
million for the fiscal year ended June 30, 1998 to $121.5 million for the fiscal
year ended June 30, 1999. As a percentage of revenues, cost of claims remained
unchanged at approximately 91%.

Gross profit increased $3.7 million, from $8.8 million for the fiscal year
ended June 30, 1998 to $12.5 million for the fiscal year ended June 30, 1999,
primarily as a result of the increase in revenues, offset by the increase in the
cost of claims.

Selling, general and administrative expenses, which include amounts charged
by affiliates, increased $3 million, or approximately 42%, from $7.2 million for
the fiscal year ended June 30, 1998 to $10.2 million for the fiscal year ended
June 30, 1999. The increase resulted primarily from an increase of $550,000
representing additional reserves against certain receivables. Health Card
evaluated its accounts receivable as of June 30, 1999 taking into consideration
the expiration of certain contracts during the period and the status of
negotiations to renew those contracts. As consideration for the renewal of these
contracts, Health Card determined that it would be necessary to negotiate the
receivable balance due from these contracts and that Health Card most likely
would not be able to collect the full amount. As a result, Health Card estimated
and recorded a reserve for the amount that may not be collectible. In prior
periods, due to the status of these contracts, these additional reserves were
not required based upon Health Card's analysis. The remaining increase in
selling, general and administrative expenses resulted from an increase of
$37,500 in the bad debt reserve, a $170,000 bonus to certain
officers/stockholders, a $360,000 compensation accrual to an officer/stockholder
and a $1.9 million increase in compensation, benefits, sales and marketing and
other expenses related to the expansion of Health Card's business.

General and administrative expenses charged by affiliates decreased $2.1
million, or approximately 43%, from $4.9 million for the fiscal year ended June
30, 1998 to $2.8 million for the fiscal year ended June 30, 1999. The decrease
resulted primarily from a decrease of $2.1 million due to compensation of
employees hired by Health Card who were previously engaged through an affiliated
service vendor and a decrease of $905,000 for software maintenance, offset by
increases of $340,000 for equipment rental, $200,000 for data processing related
charges and $362,000 for other operating expenses.

Other income increased $773,000 from a net expense of $181,000 for the
fiscal year ended June 30, 1998 to income of $592,000 for the fiscal year ended
June 30, 1999, due to a $382,000 increase in interest accrued on a loan due from
an affiliate, a $29,000 increase in interest earned on short term investments of
excess cash balances and a $362,000 decrease in public offering costs.

The provision for income taxes increased $407,000 from $569,000 for the
fiscal year ended June 30, 1998 to $976,000 for the fiscal year ended June 30,
1999, as a result of increased taxable income after utilization of a net
operating loss carryforward in the amount of approximately $595,000.

41

Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30, 1997

Revenues increased $28.1 million, or approximately 40%, from $70.4 million
in fiscal 1997 to $98.5 million in fiscal 1998. The increase resulted primarily
from a $9.6 million increase in fees related to the increase in the number of
plan participants under an arrangement with one of Health Card's major sponsors.
Claims under the plan of another sponsor increased by 217,040 claims which
resulted in an increase in revenues of approximately $8.1 million. The remaining
increase of approximately $10.4 million was due primarily to other existing
sponsors as a result of higher charges relating to pharmaceuticals, new drugs,
plan participant growth and an increase in the average number of claims per plan
participant.

Cost of claims increased $26.5 million, or approximately 42%, from $63.3
million in fiscal 1997 to $89.8 million in fiscal 1998. As a percentage of
revenues, cost of claims increased from approximately 90% in fiscal 1997 to
approximately 91% in 1998, due primarily to a higher number of claims processed,
at a reduced billing rate, under an arrangement with one of Health Card's major
sponsors.

Gross profit increased $1.7 million, from $7.1 million for fiscal 1997 to
$8.8 million for fiscal 1998, as a result of the increase in revenues, offset by
the increase in the cost of claims.

Selling, general and administrative expenses, which include amounts charged
by affiliates, increased $1.3 million, or approximately 22%, from $5.9 million
in fiscal 1997 to $7.2 million in fiscal 1998. The increase resulted primarily
from $881,000 of additional compensation and benefits for personnel required to
process additional claims and to expand Health Card's sales and marketing
efforts. In addition, $321,000 of the increase resulted from increased
administrative, marketing and consulting fees incurred with related parties and
$90,000 of marketing and consulting costs that were incurred with a third-party
consultant. As a percentage of revenues, selling, general and administrative
expenses decreased from 8.3% in fiscal 1997 to 7.3% in fiscal 1998.

General and administrative expenses charged by affiliates increased
$400,000, or approximately 9%, from $4.5 million in fiscal 1997 to $4.9 million
in fiscal 1998. The increase resulted primarily from an increase of $484,000 for
salaries, $78,000 for consulting and $97,000 for miscellaneous expenses, offset
by decreases of $259,000 for software maintenance.

Other income decreased approximately $224,000, from income of $43,000 in
fiscal 1997 to a net expense of $181,000 in fiscal 1998, due to $445,000 of
public offering expenses. This was offset by a $114,000 increase in interest
accrued on stockholder loans, a $30,000 increase in interest accrued on a loan
due from an affiliate and a $77,000 increase in interest earned on short term
investments of excess cash balances.

The provision for income taxes increased $759,000, from a benefit of
$190,000 in fiscal 1997 to an expense of $569,000 in fiscal 1998, as a result of
the increase in taxable income and a decrease in the deferred tax valuation
allowance in the 1997 period.

42

Liquidity and Capital Resources

As of June 30, 1998 and 1999, Health Card had a working capital deficiency
of $8.7 million and $6.7 million, respectively.

Net cash provided by operating activities was approximately $3.5 million,
$922,000 and $1.5 million for the fiscal years ended June 30, 1997, 1998 and
1999, respectively. During fiscal 1998, net cash provided by operating
activities resulted primarily from net income and an increase in accounts
payable, offset by an increase in accounts receivable and due to/from
affiliates. The increases in accounts receivable and accounts payable were due
to an increase in the volume of business. For fiscal 1999, net cash provided by
operating activities resulted primarily from net income and an increase in
accounts payable and accrued expenses, offset by an increase in accounts
receivable. Health Card evaluated its accounts receivable as of June 30, 1999,
taking into consideration the expiration of certain contracts during the period
and the status of negotiations to renew those contracts. As consideration for
the renewal of these contracts, Health Card determined that it would be
necessary to negotiate the receivable balance due from these contracts and that
Health Card most likely would not be able to collect the full amount. As a
result, Health Card estimated and recorded a reserve of $550,000 for the amount
that may not be collectible. In prior periods, due to the status of these
contracts, these additional reserves were not required based upon Health Card's
analysis.

Historically, the timing of Health Card'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 Health Card's pharmacy network on the other hand. These terms generally lead
to Health Card's payments to participating pharmacies being slower than its
corresponding collections from plan sponsors. Health Card believes that this
situation is not unusual in the prescription 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, Health Card could require additional financing.
There can be no assurance that such financing could be obtained at rates or on
terms acceptable to Health Card, if at all.

Net cash used in investing activities amounted to approximately $477,000,
$416,000 and $1.7 million for the fiscal years ended June 30, 1997, 1998 and
1999, respectively. These uses of cash resulted primarily from capital
expenditures, and advances and payments of amounts due to/from stockholders.

Net cash (used in) provided by financing activities amounted to
approximately ($1.2 million), ($983,000) and $1.7 million for the fiscal years
ended June 30, 1997, 1998 and 1999, respectively. These uses of cash resulted
primarily from capital distributions and repayment of debt. The cash provided
for financing activities for fiscal 1999 resulted primarily from 340,919 shares
of common stock purchased for $2 million by the principal stockholder.

43

In February 1998, Health Card entered into an agreement with an
unaffiliated third party for computer software products and professional
services. The agreement required Health Card to pay an initial license fee of
$400,000, of which $100,000 was paid upon execution of the agreement and $25,000
paid monthly through March 1999. In addition, if certain milestones are met,
based on the number of processed claims, as defined, the initial license fee
increases incrementally by up to an additional $500,000 over the term of the
license. A milestone has been met which has increased the initial license fee by
$150,000 due to increased annualized volume of claims processed. The agreement
also provides for the monthly payment of a fee for maintenance and updating
services aggregating annually to 18% of the initial license fee, as defined.

The registration statement for Health Card's Public Offering became
effective on July 28, 1999 and Health Card consummated the Public Offering on
August 2, 1999. Health Card received net proceeds of $12,883,100 in connection
with the Public Offering (inclusive of $1,992,900, in partial satisfaction of
indebtedness owed by affiliates of Health Card, from net proceeds received by
the Brodsky Trust). See Item 13 hereof.

Health Card anticipates that the net proceeds of the Public Offering and
the repayment of certain affiliate and shareholder debt, together with
anticipated cash flow from operations, will be sufficient to satisfy Health
Card's contemplated cash requirements for at least 24 months following the end
of fiscal 1999. This is based upon current levels of capital expenditures and
anticipated operating results for the next 24 months. Alternatively, revolving
credit lines and debt financing are being evaluated as backups to anticipated
cash needs. Additionally, effective June 1, 1998, Health Card hired 11
programmers, at lower costs than previously charged by an affiliate which
provided software development consulting services to Health Card. The primary
difference in cost resulting from hiring the programmers is an administrative
fee of approximately 7% which had been charged by the affiliate based on
compensation and related costs. Health Card believes this will further increase
cash flow. In the event that Health Card's plans change or its assumptions prove
to be inaccurate or the proceeds of the Public Offering otherwise prove to be
insufficient to fund operations and implement Health Card's proposed expansion
strategy, Health Card could be required to seek additional financing sooner than
anticipated.

Other Matters

Inflation

Management does not believe that inflation has had a material adverse
impact on Health Card's net income.

Year 2000 Readiness

The Year 2000 problem is the result of computer programs being written
using two digits, rather than four, to define the applicable year. Programs that
have time-sensitive software may recognize a date using "00" as the Year 1900
rather than the Year 2000, which could result in miscalculations or system
failures. Health Card implemented a Year 2000 compliance review

44

designed to ensure that its computer systems, applications and embedded
operating systems will function properly beyond 1999. This compliance review
involved assessing the risks of the Year 2000 issue, and planning and
instituting mitigation actions to minimize those risks. Health Card's standard
for compliance requires that, for a computer system or business process to be
Year 2000 compliant, it must be designed to operate without error in date and
date-related data prior to, on and after January 1, 2000. Health Card believes
that all of its "mission critical" systems have been identified, and has
completed compliance testing.

Health Card has participated with the National Health Information Network
in the NHIN Y2K Processor Testing Program which is designed to test the Year
2000 compliance of pharmacy software. Chain pharmacy and member information was
submitted to NHIN and NHIN submitted claim data to test Health Card's
compliance. NHIN acted as a pharmacy and transmitted claims to NDC, which is
Health Card's switch vendor. Health Card set its clocks and dates to simulate
the Year 2000 and leap year within the Year 2000. Health Card has received
certification in all appropriate submission and reconciliation formats.

Information Technology Systems

Health Card recently completed a comprehensive review of its information
technology systems and has updated its information systems and applications in
preparation for the Year 2000. Health Card has incurred, and may be expected to
continue to incur, internal staff costs as well as outside consulting and other
expenditures related to this initiative. Historical and anticipated expenditures
related to remediation, testing, conversion, replacement and upgrading system
applications in connection with the Year 2000 problem are expected to total
approximately $100,000. Total expenses, including depreciation and amortization
of new package systems, are not expected to have a material impact on Health
Card's financial condition during the conversion process. Year 2000 costs are
expensed as incurred.

Non-IT Technology

An inventory and assessment of all non-IT systems (including items
containing embedded chips, such as elevators, electronic door locks, telephones)
has been completed. The great majority of these non-IT systems are not believed
to be potential sources of significant disruption, although the contingency
plans (described below) will address non-IT Year 2000 failure as well as IT
systems failure. Health Card's telephone system was determined to be the only
non-IT system not Year 2000 compliant. A new system was purchased and installed
and certified to be Year 2000 compliant by the vendor.

Health Card's management has developed a "worst-case scenario" with respect
to Year 2000 non-compliance and contingency plans designed to minimize the
effects of such scenario. The contingency plans involve analysis of the use of
alternative, non-IT methods of processing claims, including manual processing,
in the event of IT system failure on the part of outside parties. The manual
processing of claims would also be assisted, in a worst case scenario, by the
use of paper

45

claim forms rather than the computer formats currently being used. As to claims
management, the worst case scenario would require that another switching company
be used to process claims. This option has already been researched and
contingency plans formulated. Switching companies electronically route pharmacy
claims to the appropriate prescription benefit management company. Health Card
is currently testing its switching network. One major vendor of claims
management services with which Health Card does business, PHI, has certified
that software licensed from it is Year 2000 compliant. All client formats have
been reviewed and have been found to be either Year 2000 compliant or very
nearly so. There has also been communication between vendors and Health Card
with respect to the exchange of billing tape formats, in an effort to be certain
that Health Card's formats are acceptable to the vendors, and vice versa.

