<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 1999
REGISTRATION NO. 333-72209
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEW YORK 8090 11-2581812
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
26 HARBOR PARK DRIVE
PORT WASHINGTON, NEW YORK 11050
TELEPHONE: (516) 626-0007
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
------------------------
BERT E. BRODSKY
CHIEF EXECUTIVE OFFICER
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
26 HARBOR PARK DRIVE
PORT WASHINGTON, NEW YORK 11050
TELEPHONE: (516) 626-0007
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
STEVEN J. KUPERSCHMID, ESQ. DENNIS N. BERMAN, ESQ.
CERTILMAN BALIN ADLER & HYMAN, LLP SONNENSCHEIN NATH & ROSENTHAL
90 MERRICK AVENUE 1221 AVENUE OF THE AMERICAS, 24TH FLOOR
EAST MEADOW, NY 11554 NEW YORK, NY 10020
TELEPHONE: (516) 296-7000 TELEPHONE: (212) 768-6737
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of the registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
(cover continued on following page)
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
________________________________________________________________________________
<PAGE>
(cover continued from previous page)
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
<S> <C> <C> <C> <C> <C> <C>
PROPOSED
MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS NUMBER OF SHARES OFFERING PRICE AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED TO BE REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Common Stock(2)....................... 2,875,000 Shares $10.00 $28,750,000 $7,993
Representatives' Warrants to Purchase
Common Stock(3)..................... 250,000 Warrants $ .001 $ 250 --
Common Stock underlying the
Representatives' Warrants(4)........ 250,000 Shares $12.00 $ 3,000,000 $ 834
Total Registration Fee...... -- -- $31,750,250 $8,827(5)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933, as amended (the
'Securities Act').
(2) Includes 375,000 shares of common stock that may be issued upon exercise of
a 45-day option granted to the underwriters solely to cover over-allotments,
if any.
(3) No fee required pursuant to Rule 457(g) under the Securities Act.
(4) Pursuant to Rule 416 under the Securities Act, this Registration Statement
also covers such additional shares as may become issuable as a result of the
anti-dilution provisions contained in the Representatives' Warrants.
(5) $7,062 paid previously.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JUNE 9, 1999
PROSPECTUS
2,500,000 SHARES
[LOGO]
COMMON STOCK
National Medical Health Card Systems, Inc. is offering 2,000,000 shares of
its common stock. The selling stockholder identified in this prospectus is
offering an additional 500,000 shares. There is currently no public market for
Health Card's shares. Upon consummation of this offering, we will receive the
proceeds from the sale of shares by the selling stockholder, net of underwriting
discounts and commissions, certain fees payable to the representatives and
estimated gross taxes, as partial repayment of certain indebtedness. See
'Certain Transactions.' Our shares have been conditionally approved for
quotation on the Nasdaq National Market under the symbol 'NMHC.' We anticipate
that the public offering price will be between $8.00 and $10.00 per share.
------------------------
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK.
SEE 'RISK FACTORS,' BEGINNING ON PAGE 5.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED
OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ----------
<S> <C> <C>
Public Offering Price................................................................... $ $
Underwriting Discounts and Commissions.................................................. $ $
Proceeds to Health Card................................................................. $ $
Proceeds to Selling Stockholder......................................................... $ $
</TABLE>
Health Card has granted the underwriters an option to purchase additional
shares to cover over-allotments. It is expected that delivery of the shares will
be made to investors on or about , 1999.
[Logo]
[Logo]
------------------------
, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................................................... 1
Risk Factors............................................................................................... 5
Forward-Looking Statements................................................................................. 13
Use of Proceeds............................................................................................ 14
Dividend Policy............................................................................................ 14
Dilution................................................................................................... 15
Capitalization............................................................................................. 16
Selected Consolidated Financial Information................................................................ 17
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 18
Business................................................................................................... 24
Management................................................................................................. 52
Certain Transactions....................................................................................... 58
Principal and Selling Stockholders......................................................................... 63
Description of Capital Stock............................................................................... 64
Shares Eligible for Future Sale............................................................................ 66
Underwriting............................................................................................... 67
Legal Matters.............................................................................................. 69
Experts.................................................................................................... 69
Available Information...................................................................................... 69
Index to Financial Statements.............................................................................. F-1
</TABLE>
------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information that is different
from that contained in this prospectus. This prospectus may only be used where
it is legal to sell these securities. The information contained in this
prospectus may only be accurate on the date of this prospectus.
Until , 1999 (25 days after the date of this prospectus), all dealers
that buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This requirement is in
addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER
BEFORE DECIDING TO INVEST IN OUR SHARES. WE URGE YOU TO READ THIS ENTIRE
PROSPECTUS CAREFULLY INCLUDING THE 'RISK FACTORS' SECTION, WHICH BEGINS ON PAGE
5, AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
IN THIS 'PROSPECTUS SUMMARY' SECTION, 'WE,' 'OUR' AND 'OURS' REFER TO
HEALTH CARD, AND 'YOU,' 'YOUR' AND 'YOURS' REFER TO A PURCHASER OF THE SHARES OF
HEALTH CARD AND THE SELLING STOCKHOLDER OFFERED BY THIS PROSPECTUS.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
We are an independent company, established in 1981, providing comprehensive
prescription benefit management services. Our programs are designed to assist
prescription benefit plan sponsors by:
containing the cost of prescription drugs,
monitoring the cost and quality of prescription services,
providing sophisticated consulting services, and
providing disease information services.
Sponsors of prescription benefit plans managed by us include managed care
organizations, local governments, unions, corporations and third party health
care plan administrators. We focus our marketing efforts on prospective sponsors
with plans covering up to 100,000 participants, although we also seek and
service sponsors with plans covering less or significantly more plan
participants. As of May 1, 1999, plans managed by us covered over 515,000
eligible employees, retirees, members and their dependents. See 'Business.'
We began our business as a provider of computerized prescription claims
processing services to sponsors and subsequently, increased our capabilities to
become a provider of comprehensive prescription benefit management services. In
1995, our management began to redirect the focus of our business, with the goal
of becoming a leading national independent company providing comprehensive
prescription benefit management services. In particular, we concentrated on (a)
attracting a management team with significant industry experience, (b)
implementing a nationwide marketing effort and (c) enhancing our information
systems.
During the period July 1, 1995 to May 1, 1999, our network of participating
pharmacies grew to over 44,000. During the same period, the number of plan
participants covered by our sponsors' plans grew approximately 115% from
approximately 240,000 to over 515,000. Revenues for the fiscal year ended June
30, 1998 increased approximately 40% as compared to revenues for the fiscal year
ended June 30, 1997. Revenues for the nine months ended March 31, 1999 increased
approximately 39% as compared to revenues for the nine months ended March 31,
1998.
OUR STRATEGY
Our goal is to become a leading national independent prescription benefit
manager. To achieve this goal we intend to:
acquire complementary companies and other strategic assets,
expand our sponsor base,
improve our information systems,
expand our consulting and disease information services, and
establish strategic relationships.
See 'Risk Factors' and 'Business.'
1
<PAGE>
OUR INDUSTRY
An industry source estimates that 1997 U.S. purchases of prescription drugs
totaled approximately $83 billion, of which purchases from retail outlets were
approximately $53 billion and purchases from mail order were approximately $9
billion. Such industry source indicates that prescriptions managed by
prescription benefit management companies represent an increasing proportion of
such purchases. Despite cost containment efforts in the health care industry,
continued advances in medical technology, new drug development and increasing
drug utilization have led to significant increases in related health care costs,
creating a need for more efficient systems. Prescription benefit management
companies evolved to address the need for efficient, cost-effective drug
delivery. The health care industry in general, and the prescription benefit
management business in particular, encompass many activities that are highly
regulated by state and federal government agencies. See 'Risk Factors' for a
discussion of how government regulation can affect businesses in our industry.
We believe that the foregoing trends in the pharmaceutical industry will
foster greater consolidation within our industry, as many of the smaller
prescription benefit management companies will find it increasingly difficult to
address the sophisticated needs of health plan sponsors. We also believe there
is an increasing demand among these sponsors for comprehensive plan consulting
services and disease information services, as cost containment becomes more
dependent on improvements in the quality of care. Our consulting and disease
information services are continuing to be developed to address these demands,
through the use of traditional prescription benefit management services combined
with an outcome-oriented focus and sophisticated information systems. See
'Business -- Services -- Consulting Services and Disease Information Services.'
Our executive offices are located at 26 Harbor Park Drive, Port Washington,
New York 11050 and our telephone number is (516) 626-0007.
- ----------------------------------------------------------
The information contained in this prospectus gives effect to the following
events, each of which happened in May 1999:
(a) a 0.1278447-for-one reverse split in our common stock;
(b) a reduction in the number of shares of common stock that we will have
authority to issue from 200,000,000 to 25,000,000; and
(c) our election to be governed by certain recently enacted provisions of
the New York Business Corporation Law.
In addition, the information in this prospectus is based on the assumption
that certain other events do not happen. It is assumed throughout this
prospectus that:
(a) the underwriters do not exercise an over-allotment option, which gives
them the right to buy up to 375,000 shares from us; and
(b) the underwriters' representatives do not exercise the warrants to be
granted to them to purchase up to an aggregate of 250,000 shares of
common stock.
(c) no options are granted under our 1999 Stock Option Plan.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by Health Card............. 2,000,000 shares
Common Stock Offered by the Selling
Stockholder................................... 500,000 shares
Common Stock Outstanding After the Offering..... 7,312,496 shares(1)
Use of Proceeds................................. Future acquisitions, enhancement of information systems, working
capital including expansion of our sales and marketing efforts,
and general corporate purposes. See 'Use of Proceeds.'
Risk Factors.................................... This offering involves a high degree of risk and immediate and
substantial dilution. See 'Risk Factors' and 'Dilution.'
Proposed Nasdaq National Market Symbol.......... 'NMHC'
</TABLE>
- ------------
(1) Assumes no options are granted under our 1999 Stock Option Plan. This figure
also excludes 250,000 shares issuable upon the exercise of the
representatives' warrants and 375,000 shares issuable upon the exercise of
the underwriters' over-allotment option. See 'Underwriting.'
3
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
INCOME STATEMENT DATA:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
----------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................. $56,265,033 $71,288,411 $99,988,921 $70,978,094 $98,375,371
Cost of claims....................... 50,799,422 64,176,942 91,230,939 64,549,184 89,139,415
----------- ----------- ----------- ----------- -----------
Gross profit......................... 5,465,611 7,111,469 8,757,982 6,428,910 9,235,956
Selling, general and administrative
expenses*.......................... 4,216,259 5,855,282 7,192,027 4,896,612 7,482,553
----------- ----------- ----------- ----------- -----------
Operating income..................... 1,249,352 1,256,187 1,565,955 1,532,298 1,753,403
Other income (expense)............... 21,530 42,595 (180,507) 59,267 436,834
----------- ----------- ----------- ----------- -----------
Income before income taxes........... 1,270,882 1,298,782 1,385,448 1,591,565 2,190,237
Provision for income taxes
(benefit).......................... (185,275) (189,984) 569,000 663,000 731,000
----------- ----------- ----------- ----------- -----------
Net income........................... $ 1,456,157 $ 1,488,766 $ 816,448 $ 928,565 $ 1,459,237
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Earnings per common share:
Basic........................... $ 0.47 $ 0.46 $ 0.16 $ 0.19 $ 0.28
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Diluted......................... $ 0.35 $ 0.37 $ 0.16 $ 0.19 $ 0.28
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted average shares outstanding:
Basic........................... 3,093,085 3,258,459 4,966,885 4,965,326 5,169,411
Diluted......................... 4,182,909 4,008,481 4,969,166 4,967,407 5,169,411
- ------------
*Includes amounts charged by
affiliates aggregating:............ $ 2,868,974 $ 4,511,144 $ 4,904,514 $ 3,672,165 $ 2,361,913
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
AS OF -----------------------------
JUNE 30, 1998 ACTUAL AS ADJUSTED(1)
------------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents.......................................... $ 1,305,792 $ 2,037,150 $ 19,051,550
Working capital (deficit).......................................... (8,658,324) (6,538,632) 10,737,742
Total assets....................................................... 18,343,900 25,300,711 40,418,737
Long-term debt (including current portion)......................... 9,742 4,691 4,691
Total stockholders' equity (deficit)............................... (2,006,282) 1,578,380 16,958,380
</TABLE>
- ------------
(1) The 'As Adjusted' data reflects the application of net proceeds as discussed
in Use of Proceeds. In addition, the 'As Adjusted' data reflects the net
proceeds from the sale of 500,000 shares by the selling stockholder as
partial repayment of certain indebtedness due to the Company from
affiliates.
SUPPLEMENTAL DATA(1):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
----------------------------------- ----------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Retail pharmacy claims processed................. 1,675,490 1,990,976 2,405,627 1,731,640 2,199,590
Mail pharmacy claims processed................... 28,238 62,413 131,611 90,518 126,874
Estimated plan participants (at period end)...... 271,784 291,446 401,226 400,604 417,649
</TABLE>
- ------------
(1) This data has not been audited. See 'Prospectus Summary,' 'Management's
Discussion and Analysis of Financial Condition and Results of Operations'
and 'Business.'
4
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors before deciding to
purchase shares of our common stock. We have separated the risks into two
categories:
business risks inherent in our operations and our industry, and
risks relating to this offering.
BUSINESS RISKS INHERENT IN OUR OPERATIONS AND OUR INDUSTRY
THE MAJORITY OF OUR REVENUES ARE ATTRIBUTABLE TO A FEW SPONSORS. THE LOSS OF ONE
OF THESE SPONSORS COULD ADVERSELY AFFECT OUR BUSINESS. We depend on a small
number of sponsors for a significant portion of our revenues. See
'Business -- Sponsors.' The following sponsors accounted for the percentage of
revenues and approximate number of participants for the periods indicated in the
following table:
<TABLE>
<CAPTION>
PERCENT OF REVENUES NUMBER OF PARTICIPANTS
--------------------------------- ---------------------------------
YEAR ENDED NINE MONTHS ENDED YEAR ENDED NINE MONTHS ENDED
SPONSOR JUNE 30, 1998 MARCH 31, 1999 JUNE 30, 1998 MARCH 31, 1999
- ----------------------------------------------- ------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Vytra Health Plans Long Island, Inc............ 42% 39% 166,840 157,104
Suffolk County................................. 15 14 38,893 39,617
Operating Engineers Trust Funds................ 8 12 40,070 41,451
</TABLE>
Our arrangements with these sponsors are either oral, short-term,
terminable by the sponsor or subject to continuing negotiation. Under one of our
arrangements with Vytra, the written agreement sets forth a formula which
determines our financial commitment with respect to the price of covered drugs.
