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, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
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</table>
Commission file number 000-26749
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-2581812
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(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification No.)
26 Harbor Park Drive, Port Washington, NY 11050
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (516) 626-0007
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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 ----------------
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No ------------- -------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's Common Stock, as of
May 8, 2002 was 7,266,519 shares.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1 - CONDENSED FINANCIAL STATEMENTS: 3
CONSOLIDATED BALANCE SHEET as of June 30, 2001 3
and March 31, 2002 (unaudited)
CONSOLIDATED STATEMENT OF INCOME (unaudited) 4
for the three months and nine months ended March 31, 2001
and 2002
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) 5
for the nine months ended March 31, 2001 and 2002
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 15
CONDITION AND RESULTS OF OPERATIONS
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 21
MARKET RISK
PART II - OTHER INFORMATION 22
ITEM 1 - LEGAL PROCEEDINGS 22
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS 23
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 23
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
ITEM 5 - OTHER INFORMATION 23
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 24
</table>
PART I - FINANCIAL INFORMATION
ITEM 1 - CONDENSED FINANCIAL STATEMENTS
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($ in thousands)
<table>
<s> <c> <c>
June 30, March 31,
2001 2002
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Assets (unaudited)
Current:
Cash and cash equivalents (including cash equivalent investments of $1,216 $ 12,475 $ 5,616
and $1,245
Accounts receivable, less allowance for possible losses of $1,847 30,081 60,694
and $2,552
Rebates receivable 7,789 11,070
Due from affiliates 987 415
Deferred tax asset 1,103 1,728
Other current assets 1,004 929
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Total current assets 53,439 80,452
Property, equipment and software development costs, net 8,584 9,025
Due from affiliates 3,832 3,583
Intangible assets, net of accumulated amortization of $39 and $237 266 2,693
Goodwill 12,944 51,032
Other assets 45 596
Deferred tax asset -- 158
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Total Assets $79,110 $147,539
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Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 57,646 $101,843
Current portion of capital lease obligations 542 635
Convertible notes payable -- 11,600
Revolving credit facility and loans payable-current 110 4,225
Due to officer/stockholder 542 554
Due to affiliates 344 6
Other current liabilities 1,346 500
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Total current liabilities 60,530 119,363
Capital lease obligations, less current portion 1,333 955
Revolving credit facility, less current portion -- 5,000
Long term loans payable and other liabilities 73 536
Deferred tax liability 1,702 2,143
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Total liabilities 63,638 127,997
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Commitments and Contingencies
Stockholders' equity:
Preferred stock $.10 par value; 10,000,000 shares authorized, none outstanding -- --
Common Stock, $.001 par value, 25,000,000 shares authorized, 7,312,496 and
7,457,519 shares issued and 7,121,496 and 7,266,519 outstanding 7 7
Additional paid-in-capital 13,255 13,885
Retained earnings 3,254 6,394
Treasury stock at cost, 191,000 shares (744) (744)
Notes receivable - stockholders (300) --
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Total stockholders' equity 15,472 19,542
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Total Liabilities and Stockholders' Equity $ 79,110 $147,539
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</table>
See accompanying condensed notes to consolidated financial statements
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
($ in thousands, except per-share amounts)
<table>
<s> <c> <c>
Three months ended Nine months ended
March 31 March 31
2001 2002 2001 2002
---- ---- ---- ----
Revenues $ 72,374 $ 145,683 $ 192,513 $ 313,837
Cost of claims 66,222 136,251 177,107 289,412
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Gross Profit 6,152 9,432 15,406 24,425
Selling, general and administrative expenses* 5,858 7,295 14,584 19,336
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Operating income 294 2,137 822 5,089
Interest income (expense), net 253 (336) 672 (108)
Other income, net -- 38 -- 63
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Income before income taxes 547 1,839 1,494 5,044
Provision for income taxes 270 736 751 1,904
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Net Income $ 277 $ 1,103 $ 743 $ 3,140
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Earnings per common share:
Basic $ 0.04 $ 0.15 $ 0.10 $ 0.44
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Diluted $ 0.04 $ 0.14 $ 0.10 $ 0.41
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Weighted average number of common shares outstanding:
Basic 7,121 7,209 7,094 7,179
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Diluted 7,151 8,023 7,101 7,750
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* Includes amounts charged by affiliates aggregating: $ 1,017 $ 244 $ 2,993 $ 1,642
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</table>
See accompanying condensed notes to consolidated financial statements
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
($ in thousands)
Nine months ended
March 31,
2001 2002
---- ----
Cash flows from operating activities:
Net income $ 743 $ 3,140
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,802 2,281
Amortization of deferred gain -- (63)
Net gain on sale of capital assets -- (370)
Bad debt expense and allowance for possible losses 378 675
Compensation expense accrued to officer/stockholder 358 13
Deferred income taxes (40) (343)
Interest accrued on stockholders' loans (19) --
Changes in assets and liabilities, net of effect from
acquisitions:
(Increase) decrease in:
Accounts receivable (8,154) (31,289)
Rebates receivable (719) (3,281)
Other current assets (150) 68
Due to/from affiliates (625) 483
Other assets 44 (54)
Increase (decrease) in:
Accounts payable and accrued expenses 10,144 43,032
Other current liabilities (44) (595)
Other long term liabilities 9 380
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Net cash provided by operating activities 3,727 14,077
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Cash flows from investing activities:
Capital expenditures (2,543) (2,376)
Proceeds from sale of capital assets 31 1,321
Acquisition of Centrus, net of cash acquired -- (40,284)
Acquisition of PAI, net of cash acquired (4,487) --
Acquisition of PMP, net of cash and cash equivalents (6,684) --
Repayment of note by stockholder -- 300
Interest received on notes from stockholders 39 --
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Net cash used in investing activities (13,644) (41,039)
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Cash flows from financing activities:
Proceeds from exercise of stock options -- 380
Proceeds from convertible note offering -- 11,600
Proceeds from revolving credit facility 4,000 28,700
Repayment of revolving credit facility, net (4,000) (19,506)
Deferred financing costs -- (532)
Repayment of debt and capital lease obligations (518) (539)
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Net cash provided by (used in) financing activities (518) 20,103
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Net decrease in cash and cash equivalents (10,435) (6,859)
Cash and cash equivalents at beginning of period 15,725 12,475
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Cash and cash equivalents at end of period $ 5,290 $ 5,616
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See accompanying condensed notes to consolidated financial statements
</table>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
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"),
Centrus Corporation f/k/a HSL Acquisition Corp. (see Note 2) ("Centrus")
National Medical Health Card IPA, Inc. ("IPA"), PSCNY IPA, Inc. ("PSCNY"), and
Specialty Pharmacy Care, Inc. ("Specialty"); also included on a consolidated
basis are the accounts of NMHC Funding, LLC ("Funding"), a limited liability
company of which the Company and its subsidiaries are the owners of all of the
membership interests. Unless the context otherwise requires, references herein
to the "Company" refer to the Company and its subsidiaries, on a consolidated
basis. 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, 2002 and 2001 unaudited interim financial statements
include all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of results for these interim periods. In the opinion of
the Company's management, the disclosures contained in this Form 10-Q are
adequate to make the information presented not misleading when read in
conjunction with the Notes to Consolidated Financial Statements included in the
Company's Form 10-K for the year ended June 30, 2001. The results of operations
for the three and nine month periods ended March 31, 2002 are not necessarily
indicative of the operating results to be expected for the full year.