Health Card is attempting to contact vendors and others on whom it relies
to assure that their systems will be converted in a timely fashion. However,
there can be no assurance that the systems of other companies on which Health
Card's systems rely will also be converted in a timely fashion, so that any such
failure to convert by another company would not have an adverse effect on Health
Card's information systems. Furthermore, no assurance can be given that any or
all of Health Card's information systems are or will be Year 2000 compliant, or
that the ultimate costs required to address Year 2000 issues or the impact of
any failure to achieve substantial Year 2000 compliance will not have a material
adverse effect on Health Card's business, operating results and financial
condition.

There is still uncertainty about the broader scope of the Year 2000 issue
as it may affect Health Card and third parties that are critical to its
operations. For example, lack of readiness by electrical and water utilities,
financial institutions, governmental agencies or other providers of general
infrastructure could pose significant impediments to Health Card's ability to
carry on its normal operations. In the event that Health Card is unable to
complete its remedial actions and is unable to implement adequate contingency
plans in the event that problems are encountered, there could be a material
adverse effect on its business, operating results and financial condition.

Recent Pronouncements

In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards.

Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"),
Reporting Comprehensive Income, establishes standards for reporting and display
of comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.

Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
Disclosures about Segments of an Enterprise and Related Information, which
supersedes SFAS No. 14, Financial

46

Reporting for Segments of a Business Enterprise, establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas, and major customers. SFAS No. 131 defines operating segments
as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.

Both of these new standards are effective for financial statements for
years beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Health Card's financial position, results of
operations and disclosures were unaffected by the implementation of these new
standards.

In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 ("SFAS No. 132"), Employers'
Disclosure about Pensions and Other Postretirement Benefits, which standardized
the disclosure requirements for pensions and other postretirement benefits. The
adoption of SFAS No. 132 in 1998 is not expected to materially impact Health
Card's current disclosures.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Investments
and Hedging Activities Income ("SFAS No. 133"), which requires the recording of
all derivative instruments as assets or liabilities measured at fair value.
Among other disclosures, SFAS No. 133 requires that all derivatives be
recognized and measured at fair value regardless of the purpose or intent of
holding the derivative.

SFAS No. 133 is effective for financial statements for years beginning
after June 15, 1999. Health Card has no derivative investments and does not
participate in hedging activities; therefore, its financial position, results of
operations and disclosures will be unaffected by the adoption of this standard.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The audited financial statements of Health Card as of June 30, 1999 and
1998 and for the years ended June 30, 1999, 1998 and 1997 are included in this
Form 10-K following Item 14 hereof.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

47

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Executive Officers and Directors

Certain information concerning the executive officers and Directors of
Health Card is set forth below:

Name Age Positions Held

Bert E. Brodsky..................... 56 Chairman of the Board and Chief
Executive Officer
Gerald Shapiro...................... 69 Vice Chairman of the Board and
Secretary
Marjorie G. O'Malley................ 49 President and Chief Operating
Officer
Linda Portney....................... 54 Executive Vice President of
Operations
Mary Casale......................... 60 Executive Vice President of
Sales and Marketing
Barry Denaro........................ 43 Treasurer and Chief Financial
Officer
Kenneth J. Daley.................... 61 Director
Richard J. Strauss, M.D., F.A.C.S... 53 Director
Gerald Angowitz..................... 49 Director

Bert E. Brodsky has served as Chairman of the Board of Health Card since
December 7, 1998, and as Chief Executive Officer since June, 1998. Mr. Brodsky
has at various times since 1983 served as Chairman of the Board, President and a
Director of Health Card. Mr. Brodsky has served as Chairman of the Board and
Treasurer of Sandata, Inc., a provider of computerized data processing services
and custom software and programming services, since June 1983 and as President
of Sandata since December 1989. Sandata's shares of common stock are publicly
traded. From October 1983 though December 1993, Mr. Brodsky served as Chairman
of the Board of Compuflight, Inc., a provider of computerized flight planning
services. Since August 1980, Mr. Brodsky has served as Chairman of the Board and
President of P.W. Medical Management, Inc., which provides financial and
consulting services to physicians. For more than the past five years, Mr.
Brodsky has also served as President of P.W. Capital Corp., a consulting
services firm, Chairman of Sandsport Data Services, Inc., a computer services
firm and wholly-owned subsidiary of Sandata, President of Brodsky Sibling
Realty, Inc., a real estate company, and President of Document Storage and
Management, Inc., a document storage company. Mr. Brodsky has also been
Operating Manager of BFS Realty, LLC, a real estate company, since October 1996,
BFS Realty II, LLC, a real estate company, since November 1996 and Four B's
Realty, LLC, a real estate company, since July 1996. See Item 13 hereof.

48

Gerald Shapiro has served as Vice Chairman of the Board of Health Card
since December 7, 1998. Mr. Shapiro has also served as Secretary since October
28, 1998. From June 1, 1998 until December 7, 1998, Mr. Shapiro served as
Chairman of the Board. From February 4, 1998 until June 1, 1998, Mr. Shapiro
served as Health Card's Vice Chairman. For more than the past five years, Mr.
Shapiro has served as a consultant to Sandata, President of Lee Management
Associates, Inc., a physician billing and consulting firm, Chairman and
Treasurer of Mediclaim, Inc., a physician billing and consulting firm, President
of Brookhaven M.R.I., Inc., a company that operates magnetic resonance imaging
machines, Vice President of Mobile Health Management Services, Inc., a provider
of medical screening services, and Treasurer of Document Storage and Management,
Inc. From 1973 to 1978, Mr. Shapiro served as President of Ally & Gargano, Inc.,
an advertising agency, and from 1971 to 1973 he was President of Hertz
Corporation.

Marjorie G. O'Malley has served as President and Chief Operating Officer of
Health Card since December 7, 1998. From July 1995 to December 1998, Ms.
O'Malley was the Principal of Strategic Healthcare Consultants, a consulting
firm to various health care companies, pharmacy benefit managers, pharmacy
chains and pharmaceutical companies. Ms. O'Malley served as a consultant to
Health Card from July 1995 to July 1998. From 1980 until July 1995, Ms. O'Malley
was employed by CIGNA Corporation in a variety of positions. Ms. O'Malley formed
and served as President of RxPrime, CIGNA Corporation's pharmacy benefit
management business, from 1993 until July 1995. From 1990 to 1993, Ms. O'Malley
was Vice President, Finance and Planning for CIGNA HealthCare, one of the
largest health care management organizations in the United States. Prior to
joining CIGNA Corporation, Ms. O'Malley served as Senior Vice President and
Treasurer of Old Stone Bank and Old Stone Corporation, a bank holding company.

Linda Portney has served as Executive Vice President of Operations of
Health Card since June 1998. Ms. Portney served as a Director of Health Card
from 1982 until May 1999, and as Secretary of Health Card from June 26, 1998
until October 28, 1998. From 1995 until December 1998, Ms. Portney served as
President of Health Card, and as Vice President and Secretary of Health Card
from 1983 to 1995. Ms. Portney has been employed by Health Card since 1981.

Mary Casale has served as Executive Vice President of Sales and Marketing
of Health Card since June 1, 1998. She served as a Vice President of Health Card
from March 1996 to June 1, 1998. Ms. Casale previously served as Vice President
of Managed Care Sales and Union Related Accounts at ValueRx, a prescription
benefit management company, from March 1995 to February 1996, Vice President of
Sales for the Eastern Region at Diagnostek, Inc., a prescription benefit
management company that was acquired by ValueRx, from August 1994 to March 1995,
National Vice President of Customer Development for Sales and Marketing at
Diagnostek from January 1994 to August 1994 and a consultant for special
accounts for Sales and Marketing at Diagnostek from 1989 to 1993.

Barry Denaro has served as Chief Financial Officer for Health Card since
June 1997 and as Treasurer for Health Card since February 1998. Mr. Denaro
served as Controller of NDA Clinical

49

Trial Services Inc., a provider of laboratory testing and data collection for
clinical drug trials, from April 1996 through November 1996 and served as
Controller of North Shore Agency, a collection agency, from October 1993 through
July 1995. Mr. Denaro is an attorney licensed to practice in New York State and
a certified public accountant.

Kenneth J. Daley has served as a Director of Health Card since May 10,
1999. For more than the five years prior to January 1999, Mr. Daley served as
Senior Vice President of Chase Manhattan Bank.

Richard J. Strauss, M.D., F.A.C.S. has served as a Director of Health Card
since June 26, 1998. Since 1979, Dr. Strauss has owned and operated the medical
practice of Richard J. Strauss, M.D., P.C. Dr. Strauss also has served as an
Associate Clinical Professor of Surgery at Albert Einstein College of Medicine
since 1990, and as an Instructor of Clinical Surgery at Cornell Medical Center
since 1978.

Gerald Angowitz has served as a Director of Health Card since June 26,
1998. Mr. Angowitz has served as Senior Vice President of Human Resources and
Administration for RJR Nabisco, Inc. ("RJR"), a consumer products manufacturer,
since March 1995. Mr. Angowitz previously served as Vice President of Human
Resources for RJR from February 1994 to March 1995 and Vice President of
employee benefits at RJR from January 1992 to February 1994. Mr. Angowitz is the
brother-in- law of Hugh Freund, a Vice President, Secretary, principal
stockholder and Director of Sandata.

Each of Health Card's Directors is elected for a period of one year and
serves until his successor is duly elected and qualified. During the last three
fiscal years, no Directors' fees were paid. Each of the executive officers
serves at the pleasure of Health Card's Board of Directors.

Section 16(a) Beneficial Ownership Reporting Compliance

During the fiscal year ended June 30, 1999, none of Health Card's
securities were registered pursuant to Section 12 of the Securities Exchange Act
of 1934, as amended. Accordingly, no reports as to beneficial ownership of
Health Card's securities were required during such fiscal year by Health Card's
officers, Directors or 10% stockholders.

Item 11. EXECUTIVE COMPENSATION.

Summary Compensation Table

The following table sets forth certain information with respect to the
compensation paid or awarded by Health Card to the Chief Executive Officer and
other executive officers, as well as a certain other officer (collectively, the
"Named Executive Officers"), whose salary and bonus exceeded $100,000 in all
capacities for the fiscal year ended June 30, 1999:

50

Annual Compensation Long-Term Compensation
Awards
----------------------
Other Annual Securities
Name and Principal Position Year Salary Bonus Compensation Underlying Options
- --------------------------- ---- ------ ----- ------------ ----------------------

Bert E. Brodsky, Chairman of the

Board and Chief Executive Officer........ 1999 $403,867(1) $487,500(2) $90,717(3) --
1998 $751,096(1) $ 30,000(2) $47,377(3) --
1997 $474,000(1) -- $13,714(3) --

Linda Portney, Executive Vice
President of Operations ................. 1999 $125,000 -- $20,027(4) --
1998 $125,000 -- $19,514(4) --
1997 $125,000 $ 50,000 $13,828(4) --

Mary Casale, Executive Vice
President of Sales and Marketing ....... 1999 $100,000 $103,300(5) $ 4,800(6)(7) --
1998 $100,000 $ 50,031(5) $ 4,800(6)(7) 255,689(8)
1997 $100,000 $ 15,000(5) $ 4,800(6) --

Kenneth Hammond, Vice President
of Operations .......................... 1999 $103,135 $ 10,250 -- --
1998 $100,327 -- -- --
1997 $ 13,462(9) -- -- --
- ------------------

(1) Represents salary and consulting fees paid to certain entities affiliated
with Mr. Brodsky. See Item 13 hereof.

(2) Includes an accrued bonus of $360,000 for 1999 and $30,000 for 1998. This
bonus was approved by the Board of Directors on June 1, 1998.

(3) Includes automobile lease payments and life insurance premiums to an entity
affiliated with Mr. Brodsky. See Item 13 hereof.

(4) Represents automobile lease payments to an entity affiliated with Mr.
Brodsky and amounts for automobile insurance and travel allowance.

(5) Represents $0, $15,000 and $15,000 in bonus and $103,300, $35,031 and $0 in
commissions for the fiscal years ended June 30, 1999, 1998 and 1997,
respectively. Pursuant to Ms. Casale's current arrangement with Health
Card, she is entitled to commissions as follows: .5% of gross revenues
received from direct accounts sold and .25% of gross revenues received from
accounts sold by sales people under her management.

(6) Represents automobile allowances paid to Ms. Casale.

51

(7) Does not include annual payments of $20,400 made by Health Card for the
lease of an apartment for the benefit of Ms. Casale and Marjorie G.
O'Malley.

(8) Includes a currently unexercisable option granted by Mr. Brodsky on July 1,
1997 to purchase an aggregate of 255,689 shares of Health Card common stock
from Mr. Brodsky at a price of $5.87 per share. Such option vests in
increments of 20% on the second, third, fourth, fifth and sixth
anniversaries of such option, respectively, and must be exercised, if at
all, within one year after the termination of Ms. Casale's employment with
Health Card, or by July 1, 2005, whichever is earlier.

(9) Represents amounts paid to Mr. Hammond from the commencement of his
employment with Health Card on April 28, 1997 until June 30, 1997.

