U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to
Commission file number 000-26749
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
New York 11-2581812
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
26 Harbor Park Drive, Port Washington, NY 11050
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (516) 626-0007
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's Common Stock, as of May
10, 2001 was 7,121,496 shares.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1 - CONDENSED FINANCIAL STATEMENTS: 3
CONSOLIDATED BALANCE SHEETS as of June 30, 2000 3
and March 31, 2001 (unaudited)
CONSOLIDATED STATEMENTS OF INCOME (unaudited) 4
for the three months and nine months ended
March 31, 2000 and 2001
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) 5
for the nine months ended March 31, 2000 and 2001
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 16
CONDITION AND RESULTS OF OPERATIONS
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 23
MARKET RISK
PART II - OTHER INFORMATION 24
ITEM 1 - LEGAL PROCEEDINGS 24
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS 25
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 26
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26
ITEM 5 - OTHER INFORMATION 26
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 26
PART I - FINANCIAL INFORMATION
ITEM I - CONDENSED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
June 30 March 31
ASSETS 2000 2001
Current: (Unaudited)
Cash and cash equivalents (including cash equivalent investments of $11,181,583 $ 15,724,730 $ 5,290,058
and $2,031,745 and cash restricted as to its use of $569,760 and $1,501,538)
Accounts receivable, less allowance for possible losses of $726,551 13,409,219 28,554,139
and $1,367,144
Rebates receivable 3,685,576 7,204,186
Due from affiliates 903,958 1,010,991
Deferred income tax 409,000 798,246
Other current assets 268,651 592,445
Total current assets 34,401,134 43,450,065
Property, equipment and software development costs, net 6,424,170 7,837,591
Due from affiliates 3,486,996 3,743,391
Customer relationships, net of accumulated amortization of $8,527 - 296,473
Goodwill, net of accumulated amortization of $210,368 - 11,975,828
Other Assets 51,318 48,162
$ 44,363,618 $67,351,510
LIABILITIES AND STOCKHOLDERS'EQUITY
Current:
Accounts payable and accrued expenses $ 27,430,684 $48,273,752
Current portion of capital lease obligations 456,437 532,813
Loans payable-current - 203,732
Due to officer/stockholder 60,000 417,880
Due to affiliates 311,767 -
Income taxes payable 11,991 11,904
Other current liabilities 100,036 356,625
Total current liabilities 28,370,915 49,796,706
Capital lease obligations, less current portion 1,875,444 1,468,357
Long term loans payable and other liabilities - 77,095
Deferred tax liability 692,000 970,888
Total liabilities 30,938,359 52,313,046
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock $.10 par value; 10,000,000 shares authorized, none outstanding - -
Common Stock, $.001 par value, 25,000,000 shares authorized, 6,912,496 and 6,913 7,313
7,312,496 shares issued 6,721,496 and 7,121,496 outstanding
Additional paid-in-capital 12,405,010 13,254,530
Retained earnings 2,096,203 2,839,513
Treasury stock at cost, 191,000 shares (743,767) (743,767)
Notes receivable - stockholders (339,100) (319,125)
Total stockholders' equity 13,425,259 15,038,464
$44,363,618 $67,351,510
See accompanying condensed notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended Nine months ended
March 31 March 31
2000 2001 2000 2001
---- ---- ---- ----
Revenues $43,089,755 $72,373,778 $ 126,265,944 $192,513,448
Cost of claims 38,770,872 66,221,855 115,414,966 177,107,586
Gross Profit 4,318,883 6,151,923 10,850,978 15,405,862
Selling, general and administrative expenses* 3,635,735 5,858,255 8,768,141 14,583,579
Operating income 683,148 293,668 2,082,837 822,283
Other income, net 235,637 253,061 724,341 671,727
Income before income taxes 918,785 546,729 2,807,178 1,494,010
Provision for income taxes 390,000 269,700 1,193,000 750,700
Net Income $ 528,785 $ 277,029 $ 1,614,178 $ 743,310
Earnings per common share:
Basic $ 0.08 $ 0.04 $ 0.24 $ 0.10
Diluted $ 0.08 $ 0.04 $ 0.24 $ 0.10
Weighted average number of common shares outstanding:
Basic 6,871,870 7,121,496 6,712,871 7,093,759
Diluted 6,871,870 7,150,501 6,712,871 7,101,385
* Includes amounts charged by affiliates aggregating: $ 840,728 1,017,208 $2,138,972 $ 2,992,760
See accompanying condensed notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
March 31
2000 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
OPERATING ACTIVITIES:
Net income $ 1,614,178 $ 743,310
Depreciation and amortization 851,561 1,802,209
Bad debt expense and allowance for possible losses 600,000 377,545
Compensation expense accrued to officer/stockholder 30,000 357,880
Deferred income taxes 696,000 (39,803)
Interest accrued on stockholders' loans (12,750) (19,125)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (4,141,246) (8,154,271)
Other current assets (328,463) (149,660)
Rebates receivable (1,606,617) (719,047)
Due to/from affiliates (4,656) (625,195)
Other assets 11,408 44,878
Increase (decrease) in:
Accounts payable and accrued expenses 1,923,574 10,143,733
Due to officer/stockholder (390,000) -
Income taxes payable (352,345) (43,868)
Other liabilities 52,943 8,868
Net cash provided by (used in) operating activities (1,056,413) 3,727,454
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,586,124) (2,542,670)
Disposal of capital assets - 30,500
Acquisition of PAI, net of cash and cash equivalents - (4,487,006)
Acquisition of PMP, net of cash and cash equivalents - (6,683,788)
Repayment of note by stockholder 1,036,125 -
Interest received on notes from stockholders - 39,100
Net cash used in investing activities (549,999) (13,643,864)
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock-net 9,538,037 -
Proceeds from bank line of credit - 4,000,000
Repayment of bank line of credit - (4,000,000)
Treasury Stock (528,358) -
Repayment of debt and capital lease obligations (45,299) (518,262)
Net cash provided by (used in) financing activities 8,964,380 (518,262)
Net increase (decrease) in cash and cash equivalents 7,357,968 (10,434,672)
Cash and cash equivalents, beginning of period 2,815,863 15,724,730
Cash and cash equivalents, end of period $ 10,173,831 $5,290,058
See accompanying condensed notes to consolidated financial statements
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unadudited)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
National Medical Health Card Systems, Inc. (the "Company") and its wholly owned
subsidiaries, Pharmacy Associates, Inc. ("PAI"), Interchange PMP, Inc. ("PMP"),
National Medical Health Card IPA, Inc. ("IPA") and Specialty Pharmacy Care, Inc.
("Specialty"). Unless the context otherwise requires, references herein to the
"Company" refer to the Company and its subsidiaries, PAI, PMP, IPA and
Specialty, on a consolidated basis. The results of operations and balance sheet
of PAI have been included in the consolidation as of July 20, 2000, the
effective date that the Company acquired PAI. The results of operations and
balance sheet of PMP have been included in the consolidation as of March 5,
2001, the effective date that the Company acquired PMP. All material
intercompany balances and transactions have been eliminated in the
consolidation.