For information concerning the Company's significant accounting policies,
reference is made to the Company's Annual Report on Form 10-K, for the year
ended June 30, 2001 (the "Annual Report").
2. BUSINESS ACQUISITIONS
The Company entered into an Asset Purchase Agreement (the "Asset Purchase
Agreement"), dated as of January 29, 2002, with Health Solutions, Ltd., a New
York corporation ("HSL"), HSL Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of the Company ("Sub"), and the securityholders of HSL
named therein, pursuant to which the Company agreed to acquire certain assets of
HSL relating to the pharmacy benefit management business (PBM) conducted by HSL
under the name "Centrus" (the "Acquisition"). Centrus provides PBM services
primarily to managed care organizations in the northeast. The Company intends to
continue to use the Centrus assets to provide PBM services. The Centrus existing
business complements the Company's business while significantly strengthening
the Company's managed care business.
The aggregate purchase price of the Acquisition was $40.0 million in cash,
of which $3.0 million is held in escrow to secure certain indemnification
obligations. The Company acquired approximately $1.5 million of HSL's assets and
also agreed to assume approximately $1.5 million of HSL's liabilities relating
to the Centrus business. The acquisition was accounted for under the purchase
method of accounting and the results of Centrus' operations were included in the
consolidated financial statements commencing with the acquisition date. The
excess of the acquisition costs over the fair value of identifiable net assets
acquired was $40,668,451, which consists of the following components: (i)
customer relationships valued at $2,415,000, which will be amortized over five
(5) years; (ii) an employment agreement and a consulting agreement valued at a
combined value of $89,000, which will be amortized over two (2) years: (iii)
non-compete contracts valued at $76,000, which will be amortized over four (4)
years, and (iv) goodwill of $38,088,451, which will not be amortized per SFAS
142 (see Note 8). In addition, the Company has agreed to pay HSL, as additional
purchase price, up to $4 million over a period of three years if the acquired
Centrus business achieves certain financial performance targets during the
two-year period following the Closing. HSL may also be entitled to an additional
incentive payment based on the financial performance of the Centrus business
during the one-year period following the Closing.
Simultaneously with the consummation of the Acquisition, the Company
entered into an Employment Agreement and a Stock Option Agreement with the
former president of Centrus, pursuant to which he will serve as Executive Vice
President of Managed Care for the Company. Additionally, several members of
Centrus' management team have joined the Company as employees or consultants,
and have been granted stock options to purchase an aggregate of 450,000 shares
of Common Stock, under the Company's 1999 Stock Option Plan, as amended.
On January 29, 2002, the Company and certain of its subsidiaries entered
into a $40 million secured revolving credit facility (the "Facility") with a
specialty finance company. In connection with the Facility, the Company and
certain of its subsidiaries have agreed to transfer, on an on-going basis, their
accounts receivable to Funding. The Facility has a three year term, provides for
borrowing up to $40 million at the London InterBank Offered Rate (LIBOR) plus
2.40% and is secured by receivables and other assets of the Company and certain
of its subsidiaries. Borrowings of $28.7 million under the Facility were used to
finance part of the purchase price of the Acquisition and will also be used by
the Company and certain of its subsidiaries for working capital purposes and
future acquisitions in support of its business plan. As of April 30, 2002,
approximately $10,966,000 was outstanding under the Facility.
On January 22, 2002 the Company completed a convertible note offering (the
"Note Offering") in the aggregate principal amount of $11.6 million, which is
subordinated to the Facility. Pursuant to the Note Offering, subscribers
received a promissory note (each a "Note") paying interest quarterly on the
unpaid principal balance at the rate of 12% per annum. The subscribers,
including Kenneth Daley and Gerald Shapiro, who are directors of the Company,
are all accredited investors. The Notes have a term of one year, unless
otherwise extended pursuant to the terms of the Note. The Notes are convertible
at anytime at the election of the holders into shares of the common stock, par
value $.001 per share (the "Common Stock") of the Company ("Conversion Shares")
at a conversion price per share equal to $12.00, the fair value of the Common
Stock on January 22, 2002. The Note holders have been granted certain
registration rights with respect to the Conversion Shares pursuant to a
Registration Rights Agreement. Proceeds from the Note Offering were used to
finance part of the purchase price of the Acquisition and will also be used by
the Company and certain of its subsidiaries for working capital purposes and
future acquisitions in support of its business plan.
The Company completed two acquisitions in its fiscal year ended June 30,
2001; PAI which was acquired and included in the consolidated financial
statements as of July 20, 2000 and PMP which was acquired and included in the
consolidated financial statements as of March 5, 2001.
The summarized unaudited pro forma results of operations set forth below
for the three and nine months ended March 31, 2001 and March 31, 2002 assume the
Centrus, PAI and PMP acquisitions had occurred as of the beginning of each of
these periods.