We sometimes pay less than the prices determined by this formula. We cannot
assure you that Vytra will not object in the future to the prices paid by us nor
can we assure you that its objection will not result in our losing the
contractual relationship with Vytra under this arrangement, or all of its
business. If we were to lose Vytra, Suffolk or Operating Engineers as a sponsor,
or lose a significant portion of any such sponsor's business or if the terms of
these arrangements were to change it would have a material adverse effect on our
business, operating results and financial condition. If we were to lose any of
these sponsors, we cannot assure you that we will be able to replace them with
additional sponsors.
WE HAVE A HISTORY OF WORKING CAPITAL DEFICITS, WHICH COULD ADVERSELY AFFECT OUR
BUSINESS. The following table sets forth our working capital deficits and
stockholders' deficits for the periods indicated in the first column.
<TABLE>
<CAPTION>
PERIOD ENDED WORKING CAPITAL (DEFICIT) STOCKHOLDERS' EQUITY (DEFICIT)
- ---------------------------------------------------------- ------------------------- ------------------------------
<S> <C> <C>
Year ended June 30, 1996.................................. $(7,530,351) $ (3,663,125)
Year ended June 30, 1997.................................. (7,436,095) (2,343,671)
Year ended June 30, 1998.................................. (8,658,324) (2,006,282)
Nine months ended March 31, 1999 (unaudited).............. (6,538,632) 1,578,380
</TABLE>
We believe that the net proceeds of the offering, together with our
existing capital resources and anticipated revenues from operations, will enable
us to maintain our current and planned operations for at least 24 months after
consummation of the offering. If our plans or assumptions change or prove to be
inaccurate, or if the net proceeds of the offering or cash flow prove to be
insufficient, we may seek to minimize cash expenditures and/or obtain additional
financing in order to support our plan of operations. However, we cannot assure
you that additional financing will be available when needed or on terms
acceptable to us, if at all. See 'Risk Factors -- If we do find a suitable
acquisition, it may be difficult for us to get financing' and 'Use of Proceeds.'
Our history of working capital deficits may decrease our ability to attract new
investors or to raise additional capital.
OUR POSSIBLE INABILITY TO PAY PHARMACIES COULD ADVERSELY AFFECT OUR BUSINESS.
Our agreements with many pharmacies in our network do not require us to make
payments within a specified period.
5
<PAGE>
However, we know from experience that they expect timely payment. We try to
process pharmacy claims promptly while still obtaining funds from sponsors
before making payment to the participating pharmacies. We cannot assure you that
the sponsors will pay us in a timely fashion. See 'Business Services Pharmacy
Network -- Pharmacy Relations.' While we do not believe that there has been any
material negative effect on our business resulting from our payment schedule and
we believe our relationships with pharmacies are generally good, no assurances
can be made that pharmacies in our network will not demand faster payment in the
future. In such event, or if any sponsor fails to pay us on a timely basis, we
may be required to pay participating pharmacies before being paid by that
sponsor. In addition, if any sponsor fails to pay us at all, we will still be
liable to pay our participating pharmacies. Sponsors' failure to pay us, or to
pay us in a timely manner, may have an adverse effect on our cash flow and on
our ability to maintain our pharmacy network, which in turn could have a
material adverse effect on our business, operating results and financial
condition.
LACK OF PARTICIPATION BY PHARMACIES IN OUR PHARMACY NETWORK COULD ADVERSELY
AFFECT OUR BUSINESS. The continuation of our services depends heavily on the
participation of pharmacies in our pharmacy network, which participation we
cannot guarantee. All of our arrangements with pharmacies in our pharmacy
network are either oral or terminable on short notice. If a substantial portion
of the pharmacies were to discontinue their arrangements with us and/or we were
unable to maintain a multi-state pharmacy network, our ability to market our
prescription benefit management services could be adversely affected and
sponsors could discontinue their relationships with us. Consequently, we could
experience a loss of revenues, which could have a material adverse effect on our
business, operating results and financial condition.
THE MARKET FOR PRESCRIPTION BENEFIT MANAGEMENT SERVICES IS VERY COMPETITIVE AND
IS CONSOLIDATING. THIS MAY CAUSE PRICE OR MARGIN EROSION. We compete with
numerous companies which provide the same or similar services, such as:
<TABLE>
<S> <C>
Express Scripts, Inc./Value'Rx' Consultec, Inc.
PCS Health Systems, Inc. National Prescription Administrators, Inc.
Merck-Medco Managed Care, LLC Advance Paradigm, Inc.
Provantage Health Services, Inc. MedImpact Health Care Systems, Inc.
MIM Corp. Pharmaceutical Care Network
</TABLE>
Our competitors include other independent prescription benefit management
companies, those affiliated with drug companies and those affiliated with retail
pharmacy chains. In addition, present and potential sponsors may find it
desirable to perform for themselves the services we render.
Many of our competitors have been in existence for longer periods of time,
are far better established than we are, have broader public recognition, and/or
have financial and marketing resources substantially greater than ours. Some
have more experienced management and have far more extensive facilities than
those which are now, or in the foreseeable future will become, available to us.
We cannot assure you that we will remain competitive or that we will
successfully market prescription benefit management services to existing and new
sponsors. See 'Business -- Competition.' If we are unable to market and sell our
services as well as or better than our competitors, there could be a material
decline in revenues and/or other material adverse effects on our business,
operating results and financial condition.
Over the past several years, insurance companies, HMOs and managed care
companies have experienced significant consolidation. Our sponsors have been and
may continue to be subject to consolidation pressures. Although we may gain
sponsors from certain consolidations and alliances in the industry, it is also
possible that we will lose sponsors as a result of consolidations and alliances.
Consolidations and alliances by their very nature reduce the number of clients
who may need our services. We cannot assure you that any new sponsors and any
renewal of current contracts will offset the revenues lost from sponsors
electing not to use our services, or sponsors who cease to exist, as a result of
a consolidation or alliance. See 'Business -- Sponsors.' The loss of such
revenues would have a material adverse effect on our business, operating results
and financial condition.
6
<PAGE>
Furthermore, some health care providers are consolidating to create
integrated health care delivery systems with greater regional and national
market power. These merging systems could have increased bargaining power, which
may lead to erosion of prices for our services. Our failure to maintain adequate
margins could have a material adverse effect on our business, operating results
and financial condition.
OUR POSSIBLE VIOLATION OF CONFIDENTIALITY PROVISIONS COULD ADVERSELY AFFECT OUR
BUSINESS. We are a party to numerous agreements which contain confidentiality
provisions. We have agreed to keep confidential certain terms of our
arrangements with Vytra and our rebate administrator, Foundation Health
Pharmaceutical Services, d/b/a Integrated Pharmaceutical Services, among others.
These confidentiality provisions prohibit us from disclosing either certain
terms of the agreement or the existence of the agreement. We have not obtained
waivers of these confidentiality provisions from any of the other parties to
these agreements. Thus, the disclosure in this prospectus which describes these
agreements, and/or the filing of any such agreement as an exhibit to the
registration statement, may constitute a violation of the terms of such
agreement. Such a violation could in turn lead to liability for breach of such
contractual provision, a loss of business, or other material adverse effect on
our business, operating results and financial condition.
OUR BUSINESS IS DESIGNED TO FUNCTION IN THE CURRENT HEALTH CARE REIMBURSEMENT
SYSTEM; CHANGES IN THAT SYSTEM COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
Our services are designed to function in the health care financing and
reimbursement system currently being used in the United States. During the past
several years, the U.S. health care industry has been subject to increased
governmental regulation of reimbursement rates. We cannot predict what effect,
if any, such factors might have on our business, operating results and financial
condition. We believe that the commercial value and appeal of our services may
be adversely affected if the current health care reimbursement system were to be
materially changed.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF OUR REBATE ADMINISTRATOR TERMINATES
OUR AGREEMENT, OR IF DRUG MANUFACTURERS ALTER OR DISCONTINUE REBATE PROGRAMS.
Pursuant to an agreement with Foundation Health Pharmaceutical Services d/b/a
Integrated Pharmaceutical Services, a rebate administrator, we submit claims for
rebates to Integrated. These rebates relate to certain prescriptions filled
under plans that we administer. Integrated submits our rebate claims, along with
rebate claims of others, to the appropriate drug manufacturer, pursuant to
agreements Integrated has negotiated with various drug manufacturers. We have
signed agreements joining us to certain agreements between Integrated and
certain drug manufacturers. We believe that some of the underlying agreements
which we have joined obligate us to include certain drugs at specified levels in
our formulary in order to receive corresponding levels of rebates and that
certain of these underlying agreements to which we are joined obligate us to
exclude certain drugs from our formulary. We have been provided with summaries
of the rebate programs which we understand to be the subject of those
agreements, but have not been provided with the actual agreements. Although we
have not experienced any problems in the past, we cannot assure you that the
terms of those agreements will not have a material adverse effect on our
business, operating results and financial condition.
Our agreement with Integrated is terminable on 90 days' prior notice by
either party. For the fiscal year ended June 30, 1998, rebates accounted for 1%
of our revenues. For the nine month periods ended March 31, 1999 and 1998,
rebates accounted for 2% and 2% of our revenues, respectively. If Integrated
terminates the agreement, and another rebate administrator is not engaged, it
would have a material adverse effect on our business, operating results and
financial condition. We cannot assure you that the Integrated agreement will not
be terminated. On March 31, 1999, one of our competitors, Advance Paradigm,
Inc., announced that it had acquired Integrated. We are not sure what effect, if
any, such acquisition will have on our business.
An event that is much less likely to occur but is a more significant
economic risk is that drug manufacturers might cease to offer rebates on their
products. Although we are unaware that any such cessation is planned, and we
believe that cessation of such programs is unlikely, we cannot be certain that
drug manufacturers will continue to offer rebates. If such rebate programs were
to be
7
<PAGE>
discontinued, we could suffer a loss of revenues which could have a material
adverse effect on our business, operating results and financial condition.
Subject to our agreement to provide certain minimum levels of rebates to
Vytra and Suffolk County, we retain all, part or none of the rebates received by
us in connection with our administration of sponsors' plans. Our participation
in such rebate programs and rebate sharing programs may expose us to
investigation and/or punishment under certain laws, rules and regulations
including the federal Anti-Kickback Statute and state laws and regulations
regarding professional misconduct applicable to pharmacies. See
'Business -- Government Regulation.' Our failure to obtain certain rebates could
cause us to be in violation of agreements with certain sponsors and could
negatively impact our ability to compete. See 'Risk Factors -- The health care
industry is highly regulated at the federal, state and local levels. Our failure
to comply with these regulations could adversely affect our business.'
THE HEALTH CARE INDUSTRY IS HIGHLY REGULATED AT THE FEDERAL, STATE AND LOCAL
LEVELS. OUR FAILURE TO COMPLY WITH THESE REGULATIONS COULD ADVERSELY AFFECT OUR
BUSINESS. The healthcare industry is subject to extensive federal, state and
local laws and regulations which are not always clear or consistently applied,
and compliance may impose a burden on our operations. While we may not have
complied in the past, we have recently reviewed our operations for areas of
non-compliance and we believe that we substantially comply with the laws and
regulations material to the operation of our business, or are taking steps to
identify and comply with such laws and regulations.
However, regulatory authorities may disagree and take enforcement or other
actions against us. These actions may result in civil or criminal fines or
penalties restricting our ability to engage in certain business practices or
subject us to loss of license and/or exclusion from the Medicare and Medicaid
programs. We cannot predict the impact of future legislation or regulatory
changes or assure you that we will have the regulatory approvals required to
operate our business.
Our business is subject to the following particular risks that arise as a
result of this regulatory environment:
some of our activities have been conducted without obtaining licenses that
may have been required.
our rebate, therapeutic interchange and formulary management programs may
violate the Anti-Kickback Statute and the laws and related rules of
professional misconduct applicable to licensed pharmacies.
our use of certain health information may violate certain rights of
privacy and confidentiality of plan participants.
our disease information services, drug usage monitoring, preferred drug
management and consulting services may violate certain laws and
regulations applicable to the licensed professions of medicine, nursing,
and pharmacy.
future agreements with Vytra must be submitted to the New York State
Department of Health for review. DOH may not approve any such agreement.
some of the services we have contracted to provide to sponsors could be
found to violate certain utilization review regulations.
our prescription benefit management activities may be regulated in any
state in which our sponsors, plan participants or participating pharmacies
do business or reside.
A finding that we have violated any applicable laws or regulations could
have a material adverse effect upon our business, operating results and
financial condition. Moreover, our involvement in any judicial or regulatory
proceeding regardless of its merits, and the related costs, could have a
material adverse effect on our business, operating results and financial
condition. For a more detailed discussion of the risks stated above and an
analysis of government regulations which may apply to our business, see
'Business -- Government Regulation.'
8
<PAGE>
CERTAIN OF OUR ACTIVITIES COULD BE DEEMED TO CONSTITUTE VIOLATIONS OF ANTI-TRUST
REGULATIONS. Retail pharmacies have instituted lawsuits against drug
manufacturers challenging brand drug pricing practices under various state and
federal anti-trust laws. These lawsuits contend that drug manufacturers have
offered discounts or rebates to pharmacy benefit management companies while
precluding retail pharmacies from the availability of the discounts and rebates.
In one lawsuit, the parties agreed that retail pharmacies would be eligible for
similar discounts should they demonstrate the ability to affect market share in
the same or similar manner as managed care entities. Although we have not been
named a party to that lawsuit, we could face increased competition from
pharmacies and pharmacy chains. Beyond these specific instances, federal and
state anti-trust laws and trade regulations permit enforcement not only by
governmental entities but also by any person injured in business by reason of
any act prohibited by such laws or regulations. Moreover, many of these laws
entitle any person threatened with loss or damage by anti-trust violations to
obtain injunctive relief. In addition, a successful anti-trust plaintiff may be
entitled to treble damages and attorneys' fees.
CERTAIN OF OUR ACTIVITIES COULD BE DEEMED TO CONSTITUTE VIOLATIONS OF ERISA
REGULATIONS. It is possible that we could be restricted from commercial
activities and relationships with pharmacies, drug manufacturers and others, if
those relationships conflict with fiduciary duties to plan members under ERISA
statutes and regulations. These restrictions would apply if it were determined
that we are a fiduciary under ERISA. We could be considered a fiduciary and be
subject to applicable penalties under ERISA if it were found that we:
have discretionary responsibility for part or all of a group plan's
administration, or
exercise authority or control over the management or disposition of the
plan's assets.
OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY, WHICH MAY
CAUSE VOLATILITY IN THE PRICE OF OUR COMMON STOCK. Our operating results have in
the past and are likely in the future to vary significantly from quarter to
quarter. Fluctuations in our results make it harder to identify and understand
trends in our business and may lead to volatility in our stock price. In
addition, our experience over the last several years leads us to believe that
the following factors are also material risks which could cause our quarterly
operating results to fluctuate significantly:
the expiration or termination of contracts with significant sponsors,
the size and timing of new contracts, whether through acquisitions or
otherwise,
the number of covered lives in our sponsors' benefit plans,
changes in our pricing policies or in our competitors' pricing,
market acceptance of our services,
changes in operating expenses, and
conditions in the healthcare industry and the economy generally.
Our revenues are not predictable with any significant degree of certainty
because of these factors and because the market for our services is rapidly
evolving. Based upon the factors listed above, we believe that our quarterly
revenues, expenses and operating results are likely to vary significantly in the
future, that period-to-period comparisons of our operating results are not
necessarily meaningful and that, in any event, such comparisons should not be
relied upon as indications of our future performance. Furthermore, it is
possible that in some future quarters, our operating results will fall below our
expectations or the expectations of market analysts and investors. If we do not
meet these expectations, the price of the common stock may decline
significantly.
WE MAY NOT ACQUIRE COMPLEMENTARY COMPANIES OR STRATEGIC ASSETS, OR MAY NOT
SUCCESSFULLY INTEGRATE THEM INTO OUR OPERATIONS. Following the consummation of
the offering, we intend to identify and pursue acquisitions of complementary
companies and strategic assets, such as sponsor bases, products and technology.
Increased competition for acquisition candidates may develop, in which event
there may be fewer acquisition opportunities available to us as well as higher
9
<PAGE>
acquisition prices. There can be no assurance that we will be able to identify
acquisition opportunities.
If any such opportunity involves the acquisition of a business, we cannot
be certain that:
we will successfully integrate the operations of the acquired business
with ours,
all the benefits expected from such integration will be realized,
management's attention will not be diverted or divided, to the detriment
of current operations,
amortization of acquired intangible assets will not have a negative effect
on our operating results or other aspects of our business,
delays or unexpected costs related to the acquisition will not have a
detrimental effect on our combined business, operating results and
financial condition,
sponsor dissatisfaction with, or performance problems at, an acquired
company will not have an adverse effect on our reputation, or
our respective operations, management and personnel will be compatible.
In most cases, acquisitions will be consummated without seeking and
obtaining shareholder approval, in which case shareholders will not have an
opportunity to consider and vote upon the merits of such an acquisition.
Although we will endeavor to evaluate the risks inherent in a particular
acquisition, there can be no assurance that we will properly ascertain or assess
such risks. See 'Business -- Business Strategy.'
IF WE DO FIND A SUITABLE ACQUISITION, IT MAY BE DIFFICULT FOR US TO GET
FINANCING. To the extent that potential acquisition candidates are unwilling to
accept our common stock as part of the acquisition payment, we may be required
to use cash resources for our acquisition program. We may be required to obtain
additional financing for future acquisitions. If we do not have sufficient cash,
our growth could be limited unless we can obtain additional capital through debt
or equity financings. We cannot assure you that we will be able to obtain
financing on commercially reasonable terms or at all. Furthermore, equity
financing will result in a dilution to our existing shareholders. The degree of
dilution may be significant. In the case of debt financing, we run the risks of
interest rate fluctuations and insufficiency of cash flow to pay principal and
interest, along with other risks traditionally associated with incurring
indebtedness. See 'Use of Proceeds.' If debt and/or equity financings are
undertaken, our acquisition plan may be adversely affected.
WE DEPEND ON OUR CHAIRMAN OF THE BOARD AND OTHER EXECUTIVE MANAGEMENT, WHO HAVE
EXPERIENCE IN HELPING COMPANIES GROW. We believe that our future success depends
significantly upon the continued services of our senior management, in
particular Bert E. Brodsky, Chairman of the Board, Chief Executive Officer,
Gerald Shapiro, Vice Chairman of the Board, Marjorie O'Malley, President and
Mary Casale, Executive Vice President of Sales and Marketing. Mr. Brodsky and
Mr. Shapiro, as well as Ms. O'Malley and Ms. Casale, are experienced in managing
the growth of small companies and/or divisions of larger companies. The loss of
the services of either Mr. Brodsky or Mr. Shapiro or of other persons in senior
management would mean the loss of years of experience in both general business
matters and in our industry, which could have a material adverse effect on our
operations and financial condition. We cannot assure you that we will be able to
retain our current management. Upon the consummation of the offering, we intend
to obtain a $1,000,000 key-person life insurance policy on Mr. Brodsky.
OUR CHAIRMAN OF THE BOARD AND HIS AFFILIATES WILL OWN OR CONTROL OVER 50% OF OUR
OUTSTANDING COMMON STOCK AND WILL CONTROL HEALTH CARD. THIS COULD HINDER A
CHANGE OF CONTROL THAT MIGHT BE IN YOUR INTEREST. Prior to the offering, our
Chairman of the Board, Mr. Brodsky, and his affiliates beneficially owned or
controlled an aggregate of 83.8% of our issued and outstanding common stock,
including shares subject to existing options granted by Mr. Brodsky. Upon the
closing of the offering, Mr. Brodsky and his affiliates will beneficially own or
control an aggregate of 54% of the shares of common stock in the event the
over-allotment option is not exercised and 51.4% of the shares of common stock
in the event the over-allotment option is exercised. Accordingly, such
10
<PAGE>
shareholders, acting together, for as long as they own more than 50% of the
outstanding common stock, will have the ability to significantly influence:
the election of our Board of Directors,
the approval of matters requiring approval of the Board of Directors, and
decisions on matters submitted to our shareholders for approval.
The ability of a small group of shareholders to exert such influence may
materially impair our ability to attract new investors or to obtain financing.
The voting power of these holders may also discourage or prevent any proposed
takeover of our company unless the terms thereof are approved by such holders.
See 'Management' and 'Principal Shareholders.'
THE TERMINATION OF OUR RELATIONSHIP WITH SANDATA, INC. WOULD MATERIALLY
ADVERSELY AFFECT OUR BUSINESS. Our relationship with Sandata, Inc., an
affiliated third party that, through its wholly owned subsidiaries, supplies a
significant portion of our information systems technology, is described in the
sections of this prospectus entitled 'Business -- Information Systems' and
'Certain Transactions -- Health Card's Relationship with Sandata.' A subsidiary
of Sandata provides consulting services and leases computer hardware to us; the
termination of this relationship would have a material adverse effect on our
business due to the significant amount of equipment and services this affiliated
party supplies to us. In addition, because we lease computer hardware from this
subsidiary of Sandata, and because this subsidiary has historically developed
and maintained a significant portion of our information systems, the termination
of this relationship would have a material adverse effect on our operating
results and financial condition.
ENHANCEMENT OF OUR INFORMATION SYSTEMS MAY BE COSTLY AND/OR DISRUPTIVE. Our
information systems constitute our primary resource for providing integrated
prescription benefit management services. Our on-line claims management system
is an integral part of our information systems. In addition, we obtain certain
components of our information systems from affiliated and unaffiliated third
party vendors. We expect that we will need to enhance these systems from time to
time. The cost of enhancements may be significant, and may require the
significant use of our operational resources, including personnel. We cannot
assure you that any such enhancements will be made without significant
disruption of our business and/or a material adverse effect on our operating
results and financial condition. If we are unable to effect these enhancements,
it may place us at a competitive disadvantage, which could in turn have a
material adverse effect on our business, operating results and financial
condition.
OUR OPERATIONS MAY BE DISRUPTED IF SYSTEMS FAILURE OR DATA CORRUPTION RESULT
FROM THE YEAR 2000 ISSUE. We cannot assure you that the systems of other
companies on which our systems rely will be Year 2000 compliant in a timely
fashion. Other than the foregoing, our management does not believe that we will
have any material Year 2000 risks, either in terms of operational difficulties
or expenses, although no assurances can be made that our assessment is correct.
See 'Business -- Preparation for Year 2000 Readiness.' If management's
assessment of our Year 2000 readiness is incorrect, or if other companies' Year
2000 problems are significant, it could have a material adverse effect on our
business, operating results and financial condition. See 'Business -- Year 2000
Readiness.'
IF WE FAIL TO RECRUIT AND RETAIN KEY MANAGEMENT AND TECHNICAL PERSONNEL, OUR
ABILITY TO SUPPORT GROWTH AND BE COMPETITIVE COULD BE ADVERSELY AFFECTED. Our
success is partly dependent upon our ability to hire and retain additional
personnel. Qualified personnel are generally in great demand in our business,
and our inability to recruit and/or retain them could have a materially adverse
effect on our business, operating results and financial condition. We cannot
assure you that we will be able to attract and retain additional qualified
personnel in the future.
11
<PAGE>
RISKS RELATED TO THIS OFFERING
MANAGEMENT WILL HAVE SIGNIFICANT DISCRETION OVER THE USE OF PROCEEDS SINCE A
LARGE PORTION OF THE PROCEEDS IS ALLOCATED TO WORKING CAPITAL. MANAGEMENT MAY
USE THE PROCEEDS IN A MANNER WHICH IS DIFFERENT FROM THEIR CURRENT INTENT. While
we intend to use the net proceeds of the offering as described in the 'Use of
Proceeds' section of this prospectus, we will have broad discretion to adjust
the application and allocation of such net proceeds in order to address changed
circumstances and opportunities. The success of our acquisition plans, and of
the operations that are influenced by working capital allocations, will be
substantially dependent upon the discretion and judgment of our management with
respect to the application and allocation of the net proceeds. See 'Use of
Proceeds.'
THERE IS NO CURRENT PUBLIC MARKET FOR OUR COMMON STOCK. IF A PUBLIC MARKET DOES
NOT DEVELOP IN THE FUTURE, IT COULD LIMIT YOUR ABILITY TO SELL YOUR SHARES.
There is presently no public market for our common stock and we cannot assure
you that an active public market will develop or be sustained after the
offering. The offering price per share of the common stock will be determined by
negotiations between us and the representatives, and is not necessarily related
to our asset value, net worth or other established criteria of value, and may
not be indicative of the prices that will prevail in the public market. In
addition, the stock market has from time to time experienced price and volume
fluctuations that are often unrelated to the operating performance of particular
companies. Since there is currently no active public market, the offering price
may not bear any relationship to the actual value of our common stock. The
market price of our common stock, similar to that of securities of other growing
companies, may be highly volatile. The market price of the common stock could be
subject to significant fluctuations in response to our operating results and
other factors, and there can be no assurance that the market price of our common
stock will not decline below the offering price. See 'Underwriting,'
'Description of Securities' and 'Financial Statements.'
REPRESENTATIVES' WARRANTS COULD DILUTE SHAREHOLDERS' INTERESTS OR IMPAIR OUR
ABILITY TO RAISE CAPITAL. The representatives will buy from us, for nominal
consideration, warrants to purchase an aggregate of 250,000 shares of common
stock. For the term of the warrants, the holders thereof will have, at nominal
cost, the opportunity to profit from a rise in the market price of the common
stock without assuming the risk of ownership, with a resulting dilution in the
interest of other security holders. As long as the warrants remain unexercised,
our ability to obtain additional capital might be adversely affected. Moreover,
the holders of the warrants may be expected to exercise them at a time when we
would, in all likelihood, be able to obtain any needed capital through a new
offering of our securities on terms more favorable than those provided by the
warrants. See 'Underwriting -- The Representatives' Warrants.'
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK
VALUE OF THE STOCK YOU PURCHASE. The assumed public offering price is
substantially higher than the net tangible book value per outstanding share of
common stock. Purchasers of our shares will incur immediate and substantial
dilution of $6.68 per share in the net tangible book value of our shares from
the assumed public offering price of $9.00.
A SIGNIFICANT NUMBER OF SHARES ARE ELIGIBLE FOR SALE AND THEIR SALE COULD
DEPRESS OUR STOCK PRICE. Sales of substantial amounts of our shares in the
public market after this offering could depress the market price of our common
stock. These sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of the offering, Health Card will have outstanding
7,312,496 shares of common stock. Of these shares, the 2,500,000 shares sold in
the offering (2,875,000 shares if the over-allotment option is exercised), and,
except as described in 'Shares Eligible For Future Resale,' the 4,812,496
remaining issued and outstanding shares of common stock will be freely tradeable
without restriction under the Securities Act, unless held by our 'affiliates' as
that term is defined in Rule 144 under the Securities Act.
WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT ANTICIPATE PAYING DIVIDENDS IN
THE FORESEEABLE FUTURE. We have never paid any cash dividends on our common
stock and do not intend to pay
12
<PAGE>
any cash dividends in the foreseeable future. We anticipate retaining any
earnings which we may realize in the near future to finance our growth.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements which involve known and
unknown risks and uncertainties or other factors that may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. The words 'believes,' 'anticipates,' 'plans,'
'expects,' 'intends,' 'estimates' and similar expressions are intended to
identify forward-looking statements. Factors that might cause such differences
include, but are not limited to, those discussed under the heading 'Risk
Factors,' as well as factors discussed in other places in this prospectus.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by Health Card from the sale of 2,000,000
shares of common stock offered by Health Card are estimated to be $15,380,000
based on an assumed offering price of $9.00 per share. Net proceeds are
estimated after deducting underwriting discounts and commissions, and other
estimated expenses of the offering payable by Health Card.
Health Card anticipates that the net proceeds will be used as follows:
approximately $10,000,000 for future acquisitions,
approximately $1,500,000 for enhancement of Health Card's information
systems,
approximately $3,880,000 for working capital, including expansion of
Health Card's sales and marketing efforts, and general corporate purposes.
Health Card intends to acquire other prescription benefit management
companies and related strategic assets. Although Health Card is exploring
acquisition opportunities, no discussions have proceeded past the exploratory
stage. Health Card has no agreements or commitments with respect to any such
acquisition. Health Card has not allocated any particular portion of the net
proceeds for any specific acquisition. The net proceeds from the offering will
be invested in interest bearing government securities and other short-term
investment grade securities until needed. Upon the consummation of this
offering, we will receive the proceeds from the sale of shares by the selling
stockholder, net of underwriting discounts and commissions, a non-accountable
expense allowance, a financial advisory fee and estimated gross Federal and
state taxes, as partial repayment of certain indebtedness. See 'Certain
Transactions -- Indebtedness of Management.'
DIVIDEND POLICY
Health Card has not declared or paid any cash dividends in the past and
does not anticipate doing so in the foreseeable future. Health Card intends to
retain any earnings to finance its growth. Any future payments of dividends will
be at the discretion of the Board of Directors and will depend upon such factors
as the Board of Directors deems relevant. No assurance can be given that Health
Card will pay dividends in the foreseeable future.
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<PAGE>
DILUTION
The difference between (a) the offering price per share of common stock and
(b) the net tangible book value per share after the offering, constitutes the
dilution to investors in the offering. Net tangible book value per share is
determined by dividing the net tangible book value of Health Card (total
tangible assets less total liabilities) by the number of outstanding shares of
common stock.