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and substantially in the form
prescribed by the Securities and Exchange Commission in instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, the March 31, 2001 and 2000 unaudited interim financial statements
include all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of results for these interim periods. In the opinion of
the Company's management, the disclosures contained in this Form 10-Q are
adequate to make the information presented not misleading when read in
conjunction with the Notes to Consolidated Financial Statements included in the
Company's Form 10-K, as amended, for the year ended June 30, 2000. The results
of operations for the three and nine month period ended March 31, 2001 are not
necessarily indicative of the operating results to be expected for the full
year.
Certain amounts in the prior period have been reclassified to conform to
the current period presentation. (See Note 10.) For information concerning the
Company's significant accounting policies, reference is made to the Company's
Annual Report on Form 10-K, for the year ended June 30, 2000, as amended (the
"Annual Report").
2. BUSINESS ACQUISITIONS
Pursuant to the terms of the Agreement and Plan of Merger between the
Company and PAI, dated July 20, 2000 (the "PAI Agreement"), the Company acquired
PAI, a regional prescription benefit management company operating in Arkansas,
Louisiana, and Mississippi. Under the terms of the merger agreement,
stockholders of PAI received an aggregate of $6 million in cash and 400,000
shares of the Company's Common Stock, which was valued at $849,920 on the
acquisition date. The acquisition was accounted for under the purchase method of
accounting and the results of PAI's operations were included in the consolidated
financial statements commencing with the acquisition date. The excess of the
acquisition costs over the fair value of identifiable net assets acquired was
$6,218,469, which consists of the following components: (i) customer
relationships valued at $131,000; which will be amortized entirely over the
current year; (ii) non-compete contracts valued at $44,400, which will be
amortized over five (5) years; and (iii) goodwill of $6,043,069 which will be
amortized over twenty (20) years. PAI stockholders may also receive additional
consideration of up to $2 million payable in a combination of cash and Common
Stock over a two-year period if certain financial targets of PAI are met.
The Company entered into an Employment Agreement and a Stock Option
Agreement with the former president of PAI. In addition, substantially all of
the former employees of PAI were hired by the Company.
The Company assumed all the assets and liabilities of PAI, as of July 20,
2000, including two outstanding loans as follows: (i) a note payable to Regions
Bank with a principal balance as of March 31, 2001 of $78,832. Such note is
payable in monthly installments in the amount of $2,432, including interest at
the rate of 7.75% and principal through July 2004. Repayment of such note is
currently secured by a lien on and a security interest in an automobile; and
(ii) a loan representing prepaid rebates from its rebate administrator with a
principal balance as of March 31, 2001 of $175,159, payable with interest at the
rate of 8.5% in four quarterly payments of $94,261 commencing December 31, 2000
and ending September 30, 2001.
On March 5, 2001, the Company acquired substantially all of the assets and
certain of the liabilities of Provider Medical Pharmaceutical, LLC ("PMP"), an
Oklahoma limited liability company, pursuant to an Asset Purchase Agreement
among the Company, PMP and the members of PMP. The assets acquired from PMP
included, among other things, PMP's accounts receivable and intellectual
property, PMP's rights under various contracts and the goodwill value of PMP's
business.
The purchase price for the assets consisted of: (i) $4,000,000 in cash,
(ii) the satisfaction by the Company of PMP's bank indebtedness of approximately
$1,300,000, and (iii) cancellation of the $1,500,000 promissory note from PMP to
the Company, dated January 16, 2001. Part of the cash portion of the purchase
price was paid into an escrow account to provide security for the
indemnification obligations of PMP and its members to the Purchaser. The
acquisition was accounted for under the purchase method of accounting and the
results of PMP's operations were included in the consolidated financial
statements, commencing with the acquisition date. The excess of the acquisition
costs over the fair value of identifiable net assets acquired was $6,469,670,
which consists of the following components: (i) customer relationships valued at
$305,000, which will be amortized over 2.5 years; and (ii) goodwill of
$6,164,670, which will be amortized over twenty (20) years. The Company will be
required to pay up to $1,000,000 of additional cash consideration if certain
financial targets relating to PMP's business are met over the next three years.
The cash portion of the purchase price was obtained by a loan to the
Company from The Chase Manhattan Bank pursuant to a Master Grid Note in the
principal amount of $4,000,000 (the "Note"). The amount borrowed under the Note
was repaid to the Bank on March 9, 2001, and no advances have been made since
that date. Interest on any advances under the Note was payable on March 30, 2001
and the last day of each month thereafter; the interest rate is determined at
the time of each such advance. The term of the Note expires on December 31,
2001.
Simultaneously with the consummation of the acquisition, the Company
entered into an Employment Agreement and Stock Option agreement with the former
President of PMP, pursuant to which he will serve as its Senior Vice President
of Business Development.
The summarized unaudited pro forma results of operations set forth below
for the three and nine months ended March 31, 2000 and March 31, 2001 assume the
PAI and PMP acquisitions had occurred as of the beginning of each of these
periods.
Three Months Ended March 31
2000 2001
Revenues $ 64,665,102 $77,768,108
Net income $ 206,587 $ 433,165
Net income per common share:
Basic $ 0.03 $ 0.06
Diluted $ 0.03 $ 0.06
Pro forma weighted average number of common shares outstanding:
Basic 7,271,870 7,121,496
Diluted 7,271,870 7,150,501
Nine Months Ended March 31
2000 2001
Revenues $ 186,979,285 $212,923,627
Net income $ 1,098,069 $ 538,979
Net income per common share:
Basic $ 0.15 $ 0.08
Diluted $ 0.15 $ 0.08
Pro forma weighted average number of common shares outstanding:
Basic 7,112,871 7,121,496
Diluted 7,112,871 7,129,122
Pro forma adjusted net income per common share, including acquisitions, may
not be indicative of actual results, primarily because pro forma earnings
include historical results of operations of the acquired entity and do not
reflect any cost savings or potential sales erosion that may result from the
Company's integration efforts.
3. STOCK OPTIONS
During the nine months ended March 31, 2001, the total number of incentive
options granted under the 1999 Stock Option Plan (the "Plan"), net of incentive
options forfeited during the same period, were 476,377. The options are
exercisable at prices ranging from $1.67 to $7.50 and terminate between five and
six years from the grant date. Of these, 533,000 are currently in the money,
with exercise prices lower than the current stock price, and 111,000 are
currently exercisable. None of these options have been exercised to date. During
this period the Company also granted nonstatutory options to its outside
Directors (84,000) and the majority shareholder of PMP (15,000) under the Plan
to purchase up to an aggregate of 99,000 shares of Common Stock at prices
ranging from $1.67 to $6.00 per share. These options terminate after five years.
Of these, 44,000 are currently in the money, and 14,680 are currently
exercisable; the balance are exercisable over three years after one year from
the grant date. None of the currently exercisable nonstatutory options have been
exercised to date. As of March 31, 2001 an aggregate of 1,231,806 options had
been granted under the Plan, of which 1,102,806 are incentive options. There are
a total of 1,650,000 shares reserved for issuance under the plan.