Three Months Ended March 31
---------------------------
2001 2002
---- ----
Revenues $137,550,993 $168,474,078
Net income $ 1,183,631 $ 1,200,190
Net income per common share:
Basic $ 0.17 $ 0.17
Diluted $ 0.17 $ 0.15
Pro forma weighted average number
of common shares outstanding:
Basic 7,121,496 7,209,053
Diluted 7,150,501 8,022,652
Nine Months Ended March 31
--------------------------
2001 2002
---- ----
Revenues $389,900,211 $472,734,080
Net income $ 2,575,687 $ 3,859,684
Net income per common share:
Basic $ 0.36 $ 0.54
Diluted $ 0.36 $ 0.50
Pro forma weighted average number of
common shares outstanding:
Basic 7,093,759 7,178,540
Diluted 7,101,385 7,749,738
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, 2002, the Company granted 552,457
stock options and 127,654 stock options were cancelled for a net of 424,803
stock options under the 1999 Stock Option Plan (the "Plan"). The options granted
during this period are exercisable at prices ranging from $3.50 to $15.10 and
terminate between four and ten years from the grant date. The total number of
shares of common stock reserved by the Company for issuance under the Plan is
2,850,000 plus an indeterminable number of shares of common stock issuable
pursuant to the anti-dilution provisions of the Plan or upon the exercise of
"reload options." There are no options outstanding that contain the "reload"
provision. Shares issuable pursuant to options granted under the Plan as of
March 31, 2002 equal 1,577,456, net of 82,523 options exercised to date.
See also Note 11 hereto ("Subsequent Events").
<page>
4. EARNINGS PER SHARE
A reconciliation of shares used in calculating basic and diluted earnings
per share follows:
<table>
<s> <c> <c>
Three months ended March 31,
2001 2002
---- ----
Basic weighted average # of shares outstanding 7,121,496 7,209,052
Effect of assumed exercise of employee stock options 29,005 771,933
Contingently issuable shares related to the PAI acquisition - 41,667
--------- ---------
Diluted weighted average # of shares outstanding 7,150,501 8,022,652
========= =========
Nine months ended March 31,
2001 2002
---- ----
Basic weighted average # of shares outstanding 7,093,759 7,178,539
Effect of assumed exercise of employee stock options 7,626 539,062
Contingently issuable shares related to the PAI acquisition - 32,137
--------- ----------
Diluted weighted average # of shares outstanding 7,101,385 7,749,738
========= ==========
</table>
The effect of the assumed conversion of convertible notes under the Note
Offering has been evaluated. The conversion would be anti-dilutive, and
accordingly is not included in the calculation of diluted weighted average
number of shares outstanding.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30, March 31,
2001 2002
---- ----
Claims Payable $46,615,563 $ 86,557,378
Rebates Payable to sponsors 6,479,069 10,290,199
Other Payables 4,550,931 4,995,691
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$57,645,563 $101,843,268
6. RELATED PARTY TRANSACTIONS
Certain costs paid to affiliates were capitalized as software development
costs. For the nine months ended March 31, 2002, the amount charged by
affiliates and capitalized was approximately $96,000.
As of January 1, 2002, the Company has eliminated the majority of related
party service transactions with the exception being rent as described below. 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:
<table>
<s> <c> <c>
Three months ended
March 31,
2001 2002
---- ----
Software maintenance and related services $ 291,011 $ 13,786
Management and consulting fees 386,428 56,967
Administrative and bookkeeping services and supplies 210,311 72,383
Rent and utilities 129,458 100,684
--------- -----------
$1,017,208 $243,820
=========== ==========
Nine months ended
March 31,
2001 2002
---- ----
Software maintenance and related services $ 851,316 $495,194
Management and consulting fees 1,171,805 255,980
Administrative and bookkeeping services and supplies 579,181 502,189
Rent and utilities 390,458 389,029
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$2,992,760 $1,642,392
========== ==========
</table>
The Company has accrued approximately $165,000 of interest income from
affiliates, arising from two loans, for the nine months ended March 31, 2002.
This compares to approximately $299,000 for the nine months ended March 31,
2001. The two loans are as follows: (i) Sandata Technologies, Inc. (formerly
Sandata, Inc.), a corporation of which Mr. Brodsky is the Chairman of the Board,
Treasurer and a principal stockholder ("Sandata"), owed the Company $500,000
principal plus interest pursuant to a promissory note dated May 31, 2000. The
Note was paid in full in August 2001; (ii) a non-recourse promissory note dated
July 31, 2000, made payable to the order of the Company by P.W. Capital, LLC, a
company affiliated with Mr. Brodsky, 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
$.001 par value Common Stock of the Company registered in the name of Mr.
Brodsky and is subject to his personal guarantee. The first $400,000 payment due
under the note as of July 31, 2001 was satisfied by offsetting an equal amount
owed to Mr. Brodsky by the Company. Effective July 31, 2001, the interest rate
on the note was changed to the prime rate in effect from time to time.
The Company currently occupies 29,915 square feet of office space located
at 26 Harbor Park Drive, Port Washington, New York 11050 (the "Facility"). The
Company subleases the Facility from BFS Realty, LLC, an affiliate of Mr. Brodsky
(the "Affiliate"). The Affiliate leases the Facility from the Nassau County
Industrial Development Agency, pursuant to a lease which was entered into by
that agency and the Affiliate in July 1994, and which expires in March 2005. The
Affiliate has the right to become the owner of the Facility upon expiration of
the Lease. The Affiliate subleases a portion of the Facility to the Company (the
"Lease"). As of November 1, 2001, the Company and the Affiliate amended the
Lease. The Lease provides that, effective August 1, 2001, the rent payable by
the Company shall be an aggregate annual rent of $308,305. While formerly the
Company made estimated monthly real estate tax, utility and maintenance-expense
payments to the Affiliate, the Lease now provides that the Company will pay its
pro-rata share of such expenses directly, to the entities to whom payment must
be made. The Company estimates that such monthly expenses will approximate an
aggregate of $336,000 per year. The annual rent will increase by 5% per year
during the term of the Lease. The annual expenses are also expected to increase,
although the Company cannot estimate by how much. The Lease expires in July,
2010. The Company believes that the Facility is adequate for current purposes.
Leasehold improvements made to this space during the nine months ended March 31,
2002, was approximately $60,000.