As of March 31, 1999, the net tangible book value of Health Card was
$1,578,380, or $0.30 per share. Assuming an amount of net proceeds as described
in 'Use of Proceeds' above, the net tangible book value of Health Card as of
March 31, 1999, assuming the offering had been consummated on that date, would
have been $16,958,380 or $2.32 per common share. This amount represents:
immediate dilution of approximately $6.68 (74%) per share of common stock
to new investors, and
an immediate increase of approximately $2.02 per share of common stock to
current shareholders.
The following table illustrates the per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed offering price of common stock................................................. $9.00
Net tangible book value before offering........................................... $0.30
Increase attributable to new investors............................................ 2.02
-----
Net tangible book value after the offering........................................ 2.32
-----
Total dilution to new investors(1)..................................................... $6.68
-----
-----
</TABLE>
The following table sets forth the relative cost and ownership percentage
of the common stock offered hereby as compared to the common stock outstanding
immediately prior to the offering:
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED(1) CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Current shareholders..................... 5,312,496 72.6% $ 2,906,100(2) 13.9% $0.55
New investors............................ 2,000,000 27.4 18,000,000 86.1 $9.00
--------- ------- ----------- ------- ------
Total............................... 7,312,496 100.0% $20,906,100 100.0%
--------- ------- ----------- -------
--------- ------- ----------- -------
</TABLE>
- ------------
(1) This figure excludes 250,000 shares issuable upon the exercise of the
representatives' warrants and 375,000 shares issuable upon exercise of the
underwriters' over-allotment option. See 'Description of Capital
Stock -- Common Stock.'
(2) Not reduced by notes receivable in the amount of $1,328,475 issued by
shareholders as payment for shares.
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<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1999, (i) the actual
capitalization of Health Card, and (ii) the as adjusted capitalization to give
effect to the application of the proceeds from the offering (at an assumed
public offering price of $9.00 per share of common stock and net of underwriting
discounts and commissions and estimated offering expenses). The table should be
read in conjunction with Health Card's financial statements, including the notes
thereto, and 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-----------------------------
ACTUAL AS ADJUSTED(1)
----------- --------------
<S> <C> <C>
Current portion of long term debt....................................... $ 4,691 $ 4,691
----------- --------------
----------- --------------
Long-term debt, net of current portion.................................. -- --
----------- --------------
Stockholders' equity:
Preferred stock, $.10 par value, 10,000,000 shares authorized; none
issued and outstanding........................................... -- --
Common stock, $.001 par value, 25,000,000 shares authorized;
5,312,496 shares issued and outstanding (actual), 7,312,496
shares issued and outstanding (as adjusted)...................... 5,313 7,313
Additional paid-in capital......................................... 2,900,787 18,278,787
Retained earnings.................................................. 755 755
Notes receivable -- stockholders................................... (1,328,475) (1,328,475)
----------- --------------
Total stockholders' equity......................................... 1,578,380 16,958,380
----------- --------------
Total capitalization.......................................... $ 1,583,071 $ 16,963,071
----------- --------------
----------- --------------
</TABLE>
- ------------
(1) This figure excludes 250,000 shares issuable upon the exercise of the
representatives' warrants and 375,000 shares issuable upon the exercise of
the underwriters' over-allotment option. See 'Description of Capital
Stock -- Common Stock.'
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables summarize certain selected financial information for
each of the years in the five year period ended June 30, 1998 and for the nine
months ended March 31, 1998 and 1999 and provide certain supplemental data. The
consolidated income statement data for the years ended June 30, 1996, 1997 and
1998 and the selected consolidated balance sheet data as of June 30, 1997 and
1998 have been derived from the audited consolidated financial statements of
Health Card included elsewhere in this prospectus. The consolidated income
statement data for the years ended June 30, 1994 and 1995 and the selected
consolidated balance sheet data as of June 30, 1994 and 1995 have been derived
from unaudited financial statements of Health Card which are not included in
this prospectus. The consolidated income statement data for the nine months
ended March 31, 1998 and 1999 and the selected consolidated balance sheet data
as of March 31, 1998 and 1999 have been derived from Health Card's unaudited
interim consolidated financial statements, included elsewhere in this
prospectus, which in the opinion of management, reflect all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of the financial position and results of operations for the periods presented.
The information contained in this table should be read in conjunction with
Health Card's consolidated financial statements and the notes thereto, and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' included elsewhere in this prospectus. The consolidated income
statement data for the nine month period ended March 31, 1999 is not necessarily
indicative of the results of operations that may be expected for a full year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues...................... $38,751,636 $45,230,912 $56,265,033 $71,288,411 $99,988,921 $70,978,094 $98,375,371
Cost of claims................ 37,174,861 42,316,738 50,799,422 64,176,942 91,230,939 64,549,184 89,139,415
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit.................. 1,576,775 2,914,174 5,465,611 7,111,469 8,757,982 6,428,910 9,235,956
Selling and general
administrative expenses*.... 1,792,037 3,394,577 4,216,259 5,855,282 7,192,027 4,896,612 7,482,553
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)....... (215,262) (480,403) 1,249,352 1,256,187 1,565,955 1,532,298 1,753,403
Other income (expense)........ 1,585 17,723 21,530 42,595 (180,507) 59,267 436,834
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes
(loss)...................... (213,677) (462,680) 1,270,882 1,298,782 1,385,448 1,591,565 2,190,237
Provision for income taxes
(benefit)................... 429 850 (185,275) (189,984) 569,000 663,000 731,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............. $ (214,106) $ (463,530) $ 1,456,157 $ 1,488,766 $ 816,448 $ 928,565 $ 1,459,237
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) per common
share:
Basic..................... $ (0.09) $ (0.19) $ 0.47 $ 0.46 $ 0.16 $ 0.19 $ 0.28
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Diluted................... $ (0.09) $ (0.19) $ 0.35 $ 0.37 $ 0.16 $ 0.19 $ 0.28
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Weighted average number of
common shares outstanding:
Basic..................... 2,459,748 2,447,057 3,093,085 3,258,459 4,966,885 4,965,326 5,169,411
Diluted................... 2,459,748 2,447,057 4,182,909 4,008,481 4,969,166 4,967,407 5,169,411
- ------------------------------
*Includes amounts charged by
affiliates aggregating...... $ 934,561 $ 2,342,352 $ 2,868,974 $ 4,511,144 $ 4,904,514 $ 3,672,165 $ 2,361,913
<CAPTION>
AS OF JUNE 30, AS OF MARCH 31,
------------------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..... $ 7,629 $ 30,629 $ 11,137 $ 1,782,597 $ 1,305,792 $ 2,318,064 $ 2,037,150
Working capital (deficit)..... (3,226,240) (5,760,534) (7,530,351) (7,436,095) (8,658,324) (8,272,004) (6,538,632)
Total assets.................. 2,553,723 3,975,483 8,531,507 11,871,820 18,343,900 18,496,312 25,300,711
Long-term debt (including
current portion)............ -- 25,346 869,437 263,648 9,742 12,733 4,691
Total stockholders' equity
(deficit)................... (2,844,382) (4,527,246) (3,663,125) (2,343,671) (2,006,282) (1,736,264) 1,578,380
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
----------------------------------------------------- -------------------------
1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA(1):
Retail pharmacy claims
processed................... 1,463,247 1,675,490 1,990,976 2,405,627 1,731,640 2,199,590
Mail pharmacy processed
claims...................... 17,889 28,238 62,413 131,611 90,518 126,874
Estimated plan participants
(at period end)............. 230,000 271,784 291,446 401,226 400,604 417,649
</TABLE>
- ------------------------------
(1) This data has not been audited. See 'Prospectus Summary,' 'Management's
Discussion and Analysis of Operations' and 'Business.'
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Health Card derives its revenues from the provision of comprehensive
prescription benefit management services to sponsors of prescription benefit
plans. Sponsors of such plans managed by Health Card include managed care
organizations, local governments, unions, corporations and third party health
care plan administrators. Health Card provides its sponsors with integrated
prescription benefit management services, including electronic point-of-sale
pharmacy claims management, retail pharmacy network management, mail pharmacy
claims management, benefit design consultation, preferred drug management
programs, drug review and analysis, consulting services, disease information
programs, data access, reporting and information analysis and physician
profiling. As of May 1, 1999, Health Card had approximately 515,000 plan
participants and a pharmacy network of approximately 44,000 participating
pharmacies.
Health Card has developed and is continuing to develop a comprehensive
prescription benefit database and performs outcome studies to develop disease
information programs which are used to reduce overall healthcare costs. Because
Health Card believes that information-based services are becoming a more
important component of managed care, Health Card believes that its disease
information programs will provide an increasing source of revenue in the future.
Revenues include (i) the cost of pharmaceuticals dispensed by pharmacies
participating in Health Card's pharmacy network or by Health Card's mail service
pharmacies, (ii) related administrative and dispensing fees, and (iii) net
rebates received from pharmaceutical manufacturers. Cost of sales includes the
amounts paid to network pharmacies for pharmaceutical claims and the cost of
prescriptions sold through the mail service pharmacies. Three sponsors, Vytra,
Suffolk and Operating Engineers, accounted for approximately 65% of revenues
during the nine months ended March 31, 1999. During the nine months ended March
31, 1998, two of these sponsors accounted for 60% of total revenue. Our
arrangements with these sponsors are either oral, short-term, terminable by the
sponsor or subject to continuing negotiation. If we were to lose Vytra, Suffolk
or Operating Engineers as a sponsor, or lose a significant portion of any such
sponsor's business or if the terms of these arrangements were to change it would
have a material adverse effect on our business, operating results and financial
condition. Health Card believes that its sponsor base is growing and
diversifying and expects the percentage of total revenue contributed by its two
or three largest current customers to continue to decline in the future.
Under one of our arrangements with Vytra, the written agreement sets forth
a formula which determines our financial commitment with respect to the price of
covered drugs. We have verbally advised Vytra that we have been paying less than
the amounts called for by such formula. In management's opinion, the formula
reflected in the agreement determines the maximum prices payable to pharmacies,
although this is not expressly stated. Management believes that it would not be
reasonable to conclude that such formula determines minimum prices payable to
pharmacies, because neither Vytra nor Health Card would reasonably mandate
minimum prices in a business relationship intended to reduce sponsor cost. Based
upon this assumption, and the fact that we verbally advised Vytra of this
practice over one year ago and Vytra has not objected, we believe that we have
no obligation to refund any amounts to Vytra. Although Vytra has not objected to
our paying less, we cannot assure you that Vytra will not object in the future,
nor can we assure you that its objection will not result in our losing the
relationship with Vytra under this arrangement, or all of its business.
Rebates accounted for less than 2% of total revenue, but contributed
approximately 18% of total gross margin during the nine months ended March 31,
1999. Due to the expected growth and diversification of the business mentioned
above, Health Card also expects rebate revenue, as a percentage of total
revenue, to increase and continue to account for a significant percentage of
total gross margin. Certain of our sponsors are entitled to a portion of rebates
received by us, which portion varies by sponsor. If such rebate programs were to
be discontinued by drug manufacturers, it would have a material adverse effect
on our business, operating results and
18
<PAGE>
financial condition. In addition, we collect rebates through a rebate
administrator under an agreement which is terminable on 90 days' prior notice by
either party. Our rebate administrator was recently acquired by one of our
competitors and we are not sure what effect, if any, such acquisition will have
on our business.
The prescription benefit management industry is intensely competitive,
generally resulting in continuous pressure on Health Card's gross profit as a
percentage of total revenue. In recent years, industry consolidation and
dramatic growth in managed healthcare have led to increasingly aggressive
pricing of prescription benefit management services. Given the pressure on all
parties to reduce healthcare costs, Health Card expects this competitive
environment to continue for the foreseeable future.
Since 1995, Health Card has made key additions to its senior management
team and has invested heavily in building its information systems
infrastructure, and hiring professional staff and marketing and service
personnel and expects to continue making such investments. Health Card plans to
continue its internal growth through increased marketing of its services and by
expanding the range of services offered, particularly to include value added
consulting and information-based services which Health Card believes to be in
growing demand within the healthcare industry. In addition, Health Card intends
to use a large portion of the proceeds of this offering to supplement its
internal growth by making acquisitions of other prescription benefit management
service providers.
RESULTS OF OPERATIONS
NINE MONTH PERIOD ENDED MARCH 31, 1999 COMPARED TO THE NINE MONTH PERIOD ENDED
MARCH 31, 1998
Revenues increased $27.4 million or approximately 39% from $71 million for
the nine months ended March 31, 1998 to $98.4 million for the nine months ended
March 31, 1999. The increase resulted primarily from a $6.7 million increase in
fees related to the increase in the number of plan participants under an
arrangement with one of our major sponsors and includes approximately $500,000
in additional revenue recorded in September 1998 when the Company received
verbal acceptance of the calculation under the provisions of the arrangement to
adjust for the increased cost of drugs primarily related to the prior year. The
remaining $20.7 million increase resulted from an increase in the volume of
claims processed under Health Card's other plans.
Cost of claims increased $24.6 million or approximately 38%, from $64.5
million for the nine months ended March 31, 1998 to $89.1 million for the nine
months ended March 31, 1999. As a percentage of revenues, cost of claims
remained constant at 91%.
Gross profit increased $2.8 million, from $6.4 million for the nine months
ended March 31, 1998 to $9.2 million for the nine months ended March 31, 1999,
primarily as a result of the increase in revenues, offset by the increase in the
cost of claims.
Selling, general and administrative expenses, which include amounts charged
by affiliates, increased $2.6 million or approximately 53%, from $4.9 million
for the nine months ended March 31, 1998 to $7.5 million for the nine months
ended March 31, 1999. The increase resulted primarily from an increase of
$550,000 representing additional reserves against certain receivables. The
Company evaluated its accounts receivable as of March 31, 1999 taking into
consideration the expiration of certain contracts during the period and the
status of negotiations to renew those contracts. As consideration for the
renewal of these contracts, the Company determined that it would be necessary to
negotiate the receivable balance due from these contracts and that the Company
most likely would not be able to collect the full amount. As a result the
Company estimated and recorded a reserve for the amount that may not be
collectible. In prior periods, due to the status of these contracts, these
additional reserves were not required based upon the Company's analysis. The
remaining increase in selling, general and administrative expenses resulted from
an increase of $25,000 in the bad debt reserve, a $170,000 bonus to certain
officers/stockholders, a $270,000 compensation accrual to an officer/stockholder
and a $1.6 million
19
<PAGE>
increase in compensation, benefits, sales and marketing and other expenses
related to the expansion of our business.