On February 20, 2001, the Company granted 500,000 incentive stock options
to Mr. Brodsky under the Plan. These options are exercisable at $1.84 per share
over a five-year period starting on the grant date. The options terminate
February 20, 2006. These options are included in the discussion above.
4. 2000 RESTRICTED STOCK GRANT PLAN
On October 16, 2000, the Board of Directors approved the adoption of the
Company's 2000 Restricted Stock Grant Plan (the "Stock Grant Plan"). The Stock
Grant Plan was subsequently adopted by the Shareholders at the Company's Annual
Meeting on November 20, 2000. The Stock Grant Plan provides for the issuance of
shares that are subject to both standard restrictions on the sale or transfer of
such shares (e.g., the standard seven year vesting schedule set forth in the
Stock Grant Plan) and /or restrictions that the Board may impose, such as
restrictions relating to length of service, corporate performance, or other
restrictions. As of March 31, 2001 no grants had been made under the Stock Grant
Plan; and therefore, no shares had vested under it. There are 700,000 shares of
Common Stock reserved for issuance in connection with grants made under the
Stock Grant Plan.
5. EARNINGS PER SHARE
A reconciliation of shares used in calculating basic and diluted earnings
per share follows:
Three months ended March 31
2000 2001
---- ----
Basic 6,871,870 7,121,496
Effect of assumed conversion of employee stock options - 29,005
--------- ---------
Diluted 6,871,870 7,150,501
Nine months ended March 31
2000 2001
---- ----
Basic 6,712,871 7,093,759
Effect of assumed conversion of employee stock options - 7,626
--------- ---------
Diluted 6,712,871 7,101,385
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30 March 31
2000 2001
---- ----
Claims payable $22,571,928 $39,165,993
Rebates payable to sponsors 3,565,258 5,587,005
Other payables 1,293,498 3,520,754
----------- -----------
$27,430,684 $48,273,752
=========== ===========
7. RELATED PARTY TRANSACTIONS
Certain costs paid to affiliates were capitalized as software development
costs. For the nine months ended March 31, 2001, the amount charged by
affiliates and capitalized was approximately $500,000.
The Company purchased computer equipment, furniture and fixtures from an
affiliate during the nine months ended March 31, 2001 for approximately
$373,000. The price of some of these assets included a 20% fee for purchasing,
handling and other services.
For the periods presented, certain general, administrative and other
expenses reflected in the financial statements include allocations of certain
corporate expenses from affiliates which take into consideration personnel,
estimates of the time spent to provide services or other appropriate bases.
These allocations include services and expenses for 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 a stand-alone basis,
management believes that any variance in costs would not be material.
General and administrative expenses related to transactions with affiliates
included in the statement of income are:
Three months ended March 31
2000 2001
Software maintenance and related services $ 260,944 $ 291,011
Management and consulting fees 309,423 386,428
Administrative and bookkeeping services and supplies 186,841 210,311
Rent and utilities 83,520 129,458
------- ---------
$ 840,728 $1,017,208
Nine months ended March 31
2000 2001
---- ----
Software maintenance and related services $ 717,944 $ 851,316
Management and consulting fees 655,131 1,171,805
Administrative and bookkeeping services and supplies 496,378 579,181
Rent and utilities 269,519 390,458
------- ---------
$ 2,138,972 $2,992,760
The Company has accrued approximately $318,000 of interest income from
affiliates, arising from two loans, for the nine months ended March 31, 2001.
This compares to approximately $263,000 for the nine months ended March 31,
2000. As of March 31, 2001, the Company received cash of $23,750 against this
accrual. The two loans are as follows: (i) as of March 31, 2001, Sandata, Inc.,
a corporation of which Mr. Brodsky is the Chairman of the Board, Treasurer and a
principal stockholder ("Sandata"), owed the Company $511,772 pursuant to a
promissory note dated May 31, 2000, made payable by Sandata to the order of the
Company in the original principal amount of $500,000 plus interest at the rate
of 9-1/2%; interest on such note is payable quarterly; and such note, which was
originally due on June 1, 2001, is now due on March 31, 2002; (ii) on June 1,
1998, the Company 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 ("P.W. Capital"), a company
affiliated with Mr. Brodsky. On June 1, 1998 P.W. Capital executed a demand
promissory note made payable to the order of the Company 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 the Company. On June 1, 1998, Mr. Brodsky executed an unconditional guaranty
in favor of the Company for the full and prompt payment to the Company of all
amounts payable under the P.W. Capital promissory note dated June 1, 1998. Such
note was secured by 1,022,758 shares of Common Stock of the Company and is
without recourse to the maker. Such note was restructured by a new non-recourse
promissory note dated July 31, 2000, made payable by P.W. Capital to the order
of the Company in the amount of $3,890,940. Such note is payable in annual
installments of $400,000, consisting of principal and interest at the rate of
8-1/2% per annum on each of the first and second anniversary dates, with the
total remaining balance of principal and interest due and payable on July 31,
2003. The note is collateralized by 1,000,000 shares of Common Stock of the
Company.
The Company occupies approximately 15,500 square feet of space at 26 Harbor
Park Drive, Port Washington, New York under an amended lease at a monthly cost
of $46,999 (including utilities). The lessor is BFS Realty, LLC ("BFS"), 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. The Company believes that the terms
of the 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.
During the fiscal years ended June 30 1999 and 2000, the Company paid another
affiliated party approximately $15,833 and $10,200, respectively, in connection
with improvements to the building in which the Company's offices are located. In
October, 2000, an oral agreement was reached among BFS, Sandata and the Company
as to a reallocation of the common space at 26 Harbor Park Drive, which resulted
in an increase of $6,400 per month in the rent payable by the Company. This
increase was retroactive to June 1, 2000, resulting in an aggregate increase,
over the term of the lease, of $294,000. Furthermore, in March 2001, the Company
took over approximately 900 additional square feet as part of renovations to the
building and further reallocation of the common space. This additional space and
the unamortized cost of the renovations led to a monthly increase in rent of
$7,000. This increase will result in an aggregate increase, over the term of the
lease, of $252,000. The Company anticipates that negotiations for a new
long-term lease, reflecting the revised square footage and on substantially
similar terms (except for market value adjustments in rent, expenses and the
like) as the present lease, will begin in the near future. Sandata also occupies
space at 26 Harbor Park Drive. Except for certain common areas, Sandata and the
Company do not share space in such facility.
8. MAJOR CUSTOMERS AND PHARMACIES
For the three months ended March 31, 2000, approximately 38% of revenues of
the Company were from two plan sponsors administering multiple plans. For the
three months ended March 31, 2001, approximately 17% of the consolidated
revenues of the Company were from one plan sponsor administering multiple plans.
For the nine months ended March 31, 2000, approximately 47% of the revenues were
from three plan sponsors, two of which were administering multiple plans, while
19% of the revenues for the nine months ended March 31, 2001 were from one plan
sponsor administering multiple plans. Amounts due from this sponsor at March 31,
2001 approximated $2,035,000.