See also Note 11 hereto ("Subsequent Events").
7. MAJOR CUSTOMERS AND PHARMACIES
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 three months ended March 31, 2002, approximately 37% of
the consolidated revenues of the Company were from two plan sponsors
administering multiple plans. For the nine months ended March 31, 2001,
approximately 19% of the revenues were from one plan sponsor administering
multiple plans, while 22% of the revenues for the nine months ended March 31,
2002 were from two plan sponsors administering multiple plans. Amounts due from
these sponsors at March 31, 2002 approximated $2,174,000.
For the three months ended March 31, 2001, approximately 28% of the cost of
claims were from two pharmacy chains. For the three months ended March 31, 2002,
approximately 19% of the cost of claims were from one pharmacy chain. For the
nine months ended March 31, 2001, approximately 25% of the cost of claims were
from two pharmacy chains and approximately 20% of the cost of claims were from
one pharmacy chain for the nine months ended March 31, 2002. Amounts payable to
this pharmacy chain at March 31, 2002 was approximately $14,589,000.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
Nos. 141 and 142, Business Combinations and Goodwill and Other Intangibles,
respectively. SFAS 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill
is no longer subject to amortization over its estimated useful life. Rather,
goodwill is subject to at least an annual assessment for impairment by applying
a fair-value based test. Additionally, an acquired intangible asset should be
separately recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented or exchanged, regardless of the acquirer's intent
to do so. The Company has adopted these SFAS's as of July 1, 2001 and has
performed the requisite impairment testing. As of July 1, 2001 there is no
impairment to the goodwill recorded on the accompanying balance sheet.
SFAS 142 requires the disclosure of net income and earnings per share
computed on a pro forma basis by reversing the goodwill amortized in the periods
presented. Such pro forma disclosures are required in the period of adoption and
thereafter until all periods presented reflect goodwill accounted for in
accordance with SFAS 142. Had SFAS 142 been effective prior to July 1, 2001, our
net income would have been $374,000 or $0.05 per basic and diluted share for the
three months ended March 31, 2001 and $975,000, or $0.14 per basic and diluted
share for the nine months ended March 31, 2001.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." SFAS 144 provides updated guidance concerning the recognition
and measurement of an impairment loss for certain types of long-lived assets,
expands the scope of a discontinued operation to include a component of an
entity and eliminates the current exemption to consolidation when control over a
subsidiary is likely to be temporary. SFAS 144 is effective for the Company on
July 1, 2002. The Company does not expect the adoption of SFAS 144 to have a
material impact on the Company's 2003 financial statements.
The consolidated financial statements reflect, for all periods presented,
the adoption of the classification requirements pursuant to Emerging Issues Task
Force ("EITF") No. 00-14, Accounting for Certain Sales Incentives, which was
effective in the Company's third quarter of 2001, and was subsequently codified
as EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer.
Accordingly, the Company reduced cost of claims for the prior 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.
9. SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended March 31, 2001 and March 31, 2002, the Company
paid $178,489 and $540,748 in interest and $838,210 and $2,071,516 in income
taxes, respectively. During the nine months ended March 31, 2001, in a non-cash
transaction, the Company issued 400,000 shares of its unregistered Common Stock,
valued at $849,920, as part of the acquisition of PAI in July 2000. During the
nine months ended March 31, 2002, in a second non-cash transaction, the Company
issued 62,500 shares of its unregistered Common Stock, valued at $250,000, as
additional consideration to the stockholders of PAI in August 2001.
10. LITIGATION
See Item 1 of Part II of this Quarterly Report on Form 10-Q.
11. SUBSEQUENT EVENTS
On April 12, 2002, the Company and James Bigl, then the President of the
Company, entered into an Amendment to Promissory Note pursuant to which the
Company agreed to increase the amount loaned to Mr. Bigl to $100,000. The loan
bears interest at 8%, and is due on April 25, 2003.
On April 30, 2002, the board of Directors adopted resolutions authorizing
an increase by one in the number of Directors constituting the Board of
Directors, and appointing James Bigl to fill the newly created vacancy. On the
same date, the Board accepted the resignation of Bert E. Brodsky as Chief
Executive Officer of the Company and appointed Mr. Bigl as Chief Executive
Officer. In conjunction with his new positions, the Board granted Mr. Bigl
100,000 options to purchase Common Stock at an option price of $9.00 per share,
vesting over a four-year period, and increased his salary, effective June 12,
2002.
An action was commenced against the Company on April 30, 2002 by Midwest
Health Plans Inc. ("MHP") in the United States District Court for the Eastern
District of Michigan. The complaint alleges, among other things, that the
parties entered into a contract dated July 1999 (the "Agreement"), and further
alleges that the Company has overcharged MHP for the administration of
prescription benefit services in contravention to the terms of the Agreement.
MHP is seeking three (3) million dollars in damages. The Company believes the
claims alleged in the complaint are without merit and intends to vigorously
defend the action.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Results of Operations
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Revenues increased $73.3 million, or approximately 101%, from $72.4 million
for the three months ended March 31, 2001, to $145.7 million for the three
months ended March 31, 2002. Of the increase, $51.6 million, or 70%, was due to
the inclusion of revenues from Centrus from January 29 through March 31, 2002.
PMP accounted for another $5.1 million of the increase since it was acquired on
March 5, 2001 and included three months of revenue in the quarter ended March
31, 2002 compared to less than one month in the quarter ended March 31, 2001.
Another $14.3 million of the increase was due to revenues related to new
sponsors or new services offered during the quarter ended March 31, 2002. The
majority of the balance of the increase, or $2.3 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.
Cost of claims increased $70.0 million, or approximately 106%, from $66.2
million for the three months ended March 31, 2001, to $136.2 million for the
three months ended March 31, 2002. Centrus accounted for $49.8 million, or 71%
of the increase. PMP accounted for another $4.7 million of the increase. An
increase in gross rebates received accounted for $0.8 million of the increase.