General and administrative expenses charged by affiliates decreased $1.3
million or approximately 38%, from $3.7 million for the nine months ended March
31, 1998 to $2.4 million for the nine months ended March 31, 1999. The decrease
resulted primarily from a decrease of $1.3 million due to compensation of
employees hired by Health Card who were previously engaged through an affiliated
service vendor, $580,000 for software maintenance, offset by increases of
$242,000 for equipment rental, $131,000 for data processing related charges,
$68,000 for consulting and $91,000 for increases in other operating expenses.
Other income increased $378,000, from $59,000 for the nine months ended
March 31, 1998 to $437,000 for the nine months ended March 31, 1999, due to a
$274,000 increase in interest accrued on a loan due from an affiliate, an
$87,000 increase in interest earned on short term investments of excess cash
balances and a $17,000 decrease in public offering costs.
The provision for income taxes increased $68,000, from $663,000 for the
nine months ended March 31, 1998 to $731,000 for the nine months ended March 31,
1999, as a result of increased taxable income.
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997
Revenues increased $28.7 million or approximately 40%, from $71.3 in fiscal
1997 to $100 million in fiscal 1998. The increase resulted primarily from a $9.6
million increase in fees related to the increase in the number of plan
participants under an arrangement with one of our major sponsors and a $19.1
million increase resulting from an increase in the volume of claims processed
under Health Card's other plans.
Cost of claims increased $27 million or approximately 42% from $64.2
million in fiscal 1997 to $91.2 million in fiscal 1998. As a percentage of
revenues, cost of claims increased from approximately 90% in fiscal 1997 to
approximately 91% in 1998, due primarily to a higher number of claims processed,
at a reduced billing rate, under an arrangement with one of our major sponsors.
Gross profit increased $1.7 million, from $7.1 million for fiscal 1997 to
$8.8 million for fiscal 1998, as a result of the increase in revenues offset by
the increase in the cost of claims.
Selling, general and administrative expenses, which include amounts charged
by affiliates, increased $1.3 million or approximately 22%, from $5.9 million in
fiscal 1997 to $7.2 million in fiscal 1998. The increase resulted primarily from
$881,000 of additional compensation and benefits for personnel required to
process additional claims and to expand Health Card's sales and marketing
efforts. In addition, $321,000 of the increase resulted from increased
administrative, marketing and consulting fees incurred with related parties and
$90,000 of marketing and consulting costs that were incurred with a third-party
consultant. As a percentage of revenues, selling, general and administrative
expenses decreased from 8.2% in fiscal 1997 to 7.2% in fiscal 1998.
General and administrative expenses charged by affiliates increased
$400,000 or approximately 9% from $4.5 million in fiscal 1997 to $4.9 million in
fiscal 1998. The increase resulted primarily from an increase of $484,000 for
salaries, $78,000 for consulting and $97,000 for miscellaneous expenses offset
by decreases of $259,000 for software maintenance.
Other income decreased approximately $224,000, from income of $43,000 in
fiscal 1997 to a net expense of $181,000 in fiscal 1998, due to $445,000 of
public offering expenses. This was offset by a $114,000 increase in interest
accrued on stockholder loans, a $30,000 increase in interest accrued on a loan
due from an affiliate and a $77,000 increase in interest earned on short term
investments of excess cash balances.
The provision for income taxes increased $759,000, from a benefit of
$190,000 in fiscal 1997 to an expense of $569,000 in fiscal 1998, as a result of
the increase in taxable income and a decrease in the deferred tax valuation
allowance in the 1997 period.
20
<PAGE>
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
Revenues increased $15 million or approximately 27% from $56.3 million in
fiscal 1996 to $71.3 million in fiscal 1997. The increase resulted primarily
from a $15 million increase in fees related to the increase in the number of
plan participants under an arrangement with one of our major sponsors.
Cost of claims increased $13.4 million or approximately 26%, from $50.8
million in fiscal 1996 to $64.2 million in fiscal 1997. As a percentage of
revenues, cost of claims remained unchanged at approximately 90%.
Gross profit increased $1.6 million, from $5.5 million in fiscal 1996 to
$7.1 million in fiscal 1997, primarily as a result of the increase in revenues,
offset by the increase in the cost of claims.
Selling, general and administrative expenses, which include amounts charged
by affiliates, increased $1.7 million or approximately 40%, from $4.2 million in
fiscal 1996 to $5.9 million in fiscal 1997. The increase resulted primarily from
an increase of $824,000 in software maintenance, $636,000 in fees related to an
increase in personnel performing sales and bookkeeping functions, $132,000 in
increased sales and marketing efforts and $108,000 for miscellaneous expenses.
The increases are a result of an expanded customer base and expenses incurred by
Health Card to expand Health Card's services available to sponsors. As a
percentage of revenues, selling, general and administrative expenses increased
from 7.5% in fiscal 1996 to 8.2% in fiscal 1997.
General and administrative expenses charged by affiliates increased $1.6
million or approximately 55% from $2.9 million in fiscal 1996 to $4.5 million in
fiscal 1997. The increase resulted primarily from an increase of $824,000 for
software maintenance, $631,000 for salaries, $114,000 for rent and $31,000 for
miscellaneous expenses.
Other income increased $21,000, from $22,000 in fiscal 1996 to $43,000 in
fiscal 1997, as a result of additional interest earned on overnight investments.
The effective income tax rate remained unchanged at an approximate benefit
of 15%, due to the reduction of the deferred income tax valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997 and 1998 and March 31, 1999, Health Card had a working
capital deficiency of $7.4 million, $8.7 million and $6.5 million, respectively.
Net cash provided by operating activities was approximately $1.2 million,
$3.5 million, $922,000 and $209,000 for the fiscal years ended June 30, 1996,
1997 and 1998 and the nine month period ended March 31, 1999, respectively.
During fiscal 1998, net cash provided by operating activities resulted primarily
from net income and an increase in accounts payable offset by an increase in
accounts receivable and due to/from affiliates. The increases in accounts
receivable and accounts payable were due to an increase in the volume of
business. For the nine month period ended March 31, 1999, net cash provided by
operating activities resulted primarily from net income and an increase in
accounts payable and accrued expenses, offset by an increase in accounts
receivable. Health Card evaluated its accounts receivable as of March 31, 1999,
taking into consideration the expiration of certain contracts during the period
and the status of negotiations to renew those contracts. As consideration for
the renewal of these contracts Health Card determined that it would be necessary
to negotiate the receivable balance due from these contracts and that Health
Card most likely would not be able to collect the full amount. As a result,
Health Card estimated and recorded a reserve of $550,000 for the amount that may
not be collectible. In prior periods, due to the status of these contracts,
these additional reserves were not required based upon Health Card's analysis.
Historically, the timing of Health Card's accounts receivable and accounts
payable has generally been a net source of cash from operating activities. This
is the result of the terms of trade in place with plan sponsors on the one hand,
and our pharmacy network on the other hand. These terms generally lead to our
payments to participating pharmacies being slower than our corresponding
collections from plan sponsors. Health Card believes that this situation is not
21
<PAGE>
unusual in the prescription benefit management industry and expects to operate
on similar terms for the foreseeable future. However, there can be no assurance
that such terms of trade will continue in the future and, if they were to change
materially, Health Card could require additional financing. There can be no
assurance that such financing could be obtained at rates or on terms acceptable
to Health Card, if at all.
Net cash used in investing activities amounted to approximately $387,000,
$477,000, $416,000 and $1.3 million for the fiscal years ended June 30, 1996,
1997 and 1998 and the nine month period ended March 31, 1999, respectively.
These uses of cash resulted primarily from capital expenditures and advances and
payments of amounts due to/from stockholders.
Net cash (used in), provided by financing activities amounted to
approximately ($823,000), ($1.2 million), ($983,000) and $1.8 million for the
fiscal years ended June 30, 1996, 1997 and 1998 and the nine month period ended
March 31, 1999, respectively. These uses of cash resulted primarily from capital
distributions and repayment of debt. The cash provided for financing activities
for the nine month period ended March 31, 1999 resulted primarily from 340,919
shares of common stock purchased for $2 million by the principal stockholder.
In February 1998, Health Card entered into an agreement with an
unaffiliated third party for computer software products and professional
services. The agreement required Health Card to pay an initial license fee of
$400,000, of which $100,000 was paid upon execution of the agreement and $25,000
paid monthly through March 1999. In addition, if certain milestones are met,
based on the number of processed claims, as defined, the initial license fee
increases incrementally by up to an additional $500,000 over the term of the
license. As of March 31, 1999, a milestone has been met which has increased the
initial license fee by $150,000 due to increased annualized volume of claims
processed. The agreement also provides for the monthly payment of a fee for
maintenance and updating services aggregating annually to 18% of the initial
license fee, as defined.
Health Card anticipates that the net proceeds of the offering and the
repayment of certain affiliate and shareholder debt, together with anticipated
cash flow from operations, will be sufficient to satisfy Health Card's
contemplated cash requirements for at least 24 months following the completion
of the offering. This is based upon current levels of capital expenditures and
anticipated operating results for the next 24 months. Alternatively, revolving
credit lines and debt financing are being evaluated as backups to anticipated
cash needs. Additionally, effective June 1, 1998, Health Card hired 11
programmers, at lower costs than previously charged by an affiliate, which
provided software development consulting services to Health Card. The primary
difference in cost resulting from hiring the programmers is an administrative
fee of approximately 7% which had been charged by the affiliate based on
compensation and related costs. Health Card believes this will further increase
cash flow. In the event that Health Card's plans change or its assumptions prove
to be inaccurate or the proceeds of the offering otherwise prove to be
insufficient to fund operations and implement Health Card's proposed expansion
strategy, Health Card could be required to seek additional financing sooner than
anticipated.
OTHER MATTERS
INFLATION
Management does not believe that inflation has had a material adverse
impact on Health Card's net income.
YEAR 2000 COMPLIANCE
See 'Business -- Year 2000 Readiness' for a discussion of Health Card's
Year 2000 readiness.
RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards.
Statement of Financial Accounting Standards No. 130 ('SFAS No. 130'),
Reporting Comprehensive Income, establishes standards for reporting and display
of comprehensive income,
22
<PAGE>
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
Statement of Financial Accounting Standards No. 131 ('SFAS No. 131')
Disclosures about Segments of an Enterprise and Related Information which
supersedes SFAS NO. 14, Financial Reporting for Segments of a Business
Enterprise, establishes standards for the way that public enterprises report
information about operating segments in annual financial statement and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas, and major customers. SFAS
No. 131 defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.
Both of these new standards are effective for financial statements for
years beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Health Card's financial position, results of
operations and disclosures will be unaffected by the implementation of these new
standards.
In February 1998 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 ('SFAS No. 132'), Employers'
Disclosure about Pensions and Other Postretirement Benefits, which standardized
the disclosure requirements for pensions and other postretirement benefits. The
adoption of SFAS No. 132 in 1998 is not expected to materially impact Health
Card's current disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Investments
and Hedging Activities Income ('SFAS 133'), which requires the recording of all
derivative instruments as assets or liabilities measured at fair value. Among
other disclosures, SFAS 133 requires that all derivatives be recognized and
measured at fair value regardless of the purpose or intent of holding the
derivative.
SFAS 133 is effective for financial statements for years beginning after
June 15, 1999. Health Card has no derivative investments and does not
participate in hedging activities; therefore, its financial position, results of
operations and disclosures will be unaffected by the adoption of this standard.
23
<PAGE>
BUSINESS
GENERAL
Health Card is an independent company, established in 1981, providing
comprehensive prescription benefit management services. Health Card's programs
are designed to assist prescription benefit plan sponsors by:
containing the cost of prescription drugs,
monitoring the cost and quality of prescription services,
providing sophisticated consulting services, and
providing disease information services.
Sponsors of prescription benefit plans managed by Health Card include managed
care organizations, local governments, unions, corporations and third party
health care plan administrators. Health Card focuses its marketing efforts on
prospective sponsors with plans covering up to 100,000 participants, although it
seeks and services sponsors with plans covering less or significantly more plan
participants. As of May 1, 1999, plans managed by Health Card covered over
515,000 eligible employees, retirees, members and their dependents, increased
from 240,000 participants on July 1, 1995.
Health Card provides sponsors with integrated prescription benefit management
services, including:
electronic point-of-sale pharmacy claims management,
retail pharmacy network management,
mail pharmacy claims management,
benefit design consultation,
preferred drug management programs,
drug review and analysis programs,
consulting services,
disease information services,
data access, reporting and information analysis, and
physician profiling.
Each of these services is described below under the heading 'Services.'
Each plan participant receives an identification card which may be used at
any pharmacy participating in Health Card's pharmacy network and the sponsor's
plan. The card entitles the plan participant to purchase prescription drugs and
certain other physician-prescribed items by paying a deductible and/or
'co-payment' amount as determined by the plan sponsor. As of May 1, 1999, the
pharmacy network included an aggregate of over 44,000 retail chain and
independent pharmacies as well as three mail order pharmacies. See
'Business -- Services.'
Health Card assists each sponsor to establish the deductible and
'co-payment' amounts and the availability of benefits under its plan. Plans
generally cover (a) prescriptions for legend drugs, which are drugs that cannot
be dispensed without a prescription, (b) prescriptions requiring compounding of
ingredients, one of which is a legend drug, (c) prescribed insulin and
prescribed insulin syringes, and (d) needles and test strips. Items generally
excluded from coverage include diet supplements, over-the-counter drugs (whether
or not prescribed by a physician), medical appliances such as glucometers and
blood pressure monitors, bandages, heat lamps, experimental drugs, drugs
furnished by a hospital to inpatients, and blood and blood plasma.
Health Card attempts to contain the cost of sponsors' plans by negotiating
favorable pricing arrangements with pharmacies participating in its pharmacy
network. Health Card also provides additional cost management through the
real-time electronic communication of claims data and plan criteria between
those pharmacies and Health Card. The claims submission, review and
24
<PAGE>
approval generally occur in a matter of seconds. See 'Business -- Information
Systems.' Claims are processed through multiple reviews in order to:
confirm plan conformity,
verify plan participant eligibility,
verify correct pharmacy payment, and
conduct drug review and analysis.
Concurrently, information is sent by Health Card's information systems to the
pharmacist about:
drug interactions,
premature refills of prescriptions,
duration or duplication of therapy, and
geriatric or pediatric precautions
based on Health Card's prescription claims history for the plan participant,
FDA-approved standards and Health Card's recommended drug and treatment
guidelines. These situations or circumstances are collectively referred to as
'contraindications.'
The final claim approval or denial is immediately communicated by Health
Card to the pharmacy. If a claim is approved, the communication establishes the
claim for payment and indicates the co-payment or deductible to be charged to
the plan participant.