Marjorie G. O'Malley, Health Card's President and Chief Operating Officer,
has served in such capacity since December 7, 1998. Ms. O'Malley's current
annual salary is $175,000. Beginning with the fiscal year ending June 30, 2000,
Ms. O'Malley is entitled to participate in a bonus pool allocated for senior
executives equal to 15% of any increase in pre-tax profits over the prior year.
In addition, on December 7, 1998, Mr. Brodsky granted an option to Ms. O'Malley
to purchase 63,922 shares of Health Card common stock from Mr. Brodsky at a
price of $5.87 per share. Such option vests in one-third increments on the
first, second and third anniversaries of such option, respectively, and must be
exercised, if at all, within one year from the date of the termination of Ms.
O'Malley's employment with Health Card, or by December 7, 2002, whichever is
earlier.

John T. Ciufo, Health Card's Vice President of Clinical Services, has
served in such capacity since December 1998. Mr. Ciufo's current annual salary
is $130,000. Mr. Ciufo is also entitled to participate in the bonus pool
beginning with the fiscal year ending June 30, 2000. In addition, on December 7,
1998, Mr. Brodsky granted an option to Mr. Ciufo to purchase 25,569 shares of
common stock of Health Card from Mr. Brodsky at a price of $5.87 per share. Such
option vests in one-third increments on the first, second and third
anniversaries of such option, respectively, and must be exercised, if at all,
within one year from the date of the termination of Mr. Ciufo's employment, or
by December 7, 2003, whichever is earlier.

Option/SAR Grants in Last Fiscal Year

There were no individual grants of stock options or stock appreciation
rights to any Named Executive Officer during the fiscal year ended June 30,
1999.

52

Aggregated Option Exercises in Fiscal Year Ended June 30, 1999 and Fiscal
Year-End Option Values

Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money Options
Number of Options at Fiscal at Fiscal Year End
Shares Acquired Value Year End Exercisable /
Name on Exercise Realized Exercisable/Unexercisable Unexercisable
- ---- ----------- -------- ------------------------- -------------

Bert E. Brodsky -0- - - 0 - / - 0 - - 0 - / - 0 -
Linda Portney -0- - - 0 - / - 0 - - 0 - / - 0 -
Mary Casale -0- - - 0 - / 255,689 - 0 - / $416,773
Kenneth Hammond -0- - - 0 - / - 0 - - 0 - / - 0 -

Employment Contracts, Termination of Employment and Change-in-Control
Arrangements

Except as described below, there are no written employment or similar
agreements with any of the Named Executive Officers. See Item 13 hereof for a
discussion of certain fees paid and payable to Mr. Brodsky.

Mr. Brodsky agreed with Health Card that, effective with the consummation
of the Public Offering, he was entitled to receive, as the total compensation
payable to him and his affiliates for services rendered by Mr. Brodsky in his
capacity as Chairman of the Board and Chief Executive Officer of Health Card, an
annual salary of $200,000 plus a bonus and annual adjustments to be determined
by the Board of Directors.

Pursuant to an agreement dated April 14, 1994 with P.W. Medical Management,
Inc. and assigned to P.W. Capital Corp., P.W. Capital provides services in
connection with the day-to-day activities of Health Card, including marketing,
customer service, financial advice and general business advice. Fees payable to
P.W. Capital are a minimum of $25,000 per year, payable in monthly installments.
Currently actual fees are being paid at the rate of approximately $58,000 per
month, although no assurance can be given that such amount will not be higher
for any particular month or months. Although the agreement has no specified
term, if either P.W. Capital or Health Card fails materially to fulfill its
obligations under the agreement, following notice and an opportunity to cure,
the other party has the right to terminate this agreement. P.W. Capital and
Health Card agreed that, upon the effectiveness of the employment agreement
discussed below, this agreement would terminate.

Pursuant to an Employment Agreement effective July 1, 1999, Mr. Brodsky has
agreed to serve as Health Card's Chairman of the Board and Chief Executive
Officer at an annual salary of $200,000, subject to adjustment by the Board of
Directors. This agreement has a term of two years, unless terminated by Health
Card for cause, or in the event Mr. Brodsky becomes permanently disabled. The
agreement provides for certain fringe benefits payable to or on behalf of Mr.
Brodsky, such as the use of a car. In addition, the agreement provides for
certain termination benefits payable to Mr. Brodsky, which, depending upon the
reason for termination, can be equal to up to two years salary. It is
anticipated that Mr. Brodsky may devote a portion of his business time to
business affairs unrelated to

53

Health Card, provided that such activities do not prevent him from fulfilling
his obligations under the agreement. The agreement does not quantify the amount
of time that Mr. Brodsky must devote to Health Card. However, it is contemplated
that Mr. Brodsky will devote a substantial portion of his business time to the
affairs of Health Card.

Ms. O'Malley, Ms. Portney, Ms. Casale, Mr. Ciufo and Mr. Hammond are
employed by Health Card pursuant to letters, employee covenant agreements and/or
confidentiality and non-disclosure agreements reflecting the compensation terms
described under Item 11 hereof and/or restricting the employee from engaging in
certain competitive activity and/or disclosing certain information.

Compensation Committee Interlocks and Insider Participation

Until May 10, 1999, Health Card did not have a Compensation Committee or
other committee of the Board of Directors performing similar functions.
Decisions concerning the compensation of executive officers were made by the
Board of Directors.

Effective May 10, 1999, Health Card established a Compensation Committee
consisting of Messrs. Shapiro and Angowitz and Dr. Strauss. The Compensation
Committee is responsible for making recommendations to the Board of Directors
regarding compensation arrangements for executive officers of Health Card,
including annual bonus compensation, and consults with management of Health Card
regarding compensation policies and practices. The Compensation Committee also
makes recommendations concerning the adoption of any compensation plans in which
management is eligible to participate, including the granting of stock options
or other benefits under such plans. Within 90 days following the consummation of
the Public Offering, it is anticipated that Mr. Daley will replace Dr. Strauss
on such committee.

Gerald Shapiro, the Vice Chairman of the Board of Directors of Health Card,
and Bert E. Brodsky, Health Card's Chairman of the Board and Chief Executive
Officer, are each members of the Board of Directors and/or officers of the
following companies (unless otherwise stated, such affiliations have been
maintained for more than the past five years): (i) P.W. Capital Corp., a
consulting services firm (Mr. Brodsky since June 1996 and Mr. Shapiro since
October 1994), (ii) Brookhaven M.R.I., Inc., a company that operates magnetic
resonance imaging machines, (iii) Mobile Health Management Services, Inc., a
provider of medical testing services, (iv) 780 Bay Walk Land Co., Inc., a real
estate company (since August 1994), (v) Accutrak Media, Inc., a computer
duplication disk company, (vi) Bert Brodsky Associates, Inc., an insurance
consulting firm (since February 1996), (vii) Island Mermaid Restaurant Corp., a
company that operates a restaurant, (viii) Wilder Woods Estates, LLC, a real
estate company (since April 1997), (ix) Document Storage and Management Inc., a
document storage company (since 1994), (x) Lee Management Associates, Inc., a
billing and collections firm, (xi) United States Information Corp., a facsimile
subscription service company, and (xii) Medical Arts Office Services, Inc., a
company that provides personnel and administrative services (since November
1998). See Item 13 hereof.

54

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth certain information, as of August 31, 1999,
concerning the beneficial ownership of Health Card's common stock for:

o each person who is known by Health Card to be the beneficial
owner of more than five (5%) percent of Health Card's shares of
common stock,
o each of the Named Executive Officers,
o each of Health Card's Directors, and
o all of Health Card's executive officers and Directors as a group.

Except as otherwise indicated below, each of the entities or persons named in
the table has sole voting and investment power with respect to all shares of
common stock beneficially owned.

Approximate
Number of Shares Percentage of
of Common Stock Outstanding Shares
Name and Address (1) Beneficially Owned of Common Stock
- -------------------- ------------------ -------------------

Bert E. Brodsky..................... 4,051,164(2) 55.4%(2)
Irrevocable Trust of David
C. Brodsky........................ 383,559 5.5%
Gerald Shapiro...................... 383,534 5.5%
Linda Portney....................... 219,162 3.2%
Mary Casale......................... 51,138(3) *
Kenneth Hammond - -
Kenneth J. Daley.................... 3,334(4) *
Richard J. Strauss, M.D.,
F.A.C.S........................... 3,334(4) *
Gerald Angowitz..................... 3,334(4) *
All executive officers and
Directors as a group (9 persons).. 4,716,667(2)(3) 67.6%(2)(3)
__________________ (4)(5) (4)(5)

* Less than 1%.

(1) The address of each person named in the table is c/o National Medical
Health Card Systems, Inc. at 26 Harbor Park Drive, Port Washington, New
York 11050.

(2) Includes (i) an aggregate of 965,585 shares of common stock beneficially
owned by Mr. Brodsky's children's trusts, of which Mr. Brodsky is a
trustee, (ii) 100,000 shares of common stock beneficially owned by the Bert
E. Brodsky Revocable Trust, of which Mr. Brodsky's wife is the trustee, and
(iii) 1,725 shares of common stock beneficially owned by P.W. Capital
Corp., of which Mr. Brodsky is President. Includes an aggregate of 345,179
shares of common stock

55

subject to options granted to certain executive officers of Health Card,
including those referred to in note (3) below. See Item 11 hereof.

(3) Includes 51,138 shares of common stock subject to options that are
currently exercisable. Does not include an aggregate of 204,551 shares of
common stock subject to currently unexercisable options.

(4) Includes for each of Mr. Daley, Dr. Strauss and Mr. Angowitz 3,334 shares
of common stock subject to options that are currently exercisable. Does not
include for each of them 6,666 shares of common stock subject to currently
unexercisable options.

(5) Includes 1,667 shares of common stock subject to options that are currently
exercisable. Does not include an aggregate of 3,333 shares of common stock
subject to currently unexercisable options.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

From time to time, Mr. Brodsky and his affiliates have engaged in numerous
transactions with Health Card.

Health Card's Relationship with Sandata

On June 1, 1998, Health Card entered into an agreement with Sandata, Inc.,
of which Mr. Brodsky is the Chairman of the Board, President, Treasurer and a
principal stockholder. This agreement, which was amended on the same date,
relates to the hiring of 11 employees of Sandata by Health Card to provide
development, enhancement and maintenance of Health Card's information systems
internally. Health Card paid Sandata $208,000 in consideration for Sandata's
assigning to Health Card certain rights relative to such employees. Health Card
also assumed a liability of $86,000 relating to these employees. Sandata,
through its subsidiaries, is expected to continue to provide consulting services
related to Health Card's information systems, on such terms and conditions as
may be agreed to between the parties from time to time. Also, Sandata confirmed
Health Card's proprietary rights in certain software developed by Sandata for
Health Card, among other things.

A significant portion of Health Card's information systems has historically
been developed, enhanced, modified and maintained by Sandsport Data Services,
Inc., a wholly-owned subsidiary of Sandata. Furthermore, Health Card leases
computer hardware for its data processing center at a monthly cost of
approximately $33,000 (as of the date of this Form 10-K) from Sandsport pursuant
to an oral agreement, terminable at will by either party. Management of Health
Card believes that the terms of such lease are as fair to Health Card as those
that could be obtained from an unaffiliated third party, although no independent
fee quotes have been obtained. Prior to November 1998, a significant portion of
Health Card's data processing needs were provided by an unaffiliated company.
Starting in July 1998, Health Card obtained equipment under an oral month to
month operating lease with Sandsport to enable it to perform its own data
processing requirements. Lease payments under this lease for the fiscal year
ended

56

June 30, 1999 totaled $350,287 and were paid at a monthly rate of approximately
$22,000 for two months, $24,000 for five months and are currently $32,857 per
month.

The Company purchased new furniture and fixtures from Sandata during the
fiscal year ended June 30, 1999 for approximately $236,000 in connection with
Health Card's new customer service center. The price included a 20% purchasing
and handling fee relating to unpacking, assembling and configuring of such
furniture and fixtures.

During the fiscal years ended June 30, 1997, 1998 and 1999, Health Card
incurred fees to Sandsport in the aggregate amounts of approximately $2,360,000,
$2,492,299 and $1,617,611, respectively. As of June 30, 1999, Health Card owed
$549,482 to Sandsport.

Employee Management Relationship with Medical Arts Office Services, Inc.

Medical Arts Office Services, Inc. may be deemed an affiliate of Health
Card. Certain persons employed by companies affiliated with Mr. Brodsky are also
officers and Directors of Medical Arts, of which Mr. Brodsky is the sole
shareholder.

Medical Arts provides Health Card with paralegal, bookkeeping and
administrative services (including payroll processing) pursuant to an oral
agreement, terminable at will by either party.

During the fiscal year ended June 30, 1999, the total payments made by
Health Card to Medical Arts were approximately $237,307, of which $75,000 was
paid for bookkeeping services, $60,423 was paid for paralegal services and
$101,884 was paid for administrative services.

The hourly rates charged by Medical Arts for such services currently are as
follows: paralegal services at $90 per hour, bookkeeping services at $6,250 per
month, and administrative services at various rates per hour depending upon the
provider of the service. Management believes that the hourly rates charged by
Medical Arts are as fair to Health Card as those that could be obtained from an
unaffiliated third party, although no independent fee quotes have been obtained.