The balance of the increase is related to the increased revenue as described
above. As a percentage of revenues, cost of claims increased from 91.5% to 93.5%
for the three months ended March 31, 2001 and March 31, 2002, respectively. The
increase relates primarily to the higher cost of claims on the Centrus book of
business, which serves primarily, managed care clients. Industry-wide, managed
care clients have a greater cost of claims, and consequently a lower gross
margin, than other types of business in the PBM industry. Centrus' cost of
claims for the quarter ended March 31, 2002 ran about 3 to 6 percentage points
greater then the rest of the Company's business, and since Centrus accounted for
35% of the Company's revenue in the quarter, this impacted the overall cost of
claims percentage.
Gross profit increased from $6.1 million, for the three months ended March
31, 2001, to $9.4 million for the three months ended March 31, 2002; a $3.3
million, or 53% increase. In addition to the revenue volume increase, Centrus
accounted for $1.8 million, or 55%, of the increase. PMP accounted for another
$0.4 million, and the net increase in rebates after accounting for the amount
that is shared with sponsors accounted for another $1.1 million, or 33%. Gross
profit, as a percentage of revenue, declined from 8.5% to 6.5%, for the three
months ended March 31, 2001 and March 31, 2002, respectively. The decrease
year-over-year is principally related to the lower margins achieved by Centrus.
There is also a general decline in margins in the industry due to competitive
pressures.
Selling, general, and administrative expenses, which include amounts
charged by affiliates, increased $1.4 million, or approximately 25%, from $5.9
million for the three months ended March 31, 2001 to $7.3 million for the three
months ended March 31, 2002. Approximately 93% of the increase, or $1.3 million,
was related to the inclusion of Centrus in the consolidated numbers. There were
quarter over quarter increases in several areas which were partially offset by
the elimination of goodwill amortization due to the adoption of SFAS 142. Per
SFAS 142, the Company no longer amortizes goodwill as of July 1, 2001 (see Note
8).
Selling, general, and administrative expenses as a percentage of revenue
declined from 8.1% for the quarter ended March 31, 2001 to 5.0% for the quarter
ended March 31, 2002. The primary reason for the decline is that with the
Centrus acquisition revenues increased approximately 101% quarter over quarter,
while selling, general, and administrative expenses only increased approximately
25% over these periods as there are benefits from economies of scale.
General and administrative expenses charged by affiliates decreased
approximately $773,000, or 76%, quarter over quarter from $1,017,000 to $244,000
for the three months ended March 31, 2001 and March 31, 2002, respectively. The
Company has eliminated most of the related party service transactions with
affiliates effective January 1, 2002. The majority of the decrease related to
reduced information technology services and management and consulting fees
procured from affiliated companies. The use of outside consultants for the most
part replaced the use of affiliated companies to update the information
technology infrastructure.
For the three months ended March 31, 2001, the Company recognized other
income, net, of approximately $253,000. For the three months ended March 31,
2002, the Company incurred other expense, net of approximately $298,000. The
components of the approximate $551,000 increase in net expense were an
approximate $375,000 increase in interest expense, and an approximate $213,000
decrease in interest income, and an approximate $38,000 gain on sold assets. The
primary reasons for the net increase in expense were the interest expense
incurred on the Company's revolving credit facility and on the Note Offering
during the quarter ended March 31, 2002 to finance the acquisition of Centrus -
see Item 2 of Part I. Partially offsetting the increase in interest expense was
an approximate $38,000 gain on the sale of assets related to a sale/leaseback
transaction, which gain of approximately $459,000 was recorded as deferred
revenue and is being recognized over the life of the lease, which is thirty-six
(36) months.
Income before income taxes increased approximately $1.3 million, or 236%,
from approximately $0.5 million for the three months ended March 31, 2001, to
approximately $1.8 million for the three months ended March 31, 2002. The
primary reason for the increase was the increased gross margin generated as
described above. Centrus contributed $0.5 million of the increase prior to the
interest expense incurred to acquire Centrus.
EBITDA (earnings before interest, taxes, depreciation and amortization) for
these same periods showed a increase of approximately $2.0 million, or 210%,
from approximately $1.0 million for the three months ended March 31, 2001 to
approximately $3.0 million for the three months ended March 31, 2002. The
majority of the increase is due to the $1.8 million increase in operating
income, which again was due to the increase in gross profit dollars generated
during the quarter ended March 31, 2002 as compared to the quarter ended March
31, 2001.
The effective tax rate decreased from 49% for the three months ended March
31, 2001 to 40% for the three months ended March 31, 2002. The decrease stemmed
primarily from the adoption of SFAS 142. Effective July 1, 2001 the Company is
no longer amortizing goodwill pursuant to SFAS 142 which results in lowering the
effective rate due to the fact that the goodwill related to the PAI acquisition
is no longer a permanent difference, since it is not deductible for book or tax
purposes (See Note 8).
Nine Months Ended March 31, 2002 Compared to Nine Months Ended March 31, 2001
Revenues increased $121.3 million, or approximately 63%, from $192.5
million for the nine months ended March 31, 2001, to $313.8 million for the nine
months ended March 31, 2002. Of the increase, $51.6 million, or 43%, was due to
the inclusion of revenues from Centrus from January 29 through March 31, 2002.
PMP accounted for another $18.8 million of the increase since it was acquired on
March 5, 2001 and included nine months of revenue as of March 31, 2002 compared
to less than one month in the nine months ended March 31, 2001. Another $23.2
million of the increase was due to revenues related to new sponsors or new
services offered during the nine months ended March 31, 2002. The majority of
the balance of the increase, or $27.7 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.
Cost of claims increased $112.3 million, or approximately 63%, from $177.1
million for the nine months ended March 31, 2001, to $289.4 million for the nine
months ended March 31, 2002. Centrus accounted for $49.8 million, or 44% of the
increase. PMP accounted for another $16.9 million or 15% of the increase. An
increase in gross rebates received accounted for $4.3 million, or 4%, of the
increase. The balance of the increase is related to the increased revenue as
described above. As a percentage of revenues, cost of claims increased slightly
from 92.0% to 92.2% for the nine months ended March 31, 2001 and March 31, 2002,
respectively. The increase relates primarily to the acquisition of Centrus which
generates higher cost of claims due to its managed care business (see above).