During the nine months ended March 31, 2001, the Company settled certain
fees due from a major sponsor related to a capitation arrangement for calendar
year 1999, which reduced revenue by $733,000. The calendar year 2000 contract
with this sponsor is no longer a capitation arrangement. During the three months
ended March 31, 2001, the Company also reached agreement with a former major
sponsor to settle amounts due. This settlement increased selling, general and
administrative expenses by $588,000 (See Note 12 Subsequent Events).
For the three months ended March 31, 2000 and 2001, approximately 43% and
28% of the cost of claims were from two pharmacy chains, respectively. For the
nine months ended March 31, 2000 and 2001, approximately 42% and 25% of the cost
of claims were from these same two pharmacy chains. Amounts payable to these two
pharmacy chains at March 31, 2001 were approximately $8,143,000.
9. LITIGATION
On February 9, 1999, the Company was informed by counsel that an action had
been commenced against the Company on December 8, 1998 by the West Contra Costa
Unified School District (the "School District") and an individual plaintiff in
the State of California. The case was subsequently removed to the U.S. District
Court for the Northern District of California. The complaint alleges, among
other things, (i) that the Company unilaterally terminated its contract with the
School District in violation of the terms of the contract; (ii) that the
termination resulted in the School District incurring approximately $150,000 in
additional costs; and (iii) that, due to the wrongful termination of the
contract, the School District was forced to secure a replacement for the
benefits and the services that were to have been provided by the Company,
thereby incurring approximately $867,000 in additional expenses. The complaint
also seeks treble damages, attorneys' fees, costs, interest to date and punitive
damages. If treble damages were allowable and a judgment were to be entered
against the Company, the Company would be liable for damages in excess of
$1,500,000. Since the School District and the Company have recently begun a
mediation process, the initial results of which have been positive, the Company
has decided to postpone the deposition and the dispositive motion it has been
contemplating. A second mediation session has been scheduled for June 14, 2001.
The Company denies the allegations and intends to defend this action should it
come to trial. In the opinion of management, the outcome of this matter will not
have a material adverse effect on the Company's financial position or its
results of operations.
On October 23, 2000, the Company was served with a complaint filed by
Allcare Health Management Systems, Inc. ("Allcare") in the United States
District Court for the Northern District of Texas alleging that the Company and
numerous other defendants infringe certain patent rights allegedly owned by
Allcare.
On April 10, 2001, the Company settled the lawsuit with Allcare, and all of
the claims were dismissed by the Court on April 17, 2001. As part of the
settlement, the Company, and its subsidiaries were released from any and all
claims that were or could be brought in the lawsuit. The release covers all
prior periods as well as all future periods as long as the Company continues
licensing its pharmacy benefit management information technology systems (the
"NMHCS Systems") from a licensee of Allcare. Furthermore, the future activities
of entities acquired by the Company are covered under the release as long as
such entities' systems are converted to the NMHCS Systems within six months of
acquisition. The settlement provides Allcare the right to audit the Company in
the future to insure the NMHCS Systems are still covered by the release. The
Company also has the option to extend the duration of the release, for a fee, if
it licenses its NMHCS Systems from a different vendor in the future.
On January 11, 2001, Mary T. Casale, a former employee of the Company,
filed a Charge of Discrimination against the Company with the New York District
Office of the U.S. Equal Employment Opportunity Commission ("EEOC"). Ms. Casale
alleges, among other things, that she was constructively discharged as a result
of discriminatory age and gender practices and that she was subjected to
repeated discriminatory comments regarding her age and gender. The matter is
presently pending before the EEOC, which is expected to explore a voluntary
resolution of the dispute and to investigate Ms. Casale's allegation. The
Company believes that is has not violated any applicable laws, and is defending
the charges through its attorneys. The matter remains in its early stages, and
the EEOC has made no findings for or against any party. In addition, the Company
is being defended pursuant to an employment practices liability policy, and has
no reason to believe that coverage does not exist for the within claim.
10. RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements". In
June 2000, the SEC delayed the required implementation date to the fourth
quarter of fiscal years beginning after December 15, 1999. The Company adopted
SAB 101 which did not have a material effect on its results of operations and
financial position.
The consolidated financial statements reflect, for all periods presented,
the adoption of the classification requirements pursuant to Emerging Issues Task
Force ("EITF") 00-14, Accounting for Certain Sales Incentives-Coupons, Rebates
and Discounts, which was effective in the Company's third quarter of 2001.
Accordingly, the Company reduced cost of claims for the periods presented for
rebates received from pharmaceutical manufacturers and reduced revenues for the
rebates which are shared with the Company's customers. Historically, the Company
recorded the net difference between the rebates received and paid out as a
reduction to cost of claims.
11. SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended March 31, 2000 and March 31, 2001, the Company
paid $23,488 and $178,489 in interest and $265,000 and $838,210 in income taxes,
respectively. In a non-cash transaction, the Company issued 400,000 shares of
its Common Stock, valued at $849,920, as part of the acquisition of PAI. (See
Note 2 above for additional information about the PAI agreement).
12. SUBSEQUENT EVENTS
The Company has reached agreement with a former major sponsor concerning
the amounts due to them for rebates and other contractual terms based on the
close out of the contract. The Company has reserved an additional $588,000 in
the quarter ended March 31, 2001 to account for this settlement. The total
amount to be paid to this sponsor is $1,750,000.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
ITEM II - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
Revenues increased $29.3 million, or approximately 68%, from $43.1 million for
the three months ended March 31, 2000, to $72.4 million for the three months
ended March 31, 2001. Of the increase, $20.2 million, or 69%, was due to the
inclusion of revenues from PAI and PMP in the quarter ended March 31, 2001. $5.1
million of the increase was due to revenues related to new sponsors or new
services offered. The majority of the balance of the year-over-year increase, or
$4.4 million, was due primarily to increased revenues from other existing
sponsors as a result of several factors including higher charges relating to
increased cost of pharmaceuticals, new drugs, plan participant growth and an
increase in the average number of claims per plan participant.
Revenues for the quarter for both years were adjusted based on EITF 00-14,
Accounting for Certain Sales Incentives - Coupons, Rebates and Discounts (See
Note 10). The financial impact of this is to reduce revenues by the amount of
rebates to be paid to customers and reduce cost of claims by the gross amount of
rebates received by the Company. Previously the net difference between the gross
amount received by the Company and the amount paid to customers was treated as a
reduction in cost of claims with no effect on revenue. The impact of this change
was to reduce revenue and cost of claims by $1.4 million and $1.0 million for
the quarters ended March 31, 2001 and 2000, respectively.