Consulting Fees

For the fiscal year ended June 30, 1999, Health Card paid aggregate
consulting fees to P.W. Capital of $353,867 for services rendered by Mr.
Brodsky.

Prior to the consummation of the Public Offering, in consideration of
consulting fees, Mr. Brodsky provided managerial expertise and advice, including
but not limited to advice regarding hiring of executive management and other
personnel, marketing and sales matters, and negotiation of contracts with
sponsors and other parties. Mr. Brodsky's services were rendered in his
capacities as Chairman of the Board of Directors and Chief Executive Officer.
Pursuant to an agreement with Mr. Brodsky, payment of the above consulting fees
ceased upon consummation of the Public Offering and, in consideration of the
provision of such executive services, Mr. Brodsky began to receive, and
continues

57

to receive, remuneration as an employee of Health Card. See Item 11 hereof.

In addition, during the fiscal year ended June 30, 1999, Health Card paid
P.W. Capital $25,467 representing lease payments for cars leased for Mr.
Brodsky's benefit.

Real Estate

Health Card occupies approximately 14,600 square feet of space at 26 Harbor
Park Drive, Port Washington, New York under an amended lease at a monthly cost
of $31,000 (including utilities). The lessor is BFS Realty, LLC, which is
affiliated with Mr. Brodsky. The lease expires as of March 30, 2004. Rent under
the lease increases by 5% annually. The BFS lease was assigned by Sandata to BFS
in November 1996. Mr. Brodsky is the Operating Manager and holder of a majority
of the membership interests of BFS. Health Card believes that the terms of this
lease are as fair to it as those which could be obtained from an unaffiliated
third party, although no independent fee quotes have been obtained. Pursuant to
an agreement entered into in 1994, Health Card paid $700,000 in June 1995 in
connection with certain allocated leasehold improvements. Health Card began
occupying space at 26 Harbor Park Drive in October 1994 and began making rental
payments for such space in December 1994. In addition, during the fiscal year
ended June 30, 1999, Health Card paid another affiliated party approximately
$15,833 in connection with improvements to the building in which Health Card's
offices are located. Sandata also occupies space at 26 Harbor Park Drive. Except
for certain common areas, Sandata and Health Card do not share space in such
facility.

Pursuant to a lease dated August 10, 1998 and expiring on August 31, 2005,
Health Card occupies approximately 1,500 square feet of space at 63 Manorhaven
Boulevard, Port Washington, New York, which is licensed as a pharmacy. The
landlord for these premises is 61 Manorhaven Boulevard, LLC, of which Mr.
Brodsky is the sole member. The rent for the 12 month period ended August 31,
1999 was $1,500 per month; the annual rent increases by 5% per year. Additional
rent, in the form of certain expenses, is also payable.

Stock Transaction

On October 30, 1998, Mr. Brodsky executed a promissory note made payable on
demand to the order of Marine Midland Bank in the principal amount of
$2,000,000. Mr. Brodsky used the proceeds of the loan to purchase 340,919 shares
of common stock of Health Card. In addition, Mr. Brodsky pledged a like number
of shares to the bank as security for the loan. On October 30, 1998, Health Card
executed an unlimited continuing Guaranty Agreement for the indebtedness of Mr.
Brodsky to Marine Midland Bank. By the Guaranty Agreement, Health Card
unconditionally guaranteed the full and prompt payment to Marine Midland Bank of
the indebtedness of Mr. Brodsky. On November 3, 1998, the promissory note from
Mr. Brodsky to Marine Midland Bank, dated October 30, 1998, was converted from a
demand note to an installment note, payable in full by October 28, 1999, bearing
interest at a per annum rate of 7.72%. This note was repaid in full in January
1999. On April 8, 1999, HSBC (formerly Marine Midland Bank) advised Health Card
that its unlimited guaranty of Mr. Brodsky's $2,000,000 loan was released.

58

Indebtedness of Management

From time to time, Mr. Brodsky and certain of his affiliates (collectively
the "Brodsky Affiliates") and other directors and affiliates of Health Card have
borrowed funds, or have incurred indebtedness in connection with the purchase of
shares, from Health Card. The following table describes certain information
relating to such indebtedness.

Largest Aggregate
Amount Owed by Debtor Debt Owed
During Fiscal Year As of
Debtor Ended June 30, 1999 June 30, 1999
------ --------------------- -------------

P.W. Capital LLC(1)............... $4,553,680 $4,553,680
Port Charitable Foundation(2)..... 14,000 14,000
Bert E. Brodsky(3)................ 1,767,000 1,050,900
Hugh Freund(2).................... 8,000 -0-
Carol Freund(2)................... 8,000 -0-
Gerald Shapiro(4)................. 338,250 312,750
Sandra Rothstein(5)............... 45,100 850
Linda Portney(6).................. 2,374 2,374

- -------------

(1) On June 1, 1998, Health Card assigned certain indebtedness aggregating
$1,636,785 in principal and accrued interest, if any, from certain persons
and entities, including Mr. Brodsky, to P.W. Capital, LLC, a company
affiliated with Mr. Brodsky. On June 1, 1998, P.W. Capital executed a
demand promissory note made payable to the order of Health Card in the
principal amount of $4,254,785 with interest at the rate of 8.5% per annum,
payable quarterly, such amount reflecting the assigned debt and amounts
then owed by P.W. Capital to Health Card. On June 1, 1998, Mr. Brodsky
executed an unconditional guaranty in favor of Health Card for the full and
prompt payment to Health Card of all amounts payable under the P.W. Capital
promissory note dated June 1, 1998. Such note is secured by 1,022,758
shares of common stock of Health Card and is without recourse to the maker.

As of January 2, 1999, P.W. Capital executed a demand promissory note made
payable without interest to the order of Health Card to evidence advances
to P.W. Capital in the amount of $90,100.

(2) Port Charitable Foundation is a company affiliated with Hugh Freund and
Carol Freund, who are husband and wife. Mr. Freund is an Executive Vice
President, director and principal stockholder of Sandata.

(3) Includes principal and interest due under a non-recourse (except for
interest) promissory note dated July 1, 1997 made payable by Mr. Brodsky to
the order of Health Card in the original

59

principal amount of $1,000,000, secured by a pledge of 1,278,447 shares of
common stock of Health Card. Interest on such note, at the rate of 8.5% per
annum, is payable quarterly. The principal amount of the note is payable
five years from the date of the note.

(4) Mr. Shapiro, Vice Chairman of the Board of Health Card, is the Chairman of
the Board and Treasurer of Mediclaim, Inc. Includes principal and interest
due under a non-recourse (except for interest) promissory note dated July
1, 1997 made payable by Mr. Shapiro to the order of Health Card in the
original principal amount of $300,000, secured by a pledge of 383,534
shares of common stock of Health Card. Interest on such note, at the rate
of 8.5% per annum, is payable quarterly. The principal amount of the note
is payable five years from the date of the note.

(5) Sandra Rothstein is Mr. Brodsky's administrative assistant. In July 1997,
Ms. Rothstein purchased 51,137 shares of common stock of Health Card by
delivery of a promissory note made payable to the order of Health Card in
the original principal amount of $40,000. This note is secured by 51,137
shares of common stock of Health Card owned by Ms. Rothstein and principal
was without, and interest is with, recourse to Ms. Rothstein. As of June
30, 1999, no principal was outstanding with respect to Ms. Rothstein's
note, and $850 of interest was outstanding under such note.

(6) Linda Portney is Executive Vice President of Operations of Health Card.

The Bert E. Brodsky Revocable Trust (the "Brodsky Trust") has repaid the
indebtedness reflected above to the extent of approximately $1,992,900
(representing 73% of the proceeds from the sale of shares by the Brodsky Trust
pursuant to the Public Offering, net of underwriting discounts and commissions,
a non-accountable expense allowance and a financial advisory fee payable to the
representatives of the Public Offering). The net proceeds from the sale of
shares by the Brodsky Trust were applied first 100% to amounts owed by Mr.
Brodsky to Health Card and the balance to amounts owed by P.W. Capital to Health
Card. In addition, Mr. Brodsky has agreed to pay in full, within one year of the
consummation of the Public Offering, the remaining indebtedness owed by P.W.
Capital, reflected in the above table, after application of the net proceeds
from the sale of shares by the Brodsky Trust in the Public Offering. In the
event that P.W. Capital does not pay amounts due as and when required under its
non-recourse June 1998 promissory note, Health Card's recourse will be to
exercise its legal remedies with respect to the Health Card shares held by
Health Card as collateral and pursue legal action against Mr. Brodsky under a
related guaranty. Such note does not provide for default interest or penalties.
Mr. Shapiro has orally agreed to pay in full the indebtedness reflected opposite
his name in the above table within one year of the consummation of this
offering. In the event that Mr. Shapiro does not pay amounts due as and when
required under his July 1997 promissory note, Health Card's recourse will be to
exercise its legal remedies with respect to the Health Card shares held by
Health Card as collateral and pursue legal action against Mr. Shapiro for unpaid
interest. Such note does not provide for default interest or penalties. It is
not anticipated that additional advances to or on behalf of Mr. Brodsky or his
affiliates will be permitted in the future, unless approved by a majority of
Health Card's disinterested Directors.

60

SunStar Healthcare, Inc.

SunStar Healthcare, Inc., a Delaware corporation, is engaged in providing
managed health care services in the state of Florida by operating an HMO. Its
service territory covers 52 counties in central, northern and other parts of
Florida, including the metropolitan areas of Tampa, Orlando, Jacksonville, and
others. As of November 1, 1998, SunStar served approximately 57,000 enrolled
plan members. On February 19, 1999, Mr. Brodsky, as trustee for the irrevocable
trusts of each of his children, purchased for $250,000 (an aggregate of
$1,000,000) in preferred stock and warrants offered by SunStar. Effective May 1,
1999, Health Card began providing services to SunStar.

National Medical Health Card IPA, Inc.

National Medical Health Card IPA, Inc. was incorporated in September 1998.
Mr. Brodsky's son was its initial sole shareholder. In October 1998, Mr.
Brodsky's son transferred ownership of Health Card IPA to Health Card for no
consideration.

61

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) 1. Financial Statements

The following consolidated financial statements of Health Card are
included herein:

Report of Independent Certified Public Accountants F-2

Consolidated Balance Sheets as of June 30, 1998 and 1999 and pro forma
as of June 30, 1999 F-3

Consolidated Statements of Income for each of the years ended June 30,
1997, 1998 and 1999 F-4

Consolidated Statements of Stockholders' Equity (Deficit) for each
of the years ended June 30, 1997, 1998 and 1999 F-5

Consolidated Statements of Cash Flows for each of the years ended
June 30, 1997, 1998 and 1999 F-6

Notes to Consolidated Financial Statements F-7

2. Financial Statement Schedules

Schedule II: Valuation and Qualifying Accounts S-1

3. Exhibits

Exhibit
Number Description of Exhibit

3.1 Restated Certificate of Incorporation of Health Card(1)
3.2 Certificate of Amendment, filed May 25, 1999, to Certificate of
Incorporation of Health Card(1)
3.3 Restated Certificate of Incorporation of Health Card, as amended
3.4 Amended and Restated By-Laws of Health Card(1)
4.1 Form of Specimen Common Stock Certificate(1)
4.2 Form of Warrant Agreement, including form of Representatives'
Warrants(1)
10.1 Agreement, dated April 1, 1990, between Health Card and ChoiceCare
Long Island, Inc. d/b/a Vytra Healthcare(1)