Gross profit increased from $15.4 million, for the nine months ended March
31, 2001, to $24.4 million for the nine months ended March 31, 2002; a $9.0
million, or 59% increase. In addition to the revenue volume increase, Centrus
accounted for $1.8 million, or 20%, of the increase. PMP accounted for $1.9
million, or 21%, of the increase, and the net increase in rebates after
accounting for the amount that is shared with sponsors accounted for another
$3.3 million, or 37%. Gross profit, as a percentage of revenue, decreased from
8.0% to 7.8%, for the nine months ended March 31, 2001 and March 31, 2002,
respectively. The decrease year-over-year is again principally related to the
lower margins achieved by Centrus.
Selling, general, and administrative expenses, which include amounts
charged by affiliates, increased $4.7 million, or approximately 33%, from $14.6
million for the nine months ended March 31, 2001 to $19.3 million for the nine
months ended March 31, 2002. Approximately 28% of the increase, or $1.3 million,
was related to the inclusion of Centrus from January 29, 2002 to March 31, 2002
in the consolidated numbers. There were also year over year increases in the
following areas: (i) an approximate $1,318,000 increase in expenditures related
to increases in compensation and benefits, primarily associated with new
employees including senior management; (ii) an approximate $485,000 increase in
depreciation and amortization expenses related to increased hardware procurement
and software development in prior periods; (iii) an approximate $1,296,000
increase in the use of outside consultants primarily to update the Company's
information technology infrastructure; (iv) an approximate $301,000 increase in
commission expense related to the increase in new revenues not related to the
acquisitions; and (v) an approximate $169,000 reduction in the amount of
internal salaries that were capitalized related to enhancements to the Company's
reporting system. Partially offsetting these increases was an approximate
$233,000 decrease in intangible amortization due to the adoption of SFAS 142.
Per SFAS 142, the Company no longer amortizes goodwill as of July 1, 2001 (see
Note 8).
General and administrative expenses charged by affiliates decreased
approximately $1,351,000, or 45%, year-over-year from $2,993,000 to $1,642,000
for the nine months ended March 31, 2001 and March 31, 2002, respectively. The
Company has eliminated most of the related third party service transactions
effective January 1, 2002. The majority of the decrease related to reduced
information technology services and management and consulting services procured
from affiliated companies. The use of outside consultants for the most part
replaced the use of affiliated companies to update the information technology
infrastructure.
For the nine months ended March 31, 2001, the Company recognized other
income, net, of approximately $672,000. For the nine months ended March 31,
2002, the Company incurred other expense, net, of approximately $45,000. The
components of the approximate $717,000 increase in net expense were an
approximate $362,000 increase in interest expense, an approximate $418,000
decrease in interest income, and an approximate $63,000 gain on sold assets. The
primary reasons for the net increase in expense were the interest expense
incurred on the Company's revolving credit facility and on the Note Offering
during the year to finance the acquisition of Centrus - see Item 2 of Part I.
Partially offsetting the increase in interest expense was an approximate $63,000
gain on the sale of assets related to a sale/leaseback transaction.
Income before income taxes increased approximately $3.5 million, or 238%,
from approximately $1.5 million for the nine months ended March 31, 2001, to
approximately $5.0 million for the nine months ended March 31, 2002. The primary
reason for the increase was the increased gross margin generated as described
above. Centrus contributed $0.5 million of the increase prior to the interest
expense incurred to acquire Centrus.
EBITDA for these same periods showed an increase of approximately $4.7
million, or 173%, from approximately $2.7 million for the nine months ended
March 31, 2001 to approximately $7.4 million for the nine months ended March 31,
2002. The majority of the increase is due to the $4.3 million increase in
operating income, which again was due to the increase in gross profit dollars
generated during the nine months ended March 31, 2002 as compared to the nine
months ended March 31, 2001.
The effective tax rate decreased from 50% for the nine months ended March
31, 2001 to 38% for the nine months ended March 31, 2002. The decrease stemmed
primarily from the adoption of SFAS 142. Effective July 1, 2001 the Company is
no longer amortizing goodwill pursuant to SFAS 142 which results in lowering the
effective rate due to the fact that the goodwill related to the PAI acquisition
is no longer a permanent difference, since it is not deductible for book or tax
purposes (See Note 8).
The increase in income before income taxes and the lower overall effective
tax rate for the nine months ended March 31, 2002 as compared to the nine months
ended March 31, 2001, led to a $2.4 million, or 322%, increase in net income
from $0.7 million to $3.1 million.
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 pharmacy benefit management companies or of
companies providing related services. As of March 31, 2002, the Company had a
working capital deficit of $38.9 million, as compared to a working capital
deficit of $7.1 million as of June 30, 2001. The Company's working capital
deficit increased in the quarter ended March 31, 2002 due to the acquisition of
Centrus, as the Company paid $40.0 million in cash. The decline in working
capital was partially offset by the increased profitability generated during the
nine months ended March 31, 2002.
Net cash provided by operating activities was $3.7 million for the nine
months ended March 31, 2001, as compared to $14.1 million for the nine months
ended March 31, 2002. For the nine months ended March 31, 2002, accounts payable
increased by $43.0 million primarily related to Centrus' claims and rebates
payables being added in the third quarter. At the same time, accounts and
rebates receivables increased by $34.6 million, again primarily due to Centrus.
The net effect of these two items was $8.4 million of net cash provided by
operations. For the nine months ended March 31, 2001 accounts and rebates
receivables increased by $8.9 million and accounts payable increased by $10.1
million, a net provision of cash of only $1.2 million, a difference of $7.2
million during the two periods.
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. The Company has put in place a $40 million
revolving credit facility for acquisitions and working capital financing.
However, if such terms of trade were to change materially, and/or if the Company
were unable to obtain sufficient 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 as compared to $41.0 million for the nine months ended
March 31, 2002. The primary differences in the two periods were the acquisitions
completed. The nine months ended March 31, 2001 included the acquisitions of PAI
and PMP which used net cash of $11.1 million. The nine months ended March 31,
2002 included the acquisition of Centrus which used $40.3 million of net cash.