Drug manufacturers may issue rebates for the use of certain prescription
drugs. Pursuant to an agreement with Foundation Health Pharmaceutical Services
d/b/a Integrated Pharmaceutical Services, a rebate administrator, we submit
claims for rebates to Integrated. These rebates relate to certain prescriptions
filled under plans that we administer. Integrated submits these rebate claims,
along with rebate claims of others, to the appropriate drug manufacturer,
pursuant to agreements Integrated has negotiated with various drug
manufacturers. All, part or none of the rebates received by Health Card may be
remitted to certain of Health Card's sponsors, depending upon the terms of
Health Card's agreement with each sponsor. Through rebates from drug
manufacturers, Health Card has increased its revenues. See 'Risk Factors -- The
health care industry is highly regulated at the federal, state and local levels.
Our failure to comply with these regulations could adversely affect our
business,' and 'Business -- Services -- General -- Rebate Administration.'
Health Card's disease information services are designed to inform and
educate sponsors, plan participants, pharmacies and prescribing physicians about
drug and treatment guidelines for various diseases. Health Card prepares drug
and treatment guidelines for various diseases based on a review of
professionally prepared health care literature which is publicly available. In
compiling the drug and treatment guidelines, Health Card may also utilize
clinical guidelines that are issued by medical specialty boards and are
available to the public. The drug and treatment guidelines are reviewed by
medical and pharmacology experts and submitted to Health Card's Pharmacy &
Therapeutics Committee for review and approval. If approved, the drug and
treatment guidelines may be made available to interested sponsors and
physicians. Health Card believes that the use of disease information services
represents a market trend in the prescription benefit management industry. Its
use is designed to:
meet sponsors' growing need for information to address cost management
pressures,
enhance the quality, efficiency and cost-effectiveness of pharmacy benefit
utilization by plan participants, and
reduce costs to sponsors.
In providing these services, Health Card may utilize its drug review and
analysis programs. These programs include a series of on-line reviews which
examine a plan participant's claims history for a number of contraindicated
drugs or inappropriate dispensing patterns, among other things. Although Health
Card has only recently commenced disease information services and currently
offers such services to only one sponsor, Health Card believes that disease
information services will
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encourage plan participant compliance with physician-recommended therapy and
physician adherence to recommended drug and treatment guidelines. In turn, this
conformity should improve plan participant health care while reducing costs. See
'Risk Factors -- The health care industry is highly regulated at the federal,
state and local levels. Our failure to comply with these regulations could
adversely affect our business.'
We began our business as a provider of computerized prescription claims
processing services to sponsors and subsequently, we increased our capabilities
to become a provider of comprehensive prescription benefit management services.
In 1995, our management began to redirect the focus of our business, with the
goal of becoming a leading national independent company providing comprehensive
prescription benefit management services. In particular, we concentrated on (a)
attracting a management team with significant industry experience, (b)
implementing a multi-state marketing effort and (c) enhancing our information
systems. Over the past several years, Health Card has focused on significantly
expanding its management, marketing and administrative infrastructure and data
management capabilities. See 'Management' and 'Certain Transactions.'
Health Card's competitors include both independent prescription benefit
management companies and those that are affiliated either with drug
manufacturers or with retail pharmacy companies. Health Card has developed its
business by focusing on information systems and consulting services without many
of the restrictions that management believes are inherent in the relationships
of its affiliated competitors. Health Card therefore believes that its formulary
management and other business activities are more objective than certain of its
competitors. Health Card also believes that its information systems and
consulting services are superior to that of many of its competitors.
Accordingly, based on such beliefs, Health Card is well positioned to take
advantage of the increasing information and cost management needs of the
prescription benefit management services market.
BUSINESS STRATEGY
Following the consummation of the offering, Health Card intends to identify
and pursue opportunities to acquire complementary companies and strategic
assets, which we will refer to frequently in this prospectus as 'acquisition
opportunities.' Health Card also plans to continue development of its services
and programs and to expand its operations and sales with the goal of becoming a
leading national independent company providing comprehensive prescription
benefit management services.
Specifically, Health Card intends to take the following steps to implement
its strategy:
Pursue Strategic Acquisitions. Health Card intends to pursue
acquisition opportunities in order to increase its market share, realize
operating efficiencies and expand the scope of its services. Due to
increasing competition within the fragmented prescription benefit
management services market, Health Card believes that there are significant
opportunities to acquire or consolidate small to medium-sized companies and
acquire strategic assets that will:
expand Health Card's sponsor base,
improve Health Card's information systems,
expand Health Card's consulting and disease information services,
establish strategic relationships, and
allow it to realize additional economies of scale.
Expand Core Sponsor Base. Health Card believes that it will continue
to benefit from growth in the prescription benefit management services
market. From July 1, 1995 to May 1, 1999, the number of plan participants
for which Health Card provided prescription benefit management services
grew approximately 115% from approximately 240,000 to over 515,000. Health
Card intends to expand its sponsor base by focusing its sales efforts on
targeted markets throughout the U.S. and through acquisition opportunities.
See 'Business -- Sales and Marketing.'
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Continue Improvements to Information Systems. Health Card's
computerized information systems, which include an on-line real-time claims
management system, integrate many of the services offered by Health Card.
Health Card's information systems are network-based as compared to older
mainframe systems which management believes are utilized by certain of its
competitors. Mainframe systems generally are comparatively slower to
customize and change programs, and generally do not allow for integration
of services and programs on one system on a timely and cost-effective
basis. Conversely, the network platform typically provides Health Card with
flexibility to tailor its products to specified needs of its sponsors.
Health Card's system is scalable and intended to accommodate the processing
needs resulting from future growth. Nevertheless, Health Card intends to
continue to expand and adapt its information systems, both in response to
specific sponsor requests and based on Health Card's assessment of market
needs. See 'Business -- Information Systems,' and 'Management's Discussion
and Analysis of Financial Condition and Results of Operations.'
Expand Consulting Services and Disease Information Services. Health
Card believes that consulting services and disease information services
offer significant opportunities for future growth. Health Card is
integrating its claims management services, information systems and the
recommended drug and treatment guidelines to create comprehensive
consulting services and disease information services for its sponsors.
Health Card believes that its disease information services will
encourage physicians and plan participants to act in conformity with plans,
and physicians to adhere to recommended drug and treatment guidelines,
which, in turn, should improve plan participant health while reducing the
cost of care.
Health Card believes that through increased marketing of:
drug coverage management services,
disease information services,
formulary management (i.e., the types and brands of drugs covered by
a plan), and
therapeutic interchange services (i.e., substitution to lower cost
therapeutically equivalent drug when approved by the prescribing
physician)
Health Card intends to expand its sponsor base, expand the services
provided to current sponsors and solidify its relationships with current
sponsors.
Establish Strategic Relationships. Health Card intends to pursue
strategic relationships with sponsors, drug manufacturers, pharmacies and
others to enhance the services it provides and to reduce the cost of health
care. For example, Health Card obtains certain rebates from manufacturers
through Integrated Pharmaceutical Services. Health Card presently has a
non-exclusive relationship with Eckerd Health Services d/b/a Express
Pharmacy Services. Express Pharmacy acts as a participating pharmacy and
dispenses drugs to plan participants by mail. See 'Business -- Services.'
Health Card has also engaged from time to time in joint mailing
programs with drug manufacturers designed to furnish information to plan
participants and prescribing physicians.
INDUSTRY BACKGROUND
In response to escalating health care costs, cost containment efforts in
the health care industry have led to rapid growth in managed care and other
containment efforts. Despite these efforts, continued advances in medical
technology, new drug development and increasing drug utilization have led to
significant increases in health care costs. This has created a need for more
efficient, cost-effective drug delivery mechanisms. Prescription benefit
management companies evolved to address this need. These companies created an
opportunity for plan sponsors to provide prescription drug benefits to their
plan members in a cost-effective manner through:
mail pharmacy services,
formulary management,
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claims management, and
drug review and analysis
while often improving patient compliance with recommended drug and treatment
guidelines. An industry source estimates that 1997 U.S. purchases for
prescription drugs totaled approximately $83 billion, of which purchases from
retail outlets were approximately $53 billion and purchases from mail order were
approximately $9 billion. Such industry source indicates that prescriptions
managed by prescription benefit management companies represent an increasing
proportion of such purchases.
Traditionally, prescription benefit management companies focused primarily
on cost containment by:
managing prescription claims to reduce or eliminate duplication of
treatment, i.e., redundant drug therapies and other treatments,
encouraging substitution of generics for branded medications,
obtaining price discounts from participating pharmacies through a
pharmacy network, and
obtaining rebates from drug manufacturers.
Over the last several years, in response to increasing sponsor demand,
prescription benefit management companies have begun to develop sophisticated
computerized information systems which (a) help sponsors manage their
formularies and (b) provide data, analysis and detailed reporting, which allow
sponsors to make informed decisions about drug use and costs. Health Card
believes that sponsors have also increasingly focused on the quality and
efficiency of care, emphasizing disease prevention and health enhancement.
Health Card and its competitors have addressed these demands by combining
traditional prescription benefit management services with consulting services
and disease information programs that exploit the sophisticated information
systems.
SERVICES
GENERAL
Sponsors retain Health Card to manage the prescription drug plans that they
maintain for the benefit of their plan participants. Health Card consults with
sponsors to assist them in customizing their prescription drug plans to meet the
particular sponsor's needs. Health Card has also developed and is continuing to
expand its consulting and disease information services to meet (a) the growing
needs of sponsors to address cost management pressures, and (b) the increasing
needs of plan participants, particularly those requiring costly long-term and
recurring therapies.
Health Card's claims management services are rendered through its on-line
real time computerized claims management system, which we sometimes refer to in
this prospectus as the 'on-line claims management system.' This on-line claims
management system reduces the administrative burdens of processing claims and
managing plan benefits for sponsors, plan participants and pharmacies. Claims
are typically submitted electronically to Health Card by pharmacies
participating in the pharmacy network. They are processed for plan participant
eligibility, plan coverage, any deductible limitations, co-payment amounts,
payment schedules and pharmacy eligibility. Using its on-line claims management
system, Health Card is able to provide an accurate benefit payment to the
pharmacy or plan participant.
The on-line claims management system manages the cost of the plan at the
point of service by confirming that:
the submitted claim is in conformity with plan terms and conditions,
the plan participant is eligible for benefits, and pays any applicable
deductible and/or co-payment amounts, and
only the negotiated discounts on prescription items will be paid to
participating pharmacies.
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The data collected during the claims management process provides a basis for
reporting and analyses upon which recommendations are made to sponsors. These
recommendations are intended to assist them in lowering the costs of their plans
while improving quality and service. See 'Business -- Services -- Data Access,
Reporting and Information Analysis.'
The Health Card and Claims Processing. Each sponsor's plan participant is
issued a health card which identifies the plan participant and the sponsor. The
card may be utilized at any one of the pharmacies participating in Health Card's
multi-state pharmacy network and the sponsor's plan. The health card allows the
plan participant to purchase approved prescription drugs and other
physician-prescribed items, with the plan participant paying a deductible and/or
co-payment amount, if any, to the pharmacy. Each time a new sponsor is added,
Health Card provides pharmacies in the pharmacy network that serve the area in
which the new sponsor is located with documentation describing the use of the
health card, the sponsor and the summarized terms of the plan.
Plan participants present their health card together with a physician's
prescription to a participating pharmacy. The pharmacist, using standard
industry software, enters each claim on the pharmacy's computer; the claim is
electronically communicated to Health Card for on-line real time processing and
resolution. In the ordinary case where the prescription is for a drug listed on
the sponsor's formulary, the pharmacist is advised of the appropriate co-payment
and deductible, if any, to be collected from the plan participant and of the
payment the pharmacy will receive from Health Card. Health Card's on-line claims
management system sends appropriate messages regarding preferred drugs and
contraindications, based upon plan participants' existing claims history with
Health Card. The prescription is then dispensed by the pharmacist to the plan
participant, who pays the appropriate co-payment and/or deductible amount and
signs a signature log maintained by the participating pharmacy.
Plan participants are provided with a list of pharmacies participating in
Health Card's pharmacy network. Plan participants may alternatively choose to
fill prescriptions at a non-participating pharmacy. However, plan participants
who utilize non-participating pharmacies pay the full prescription amount, i.e.,
an amount generally in excess of the negotiated discount offered by pharmacies
in the pharmacy network. Both the plan participant and the pharmacy then
complete a direct payment claim form, which is mailed to Health Card for the
allowable payment amount to be paid to the plan participant. Alternatively, the
non-participating pharmacy may elect to immediately enroll in Health Card's
pharmacy network and participate in the on-line claims management system. See
'Business -- Pharmacy Network.'
Occasionally a plan participant's claim is rejected, based on plan
parameters, in which case the participant may be referred to the plan's sponsor
or to Health Card's customer service department. Also, on occasion a claim is
presented and the pharmacist is notified, during the course of processing the
claim, that prior authorization from the sponsor is needed before the claim can
be approved. In addition, mail order claims processing sometimes results in a
message to the pharmacist that a preferred drug is available for use in place of
the one prescribed. In such an event, the pharmacist must contact the physician
directly for permission to substitute the preferred drug; if such permission is
obtained, the pharmacist then contacts the plan participant to obtain his or her
permission to make such substitution. Although preferred drug messages are also
capable of being sent by Health Card's on-line claims management system to
retail pharmacists, to date no sponsor has asked Health Card to do so.
Invoicing and Payments. Often, sponsors are charged an agreed fee for each
prescription filled plus an administrative and/or dispensing fee for managing
each claim. Sometimes sponsors are charged an adjustable monthly fee or
projected maximum fee based on the number of plan participants, utilization,
costs of drugs or other criteria. Health Card provides flexibility of invoicing
for its sponsors. Sponsors pay Health Card; Health Card pays an individually
negotiated amount to its participating independent and chain pharmacies. Plan
participants filing for direct payment receive an allowable payment which is
usually specified by the sponsor. See 'Business -- Services -- Pharmacy Network'
and 'Risk Factors -- We have a history of working capital deficits, which could
29
<PAGE>
adversely affect our business' and 'Risk Factors -- Our possible inability to
pay pharmacies could adversely affect our business.'
Rebate Administration. Pursuant to an agreement dated January 1, 1996, with
Foundation Health Pharmaceutical Services, Inc., d/b/a Integrated Pharmaceutical
Services, Health Card submits to Integrated claims for rebates from drug
manufacturers relating to certain prescriptions filled under plans that Health
Card administers. Integrated submits Health Card's rebate claims, along with
rebate claims of others, to the appropriate drug manufacturer. Health Card
receives a percentage of the total rebates received by Integrated from drug
manufacturers regarding products dispensed to Health Card's sponsors' plan
participants, with Integrated retaining a portion of the total rebates as an
administrative fee. Part of the projected aggregate rebate will be paid to
Health Card within 120 days after the end of each quarter, with the balance
reconciled by the parties through a series of payments, off-sets and credits, by
which the fees payable to Integrated by Health Card are off-set against the
amounts owed to Health Card by Integrated. This agreement is terminable by
either party with or without cause on 90 days' prior written notice. These
claims are submitted quarterly. As of the date of this prospectus, the volume of
claims processed by Health Card may not be sufficient to enable it to obtain
rebates directly from drug manufacturers in the same aggregate amounts that
could be obtained under the Integrated agreement.