62

10.2 Prescription Drug Service Agreement, dated December 1, 1995, between
Health Card and ChoiceCare Long Island, Inc. d/b/a Vytra
Healthcare(1)(2)
10.3 Amendment to Prescription Drug Service Agreement, dated September 25,
1998, between Health Card and Vytra Healthcare(1)
10.4 Letter Agreement, dated March 30, 1999, among National Medical Health
Card Systems IPA, Inc., Health Card and Vytra Healthcare(1)
10.5 Agreement, dated January 1, 1995, between Health Card and Suffolk
County(1)
10.6 Agreement, dated March 15, 1998, between Health Card and Medi-Span,
Inc.(1)
10.7 Formulary Agreement, dated January 1, 1996, between Health Card and
Foundation Health Pharmaceutical Services d/b/a Integrated
Pharmaceutical Services(1)(2)
10.8 Mail Service Provider Agreement, dated July 1, 1996, between Health
Card and Thrift Drug, Inc. d/b/a Express Pharmacy Services(1)
10.9 Amendment to Mail Service Provider Agreement, dated January 1, 1997,
between Health Card and Thrift Drug, Inc. d/b/a Express Pharmacy
Services(1)
10.10 Agreement, dated June 1, 1998, between Sandata, Inc. and Health
Card(1)
10.11 Amendment to Agreement, dated June 1, 1998, between Sandata, Inc. and
Health Card(1)
10.12 Agreement, dated June 16, 1998, between Sandata, Inc. and Health
Card(1)
10.13 Bill of Sale, dated June 1, 1998, between Sandata, Inc. and Health
Card(1)
10.14 Letter Agreement, dated June 1, 1998, between Sandata, Inc. and Health
Card(1)
10.15 Software License Agreement and Professional Service Agreement, dated
February 18, 1998, between Health Card and Prospective Health, Inc.(1)
10.16 1999 Stock Option Plan(1)
10.17 Letter, dated January 31, 1996, from Health Card to Mary Casale(1)
10.18 Employee Covenant Agreement, dated June 15, 1998, between Health Card
and Mary Casale(1)
10.19 Stock Option Agreement, dated July 1, 1997, between Bert Brodsky and
Mary Casale(1)
10.20 Letter, dated November 30, 1998, from Health Card to Marjorie
O'Malley(1)
10.21 Employee Covenant Agreement, dated December 7, 1998, between Health
Card and Marjorie O'Malley(1)
10.22 Stock Option Agreement, dated December 7, 1998, between Bert Brodsky
and Marjorie O'Malley(1)
10.23 Letter, dated November 3, 1998, from Health Card to John Ciufo(1)
10.24 Confidentiality and Non-Disclosure Agreement, dated November 19,
1998, between Health Card and John Ciufo(1)
10.25 Stock Option Agreement, dated December 7, 1998, between Bert Brodsky
and John Ciufo(1)
10.26 Employee Covenant Agreement, dated June 16, 1998, between Health Card
and Ken Hammond(1)
10.27 Employee Covenant Agreement, dated June 1, 1998, between Health Card
and Linda Portney(1)
10.28 Lease, dated January 1, 1996, between Sandata, Inc. and Health Card(1)
10.29 Assignment, dated November 1, 1996, from Sandata, Inc., to BFS Realty,
LLC(1)
10.30 First Amendment to BFS Realty, LLC Lease, dated June 1, 1998, between
BFS Realty, LLC and Health Card(1)

63

10.31 Second Amendment to BFS Realty, LLC Lease, dated April 1, 1999,
between BFS Realty, LLC and Health Card(1)
10.32 Lease, dated August 10, 1998, between 61 Manor Haven Boulevard, LLC
and Health Card(1)
10.33 Promissory Note, dated July 1, 1997, made payable by Bert Brodsky to
the order of Health Card in the original principal amount of
$1,000,000(1)
10.34 Letter, dated June 3, 1999, from Bert Brodsky to Health Card(1)
10.35 Promissory Note, dated July 1, 1997, made payable by Gerald Shapiro to
the order of Health Card in the original principal amount of
$300,000(1)
10.36 Letter, dated June 3, 1999, from Gerald Shapiro to Health Card(1)
10.37 Promissory Note, dated June 1, 1998, made payable by P.W. Capital, LLC
to the order of Health Card in the original principal amount of
$4,254,785(1)
10.38 Agreement of Guaranty, dated June 1, 1998, by Bert E. Brodsky in favor
of Health Card(1)
10.39 Promissory Note, dated October 30, 1998, made payable by Bert Brodsky
to Marine Midland Bank in the principal amount of $2,000,000(1)
10.40 Agreement of Guaranty, dated October 30, 1998, by Health Card in favor
of Marine Midland Bank(1)
10.41 Promissory Note, dated November 3, 1998, made payable by Bert Brodsky
to Marine Midland Bank in the principal amount of $2,000,000(1)
10.42 Letter, dated January 29, 1999, from Marine Midland Bank to BDO
Seidman(1)
10.43 Letter, dated June 4, 1999, from HSBC to Bert E. Brodsky(1)
10.44 Demand Promissory Note, dated January 2, 1999, made payable by P.W.
Capital, LLC to the order of Health Card, in the original principal
amount of $90,100(1)
10.45 Consulting Agreement, dated April 14, 1994, between P.W. Medical
Management, Inc. and Health Card(1)
10.46 Assignment, dated July 1, 1996, between P.W. Medical Management, Inc.
and P.W. Capital Corp.(1)
10.47 Letter, dated June 8, 1999, from P.W. Capital Corp. to Health Card(1)
10.48 Letter, dated June 9, 1999, from Bert E. Brodsky to Health Card(1)
10.49 Letter, dated June 8, 1999, from the Bert E. Brodsky Revocable Trust
to Health Card(1)
10.50 Letter agreement, dated June 30, 1999, between the Bert E. Brodsky
Revocable Trust and Health Card(1)
10.51 Employment Agreement, dated July 1, 1999, between Health Card and Bert
E. Brodsky(1)
10.52 Letter, dated June 8, 1999, from Bert E. Brodsky to Health Card(1)
10.53 Form of Lock-up Agreement(1)
21 Subsidiaries of Health Card(1)
27 Financial Data Schedule

- ----------

(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.

64

(2) Contains confidential material omitted and filed separately with the
Securities and Exchange Commission. Brackets in document denotes such
omission.

(b) Reports on Form 8-K

No Report on Form 8-K was filed by Health Card during the three months
ended June 30, 1999.

65

National Medical Health
Card Systems, Inc.
and Subsidiary

Consolidated Financial Statements
and Supplemental Material
For the years ended June 30, 1997, 1998 and 1999

National Medical Health
Card Systems, Inc.
and Subsidiary

Consolidated Financial Statements
and Supplemental Material
For the years ended June 30, 1997, 1998 and 1999

National Medical Health
Card Systems, Inc.
and Subsidiary

Contents

Report of Independent Certified Public Accountants F-2

Consolidated financial statements:

Balance sheets as of June 30, 1998 and 1999 and
proforma as of June 30, 1999 F-3

Statements of Income for each of the years ended June 30, 1997,
1998 and 1999 F-4

Statements of Stockholders' Equity (Deficit) for each of the years
ended June 30, 1997, 1998 and 1999 F-5

Statements of Cash Flows for each of the years ended June 30, 1997,
1998 and 1999 F-6

Notes to Financial Statements F-7

F-1

Report of Independent Certified Public Accountants

Board of Directors
National Medical Health
Card Systems, Inc. and Subsidiary
Port Washington, New York

We have audited the accompanying consolidated balance sheets of National Medical
Health Card Systems, Inc. and subsidiary as of June 30, 1998 and 1999, and the
related consolidated statements of income, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended June 30, 1999. These
financial statements are the responsibility of the management of National
Medical Health Card Systems, Inc. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of National Medical
Health Card Systems, Inc. and subsidiary as of June 30, 1998 and 1999, and the
results of their operations and cash flows for each of the three years in the
period ended June 30, 1999 in conformity with generally accepted accounting
principles.

BDO Seidman, LLP

Melville, New York

September 22, 1999

F-2

National Medical Health
Card Systems, Inc.
and Subsidiary

Consolidated Balance Sheets

June 30, June 30,
----------------------------------------------------------------------- -------------------------------------- ------------------
1998 1999 1999
----------------------------------------------------------------------- ------------------ ------------------- ------------------
(Proforma)
(Note 12(a))
Assets
Current:

Cash and cash equivalents $ 1,305,792 $ 2,815,863 $15,698,963
Accounts receivable, less allowance for possible losses of
$244,189 and $ 846,344 6,079,079 13,233,760 13,233,760
Rebates receivable 4,064,868 5,303,786 5,303,786
Deferred income tax 141,000 530,000 530,000
Other current assets 98,514 283,694 283,694
----------------------------------------------------------------------- ------------------ ------------------- ------------------
Total current assets 11,689,253 22,167,103 35,050,203
Property, equipment and software development costs, net 1,596,443 2,754,522 2,754,522
Due from affiliates 4,300,902 4,579,280 3,628,880
Due from stockholders 10,774 - -
Other assets 12,528 15,728 15,728
Deferred income tax 734,000 166,000 166,000
Deferred offering costs - 1,163,378 -
----------------------------------------------------------------------- ------------------ ------------------- ------------------
$18,343,900 $30,846,011 $41,615,333
----------------------------------------------------------------------- ------------------ ------------------- ------------------
Liabilities and Stockholders' Equity
Current:
Accounts payable and accrued expenses $19,730,110 $26,883,745 $26,883,745
Current portion of long-term debt 7,137 1,950 1,950
Due to officer/stockholder 30,000 390,000 390,000
Due to affiliates 451,669 750,968 750,968
Income taxes payable 59,881 704,489 704,489
Other current liabilities 68,780 116,544 116,544
----------------------------------------------------------------------- ------------------ ------------------- ------------------
Total current liabilities 20,347,577 28,847,696 28,847,696
Long-term debt, less current portion 2,605 - -
----------------------------------------------------------------------- ------------------ ------------------- ------------------
Total liabilities 20,350,182 28,847,696 28,847,696
----------------------------------------------------------------------- ------------------ ------------------- ------------------
Commitments and Contingencies (Note 7)
Stockholders' equity (deficit):
Preferred stock $.10 par value; 10,000,000 shares authorized, none
outstanding - - -
Common stock, $.001 par value, 25,000,000 shares authorized,
4,971,577, 5,312,496 and 6,912,496 (proforma) shares issued and
outstanding 4,972 5,313 6,913
Additional paid-in capital 901,128 2,868,573 12,593,795
Retained earnings (deficit) (1,458,482) 480,529 480,529
Notes receivable - stockholders (1,453,900) (1,356,100) (313,600)
----------------------------------------------------------------------- ------------------ ------------------- ------------------
Total stockholders' equity (deficit) (2,006,282) 1,998,315 12,767,637
----------------------------------------------------------------------- ------------------ ------------------- ------------------
$18,343,900 $30,846,011 $41,615,333
----------------------------------------------------------------------- ------------------ ------------------- ------------------

F-3
See accompanying notes to consolidated financial statements.

National Medical Health
Card Systems, Inc.
and Subsidiary

Consolidated Statements of Income

Years Ended June 30,
--------------------------------------------------------------------
1997 1998 1999
------------------------------------------------------- ---------------------- ---------------------- ----------------------

Revenues $70,405,168 $98,528,384 $134,031,026
Cost of claims 63,293,699 89,770,402 121,536,733
------------------------------------------------------- ---------------------- ---------------------- ----------------------
Gross profit 7,111,469 8,757,982 12,494,293

Selling, general and administrative expenses* 5,855,282 7,192,027 10,171,314
------------------------------------------------------- ---------------------- ---------------------- ----------------------

Operating income 1,256,187 1,565,955 2,322,979
------------------------------------------------------- ---------------------- ---------------------- ----------------------
Other income (expense):
Other income, net 42,595 264,666 674,936
Public offering costs - (445,173) (82,904)
------------------------------------------------------- ---------------------- ---------------------- ----------------------
42,595 (180,507) 592,032
------------------------------------------------------- ---------------------- ---------------------- ----------------------
Income before income taxes 1,298,782 1,385,448 2,915,011
Provision for income taxes (benefit) (189,984) 569,000 976,000
------------------------------------------------------- ---------------------- ---------------------- ----------------------
Net income $ 1,488,766 $ 816,448 $ 1,939,011
------------------------------------------------------- ---------------------- ---------------------- ----------------------

Earnings per common share:
Basic $ 0.46 $ 0.16 $ 0.37
------------------------------------------------------- ---------------------- ---------------------- ----------------------
Diluted $ 0.37 $ 0.16 $ 0.37
------------------------------------------------------- ---------------------- ---------------------- ----------------------
Weighted average number of common shares outstanding:
Basic 3,258,459 4,966,885 5,205,084
Diluted 4,008,481 4,969,166 5,205,084
------------------------------------------------------- ---------------------- ---------------------- ----------------------

*Includes amounts charged by affiliates
aggregating: $ 4,511,144 $ 4,904,514 $ 2,816,982
------------------------------------------------------- ---------------------- ---------------------- ----------------------

See accompanying notes to consolidated financial statements.

F-4

National Medical Health
Card Systems, Inc.
and Subsidiary

Consolidated Statements of Stockholders' Equity (Deficit)

Notes
Notes Additional Retained
Receivable Preferred Stock Common Stock Paid-in Earnings
Stockholders Shares Amount Shares Amount Capital (Deficit)
------------ ------ ------ ------ ------ ------- ---------

Balance, June 30, 1996 $ (72,000) - - 3,258,459 $ 3,259 $ - $(3,594,384)
Capital distribution, net of
income taxes - - - - - - (169,312)
Net income - - - - - - 1,488,766
---------------------------------- ----------------- ------------------- --------------- --------- -------------- --------------
Balance, June 30, 1997 (72,000) - - 3,258,459 3,259 - (2,274,930)
Sale of stock (1,340,000) - - 1,713,118 1,713 1,338,287 -
Interest on notes receivable (113,900) - - - - - -
Capital distributions, net of
income taxes - - - - - (437,159) -
Repayment of loan by
stockholder 72,000 - - - - - -
Net income - - - - - - 816,448
---------------------------------- ----------------- ------------------- --------------- --------- -------------- --------------
Balance, June 30, 1998 (1,453,900) - - 4,971,577 4,972 901,128 (1,458,482)
Interest on notes receivable (113,900) - - - - - -
Interest paid on notes
receivable 171,700 - - - - - -
Principal paid on notes
receivable 40,000 - - - - - -
Sale of stock - - - 340,919 341 1,999,659 -
Capital distributions, net of
Income taxes - - - - - (32,214) -
Net income - - - - - - 1,939,011
---------------------------------- ----------------- ---------- -------- --------------- ---------- -------------- --------------
Balance, June 30, 1999 $( 1,356,100) 5,312,496 $ 5,313 $ 2,868,573 $ 480,529
---------------------------------- ----------------- ---------- -------- --------------- ---------- -------------- --------------

See accompanying notes to consolidated financial statements.