The difference in the amount of net cash required for these three acquisitions
was $29.2 million. 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. The net cash outlay for Centrus was $40.3 million, representing the
initial payment of $40.0 million plus $0.3 of related expenses. None of Centrus'
existing cash was acquired. Partially offsetting the increase in cash used over
the two periods was the $1.3 million gross proceeds from the sale/leaseback
transaction in October 2001.
Net cash used in financing activities was approximately $0.5 million for
the nine months ended March 31, 2001. This compares to the $20.1 million
provided by financing activities in the nine months ended March 31, 2002. During
the nine months ended March 31, 2002, the Company put in place the Note Offering
and the revolving credit facility which initially brought in $40.3 million of
cash into the Company. (See Note 2 of the Condensed Notes to Consolidated
Financial Statements Part I.) Of this, $19.5 million was repaid by March 31,
2002.
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, 2002 was $1,473,410.
PAI stockholders were 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 were met for the fiscal year ended June 30, 2001. These
targets were achieved, and $750,000 in cash was paid, and 62,500 shares of the
Company's Common Stock valued at $4.00 per share were issued to the PAI
stockholders at the end of August 2001. The PAI stockholders are eligible to
receive one more payment of up to $1 million if certain financial targets of PAI
are met for the fiscal year ended June 30, 2002. It is the Company's expectation
that these amounts will be earned and paid by the end of August 2002.
The members of PMP are eligible to receive additional consideration of up
to $1,000,000 if certain PMP clients are retained over the next three years. It
is the Company's expectations that these amounts will not be earned as the
identified clients were not generally retained directly, although they were
replaced.
The shareholders of Centrus are eligible to receive additional
consideration of up to $4,000,000, payable over three years, if certain
financial targets are met over the next two years.
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, four such milestones have been met, resulting in a 100%
increase in the license fee. The agreement also provides for the annual payment
of a fee for maintenance and updating services equal to 18% of the initial
license fee, as defined. It is anticipated that, based on internal growth and
the Centrus acquisition, that the last milestone will be met. If the remaining
milestone is reached, the cash outlay by the Company would be $100,000.
On January 29, 2002, the Company entered into a $40 million revolving
credit facility (the "Facility") with a specialty finance company, to be used
for working capital purposes and future acquisitions. The Facility replaced the
Company's existing credit facilities with its former lenders. The Facility has a
three-year term and is secured by the Company's and its subsidiaries'
receivables and other assets. Interest is payable monthly and provides for
borrowing of up to $40 million at the London Inter-Bank Offered Rate (LIBOR)
plus 2.4%. Borrowings of $28.7 million under the Facility were used to finance
part of the purchase price of the Company's recent acquisition of Centrus. The
Facility contains various covenants that, among other things, require the
Company to maintain certain financial ratios, as defined in the agreements
governing the Facility. As of April 30, 2002, approximately $10,966,000 was
outstanding under the Facility.
The Company anticipates that current cash positions, after its three
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 three acquired within the last 2 years. This will require cash and
depending on the Company's evaluation of future acquisitions, additional cash
may be required. In the event that the Company's plans change or its assumptions
prove to be inaccurate or the proceeds from the Facility 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.
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
An action was 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 moved to Federal
court. The complaint alleged, among other things, that the parties entered into
a contract in November 1996, and that the Company unilaterally terminated the
contract on December 16, 1996. The complaint further alleged that the
termination resulted in the School District incurring approximately $150,000 in
costs and $867,000 in expenses to obtain coverage from December 1996 until
October 1997. The complaint also sought treble damages. The parties have reached
an agreement pursuant to which the Company has paid to the plaintiffs an amount
that is lower than the amount of costs and expenses claimed, and is funding a
part of the plaintiffs' litigation against another defendant. The proceeds of
any settlement with or verdict against such defendant will be divided between
the Company and the School District.
An action was commenced against the Company on April 30, 2002 by Midwest
Health Plans Inc. ("MHP") in the United States District Court for the Eastern
District of Michigan. The complaint alleges, among other things, that the
parties entered into a contract dated July 1999 (the "Agreement"), and further
alleges that the Company has overcharged MHP for the administration of
prescription benefit services in contravention to the terms of the Agreement.
MHP is seeking three (3) million dollars in damages. The Company believes the
claims alleged in the complaint are without merit and intends to vigorously
defend the action.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
For information concerning the Company's 1999 Stock Option Plan, and the
options currently issued and outstanding thereunder, see Note 3 of the Condensed
Notes to Consolidated Financial Statements comprising Item 1 of Part I of this
Quarterly Report on Form 10-Q.
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
at the time of the acquisition. The stock issued to the PAI stockholders was
valued at $849,920. In August 2001, the Company issued 62,500 shares of
unregistered Common Stock of the Company to the PAI stockholders as additional
consideration. These shares were valued at $250,000.. 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 January 22, 2002, the Company completed a convertible note offering in
the aggregate principal amount of $11.6 million. For a complete description of
this note offering, see 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.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
A. The registrant held its 2001 Annual Meeting of Shareholders on January
24, 2002.
B. Six (6) directors were elected at the Annual Meeting to serve until the
next Annual Meeting of Shareholders and until their respective successors are
duly elected and qualified, or until their earlier resignation or removal. The
names of these directors and votes cast in favor of their election and votes
withheld are as follows:
Name Votes For Votes Withheld
Bert E. Brodsky 6,878,015 3,600
Gerald Shapiro 6,878,015 3,600
Kenneth J. Daley 6,878,015 3,600
Ronald L. Fish 6,878,015 3,600
Paul J. Konigsberg 6,878,015 3,600
Gerald Angowitz 6,878,015 3,600
C. A proposal to change the Company's state of incorporation from New York
to Delaware was approved as set forth below:
Votes For Votes Against Abstentions
5,551,115 25,958 2,000
D. A proposal to amend the Company's 1999 Stock Option Plan to increase the
number of shares reserved for issuance thereunder, from 1,650,000 to 2,850,000,
was approved as follows:
Votes For Votes Against Abstentions
5,393,265 168,358 17,450
E. The adoption of the proposal to change the Company's state of
incorporation from New York to Delaware also resulted in the classification of
the Board of Directors, as follows:
Class I (to serve until the 2002 annual meeting): Gerald Shapiro and Ronald Fish
Class II (to serve until the 2003 annual meeting):Gerald Angowitz and
Kenneth J. Daley
Class III (to serve until the 2004 annual meeting): Bert E. Brodsky and
Paul J. Konigsberg
Effective as of February 15, 2002, the rights and duties of the Company's
shareholders, directors and officers are governed by the Certificate of
Incorporation and By-Laws of the Delaware corporation into which the Company was
merged to effect the reincorporation. A detailed description of the effects of
the reincorporation has been previously reported in the Company's Definitive
Proxy Statement, which was filed with the SEC on December 21, 2001.