Cost of claims increased $27.4 million, or approximately 71%, from $38.8 million
for the three months ended March 31, 2000, to $66.2 million for the three months
ended March 31, 2001. PAI and PMP accounted for $17.7 million, or 65% of the
increase. As a percentage of revenues, cost of claims increased from 90.0% to
91.5% for the three months ended March 31, 2000 and March 31, 2001,
respectively. The 90.0% for the quarter ended March 31, 2000 was favorably
impacted by a one-time adjustment due to a more favorable arrangement with a
sponsor. The 91.5% for the quarter ended March 31, 2001 is much more
representative of the Company's historical performance. The acquisitions of PAI
and PMP have aided in starting to drive this percentage down.
Gross profit increased from $4.3 million, for the three months ended March 31,
2000, to $6.1 million for the three months ended March 31, 2001; a $1.8 million,
or 42% increase. PAI and PMP accounted for $2.5 million, or 135%, of the
increase. Gross profit, as a percentage of revenue, decreased from 10.0% to 8.5%
for the three months ended March 31, 2000 and March 31, 2001, respectively. The
decline year-over-year is principally related to the one time adjustment to cost
of claims taken in the three months ended March 31, 2000. However, the Company
has also seen a decline in profit margins due to competitive pressures.
Selling, general, and administrative expenses, which include amounts charged by
affiliates, increased $2.2 million, or approximately 61% from $3.6 million for
the three months ended March 31, 2000 to $5.8 million for the three months ended
March 31, 2001. Approximately 45% of the increase, or $1.0 million, was related
to the inclusion of PAI and PMP in the consolidated numbers. The balance of the
growth in these expenses was principally related to four areas: (i) an
approximate $409,000 increase in expenditures related to increases in
compensation and benefits, primarily associated with new employees; (ii) an
approximate $204,000 increase in depreciation and amortization expenses related
to increased hardware procurement and software development; (iii) an approximate
$80,000 increase in data processing charges related to increased information
technology services; and (iv) an approximate $628,000 reserve accrued related to
the settlement of the Allcare patent infringement (see Note 9 - Litigation) and
the reconciliation and settlement of amounts due to a former sponsor (See Note
12 - Subsequent Events).
General and administrative expenses charged by affiliates increased
approximately $176,000 or 21% year-over-year from $841,000 to $1,017,000 for the
three months ended March 31, 2000 and March 31, 2001, respectively. The majority
of the increase related to increased information technology services, and
additional administrative support services and supplies to support the continued
expansion of the business.
Other net income increased by approximately $17,000, or 7%, for the three months
ended March 31, 2001, as compared to the three months ended March 31, 2000. The
reason for the net increase was a $52,000 increase in interest income related to
cash balances from PAI, offset by a $35,000 increase in interest expense because
the Company entered into a capital lease agreement with Hewlett Packard for
computer hardware and related software that went into effect March, 2000.
Income before income taxes declined $372,000, from $919,000 to $547,000, or 40%,
for the three months ended March 31, 2001 as compared to the three months ended
March 31, 2000. The primary reason for the decline was the $628,000 accrued
reserve for settlements, offset by the profitability of PAI and PMP. EBITDA
(earnings before interest, taxes, depreciation and amortization) for these same
periods showed a decline of $35,000, or 4%, from $999,000 for the three months
ended March 31, 2000 to $964,000 for the three months ended March 31, 2001. This
was due to the inclusion in the period ended March 31, 2001 of: (i) $141,000 of
goodwill amortization related to the PAI and PMP acquisitions; (ii) $10,000 of
depreciation of PAI's and PMP's assets; and (iii) $203,000 of incremental
depreciation related to new assets procured during the last year.
The effective tax rate increased from 42% for the three months ended March 31,
2000 to 50% for the three months ended March 31, 2001. The increase stemmed
primarily from the non-deductibility, for tax purposes, of the goodwill
amortization related to the acquisition of PAI.
Nine Months Ended March 31, 2001 Compared to Nine Months Ended March 31, 2000
Revenues increased $66.2 million, or approximately 52%, from $126.3 million for
the nine months ended March 31, 2000, to $192.5 million for the nine months
ended March 31, 2001. Of the increase, $49.6 million, or 75% was due to the
inclusion of revenues from PAI, subsequent to July 20, 2000, and PMP, subsequent
to March 5, 2001. $8.4 million of the increase was due to revenues related to
new sponsors or new services offered. The majority of the balance of the
year-over-year increase, or $9.0 million, was due primarily to increased
revenues from other existing sponsors as a result of several factors including
higher charges relating to increased cost of pharmaceuticals, new drugs, plan
participant growth, and an increase in the average number of claims per plan
participant. Both periods were negatively impacted by a net reduction in
revenues that arose when the Company settled certain fees due from a major
sponsor related to a capitation arrangement for calendar years 1997 - 1999. The
net reduction in revenues was $821,000 for the nine months ended March 31, 2000
and $733,000 for the nine months ended March 31, 2001. The calendar year 2000
contract with this sponsor is no longer a capitation arrangement.
Revenues for the nine months for both years were adjusted based on EITF 00-14,
Accounting for Certain Sales Incentives - Coupons, Rebates and Discounts. The
financial impact of this is to reduce revenues by the amount of rebates to be
paid to customers and reduce cost of claims by the gross amount of rebates
received by the Company. Previously the net difference between the gross amount
received by the Company, and the amount paid to customers was treated as a
reduction in cost of claims with no change to revenue. The impact of this change
was to reduce revenue and cost of claims by $3.9 million and $3.1 million for
the nine months ended March 31, 2001 and 2000, respectively.
Cost of claims increased $61.7 million, or approximately 53%, from $115.4
million for the nine months ended March 31, 2000, to $177.1 million for the nine
months ended March 31, 2001. PAI and PMP accounted for $44.7 million, or 72% of
the increase. As a percentage of revenues, cost of claims increased from 91.4%
to 92.0% for the nine months ended March 31, 2000 and March 31, 2001,
respectively. The percentage for the nine months ended March 31, 2000 was
favorably impacted by two items: (i) a $736,000 reduction in rebates payable
which arose when the Company reevaluated its liabilities to a plan sponsor; and
(ii) the one-time adjustment due to a more favorable arrangement with a sponsor.
Gross profit increased from $10.8 million for the nine months ended March 31,
2000 to $15.4 million for the nine months ended March 31, 2001; a $4.6 million,
or 43%, increase. PAI and PMP accounted for $4.9 million, or 107%, of the
increase. Gross profit as a percentage of revenue declined from 8.6% to 8.0% for
the nine months ended March 31, 2000 and March 31, 2001, respectively. The
decline is attributable to the impact of the two one-time adjustments, described
in the explanation for the change in cost of claims above. The Company has also
seen a decline in profit margins due to competitive pressures.