F-5

National Medical Health
Card Systems, Inc.
and Subsidiary

Consolidated Statements of Cash Flows

Years Ended
June 30,
----------------------------------------------------------- ---------------------------------------------------------

1997 1998 1999
----------------------------------------------------------- ------------------ ------------------- ------------------

Cash flows from operating activities:

Operating activities:

Net income $ 1,488,766 $ 816,448 $1,939,011
Depreciation and amortization 240,744 368,644 772,389
Bad debt expense 115,000 70,000 52,155
Allowance for possible losses - - 550,000
Compensation expense accrued to officer/stockholder - 30,000 360,000
Deferred income taxes (200,000) 488,000 201,000
Interest accrued on stockholders' loans - (113,900) (113,900)

Changes in assets and liabilities:
Accounts receivable (974,319) (2,836,750) (7,756,836)
Other current assets (7,195) (27,138) (188,380)
Rebates receivable 253,743 (2,577,201) (1,238,918)
Due to/from affiliates 511,512 (1,562,981) 20,921
Accounts payable and accrued expenses 2,104,949 6,175,665 6,233,083
Income taxes payable - 59,881 644,608
Other liabilities (38,900) 31,420 47,764
----------------------------------------------------------- ------------------ ------------------- ------------------
Net cash provided by operating activities 3,494,300 922,088 1,522,897
----------------------------------------------------------- ------------------ ------------------- ------------------
Cash flows from investing activities:
Capital expenditures (444,646) (864,108) (1,930,468)
Loans (to)/from stockholders (32,093) (792,200) 10,774
Repayment of loans by officer/stockholder - 1,167,919 -
Repayment of note by stockholder - 72,000 40,000
Interest received on notes from stockholders - - 171,700
----------------------------------------------------------- ------------------ ------------------- ------------------
Net cash used in investing activities (476,739) (416,389) (1,707,994)
----------------------------------------------------------- ------------------ ------------------- ------------------
Cash flows from financing activities:
Sale of common stock - - 2,000,000
Capital distribution (640,312) (728,598) (54,214)
Repayment of debt (605,789) (253,906) (7,792)
Deferred offering costs - - (242,826)
----------------------------------------------------------- ------------------ ------------------- ------------------
Net cash provided by (used in) financing activities (1,246,101) (982,504) 1,695,168
----------------------------------------------------------- ------------------ ------------------- ------------------
Net increase (decrease) in cash and cash equivalents 1,771,460 (476,805) 1,510,071
Cash and cash equivalents, beginning of period 11,137 1,782,597 1,305,792
----------------------------------------------------------- ------------------ ------------------- ------------------
Cash and cash equivalents, end of period $ 1,782,597 $ 1,305,792 $2,815,863
----------------------------------------------------------- ------------------ ------------------- ------------------

See accompanying notes to consolidated financial statements.

F-6

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

1. Significant
Accounting
Policies Nature of business

National Medical Health Card Systems, Inc. provides
comprehensive prescription benefit management services to
plan sponsors which include managed care organizations,
local governments, unions, corporations and third party
health care plan administrators through its network of
licensed pharmacies throughout the United States. The
Company's prescription benefit management services include
electronic point-of-sale pharmacy claims management, retail
pharmacy network management, mail pharmacy claims
management, benefit design consultation, preferred drug
management programs, drug review and analysis, consulting
services, disease information programs, data access,
reporting and analysis and physician profiling.

The Company enters into two types of arrangements for the
payment of administrative fees, fee for service (per claim
charges) and capitation(per plan participant per month
charges). Under the fee for service arrangement, the Company
is paid by the plans for their disbursements plus a set
transaction fee. Under the capitation arrangement, the
Company receives its fee based on the number of participants
per month and pays for the cost of prescriptions filled and
thus shares the risk of operating profit or loss with these
plans.

Basis of consolidation

In October 1998, the Company acquired National Medical
Health Card IPA, Inc., which is an independent practice
association under the laws of New York. This wholly owned
subsidiary is a recently formed inactive company acquired
from a relative of the principal stockholder for no
consideration. The Company intends that the IPA will be the
contracting party with respect to any contracts with Health
Maintenance Organizations or providers containing financial
risk sharing provisions. The IPA is subject to the
regulatory authority of the Department of Health and the
laws, rules and regulations applicable to independent
practice associations in New York. Activities conducted
through June 30, 1999 included organization, planning and
development of the IPA's activities and securing regulatory
approvals.

F-7

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

The consolidated financial statements include the Company
and the above wholly owned subsidiary. All material
intercompany accounts and transactions have been eliminated
in consolidation.

Cash equivalents

The Company considers all highly liquid debt instruments and
other short-term investments with an initial maturity date
of three months or less from purchase date to be cash
equivalents. Cash equivalents at June 30, 1999 includes
$838,000 which is restricted as to its use.

Revenue recognition and cost of claims

Revenue under the fee for service arrangement related to the
sales of prescription drugs by the Company's nationwide
network of pharmacies are recognized when the claims are
adjudicated. At the point-of-sale, the pharmacy claims are
adjudicated using the Company's on-line processing system.
Adjudication is the process by which the plan participant is
checked for eligibility of coverage, the prescription is
compared to the plan parameters established by the sponsor,
the particular drug is reviewed for contraindications based
upon the plan participant's drug history, age and sex and
the information is placed into a database available for
reporting and query. The Company invoices plan sponsors and
includes as revenues the Company's administrative fees and
charges relating to pharmaceuticals dispensed by the
Company's network of pharmacies. Cost of claims includes the
amounts paid to the Company's network of pharmacies for
pharmaceutical claims reduced by rebates from drug
manufacturers. The Company does not take possession or legal
ownership of the pharmaceutical drugs dispensed by the
pharmacy network, although the Company assumes the legal
responsibility and financial risk of paying for dispensed
pharmaceuticals whether or not the Company is paid by its
sponsors.

Revenues under the capitation arrangements are recognized
monthly based on the number of participants and costs under
the capitation agreements are recognized as incurred.

F-8

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

The Company records the portion of the net rebates from drug
manufacturers, which it retains as a reduction of cost of
claims. These rebates are recognized when the Company is
entitled to them in accordance with the terms of the
Company's arrangements with the rebate administrator and the
Company's sponsors and when the amount of the rebates is
determinable. The Company records the gross rebate
receivable and the appropriate payable to the sponsors based
on estimates, which are subject to final settlement. The
estimates are based upon the claims submitted and the
Company`s rebate experience, and are adjusted as additional
information becomes available. The rebates are processed by
an independent rebate administrator. For the years ended
June 30, 1997, 1998 and 1999, net rebates recorded by the
Company as a reduction of cost of claims were $883,243,
$1,460,537 and $2,541,959, respectively.

Property, equipment and software

Office equipment and furniture and fixtures are being
depreciated over five years using accelerated recovery
methods, which approximate the double-declining-balance
method of depreciation.

Leasehold improvements are amortized on a straight-line
basis over the term of the lease.

Expenditures relating to the development of software to be
used in the claims adjudication process are charged to
expense until technological feasibility is established upon
completion of a working model of the software. Thereafter,
the remaining software development costs up to the date such
software is completed are capitalized and included on the
balance sheet as software development costs. During the
years ended June 30, 1998 and 1999, $422,316 and $1,434,507
in software development costs were capitalized,
respectively.

Amortization of capitalized amounts commences on the date
the software is placed into use and is computed using the
straight-line method over the estimated economic life of the
software, primarily five years. Amortization expense was
$182,949, $213,340 and $460,234 for the years ended June
30, 1997, 1998 and 1999, respectively.

F-9

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

A significant portion of the Company's computer software was
developed by a company affiliated by common ownership (See
Note 3(b)). The cost includes development of software
programs and enhancements, which may either, expand or
modify existing programs. To the extent that the Company has
capitalized certain amounts for software development and
those amounts exceeded the costs incurred by the affiliate,
this excess has been charged to stockholders' equity
(deficit) as a capital distribution.

Deferred offering costs

The Company accounts for deferred offering costs in
accordance with SAB Topic 5:A. Accordingly, only specific
incremental costs directly attributable to a proposed or
actual offering are classified as deferred offering costs.

The deferred offering costs in connection with the Company's
Public Offering consummated on August 2, 1999 were
capitalized and subsequently were charged to equity upon
consummation of the Public Offering. (See Note 12(a)).

Long lived assets

Long lived assets are evaluated for impairment when events
or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through the
estimated undiscounted future cash flows from the use of
these assets. When any such impairment exists, the related
assets will be written down to fair value. No such
impairment existed through June 30, 1999.

Taxes on income

The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes. Under this
standard, deferred taxes on income are provided for those
items for which the reporting period and methods for income
tax purposes differ from those used for financial statement
purposes using the asset and liability method. Deferred
income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory rates
applicable to future years to differences between the
financial statement carrying amounts and the tax bases of
existing assets and liabilities.

F-10

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

Computation of earnings per common share

Basic earnings per share has been computed using the
weighted average number of shares of common stock
outstanding. Diluted earnings per share has been computed
using the basic weighted average shares of common stock
issued plus outstanding stock options, in the periods in
which such options have a dilutive effect.

Accounting for stock based compensation

The Company has adopted the intrinsic value method of
accounting for employee stock options and will disclose the
pro forma impact on net income and earnings per share.

Concentration of credit risk

The Company may be subject to a concentration of credit risk
with respect to its trade receivables. The Company performs
ongoing credit evaluations of its customers and generally
does not require collateral. The Company maintains
allowances to cover potential or anticipated losses for
uncollectible accounts. (See Note 5).

Financial instruments which potentially subject the Company
to concentrations of credit risk are cash balances deposited
in financial institutions which exceed FDIC insurance
limits. Amounts on deposit with financial institutions which
exceeded the FDIC insurance limits at June 30, 1998 and 1999
were $2,954,241 and $3,177,895, respectively.

Use of estimates

The preparation of financial statements in conformity with
generally accepted accounting principles requires the
Company to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.

F-11

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

Estimated fair value of financial instruments

The carrying amounts of financial instruments, including
cash, accounts receivable, accounts payable and accrued
liabilities, approximate fair value because of the current
nature of these instruments. The fair value of the loans due
from stockholders and affiliates is difficult to estimate
due to their related party nature. Certain amounts due to
stockholders do not bear interest and have no set repayment
terms. Loans due from affiliates are due on demand under a
note receivable agreement personally guaranteed by the
majority stockholder and bear market interest rates;
therefore, the Company believes that the carrying amount
approximates fair value.

Effect of recently issued accounting standards

In June 1997, the Financial Accounting Standards Board
issued two new disclosure standards.

Statement of Financial Accounting Standards No. 130 ("SFAS
No. 130"), Reporting Comprehensive Income, establishes
standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except
those resulting from investments by owners and distributions
to owners. Among other disclosures, SFAS No. 130 requires
that all items that are required to be recognized under
current accounting standards as components of comprehensive
income be reported in a financial statement that is
displayed with the same prominence as other financial
statements.

F-12

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

Statement of Financial Accounting Standards No. 131 ("SFAS
No. 131"), Disclosures about Segments of an Enterprise and
Related Information, which supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise, establishes
standards for the way that public enterprises report
information about operating segments in annual financial
statements and requires reporting of selected information
about operating segments in interim financial statements
issued to the public. It also establishes standards for
disclosures regarding products and services, geographic
areas and major customers. SFAS No. 131 defines operating
segments as components of an enterprise about which separate
financial information is available that is evaluated
regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.

Both of these new standards are effective for financial
statements for years beginning after December 15, 1997 and
require comparative information for earlier years to be
restated. The Company's results of operations, financial
position, and disclosures were unaffected by implementation
of these new standards.

In February 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 132
("SFAS No. 132"), Employers' Disclosures about Pensions and
Other Postretirement Benefits, which standardizes the
disclosure requirements for pensions and other
postretirement benefits. The adoption of SFAS No. 132 in
1998 is not expected to materially impact the Company's
current disclosures.

In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Investments and Hedging Activities
Income ("SFAS No. 133"), which requires the recording of all
derivative instruments as assets or liabilities measured at
fair value. Among other disclosures, SFAS No. 133 requires
that all derivatives be recognized and measured at fair
value regardless of the purpose or intent of holding the
derivative.

F-13

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

SFAS No. 133 is effective for financial statements for years
beginning after June 15, 2000. The Company has no derivative
investments and does not participate in hedging activities;
therefore, its financial position, results of operations and
disclosures will be unaffected by the adoption of this
standard.

2. Property,
Equipment and
Software
Development
Costs Property, equipment and software development costs consist
of the following:

June 30,
1998 1999
------------------- ------------
Furniture and fixtures $ 386,480 $ 644,246
Software 2,145,606 3,746,101
Leasehold improvements - 72,207
----------------------------------------- ------------------- ------------
2,532,086 4,462,554
Accumulated depreciation/amortization 935,643 1,708,032
----------------------------------------- ------------------- ------------
$1,596,443 2,754,522
----------------------------------------- ------------------- ------------

Depreciation and amortization expense for the years ended
June 30, 1997, 1998 and 1999 was $240,744, $368,644 and
$772,389, respectively.