ITEM 5 - OTHER INFORMATION
-----------------
None.
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) 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 (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 Mail Service Provider Agreement, dated July 1, 1996,
between Health Card and Thrift Drug, Inc. d/b/a
Express Pharmacy Services (1)
10.2 Amendment to Mail Service Provider Agreement, dated
January 1, 1997, between Health Card and Thrift Drug, Inc.
d/b/a Express Pharmacy Services (1)
10.3 Software License Agreement and Professional Service Agreement,
dated February 18, 1998, between Health Card and
Prospective Health, Inc. (1)
10.4 1999 Stock Option Plan (1)
10.5 Employee Covenant Agreement, dated June 15, 1998, between
Health Card and Mary Casale (1)
10.6 Employee Covenant Agreement, dated June 16, 1998, between
Health Card and Ken Hammond (1)
10.7 Stock Option Agreement, dated August 3, 1999, between Health Card
and Ken Hammond (4)
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 Assignment, dated November 1, 1996, from Sandata, Inc., to BFS
Realty, LLC (1)
10.15 Lease, dated August 10, 1998, between 61 Manorhaven Boulevard, LLC
and Health Card (1)
10.16 Letter, dated June 3, 1999, from Bert Brodsky to Health Card (1)
10.17 Letter, dated June 3, 1999, from Gerald Shapiro to Health Card (1)
10.18 Agreement of Guaranty, dated June 1, 1998, by Bert E. Brodsky in
favor of Health Card (1)
10.19 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)
10.20 Letter dated June 8, 1999, from P.W. Capital Corp. to Health Card (1)
10.21 Letter, dated June 9, 1999, from Bert E. Brodsky to Health Card (1)
10.22 Letter, dated June 8, 1999, from the Bert E. Brodsky Revocable Trust
to Health Card (1)
10.23 Letter Agreement, dated June 30, 1999, between the Bert E. Brodsky
Revocable Trust and Health Card (1)
10.24 Employment Agreement, dated July 1, 1999, between Health Card and
Bert E. Brodsky (1)
10.25 Letter, dated June 8, 1999, from Bert E. Brodsky to Health Card (1)
10.26 Form of Lock-Up Agreement (1)
10.27 Acquisition and Merger Agreement, dated as of June 27, 2000, between
Health Card and Pharmacy Associates, Inc. (3)
10.28 Lease Agreement, dated March 4, 1996, between Pharmacy Associates,
Inc. and Executive Park Partnership (4)
10.29 Amendment to Lease, dated November 2, 1998, between Pharmacy
Associates, Inc. and Executive Park Partnership (4)
10.30 Amendment to Lease, dated November 19, 1998, between Pharmacy
Associates, Inc. and Executive Park Partnership (4)
10.31 Lease Agreement, dated July 8, 1999, between Pharmacy Associates,
Inc. and Executive Park Partnership (4)
10.32 Asset Purchase Agreement dated as of March 5, 2001 among National
Medical Health Card Systems, Inc., PMP Acquisition Corp.,
Provider Medical Pharmaceutical, LLC and members of PMP (5)
10.33 Employment Agreement, dated June 4, 2001, between National Medical
Health Card Systems, Inc. and Tery Baskin (6)
10.34 Stock Option Agreement, dated June 4, 2001, between National Medical
Health Card Systems, Inc. and Tery Baskin (6)
10.35 Stock Option Agreement, dated June 12, 2001, between National
Medical Health Card Systems, Inc. and James Bigl (6)
10.36 Asset Purchase Agreement dated January 29, 2002 by and among the
Company, Health Solutions Limited ("HSL"), HSL Acquisition Corp.,
a wholly-owned subsidiary of the Company, and the security holders
of HSL (7)
10.37 Receivables Purchase and Transfer Agreement dated January 29,
2002 by and among the Company and certain of its subsidiaries and
NMHC Funding, LLC (7)
10.38 Loan and Security Agreement dated January 29, 2002 by and
between NMHC Funding, LLC and HFC Healthco-4, LLC, an affiliate
of Healthcare Finance Group, Inc. (7)
10.39 Lease Agreement dated as of August 1, 2001, between National
Medical Health Card Systems, Inc. and BFS Realty, LLC (6)
10.40 Amended Lease Agreement dated as of August 1, 2001, between
National Medical Health Card Systems, Inc. and BFS Realty, LLC
(b) Reports on Form 8-K
A Form 8-K was filed with the Securities and Exchange Commission on
February 11, 2002 related to the acquisition of Centrus.
(1) Denotes document filed as an Exhibit to Health Card's Registration
Statement on Form S-1 (Registration Number: 333-72209) and incorporated herein
by reference.
(2) Denotes documentation filed as an Exhibit to Health Card's Report on
Form 10-K for the fiscal year ended June 30, 1999.
(3) Denotes document filed as an Exhibit to Health Card's Form 8-K for an
event dated July 20, 2000 and incorporated herein by reference.
(4) Denotes documentation filed as an Exhibit to Health Card's Report on
Form 10-K for the year ended June 30, 2000.
(5) Denotes document filed as an Exhibit to Health Card's Form 8-K for an
event dated March 5, 2001.
(6) Denotes document filed as an Exhibit to Health Card's Report on Form
10-K for the year ended June 30, 2001.
(7) Denotes document filed as an Exhibit to Health Card's Current Report on
Form 8-K for events dated January 29, 2002 and incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
(Registrant)
Date: May , 2002 By: /s/ Bert E. Brodsky
-----------------------------------
Bert E. Brodsky
Chairman of the Board
By: /s/David J. Gershen
-----------------------------------
David J. Gershen
Chief Financial Officer
and Treasurer