Selling, general, and administrative expenses, which include amounts charged by
affiliates, increased $5.8 million, or approximately 66%, from $8.8 million for
the nine months ended March 31, 2000 to $14.6 million for the nine months ended
March 31, 2001. Approximately 45% of the increase, or $2.6 million, was related
to the inclusion of PAI and PMP in the consolidated numbers. The balance of the
growth in these expenses was principally related to five areas: (i) an
approximate $1,354,000 increase in expenditures related to increases in
compensation and benefits, primarily associated with new employees; (ii) an
approximate $620,000 increase in depreciation and amortization expenses related
to increased hardware procurement and software development; (iii) an approximate
$314,000 increase in data processing charges related to increased information
technology services; (iv) an approximate $628,000 reserve accrued related to the
settlement of the Allcare patent infringement (See Note 9 - Litigation) and the
reconciliation and settlement of amounts due to a former sponsor (See Note 12 -
Subsequent Events); and (v) an approximate $266,000 increase in legal fees
related to the defense of the items discussed in Note 9 - Litigation.
General and administrative expenses charged by affiliates increased
approximately $854,000, or 40%, year-over-year from $2,139,000 to $2,993,000 for
the nine months ended March 31, 2000 and March 31, 2001, respectively. The
majority of the increase related to increased information technology services
and additional administrative support services and supplies to support the
continued expansion of the business.
Other net income declined by approximately $53,000, or 7%, for the nine months
ended March 31, 2001, as compared to the nine months ended March 31, 2000. The
main factor in the decline was a $155,000 increase in interest expense,
primarily because the Company entered into a capital lease agreement with
Hewlett Packard for computer hardware and related software that went into effect
in March 2000. The increase in interest expense was partially offset by a
$102,000 increase in interest income related to the inclusion of PAI.
Income before income taxes declined $1,313,000, or 47%, for the nine months
ended March 31, 2001, as compared to the nine months ended March 31, 2000. The
primary reasons for the decline were the one-time adjustments noted above: (i)
the $733,000 revenue reduction in the nine months ended March 31, 2001; (ii) the
$628,000 accrued reserve for settlements in the nine months ended March 31,
2001; (iii) the $736,000 reduction in rebates payable in the nine months ended
March 31, 2000; and (iv) the one-time adjustment due to a more favorable
arrangement with a sponsor in the nine months ended March 31, 2000. EBITDA for
these same periods showed a decline of $237,000, or 8%, from $2,934,000, for the
nine months ended March 31, 2000, to $2,697,000, for the nine months ended March
31, 2001. This was due to the inclusion of $334,000 of goodwill amortization
related to the PAI and PMP acquisitions in the period ended March 31, 2001,
$66,000 of depreciation of PAI's and PMP's assets, as well as $620,000 of
incremental depreciation of new assets procured during the last year.
The effective tax rate increased from 42.5%, for the nine months ended March 31,
2000, to 50.2%, for the nine months ended March 31, 2001. The increase stemmed
primarily from the non-deductibility, for tax purposes, of the goodwill
amortization related to the PAI acquisition.
Liquidity and Capital Resources
The Company's primary cash requirements are for capital expenditures and
operating expenses, including cost of pharmaceuticals, software and hardware
upgrades and the funding of accounts receivable. The Company also requires cash
for potential acquisitions of other prescription benefit management companies or
of companies providing related services. As of March 31, 2001, the Company had a
working capital deficit of $6.3 million, as compared to working capital of $6.0
million as of June 30, 2000. The primary reasons for the change in working
capital were the acquisitions of PAI and PMP. $11.2 million of cash and cash
equivalents, net of cash received, was utilized to acquire these companies
during the nine months ended March 31, 2001. These funds came from the Company's
working capital, thus a long term asset, goodwill, was acquired with a short
term asset, cash.
Net cash provided by operating activities was $3.7 million for the nine months
ended March 31, 2001, as compared to net cash used in operating activities of
$1.1 million for the nine months ended March 31, 2000. For the nine months ended
March 31, 2001, accounts payable increased by $2.0 million more than accounts
receivable, thus providing cash. This differs from the nine months ended March
31, 2000 where accounts receivable increased by $2.2 million more than accounts
payable, thus using cash. There was also $1 million more, during the nine months
ended March 31, 2001, of non-cash depreciation and amortization related to the
acquisitions and increased fixed assets.
Historically, the timing of the Company's accounts receivable and accounts
payable has generally been a net source of cash from operating activities. This
is the result of the terms of trade in place with plan sponsors, on the one
hand, and the Company's pharmacy network, on the other hand. These terms
generally lead to the Company's payments to participating pharmacies being
slower than its corresponding collections from plan sponsors. The Company
believes that this situation is not unusual in the pharmacy benefit management
industry and expects to operate on similar terms for the foreseeable future.
However, there can be no assurance that such terms of trade will continue in the
future; and if they were to change materially, the Company could require
additional working capital financing. There can be no assurance that such
financing could be obtained at rates or on terms acceptable to the Company, if
at all. If such terms of trade were to change materially, and/or if the Company
were unable to obtain additional working capital financing, there could be a
material adverse effect on the Company's business, financial condition or
results of operations.
Net cash used in investing activities was $13.6 million for the nine months
ended March 31, 2001. The net cash outlay for PAI was $4.5 million, representing
the initial payment of $6.0 million plus $0.2 million of related expenses, less
PAI's cash balance at July 20, 2000 of $1.7 million. The net cash outlay for PMP
was $6.7 million, representing the initial payment of $6.8 million plus $0.2
million of related expenses, less PMP's cash balance at March 5, 2001 of $0.3
million. In addition, there were $2.5 million of capital asset additions during
the period.
Net cash used in financing activities was $518,000 for the nine months ended
March 31, 2001, reflecting repayments against capital leases. The Company also
borrowed $4.0 million on March 5, 2001 under the Note to acquire PMP and repaid
the $4.0 million on March 9, 2001. This compares to $9.0 million provided by
financing activities for the nine months ended March 31, 2000, reflecting the
cash received from the Public Offering described in the Annual Report.
During fiscal year 2000, the Company entered into three capital lease
transactions for hardware and software. The purchase price of these capital
assets was $2,537,730. One hardware lease is for a term of 57 months, with
monthly payments of $40,322. Another hardware lease is for a term of 60 months,
with monthly payments of $3,245. The software lease is for a term of 33 months,
with monthly payments of $13,662. The principal balance of these three capital
leases as of March 31, 2001 was $2,001,170.
The Company assumed all the assets and liabilities of PAI, as of July 20, 2000,
including two outstanding loans as follows: (i) a note payable to Regions Bank
with a principal balance as of March 31, 2001 of $78,832. Such note is payable
in monthly installments in the amount of $2,432, including interest at the rate
of 7.75% and principal through July 2004. Repayment of such note is currently
secured by a lien on and a security interest in an automobile; and (ii) a loan
representing prepaid rebates from its rebate administrator with a principal
balance as of March 31, 2001 of $175,159, payable with interest at the rate of
8.5% in four quarterly payments of $94,261 commencing December 31, 2000 and
ending September 30, 2001.
PAI stockholders are eligible to receive up to $1,000,000 in additional
consideration payable in combination of cash and Common Stock if certain
financial targets of PAI are met for the fiscal year ended June 30, 2001. Based
on performance through March 31, 2001, it is highly likely that most, if not
all, of these funds will be earned and will be paid following the fiscal year.