3. Related Party
Transactions (a) Distributions - capital

The Company leases office space in Port Washington, New York
from a company affiliated by common ownership under an
agreement expiring March 30, 2004 (Note 7(a)). Leasehold
improvements made to this space by a company affiliated by
common ownership during the year ended June 30, 1999, were
approximately $72,207.

In September 1998 the Company leased space for a pharmacy in
Port Washington, New York, from a Company affiliated by
common ownership under a seven-year agreement expiring
August 31, 2005 (Note 7(a)).

F-14

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

Rent expense including utilities for the years ended June
30, 1997, 1998 and 1999 under operating leases amounted to
$264,727, $304,193 and $284,828, respectively.

Due to affiliates represent trade payables for developed
software, other software services, operating leases and
maintenance costs. During 1998 an affiliate charged the
Company approximately $208,000, as a fee to hire
programmers, which were formerly employed by an affiliated
company. The Company assumed a liability of $86,000 relating
to these employees.

In accordance with SAB 48, the Company has recorded amounts
in excess of affiliates' cost for capitalized software
development and acquisition of employees as a capital
distribution, net of tax as follows:

1997 1998 1999
------------------------ --------------- -------------- ---------------

Software development $ 640,312 $ 520,122 $ 54,214

Acquisition of
employees - 208,476 -

Tax effect* (471,000) (291,439) (22,000)
------------------------ --------------- -------------- ---------------

Net charge to
stockholders' equity
(deficit) $ 169,312 $ 437,159 $ 32,214
------------------------ --------------- -------------- ---------------

* Approximately $215,000 of the tax benefit for 1997 was offset by a
decrease in the deferred income tax valuation reserve (Note 6).

F-15

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

(b) Other

Due from affiliates represents loans to companies affiliated
by common ownership or companies controlled by the majority
stockholder. Effective June 1, 1998, the majority of the
loan balances were consolidated into a promissory note in
the amount of $4,254,785 due from one affiliated company
controlled by the majority stockholder. Such amount bears
interest at 8.5% per annum, payable quarterly, and has no
set repayment date. Mr. Brodsky has agreed to repay the
promissory note and other amounts due from affiliates within
one year of the consummation of the Public Offering
completed on August 2, 1999. This note has been classified
as a non-current asset. The note is collateralized by
1,022,758 shares of $.001 par value common stock of the
Company registered in the name of the majority stockholder
and subject to the personal guarantee of the majority
stockholder. For the years ended June 30, 1998 and 1999, the
amount of interest income accrued was $30,117 and $361,657,
respectively. Interest paid by the affiliate in December
1998 aggregated $183,000. Prior to June 1, 1998, the
outstanding balances did not bear any interest. On January
2, 1999, one of the affiliates executed a non-interest
bearing note payable to the Company in the amount of $90,100
to evidence advances to the affiliate in the same amount.
Subsequent to the year end and concurrent with the
consummation of the Company's Public Offering, a trust
controlled by the Company's majority stockholder (the
"Selling Stockholder") sold 400,000 shares of common stock
from its holdings. The Company received $1,992,900 from the
sale by the Selling Stockholder of which $1,042,500 was
applied to amounts owed by the Selling Stockholder and the
balance to amounts due from the affiliate. (See Note 12(a)).

F-16

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

Prior to June 1, 1998, the Company leased all of its
employees from an affiliated company at an agreed upon price
equal to the affiliate's cost plus a 7% administrative fee.
Effective June 1, 1998, the Company hired these employees
(which included programmers as discussed above) and paid its
own payroll and related costs. For the years ended June 30,
1997, 1998 and 1999, the administrative fee charged by the
affiliate was approximately $131,000, $157,000 and $0,
respectively.

Certain costs paid to the affiliates were capitalized as
software development costs. For the years ended June 30,
1998 and 1999, the amounts charged by affiliates and
capitalized were $422,315 and $612,906, respectively.

The Company purchased furniture and fixtures from an
affiliate during the year ended June 30, 1999 for
approximately $236,000. The price included a 20% purchasing
and handling fee.

For the periods presented, certain general, administrative
and other expenses reflected in the financial statements
include allocations of certain corporate expenses from
affiliates which take into consideration personnel,
estimates of the time spent to provide services or other
appropriate bases. These allocations include services and
expenses for general management, information systems
maintenance, financial consulting, employee benefits
administration, legal communications and other miscellaneous
services.

Management believes the foregoing allocations were made on a
reasonable basis. Although these allocations do not
necessarily represent the costs which would have been or may
be incurred by the Company on the stand-alone basis,
management believes that any variance in costs would not be
material.

F-17

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

General and administrative expenses related to transactions
with affiliates included in the statement of income are:

Year ended June 30,
----------------------------------------------

1997 1998 1999
------------------------------- --------------- --------------- ---------------

Software maintenance and
related services(i) $1,443,470 $1,124,626 $770,396

Management and consulting
fees(ii) 600,654 857,540 1,524,451

Administrative and
bookkeeping services(iii) 2,202,293 2,618,155 237,307

Rent and utilities 264,727 304,193 284,828
------------------------------- --------------- --------------- ---------------

$4,511,144 $4,904,514 $2,816,982
------------------------------- --------------- --------------- ---------------

(i) A company affiliated by common ownership provides a
significant portion of the Company's software maintenance
(Note 1), certain other software services, computer hardware
under operating leases and maintains certain computer
hardware.

(ii) The Company incurred fees to certain other affiliated
companies for various management and consulting services.
Pursuant to an agreement with one of these affiliated
companies, dated April 14, 1994, minimum fees are $25,000
per year payable in monthly installments. Actual monthly
fees through June 30, 1999 were approximately $58,000.

(iii) A company affiliated by common ownership provides the
Company with various administrative services. The
arrangement includes the leasing of all the Company's
employees through June 1, 1998 and the provision of
bookkeeping services and personnel related consulting
services.

F-18

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

Due from stockholders primarily represent loans to the
majority stockholder. These loans do not bear interest and
have no set repayment dates.

On June 1, 1998, the Company agreed to pay the majority
stockholder annual compensation of $360,000 or a lesser
amount if mutually agreed, in the form of a bonus for
continued services. The Company accrued $30,000 and $360,000
for the years ended June 30, 1998 and 1999, as a result of
this agreement. At June 30, 1999, amounts due to this
officer/stockholder aggregated $390,000.

For the year ended June 30, 1999, the Company paid the
annual premium of approximately $66,000 on a life insurance
policy where the majority stockholder is the owner and
beneficiary.

On October 23, 1998, the Company sold 340,919 shares of
common stock to the majority stockholder at $5.87 per share.
In connection with this transaction, the majority
stockholder obtained a loan from a bank for $2,000,000 to
pay for the shares. The Company unconditionally guaranteed
this loan which was due on January 28, 1999, bore interest
at an annual rate of 7.72% payable monthly, and was secured
by all assets of the Company. As the guarantor, the Company
had to comply with certain operational covenants as defined
in the guarantee agreement for the duration of the loan. On
January 28, 1999, the loan to the bank was paid in full by
the majority stockholder and the unconditional guarantee
along with the security on the assets was terminated.

F-19

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

4. Accounts
Payable and
Accrued
Expenses Accounts payable and accrued expenses consist of the
following:

June 30
-----------------------------------

1998 1999
----------------------------------------- ------------------- ---------------

Claims payable $13,571,796 $17,553,036

Rebates payable to sponsors 4,470,404 7,062,159

Other payables 1,687,910 2,268,550
----------------------------------------- ------------------- ---------------

$19,730,110 $26,883,745
----------------------------------------- ------------------- ---------------

5. Major
Customers
and
Pharmacies For the years ended June 30, 1997, 1998 and 1999,
approximately 63%, 60% and 64%, respectively, of the
revenues were from three plan sponsors administering
multiple plans. Amounts due from these three customers at
June 30, 1998 and 1999 approximated $2,751,000 and
$6,813,000, respectively. During the year ended June 30,
1999, the Company recorded approximately $500,000 of
additional revenue when the amount of the adjustment became
determinable, upon the Company receiving verbal acceptance
of the calculations under the provisions of one of its
arrangements to adjust for the increased cost of drugs
primarily related to the prior year. The Company's
arrangements with these plan sponsors are either oral,
short-term, terminable by the sponsor or subject to
continuing negotiation.

For the years ended June 30, 1997, 1998 and 1999,
approximately 30%, 25%, and 41% of the cost of claims were
from two pharmacy chains. Amounts payable to these two
pharmacy chains at June 30, 1998 and 1999 were approximately
$2,679,000 and $7,686,000, respectively.

F-20

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

The Company evaluated its accounts receivable as of June 30,
1999 taking into consideration the expiration of certain
contracts during the period and the status of the
negotiations to renew those contracts. As consideration for
the renewal of these contracts, the Company determined that
it would be necessary to negotiate the receivable balance
due from these contracts and the Company most likely would
not be able to collect the full amount. As a result, the
Company estimated and recorded a reserve in the amount of
$550,000 during the year ended June 30, 1999.

6. Taxes on
Income Provisions (benefit) for federal and state income taxes
consist of the following:

Year ended June 30,
---------------------------------------------------------

1997 1998 1999
---------------- --------------------- ------------------- ------------------
Current:
Federal $ 6,038 $ 60,000 $596,000
State 3,978 21,000 179,000
---------------- --------------------- ------------------- ------------------
10,016 81,000 775,000
---------------- --------------------- ------------------- ------------------
Deferred:
Federal (154,900) 363,000 135,000
State (45,100) 125,000 66,000
---------------- --------------------- ------------------- ------------------
(200,000) 488,000 201,000
---------------- --------------------- ------------------- ------------------
Total $(189,984) $569,000 $976,000
---------------- --------------------- ------------------- ------------------

In 1997, 1998 and 1999, $471,000, $291,439 and $22,000,
respectively, of income tax benefits reduced the capital
distribution in those years (Note 3(a)).

Differences between the federal statutory rate and the
Company's effective tax rate are as follows:

F-21

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

Year ended June 30,
------------------------------------------
1997 1998 1999
------------------------------- -------------- ------------ --------------
Statutory rate 34.0% 34.0% 34.0%
State taxes - net of federal
taxes - 7.1 5.4
Decrease in deferred income
tax valuation reserve (see
Note 3(a)) (48.6) - -
Utilization of net operating
loss carryforward - - (7.3)
Permanent differences - - 1.4
------------------------------- -------------- ------------ --------------
(14.6%) 41.1% 33.5%
------------------------------- -------------- ------------ --------------

Deferred income tax assets (current and non-current)
resulting from temporary differences are as follows:

June 30, 1998 1999
----------------------------------- ------------------- ------------------
Accounts receivable allowances $100,000 $333,000
Vacation expense accrual 41,000 41,000
Officer/stockholder bonus accrual - 156,000
Property and equipment 734,000 166,000
----------------------------------- ------------------- ------------------
$875,000 $696,000
----------------------------------- ------------------- ------------------

7. Commitments
and
Contingencies (a) On December 15, 1998, the Company leased an apartment in
Port Washington, New York for use by two members of its
management under an operating lease, which expires on
December 14, 1999. The annual rent is $20,400. Utilities and
maintenance are payable by the Company as additional rent.
Future minimum rent payments under the noncancellable
operating leases with related (Note 3) and other parties at
June 30, 1999 are as follows:

F-22

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

Year ending June 30,
--------------------------------------------------- ---------------------
2000 $ 405,000
2001 415,000
2002 436,000
2003 458,000
2004 362,000
Thereafter 28,000
--------------------------------------------------- ---------------------
$2,104,000
--------------------------------------------------- ---------------------

(b) In February 1998, the Company entered into an agreement
for computer software products and professional services
with an unrelated company. The agreement requires the
Company to pay an initial license fee of $400,000, of which
$100,000 was paid upon signing and $25,000 was payable
monthly through February 1999. The initial license fee of
$400,000 has been capitalized and is being amortized over
three years. In addition, if certain milestones were reached
based on the number of processed claims, as defined, the
license fee increases incrementally, up to an additional
$500,000 over the term of the agreement. In February 1999,
the Company met certain milestones, resulting in an
additional license fee of $150,000, which was capitalized
and is being amortized over three years. The agreement also
provides for the annual payment of 18% of the license fee,
as defined, as a service maintenance fee which is expensed
as incurred.