For the fiscal years ended June 30, 1998, 1997 and 1996, rebates accounted
for 1%, 1% and 3% of our revenue, respectively. For the nine month periods ended
March 31, 1999 and 1998, rebates accounted for 2% and 2% of all revenues,
respectively. All, part or none of the rebates received by Health Card may be
required to be remitted to certain of Health Card's sponsors, including Vytra
and Suffolk County, depending upon the terms of Health Card's arrangement with
each sponsor. Termination of the agreement with Integrated could have an adverse
effect on Health Card's business, operating results and financial condition. See
'Risk Factors -- Our business is designed to function with current rebate
programs. If our rebate administrator terminates our agreement, or if drug
manufacturers alter or discontinue rebate programs, there could be a material
adverse effect on our business,' 'Risk Factors -- The health care industry is
highly regulated at the federal, state and local levels. Our failure to comply
with these regulations could adversely affect our business.'
PHARMACY NETWORK
Retail Pharmacy Network Management. A comprehensive multi-state network of
participating pharmacies is an essential element of Health Card's business
operations. Furthermore, certain of Health Card's sponsors, including Vytra and
Suffolk, require Health Card to maintain a pharmacy network with specified
numbers of pharmacies in various locations to serve plan participants. As of
May 1, 1999 Health Card had a multi-state network of over 44,000 pharmacies, of
which approximately 76% are retail chain pharmacies and 24% are independent
pharmacies. In addition, as of May 1, 1999, three mail order pharmacies
participated in the pharmacy network. See 'Business -- Services -- Pharmacy
Network -- Mail Pharmacy Distribution and Management.'
As part of Health Card's cost containment efforts, Health Card contacts
selected participating pharmacies and plan participants by mail to audit the
validity of claims. The information requested includes:
copies of original prescriptions from participating pharmacies, and
written confirmation from plan participants of their receipt of
prescribed drugs.
Health Card also performs on-site audits of records of participating pharmacies.
Pharmacies are selected for an audit based upon parameters designed into Health
Card's computer programs. Additionally, Health Card may audit a pharmacy in
response to, among other things, a plan participant's or sponsor's complaint or
comments from customer service representatives of drug manufacturers.
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Health Card enjoys long term relationships with many of the pharmacies
participating in its pharmacy network, as the following table indicates:
<TABLE>
<CAPTION>
PHARMACY YEAR OF INITIATION
- -------------------------------------------------------- ------------------
<S> <C>
Rite Aid Corporation.................................... 1982
Eckerd Health Services.................................. 1983
CVS/Pharmacy, Inc....................................... 1983
Genovese Drugstores, Inc................................ 1982
</TABLE>
Furthermore, a significant portion of Health Card's cost of claims for recent
years originates with Genovese Drugstores, Inc. and CVS/Pharmacy, Inc.
Both the retail and mail order components of the pharmacy network are
managed by Health Card's on-line claims management system. See
'Business -- Services -- Electronic Point-of-Sale Pharmacy Claims Management.'
Mail Pharmacy Claims Management. Mail pharmacy service is generally used by
plan participants as a cost effective means of minimizing the inconvenience
resulting from repeated trips to retail pharmacies to fill prescriptions; this
is especially common when a plan participant with a chronic condition receives
long-term drug therapy. In addition, the plan participant generally saves money
through a reduction in the number of co-payments he would have paid had the
prescriptions been filled repeatedly at a retail pharmacy. Further, with mail
pharmacy service the sponsor is charged a lower dispensing fee for prescription
ingredients compared to those charged by a retail pharmacy. Health Card
presently has a non-exclusive relationship with Eckerd Health Services d/b/a
Express Pharmacy Services.
The agreement between Health Card and Express Pharmacy has an initial term
of three years ending on June 30, 1999 and is automatically renewable for
successive 12 month terms. Either party may terminate the agreement at the end
of the initial term or any successive term on 90 days prior written notice. No
such notice has been sent or received by Health Card. The agreement provides
that Express Pharmacy will:
provide the covered drugs by mail to plan participants,
collect the appropriate co-payment, and
if required by the plan, collect any additional payment if a brand drug
is dispensed when a generic drug is available.
This agreement further provides that Health Card will pay Express Pharmacy for
approved claims within 45 days after the two week processing cycle in which the
claim occurs.
As of May 1, 1999, three mail order pharmacies were participating in Health
Card's pharmacy network. Plan participants using a mail order pharmacy mail in
their prescriptions to the pharmacy. Claims submitted by mail order pharmacies
are managed using Health Card's on-line claims management system and are subject
to the same review and verification as those claims submitted by retail
pharmacies. If the claim is deemed eligible under the terms of the appropriate
plan, the participating mail order pharmacy mails the prescription item to the
plan participant. The mail order pharmacy typically covers the plan
participant's mailing costs through the use of prepaid envelopes (used by a plan
participant to submit his/her prescription) and typically pays to ship the
prescribed item to the plan participant.
Pharmacy Relations. Our agreements with many pharmacies do not require us
to make payments within a specified period. However, we know from experience
that they expect timely payment. Health Card endeavors to process claims
promptly and obtain funds from sponsors prior to making payments to
participating pharmacies; still, there can be no assurance that sponsors will
pay Health Card on time.
No assurances can be made that pharmacies in our network will not demand
faster payment in the future. In particular, in May 1996, Health Card
restructured $900,000 of outstanding overdue claims payable to Genovese into a
promissory note obligating Health Card to pay such amount over 18 months. That
note has been repaid in full. Health Card believes that there has been no
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<PAGE>
material negative effect on its business resulting from our payment schedule and
we believe our relationships with pharmacies are generally good.
Health Card may be required to pay participating pharmacies whether or not
it has been paid by its sponsors. The loss of a substantial portion of the
pharmacies in the pharmacy network could have a material adverse effect on
Health Card's business, operating results and financial condition. See 'Risk
Factors -- We have a history of working capital deficits, which could adversely
affect our business' and 'Risk Factors -- Our possible inability to pay
pharmacies could adversely affect our business.' See also 'Management's
Discussion and Analysis of Financial Condition and Results of Operations.'
BENEFIT DESIGN CONSULTATION
Health Card has a sales and marketing staff and pharmacists experienced in
prescription drug benefit plan design. Health Card assists sponsors in defining
their financial and employee-benefit objectives for their prescription drug
benefit plans and in developing a program to meet such objectives. Using both
sponsor-specific and general claims experience data, the sales and marketing
staff makes recommendations of benefit features such as:
levels of co-payments,
covered and excluded drugs,
generic substitution guidelines,
number of days supply of medication per prescription,
maximum benefit cost,
maximum plan participant out-of-pocket cost, and
coverage for prescription drugs dispensed by non-participating
pharmacies.
The clinical services staff, with occasional assistance from the operations
staff, produces customized periodic reports, and disseminates publicly
available, peer reviewed, nationally recommended treatment data regarding
generic substitution guidelines. Once a plan design has been implemented, the
sales and marketing staff monitors plan performance periodically and may
recommend changes to the plan.
PREFERRED DRUG MANAGEMENT
Through its preferred drug programs, Health Card encourages physicians and
plan participants to use drugs that are preferred by plan sponsors, usually for
lower cost but sometimes for efficacy. Health Card does this, typically, through
contacts with physicians. Almost all of Health Card's sponsors use its preferred
drug management and generic substitution programs. In administering preferred
drug programs, Health Card may recommend that a sponsor offer incentives so that
the lower cost brand name drug listed on its formulary is prescribed rather than
a more expensive therapeutically equivalent drug. With such a therapeutic
interchange program, typically the savings are distributed, for the first year
of the program, among the sponsor, the pharmacy, and Health Card; starting with
the second year, all of the savings are received by the sponsor. This type of
program is most frequently used in connection with long-term therapies. Through
a generic substitution program, a plan participant pays a lower co-payment than
he would otherwise, and thereby benefits directly from the savings. Health Card
believes there are substantial savings to be realized by encouraging plan
participants to use generic instead of brand name drugs, since the cost of a
generic prescription drug can be as much as 91% (typically 30% to 55%) lower
than the cost of the therapeutically equivalent brand name prescription drug.
Plan participants are encouraged by Health Card to use generic drugs by a
variety of methods. These methods include:
utilizing differential co-payments (that is, allowing a plan participant
accepting a generic drug to pay a lower co-payment than if the same
prescription were filled with the brand name drug),
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<PAGE>
requiring the plan participant to pay the difference between the brand and
generic price, and
offering a financial incentive to pharmacists to fill prescriptions using
generic drugs, when permitted by law, therapeutically permissible and in
all cases subject to the physician's prior approval.
The differential co-payment is the method most commonly used by Health Card to
encourage acceptance of generic substitutes for brand name drugs. See 'Risk
Factors -- The health care industry is highly regulated at the federal, state
and local levels. Our failure to comply with these regulations could adversely
affect our business.'
If a physician prescribes a specific drug and the prescription includes a
'dispense as written' ('DAW') notation, a pharmacist is not permitted to
substitute a generic drug without the physician's consent. In such event, the
pharmacist must contact the physician directly for permission to substitute a
generic equivalent or a less expensive brand name drug. Depending on state law,
if no DAW notation is made, the pharmacist must obtain the consent of only the
plan participant to dispense a generic substitute. In New York, if no DAW
notation is made and the physician does not prohibit substitution, the
pharmacist is required to dispense the generic equivalent if it is available.
Other states may have different laws, rules and regulations. Health Card's
detailed quarterly reports to sponsors assist in determining if this program is
being utilized effectively. See 'Business -- Services -- Data Access, Reporting
Information and Analysis.'
Health Card also provides therapeutic interchange and formulary management.
These programs are based upon the effectiveness, quality and cost of specific
drugs. Programs of interchange or formulary inclusion are implemented to give
sponsors lower cost with equal quality. All chosen drugs are reviewed by Health
Card's Pharmacy & Therapeutics Committee in terms of their efficacy, quality
(including side effects) and cost. See 'Business -- Consulting Services and
Disease Information Services' and 'Risk Factors -- The health care industry is
highly regulated at the federal, state and local levels. Our failure to comply
with these regulations could adversely affect our business.'
DRUG REVIEW AND ANALYSIS
Health Card's drug review and analysis services include prospective reviews
of potential claims and concurrent and retrospective reviews of submitted
claims. These include a series of on-line reviews which permit a pharmacist
filling a prescription to examine the plan participant's claims history for:
drug interactions,
premature refills of prescriptions,
duration or duplication of therapy,
pregnancy and breast feeding precautions,
geriatric or pediatric precautions,
compliance with prescriptions, both as to dosage and timing, and
other contraindications.
Health Card transmits such information to the dispensing pharmacist for
information purposes only -- not to replace the prescribing physician's or the
dispensing pharmacist's professional judgment. Health Card's consulting
department retrospectively analyzes the drug utilization patterns of plan
participants for each sponsor. Health Card may then recommend changes in the
sponsor's plan design, preferred drug management, and disease information
systems initiatives to contain costs or to better serve the plan participants.
See 'Risk Factors -- The health care industry is highly regulated at the
federal, state and local levels. Our failure to comply with these regulations
could adversely affect our business.'
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CONSULTING SERVICES AND DISEASE INFORMATION SERVICES
Prescription Benefit Plan Consulting. Health Card's consulting services are
designed to enable sponsors to enhance the quality of plan participants' care
while reducing related costs. Using data relating to the progression and
treatment of diseases, Health Card disseminates information regarding therapies
that are aimed at treating a disease in a cost-effective manner. Health Card's
information systems, which include a comprehensive database, allow Health Card
to provide (a) drug review and analysis, (b) appropriate reports and
information, and (c) disease information services. Health Card believes that
technology and information systems advances will allow for future integration of
health care claims information, including hospital, laboratory and clinical
costs. Health Card further believes that integration will enable it to assess
outcomes on a statistical basis and based on such statistical assessments to
make recommendations regarding effective prescribing practices. Health Card
believes this should allow for improved patient care while controlling therapy
costs. See 'Risk Factors -- The health care industry is highly regulated at the
federal, state and local levels. Our failure to comply with these regulations
could adversely affect our business.'
Health Card has established a Pharmacy & Therapeutics Committee currently
comprised of physicians and pharmacists. This Committee's primary responsibility
is to assist sponsors in designing a well managed, therapeutically appropriate,
cost-effective preferred drug listing or 'formulary.' The goal of the P&T
Committee is to enable sponsors to optimize plan participant care through drug
policy development and education. The P&T Committee meets quarterly and performs
the following functions:
provides information to sponsors to ensure that the covered drugs of each
plan reflect the current standard of medical practice and pharmacology,
evaluates drugs for inclusion in a plan as a preferred drug,
analyzes current literature for safety, efficacy and cost-effectiveness of
covered drugs,
provides recommendations on drug therapy and utilization,
evaluates drug review and analysis programs and criteria,
determines those drugs which require prior authorization from the sponsor,
and
reviews the associated guidelines for those drugs' proper use.
The P&T Committee currently consists of six members: Martin Edelstein, M.D.
and Paul Cohen, M.D., each of whom is a practicing physician and medical school
professor, Jack M. Rosenberg, a university professor of clinical pharmacy and
pharmacology, Joseph B. Laudano, a manager of medical affairs of a major drug
company, Howard G. Levine, a pharmacist, who is the Chairman of the Board of an
independent pharmacy group, and John Ciufo, who is Health Card's Vice President
of Clinical Services and our liaison with the P&T Committee. Mr. Ciufo is the
only member of the P&T Committee otherwise affiliated with Health Card. Vytra
has the right to designate one member of the P&T Committee, but has not
exercised its right. Each Committee member is requested to disclose his or her
affiliation with any drug company. Mr. Laudano and Mr. Rosenberg have disclosed
a current affiliation with drug companies.
Disease Information Services. Through its disease information services,
Health Card provides information to sponsors that is intended to enable them to
enhance their prescription benefit plans and to improve the treatment of plan
participants with certain medical conditions. In providing disease information
services, based upon recommended drug and treatment guidelines, Health Card:
reviews and analyzes drugs prescribed and prescriptions dispensed,
recommends plan guidelines, and
conducts plan participant and physician profiling.
By analyzing plan participants' pharmacy claims patterns, Health Card can
provide information to sponsors and health care providers, assisting in the
early identification of patients whose care might be improved through additional
or alternative treatment or medication. Health Card has developed
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<PAGE>
disease information systems covering cardiovascular and gastrointestinal
conditions, migraines, diabetes, and asthma, among others.