In February 1998, the Company entered into an agreement with an unaffiliated
third party for computer software products and professional services. The
agreement required the Company to pay an initial license fee. In addition, if
certain milestones are met, based on the number of processed claims as defined
in the agreement, the initial license fee increases in specified increments. To
date, three such milestones have been met, resulting in a 75% increase in the
license fee. The agreement also provides for the annual payment of a fee for
maintenance and updating services equal to 18% of the initial license fee, as
defined. It is anticipated that, based on internal growth and the PAI and PMP
acquisitions, at least one additional milestone will be met during calendar year
2001. If the remaining milestones are reached, the cash outlay by the Company
would be $200,000.
The Company anticipates that current cash positions, after the PAI and PMP
acquisitions and the repayment of certain affiliate and shareholder debt,
together with anticipated cash flow from operations, will be sufficient to
satisfy the Company's contemplated cash requirements for at least 24 months.
This is based upon current levels of capital expenditures and anticipated
operating results for the next 24 months. However, it is one of the Company's
stated goals to acquire other pharmacy benefit management companies, evidenced
by the two acquired during this fiscal year. This will require cash. Depending
on the Company's evaluation of future acquisitions, additional cash may be
required. Therefore, the Company has put in place a $4,000,000 revolving credit
line for acquisitions with its bank. The Company has no current borrowings
against this credit line. The Company is also currently negotiating a larger
amount, based on anticipated future earnings, to meet anticipated future needs.
In the event that the Company's plans change or its assumptions prove to be
inaccurate, or that the additional bank financing is not consummated, or the
proceeds of the bank financing prove to be insufficient to fund operations and
acquisitions, the Company could be required to seek additional financing sooner
than anticipated. There can be no assurance that such financing could be
obtained at rates or on terms acceptable to the Company, if at all.
Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements". In June
2000, the SEC delayed the required implementation date to the fourth quarter of
fiscal years beginning after December 15, 1999. The Companyadopted SAB 101 which
did not have a material effect on its results of operations and financial
position.
The consolidated financial statements reflect, for all periods presented, the
adoption of the classification requirements pursuant to Emerging Issues Task
Force ("EITF") 00-14, Accounting for Certain Sales Incentives-Coupons, Rebates
and Discounts, which was effective in the Company's third quarter of 2001.
Accordingly, the Company reduced cost of claims for the periods presented for
rebates received from pharmaceutical manufacturers and reduced revenues for the
rebates which are shared with the Company's customers. Historically, the Company
recorded the net difference between the rebates received and paid out as a
reduction to cost of claims.
Other Matters
NASDAQ Compliance
By letter dated December 7, 2000, NASDAQ notified the Company that the Company's
Common Stock had failed to maintain a minimum market value of public float of
$5,000,000 over the preceding 30 consecutive trading days, as required by NASDAQ
rules (the "MVPF Rule"). The market value of public float ("MVPF") is the dollar
amount determined by multiplying the closing bid price by the number of
outstanding shares of the Company's Common Stock excluding shares held by the
Company's directors, officers and beneficial owners of 10% or more of the
Company's shares. The Company regained compliance with the MVPF rule in the time
allotted by NASDAQ and continues to this date to be in compliance.
Inflation
Management does not believe that inflation has had a material adverse impact on
the Company's net income.
Forward-Looking Statements
This report contains forward-looking statements which involve known and unknown
risks and uncertainties or other factors that may cause actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. When used herein, the words "may", "could", "estimate", "believes",
"anticipates", "thinks", "intends", "will be", "expects", and similar
expressions identify forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. For a discussion of such risks
and uncertainties, including but not limited to risks relating to demand,
pricing, government regulation, acquisitions and affiliations, the market for
PBM services, competition and other factors, readers are urged to carefully
review and consider various disclosures made by the Company in the Company's
Annual Report for the most recently ended fiscal year, and other Securities and
Exchange Commission filings.
For more information, visit the Company's website at www.NMHC.com.
Item 3 - Quantitative and Qualitative Disclosures
about Market Risk
Not applicable.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On February 9, 1999, the Company was informed by counsel that an action had been
commenced against the Company on December 8, 1998 by the West Contra Costa
Unified School District (the "School District") and an individual plaintiff in
the State of California. The case was subsequently removed to the U.S. District
Court for the Northern District of California. The complaint alleges, among
other things, (i) that the Company unilaterally terminated its contract with the
School District in violation of the terms of the contract; (ii) that the
termination resulted in the School District incurring approximately $150,000 in
additional costs; and (iii) that, due to the wrongful termination of the
contract, the School District was forced to secure a replacement for the
benefits and the services that were to have been provided by the Company,
thereby incurring approximately $867,000 in additional expenses. The complaint
also seeks treble damages, attorneys' fees, costs, interest to date and punitive
damages. If treble damages were allowable and a judgment were to be entered
against the Company, the Company would be liable for damages in excess of
$1,500,000. Since the School District and the Company have recently begun a
mediation process, the initial results of which have been positive, the Company
has decided to postpone the deposition and the dispositive motion it has been
contemplating. A second mediation session has been scheduled for June 14, 2001.
The Company denies the allegations and intends to defend this action should it
come to trial. In the opinion of management, the outcome of this matter will not
have a material adverse effect on the Company's financial position or its
results of operations.
On October 23, 2000, the Company was served with a complaint filed by Allcare
Health Management Systems, Inc. ("Allcare") in the United States District Court
for the Northern District of Texas alleging that the Company and numerous other
defendants infringe certain patent rights allegedly owned by Allcare.
On April 10, 2001, the Company settled the lawsuit with Allcare, and all of the
claims were dismissed by the Court on April 17, 2001. As part of the settlement,
the Company and its subsidiaries were released from any and all claims that were
or could be brought in the lawsuit. The release covers all prior periods as well
as all future periods as long as the Company continues licensing its pharmacy
benefit management information technology systems (the "NMHCS Systems") from a
licensee of Allcare. Furthermore, the future activities of entities acquired by
the Company are covered under the release as long as such entities' systems are
converted to the NMHCS Systems within six months of acquisition. The settlement
provides Allcare the right to audit the Company in the future to insure the
NMHCS Systems are still covered by the release. The Company also has the option
to extend the duration of the release, for a fee, if it licenses its NMHCS
Systems from a different vendor in the future.
On January 11, 2001, Mary T. Casale, a former employee of the Company, filed a
Charge of Discrimination against the Company with the New York District Office
of the U.S. Equal Employment Opportunity Commission ("EEOC"). Ms. Casale
alleges, among other things, that she was constructively discharged as a result
of discriminatory age and gender practices and that she was subjected to
repeated discriminatory comments regarding her age and gender. The matter is
presently pending before the EEOC, which is expected to explore a voluntary
resolution of the dispute and to investigate Ms. Casale's allegation. The
Company believes that is has not violated any applicable laws, and is defending
the charges through its attorneys. The matter remains in its early stages, and
the EEOC has made no findings for or against any party. In addition, the Company
is being defended pursuant to an employment practices liability policy, and has
no reason to believe that coverage does not exist for the within claim.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
During the nine months ended March 31, 2001, the total number of incentive
options granted under the 1999 Stock Option Plan (the "Plan"), net of incentive
options forfeited during the same period, were 476,377. The options are
exercisable at prices ranging from $1.67 to $7.50 and terminate between five and
six years from the grant date. Of these, 533,000 are currently in the money,
with exercise prices lower than the current stock price, and 111,000 are
currently exercisable. None of these options have been exercised to date. During
this period the Company also granted nonstatutory options to its outside
Directors (84,000) and the majority shareholder of PMP (15,000) under the Plan
to purchase up to an aggregate of 99,000 shares of Common Stock at prices
ranging from $1.67 to $6.00 per share. These options terminate after five years.