F-23

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

(c) On February 9, 1999, the Company was informed by counsel
that an action was brought against it by the West Contra
Costa Unified School District and an individual plaintiff in
the State of California. The case was subsequently removed
to Federal court. The complaint alleges, among other things,
that the parties entered into a contract in November 1996,
for services to be provided by the Company and,
subsequently, the Company unilaterally terminated the
contract on December 16, 1996. The complaint further alleges
that this termination was in violation of the terms of the
contract and one or more statutory provisions; that the
termination resulted in the school district incurring
approximately $150,000 in additional costs due to its having
to enter into a fee for service arrangement with the Company
in order to continue providing prescription benefits to its
plan members; and that, due to the wrongful termination of
the contract, the school district was forced to secure a
replacement for the benefits and services that were to have
been provided under the contract with the Company. In
connection with this last circumstance, the complaint
alleges that the school district incurred approximately
$400,000 in additional expenses. The complaint also seeks
treble damages. If treble damages were allowable in this
case and a judgment were to be entered against the Company,
the Company would be liable for damages in excess of
$1,500,000. The Company denies the allegations and intends
to vigorously defend this action. In the opinion of
management, the outcome of this litigation will not have a
material adverse effect on the Company's financial position
or its results of operations.

F-24

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

(d) Commencing with the year ending June 30, 2000, the
Company has an employment arrangement with its senior
executives which entitles them to participate in a bonus
pool equal to 15% of any increase in pretax profits over the
prior year. Pursuant to her employment arrangement, the
Company's Executive Vice President of Sales and Marketing is
entitled to commissions of .5% of gross revenues received
from direct accounts sold and .25% of gross revenues
received from accounts sold by sales people under her
management.

8. Stock Options (a) On July 1, 1997, the Company sold an aggregate of
1,713,118 shares of common stock at $.78 per share to the
principal stockholder, a director, and an individual in
exchange for notes receivable; plus the principal
stockholder and the director agreed to cancel options to
purchase an aggregate of 1,406,292 shares of common stock at
$.08 per share.

(b) On July 1, 1997, the principal stockholder granted
options to an employee of the Company to purchase 255,689
shares of the Company's common stock at $5.87 per share from
his personal holdings. In accordance with Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123")
Accounting for Stock-Based Compensation, the options were
accounted for as granted to the employee directly by the
Company. These options vest and become exercisable as
follows:

(i) 20% on July 1, 1999

(ii) 20% on July 1, 2000

(iii) 20% on July 1, 2001

(iv) 20% on July 1, 2002

(v) 20% on July 1, 2003

These options terminate on July 1, 2005.

F-25

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

On December 7, 1998, the principal stockholder granted
options to an employee of the Company to purchase 63,922
shares of the Company's common stock at $5.87 per share from
his personal holdings. In accordance with SFAS No. 123, the
options were accounted for as granted to the employee
directly by the Company. These options vest and become
exercisable as follows:

(i) 1/3 on December 7, 1999

(ii) 1/3 on December 7, 2000

(iii) 1/3 on December 7, 2001

These options terminate on December 7, 2002.

On December 7, 1998, the principal stockholder granted
options to an employee of the Company to purchase 25,569
shares of the Company's common stock at $5.87 per share from
his personal holdings. In accordance SFAS No. 123, the
options were accounted for as granted to the employee
directly by the Company. These options vest and become
exercisable as follows:

(i) 1/3 on December 7, 1999

(ii) 1/3 on December 7, 2000

(iii) 1/3 on December 7, 2001

These options terminate on December 7, 2003.

There was no charge to operations for the issuance of these
options.

(c) SFAS No. 123 requires the Company to provide pro forma
information regarding net income and earnings per share as
if compensation cost for the Company's stock option grants
had been determined in accordance with the fair value method
prescribed in SFAS No. 123.

F-26

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

The Company estimates the fair value of each stock option at
the grant date by using the Black-Scholes option-pricing
model with the following weighted average assumptions used
for grants in fiscal years ended June 30, 1998 and 1999,
respectively: no dividends paid for all years; 0.1% expected
volatility for all years; risk-free interest rates of 6.3%
and 4.5%, respectively; and expected lives of 7.0 and 4.3
years, respectively.

Based on the above calculation, the weighted fair value of
options granted in fiscal years ended June 30, 1998 and 1999
was $2.03 and $.87, respectively.

Under the provisions of SFAS No. 123, the Company's net
income and earnings per share would have been decreased to
the pro forma amounts indicated below:

Year ended June 30,
------------------------------------------

1997 1998 1999
----------------------------- -------------- --------------- -------------

Net income:

As reported $ 1,488,766 $ 816,448 $ 1,939,011

Proforma 1,488,766 764,466 1,871,866
----------------------------- -------------- --------------- -------------

Basic earnings per share:

As reported $ .46 $ .16 $ .37

Proforma .46 .15 .36
----------------------------- -------------- --------------- -------------

Diluted earnings per share:

As reported $ .37 $ .16 $ .37

Proforma .37 .15 .36
----------------------------- -------------- --------------- -------------

F-27

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

(d) The following table summarizes information about stock
options as of June 30, 1999:

Shares of Common Weighted Average
Stock Exercise Price
--------------------------- ------------------- --------------------------
Shares under option at
June 30, 1996 1,406,292 .08
Granted, cancelled,
exercised - -
--------------------------- ------------------- --------------------------
Shares under option at
June 30, 1997 1,406,292 .08
Granted 255,689 5.87
Cancelled (1,406,292) .08
--------------------------- ------------------- --------------------------
Shares under option at
June 30, 1998 255,689 5.87
Granted 89,491 5.87
--------------------------- ------------------- --------------------------
Shares under option at
June 30, 1999 345,180 $5.87
--------------------------- ------------------- --------------------------

None of the above outstanding options were exercisable at
June 30, 1999 (Note 11).

(e) On May 10, 1999, the Company's Board of Directors
adopted the 1999 Stock Option Plan which provides for the
grant of options intended to qualify as "incentive stock
options" under Section 422 of the Internal Revenue Code and
options that are not intended to so qualify ("nonstatutory
stock options"), as well as stock appreciation rights. The
total number of shares of common stock reserved for issuance
under the plan is 1,650,000 plus an indeterminate number of
shares of common stock issuable upon the exercise of "reload
options". The 1999 Stock Option Plan was approved by
stockholders on May 10, 1999.

F-28

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

The plan is administered by the Company's Board of Directors
and options may be granted to all full-time employees
(including officers) and directors of the Company or its
subsidiary. No options have been granted under this plan.

9. Supplemental
Cash Flow
Information

Year ended June 30,
-----------------------------------------------

Cash paid: 1997 1998 1999
------------------------------- --------------- -------------- ---------------

Interest $ 2,254 $ 4,136 $ 250

Income taxes 48,916 20,901 131,827

Non cash investing and
Financing activities:

Issuance of common stock
for notes from
stockholders - 1,340,000(i) -
------------------------------- --------------- -------------- ---------------

These non-recourse (except with regard to interest)
promissory notes dated July 1, 1997, are due and payable in
five years and bear interest at 8.5% per annum payable
quarterly. The 1,713,118 shares issued in connection with
these notes included 1,278,447 shares to the majority
stockholder. The notes are collateralized by the shares of
stock purchased.

F-29

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

10. Employee
Benefit Plan Effective June 1, 1998, the Company adopted a 401(k) plan
covering substantially all employees. Participants may elect
to contribute to the plan a minimum of 1% to a maximum of
18% of their annual compensation, not to exceed a dollar
limit set by law. Annually, the Company will determine a
discretionary matching contribution equal to a percentage of
each participant's contribution. Contributions made by the
Company for the years ended June 30, 1998 and 1999 were
approximately $4,000 and $7,000, respectively.

11. Earnings Per
Share A reconciliation of shares used in calculating basic and
diluted earnings per share follows:

Year ended June 30,
-------------------------------------------

1997 1998 1999
------------------------------- --------------- --------------- -----------

Basic 3,258,459 4,966,885 5,205,084

Effect of assumed conversion
of employee stock options 750,022 2,281 -
------------------------------- --------------- --------------- -----------

Diluted 4,008,481 4,969,166 5,205,084
------------------------------- --------------- --------------- -----------

Outstanding options to purchase shares of common stock were
not included in the computation of diluted earnings per
share because, upon exercise, the common stock would be
issued by the majority stockholder in accordance with the
option agreements. (See Note 8.) These options were as
follows:

Year ended June 30,
------------------------------------------

1997 1998 1999
------------------------------- --------------- -------------- -----------

Number of options - 255,689 345,180

Weighted-average exercise
price - $5.87 $5.87
------------------------------- --------------- -------------- -----------

F-30

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

The shares held by the majority stockholder subject to
employee options have been included in the computation of
basic and diluted earnings per share.

12. Subsequent
Events (a) Public Offering

The registration statement for the Company's Public Offering
became effective on July 28, 1999. The Company consummated
the Public Offering on August 2, 1999 and issued 1,600,000
shares of common stock at an offering price of $7.50 per
share. The Company granted the underwriters of the Public
Offering 200,000 warrants for nominal consideration. The
warrants entitle the underwriters to purchase 200,000 shares
of common stock from the Company at $9.00 per share. The
warrants are exercisable for four years commencing on July
29, 2000. In addition, the underwriters were granted an
overallotment option by the Company to buy 300,000 shares of
common stock at $7.50 per share exercisable by September 11,
1999. The underwriters did not exercise this option.
Concurrent with the Public Offering, the Selling Stockholder
sold 400,000 shares of common stock from its holdings at
$7.50 per share. The Company received proceeds of
$12,883,100 representing payment for the sale of the
1,600,000 shares plus 73% of the proceeds from the sale of
the 400,000 shares by the Selling Stockholder for repayment
of $1,992,900 of indebtedness owed by the Selling
Stockholder in the amount of $1,042,500 and the balance to
amounts owed by affiliates of the Selling Stockholder to the
Company. Such proceeds were net of underwriting discounts
and commissions, a non-accountable expense allowance and a
financial advisory fee paid to the underwriters plus certain
fees and expenses paid by the Company.

The proforma balance sheet at June 30, 1999 reflects the
Public Offering transactions noted above.

F-31

National Medical Health
Card Systems, Inc.
and Subsidiary

Notes to Consolidated Financial Statements

(b) The Company entered into an employment agreement with
the majority stockholder effective July 1, 1999. Pursuant to
this agreement, the majority stockholder has agreed to serve
as Chairman of the Board of Directors at an annual salary of
$200,000, subject to adjustment by the Board of Directors.
The agreement commenced on July 1, 1999 and has a term of
two years, unless terminated by the Company for cause, or in
the event the stockholder becomes permanently disabled. The
agreement provides for certain fringe benefits payable to or
on behalf of the majority stockholder, such as the use of an
automobile. In addition, the agreement provides for certain
termination benefits payable to the majority stockholder,
which depending upon the reason for termination, can be
equal to up to two years salary.

(c) Issuance of Stock Options.

On August 3, 1999, the Company granted incentive options to
employees under the 1999 Stock Option Plan (see note 8(e))
to purchase 108,700 shares of common stock at $7.50 per
share. The options vest and become exercisable one-third
upon completion of one year of employment and one-third each
year thereafter. These options terminate on August 3, 2004.

On August 3, 1999, the Company granted nonstatutory options
to three outside directors under the 1999 Stock Option Plan
(see note 8(e)) to purchase 30,000 shares of common stock at
$7.50 per share. The options vest and become exercisable as
follows: (i) one-third on August 3, 1999, (ii) one-third on
August 3, 2000, and (iii) one-third on August 3, 2001. These
options terminate on August 3, 2004.

F-32

Report of Independent Certified Public Accountants on Financial Statement
Schedule

The audits referred to in our report to the Board of Directors of National
Medical Health Card Systems, Inc. and Subsidiary, dated September 22, 1999,
relating to the consolidated financial statements of National Medical Health
Card Systems, Inc. and Subsidiary, included the audit of the schedule listed
under Item 14 of Form 10-K for each of the three years in the period ended June
30, 1999. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based upon our audits.

In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.

BDO Seidman, LLP

September 22, 1999

National Medical Health
Card Systems, Inc.
and Subsidiary

Schedule II - Valuation and Qualifying Accounts

Additions
Balance at charged to
beginning of costs and Balance at end
Description period expense (a) Write-offs Other Changes of period
- ----------------------------------- ---------------- ----------------- ----------------- ---------------- -----------------

Reserves and allowances
deducted from asset
accounts:

Allowance for possible
losses

Year ended June 30, 1997 $100,000 $115,000 $ 15,000 $ - $200,000

Year ended June 30, 1998 $200,000 $ 70,000 $ 70,000 $ - $244,189

Year ended June 30, 1999 $244,189 $657,544 $ 55,389 $ - $846,344

(a) Charged to bad debts.

S-1

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, 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.

September 28, 1999 By: /s/ Bert E. Brodsky
--------------------------------------
Bert E. Brodsky, Chairman of the Board and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Signatures Capacity Date
---------- -------- ----

/s/ Bert E. Brodsky
________________________ Chairman of the Board and September 28, 1999
Bert E. Brodsky Chief Executive Officer

/s/ Gerald Shapiro
________________________ Vice Chairman of the Board September 28, 1999
Gerald Shapiro and Secretary

/s/ Richard J. Strauss
________________________ Director September 28, 1999
Richard J. Strauss,
M.D., F.A.C.S

/s/ Gerald Angowitz
________________________ Director September 28, 1999
Gerald Angowitz

/s/ Kenneth J. Daley
________________________ Director September 28, 1999
Kenneth J. Daley

/s/ Berry Denaro
________________________ Treasurer and Chief Financial September 28, 1999
Barry Denaro Officer