Of these, 44,000 are currently in the money, and 14,680 are currently
exercisable; the balance are exercisable over three years after one year from
the grant date. None of the currently exercisable nonstatutory options have been
exercised to date. As of March 31, 2001 an aggregate of 1,231,806 options had
been granted under the Plan, of which 1,102,806 are incentive options. There are
a total of 1,650,000 shares reserved for issuance under the plan.
On February 20, 2001, the Company granted 500,000 incentive stock options to Mr.
Brodsky under the Plan. These options are exercisable at $1.84 per share over a
five-year period starting on the grant date. The options terminate February 20,
2006. These options are included in the discussion above.
Pursuant to the terms of the PAI Agreement, the Company issued 400,000 shares of
unregistered Common Stock of the Company to certain PAI stockholders. The stock
issued to the PAI stockholders was valued at $849,920. Information concerning
the PAI Agreement, including the type and amount of consideration received by
the Company, is provided in Note 2 of the Condensed Notes to Consolidated
Financial Statements in Part I hereof. The Company was advised that the issuance
of such shares was exempt from registration under the Securities Act by virtue
of Section 4(2) thereof.
On October 16, 2000 the Board of Directors approved the adoption of the
Company's 2000 Restricted Stock Grant Plan (the "Stock Grant Plan"). The Stock
Grant Plan was subsequently adopted by the Shareholders at the Company's Annual
Meeting on November 20, 2000. The Stock Grant Plan provides for the issuance of
shares that are subject to both standard restrictions on the sale or transfer of
such shares (e.g., the standard seven year vesting schedule set forth in the
Stock Grant Plan) and/or restrictions that the Board may impose, such as
restrictions relating to length of service, corporate performance or other
restrictions. As of March 31, 2001, no grants had been made under the Stock
Grant Plan; and therefore, no shares had vested under it. There are 700,000
shares of Common Stock reserved for issuance in connection with grants made
under the Stock Grant Plan.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
3.3 Restated Certificate of Incorporation of Health Card, as amended(2)
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 Software License Agreement and Professional Service Agreement, dated February 18, 1998, between Health Card and
Prospective Health Inc.(1)
10.2 1999 Stock Option Plan(1)
10.3 Stock Option Agreement, dated August 3, 1999, between Health Card and John Ciufo(4)
10.4 Letter, dated February 1, 2000, from John Ciufo to Bert E. Brodsky(4)
10.5 Stock Option Agreement, dated February 1, 2000, between Health Card and John Ciufo(4)
10.6 Stock Option Agreement, dated August 3, 1999, between Health Card and Ken Hammond(4)
10.7 Employee Covenant Agreement, dated June 1, 1998, between Health Card and Linda Portney(1)
10.8 Employment Agreement, dated March 27, 2000, between Health Card and David Gershen(4)
10.9 Stock Option Agreement, dated May 1, 2000, between Health Card and David Gershen(4)
10.10 Employment Agreement, dated May 3, 2000, between Health Card and James Bigl(4)
10.11 Stock Option Agreement, dated June 12, 2000, between Health Card and James Bigl(4)
10.12 Stock Option Agreement, dated August 3, 1999, between Health Card and Kenneth J. Daley(4)
10.13 Stock Option Agreement, dated August 3, 1999, between Health Card and Gerald Angowitz(4)
10.14 Lease, dated January 1, 1996, between Sandata, Inc. and Health Card(1)
10.15 Assignment, dated November 1, 1996, from Sandata, Inc., to BFS Realty, LLC(1)
10.16 First Amendment to BFS Realty, LLC Lease, dated June 1, 1998, between BFS Realty, LLC and Health Card(1)
10.17 Second Amendment to BFS Realty, LLC Lease, dated April 1, 1999, between BFS Realty, LLC and Health
Card(1)
10.18 Lease, dated August 10, 1998, between 61 Manor Haven Boulevard, LLC and Health Card(1)
10.19 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)
10.20 Letter, dated June 3, 1999, from Bert Brodsky to Health Card(1)
10.21 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)
10.22 Letter, dated June 3, 1999, from Gerald Shapiro to Health Card(1)
10.23 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)
10.24 Agreement of Guaranty, dated June 1, 1998, by Bert E. Brodsky in favor of Health Card(1)
10.25 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)
10.26 Promissory Note, dated July 31, 2000, made payable by P.W. Capital, LLC to the order of Health Card, in the amount of
$3,890,940(4)
10.27 Letter, dated June 9, 1999, from Bert E. Brodsky to Health Card(1)
10.28 Letter, dated June 8, 1999, from the Bert E. Brodsky Revocable Trust to Health Card(1)
10.29 Employment Agreement, dated July 1, 1999, between Health Card and Bert E. Brodsky(1)
10.30 Letter, dated June 8, 1999, from Bert E. Brodsky to Health Card(1)
10.31 Acquisition and Merger Agreement, dated as of June 27, 2000, between Health Card and Pharmacy Associates, Inc.(3)
10.32 Lease Agreement, dated March 4, 1996, between Pharmacy Associates, Inc. and Executive Park Partnership(4)
10.33 Amendment to Lease, dated November 2, 1998, between Pharmacy Associates, Inc. and Executive Park Partnership(4)
10.34 Amendment to Lease, dated November 19, 1998, between Pharmacy Associates, Inc. and Executive Park Partnership(4)
10.35 Lease Agreement, dated July 8, 1999, between Pharmacy Associates, Inc. and Executive Park Partnership(4)
10.36 Settlement Agreement regarding capitation arrangement between the Company and Vytra, dated 12/1/00
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(1) Denotes document filed as an exhibit to Health Card's Registration Statement on Form S-1
(Registration Number:333-72209) and incorporated herein by reference.
(2) Denotes documentation filed as an Exhibit to Health Card's Report on Form 10-K for the fiscal year ended June 30, 1999.
(3) Denotes document filed as an exhibit to Health Card's Form 8-K for an event dated July 20, 2000.
(4) Denotes documentation filed as an Exhibit to Health Card's Report on Form 10-K, as amended, for the fiscal year ended
June 30, 2000.
(b) Reports on Form 8-K
Current Report on Form 8-K for an event dated March 5, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
(Registrant)
Date: May 14, 2001 By: /s/ Bert E. Brodsky
Bert E. Brodsky
Chairman of the Board
and Chief Executive Officer