Health Card's disease information services utilize the recommended drug and
treatment guidelines, changes in the drug and treatment guidelines, current
medical literature and its own assessments to identify plan participants
'at-risk' for a particular disease. If the disease information services identify
participants 'at-risk' for particular diseases, Health Card may provide the
recommended drug and treatment guidelines to sponsors, treating physicians and
plan participants. If requested by the sponsor, Health Card monitors a
participant's compliance with the recommended drug and treatment guidelines,
including prescription usage. If it appears, based upon Health Card's analysis
of the participant's claims history, that the recommended drug and treatment
guidelines are not being applied, Health Card may, if requested by the sponsor,
contact the physician, via either telephone or letter, suggesting additional
options. Physician performance and adherence to the recommended drug and
treatment guidelines are monitored by using Health Card's information systems.
Health Card is currently marketing its disease information programs on a
very limited basis, and is actually providing this service to only one sponsor
presently but anticipates that it will be providing these services to another
sponsor in the near future. Health Card believes that sponsors' demand for these
services will grow as their needs for information to address cost containment
increase. See 'Risk Factors -- The health care industry is highly regulated at
the federal, state and local levels. Our failure to comply with these
regulations could adversely affect our business.'
DATA ACCESS, REPORTING AND INFORMATION ANALYSIS
Data Access. Health Card's computerized information systems allow each
sponsor to access on-line data relating to the sponsor's plan. With this
capability, the sponsor is able to maintain and update plan participant
eligibility information and override denials of claims if it so chooses.
Reports. Sponsors receive quarterly executive reports and ad-hoc reports,
in addition to the executive and billing reports which accompany invoices. The
quarterly executive reports provide:
financial and claims information,
information on age group utilization,
amounts spent on prescriptions,
most frequently dispensed drugs in terms of claims and dollar amounts,
information about retail pharmacy and mail order mix, and
information about generic and brand drug mix.
The billing reports indicate, by plan participants' names:
the prescriptions filled,
dates dispensed,
drugs dispensed, and
the dispensing pharmacies utilized by plan participants.
Based on these reports, Health Card representatives provide information and
assist sponsors regarding benefit design, cost containment initiatives, disease
information initiatives and formulary management.
Decision Support Systems. Health Card's proprietary computerized HCFocus
decision support tool is part of Health Card's report generation system and
utilizes Health Card's proprietary database. Sponsors can use HCFocus to analyze
particular information, including, among other things:
comparison of physician prescription practices compared to a selected peer
group,
analysis and review of a plan participant's drug history,
analysis of the top drugs dispensed by number or dollar value,
35
<PAGE>
analysis of generic drug for brand name drug substitution rates, and
analysis of the dispensing patterns of particular pharmacies.
PHYSICIAN PROFILING
Health Card will, at either a physician's or a sponsor's request, analyze
(i.e., profile) a physician's prescription history and consult with either the
physician or the sponsor about the physician's prescribing pattern. Health Card
might, for example, discuss alternatives to therapies that the physician
regularly prescribes based on the drug and treatment guidelines. This practice
is designed to enhance the therapeutic benefits received by the plan participant
and, where possible, to achieve cost savings. It is also designed to promote
conformity with plan benefits and the recommended drug and treatment guidelines.
Presently, Vytra is the only Health Card sponsor using the physician profiling
services, although one more sponsor has expressed interest in using this service
later in 1999 or 2000. Health Card believes that other sponsors may be
interested in this service in the future.
SPONSORS
Sponsors include managed care organizations, local governments, unions,
employers and third party health care plan administrators of prescription drug
programs. As of May 1, 1999, Health Card was servicing 71 sponsors of benefits
plans covering over 515,000 participants (such number includes each third party
administrator client as one sponsor), with concentrations in the Northeast,
Southeast and West Coast. Between May 1, 1998 and May 1, 1999, 27 new sponsors
began utilizing Health Card's services.
Health Card's sponsors are typically asked to sign a standard form of
managerial agreement that governs Health Card's relationship with that sponsor.
Pursuant to this standard agreement, Health Card pays claims and furnishes other
related services through a network of pharmacies. The sponsor provides the
details of the plan to be managed, along with a list of all covered participants
and eligibility updates. The sponsor is liable for all charges incurred by
unauthorized people unless Health Card was notified in writing of ineligibility.
If the participant receives prescription drugs from a non-member pharmacy, and
the plan provides for reimbursement of some or all of the cost of prescription
drugs purchased from a non-member pharmacy, a claim for direct reimbursement
must be made. Health Card is obligated to ensure that an adequate number of
member pharmacies are available, furnish a description of the plan to the
pharmacies, require such pharmacies to comply with the member pharmacy
agreement, process claims and determine whether claims qualify for payment.
Health Card is also obligated to furnish the sponsor with a bi-weekly account
statement which sets forth a summary of claims costs in the preceding period,
and a description of the drugs which are included and excluded from the plan.
Pursuant to the standard agreement, the sponsor is obligated to reimburse
Health Card the cost of claims to Health Card (less any cash advances paid) as
the bi-weekly statements are received by the sponsor. The bi-weekly account
statement will also include an amount due to Health Card for the auditing,
approval and payment of claims processed during the preceding period. The
contracting party agrees to make all payments within five business days from
receipt of the bi-weekly account statement, except that any additional charges
for which a separate fee is agreed to by the parties will be remitted by the
contracting party within 30 days after receipt of billing from Health Card.
Health Card agrees to maintain, in electronic form, current and complete files
of all claims received, and records to establish the cost of drugs to each
sponsor. The sponsor can review these records. While most of Health Card's
larger sponsors negotiate other agreements with Health Card, many sponsors sign
the standard form or a modified version of the standard form. The specific terms
of each managerial agreement, including any incentive arrangements, are
negotiated by Health Card on a case by case basis. While Health Card may take
into account factors such as the number of plan participants, margins and
economies of scale, among others, in determining the terms of its arrangements
with sponsors, Health Card generally does not use set guidelines when
determining these terms.
36
<PAGE>
SIGNIFICANT SPONSORS
Health Card depends on a limited number of sponsors for a significant
portion of its revenue.
For the fiscal years ended June 30, 1998, 1997 and 1996, Vytra and Suffolk
County were the only sponsors that accounted for 10% or more of Health Card's
revenues. For the nine months ended March 31, 1999, Vytra, Suffolk County and
Operating Engineers Trust Funds were the only sponsors that accounted for 10% or
more of Health Card's revenues. The loss of any one of these sponsors would have
a material adverse effect on our business, operating results and financial
condition. The business relationship with each of these sponsors is detailed in
the immediately following sections.
VYTRA
Vytra Health Plans Long Island, Inc. (formerly known as ChoiceCare Long
Island, Inc.) ('Vytra'), a health maintenance organization, is a particularly
significant sponsor, as the following table indicates:
<TABLE>
<CAPTION>
PERCENT OF
HEALTH CARD NUMBER OF
PERIOD REVENUES PARTICIPANTS
- ------------------------------------------------------------------- ----------- ------------
<S> <C> <C>
Year ended June 30, 1997........................................... 44% 128,404
Year ended June 30, 1998........................................... 42% 166,840
Nine months ended March 31, 1999................................... 39% 157,104
</TABLE>
Health Card has been providing services to Vytra since 1990.
A. Prescription Arrangement
Health Card provides prescription benefit management services to Vytra
under two separate arrangements. Pursuant to a series of letters and
conversations, Health Card provides services to Vytra under an arrangement that
began under a written agreement that, as amended, expires in December 1999.
Under this arrangement, as amended (the 'Prescription Arrangement'), National
Medical Health Card IPA, Inc., our wholly-owned subsidiary, has agreed to
provide services to Vytra through Health Card. Health Card is in the process of
negotiating a more formal amendment to the Prescription Arrangement. Health Card
cannot be certain that a more formal amendment with Vytra will be signed, or
that any agreement that is signed will contain terms as favorable to it as the
current arrangement.
Under the Prescription Arrangement, Health Card provides prescription
benefit management services and charges a preset amount based on the number of
plan participants covered at the beginning of each month. The amount payable
under this arrangement is adjusted retrospectively to take into account actual
utilization and cost of claims. The party that benefitted from any difference in
such amount pays an adjustment to the other party. Vytra pays Health Card
additional fees for certain information services, claims processed and other
services.
The Prescription Arrangement accounted for the approximate percentage of
Health Card's revenues indicated in the following table:
<TABLE>
<CAPTION>
PERCENT OF
HEALTH CARD'S
PERIOD REVENUES
- ------------------------------------------------------------------------------- -------------
<S> <C>
Year ended June 30, 1997....................................................... 33%
Year ended June 30, 1998....................................................... 33%
Nine months ended March 31, 1999............................................... 32%
</TABLE>
Pursuant to the Prescription Arrangement, Health Card is Vytra's primary
provider of prescription benefit management services. Vytra has the right to
place a percentage of its claims with other prescription benefit management
companies, individual physicians or groups of physicians associated with Vytra.
If Vytra processes more than such percentage of its claims with other parties,
Health Card can terminate the Prescription Arrangement or renegotiate the
present amount charged to Vytra based on the number of plan participants. Under
the Prescription
37
<PAGE>
Arrangement, should Health Card offer rates more favorable than those offered to
Vytra to a competing sponsor whose plan design and demographics, service area
and services received from Health Card are substantially similar to those of
Vytra, Health Card must promptly notify Vytra. Vytra then may:
terminate the Prescription Arrangement, if the competing sponsor has more
participants (but less than twice more) than Vytra and we do not offer the
same rates to Vytra; and
receive the more favorable rates, retroactive to the date the more
favorable rates were offered to the competing sponsor, if the number of
the competing sponsor's participants is equal to or less than the number
of Vytra's participants.
As a result of adoption of new contract drafting guidelines for HMOs and IPAs in
New York, Health Card IPA will not be permitted to offer this same contract
benefit. See 'Risk Factors -- The health care industry is highly regulated at
the federal, state and local levels. Our failure to comply with these
regulations could adversely affect our business.'
The Prescription Arrangement requires Health Card to arrange for and
maintain an adequate and accessible pharmacy network for Vytra plan participants
(i.e., a specified number of pharmacies). Health Card meets this standard if one
or more participating pharmacies are located in each zip code in the Vytra
service area, which as of this date includes Queens, Nassau and Suffolk County,
in the State of New York, unless either (a) no pharmacy exists within a zip
code, or (b) a pharmacy will not participate and such non-participation is
beyond the reasonable control of Health Card. In addition, Health Card must
exercise its best efforts to maintain pharmacy network participation in
accordance with certain historical levels. Health Card is not responsible if the
number of pharmacies in the network declines because of pharmacy closings,
consolidations or changes in the pharmacy payment schedule. Health Card has
agreed with Vytra that it will not terminate a major chain of participating
pharmacies during the term of the Agreement without Vytra's consent. However, if
Vytra does not consent and the inclusion of such chain results in higher actual
costs to Health Card, then Vytra will be required to pay such increase on a
quarterly basis. In addition, Vytra may require Health Card to add specific
pharmacies to the pharmacy network. Similarly, if the inclusion of such
pharmacies results in higher actual costs to Health Card, Vytra will be
responsible for the increase.
The Prescription Arrangement sets forth certain guarantees that Health Card
must meet. These include:
processing certain percentages of claims within certain periods,
making all reasonable efforts to process all claims within a maximum
period,
answering all calls within a specified average time,
ensuring that a certain percentage of mail order prescriptions which do
not require pharmacy or physician intervention are dispensed within
certain periods,
making all reasonable efforts to make sure all mail order prescriptions
are dispensed within a maximum time period,
reaching certain generic substitution rates, and
maintaining a certain level of rebates per claim.
Health Card is required to pay a penalty for failing to meet certain guarantees.
Health Card must maintain a Pharmacy & Therapeutics Committee. Vytra has
the right to designate one representative to serve on the Pharmacy &
Therapeutics Committee, but has not exercised that right. See
'Business -- Services -- Clinical Consulting and Disease information.' Until
recently, Vytra received all of the rebates received by Health Card in
connection with the Vytra Arrangement. Health Card currently retains a portion
of such rebates. See 'Business -- Services -- General -- Rebate Administration.'
Pursuant to the Prescription Arrangement, a portion of certain financial
risks is shifted from Vytra to Health Card. Vytra is an HMO established under
the laws of the State of New York. Under New York law, an HMO may share risk
only with reinsurers or, pursuant to a written
38
<PAGE>
agreement which complies with certain drafting guidelines issued by the DOH,
with 'providers' and independent practice associations. Recently, Health Card
acquired National Medical Health Card IPA, Inc., which is an IPA under the laws
of New York State. Pursuant to a letter agreement signed in March 1999, Vytra
has agreed that the Prescription Arrangement will govern its relationship with
Health Card and Health Card IPA. As of the date of this prospectus Health Card
is performing the services under this arrangement with Vytra. While the letter
agreement does not comply with the DOH drafting guidelines, the parties have
discussed a more formal amendment, and Health Card anticipates that, if such an
amendment is executed, it will comply fully with the DOH drafting guidelines.
See 'Risk Factors -- The health care industry is highly regulated at the
federal, state and local levels. Our failure to comply with these regulations
could adversely affect our business.'
As of September 25, 1998, Health Card executed a letter agreement with
Vytra which extended the term of the original Prescription Arrangement until
December 31, 1998. This letter agreement also listed new and additional terms
which were to be included in a formal amendment to the Prescription Arrangement.
Among other things, the March 1999 letter agreement extends the term of the
September letter to December 31, 1999. Even though Health Card, Health Card IPA
and Vytra signed the March 1999 letter agreement, Health Card anticipates that a
more formal amendment will be signed and govern the parties' relationship from
January 1 to December 31, 1999, and will include, among other things, the terms
of a proposal issued by Health Card in response to a request for proposal which
was issued by Vytra, as contemplated to be modified by the September 25, 1998
letter. As of the date of this prospectus, the more formal amendment has not
been entered into. Although negotiations are continuing and we expect a more
formal amendment to be executed by both parties, no assurances can be given that
a more formal amendment will be executed, or that it will be executed on terms
favorable to Health Card. If we were to lose Vytra as a sponsor, or lose a
significant portion of Vytra's business, it would have a material adverse effect
on Health Card's business, operating results and financial condition. See 'Risk
Factors -- The majority of our revenues are attributable to a few sponsors. The
loss of one of these sponsors could adversely affect our business.'
B. Fee for Service Agreement.
Health Card also provides prescription benefit management services to Vytra
under an agreement that commenced March 15, 1990 (the 'Fee for Service
Agreement') with an initial term ended on March 31, 1991. The Fee for Service
Agreement renews annually from year to year, unless terminated by either party.
Under this Agreement, Health Card performs prescription benefit management
services and charges a fee based on the number of claims processed and paid. See
'Risk Factors -- The majority of our revenues are attributable to a few
sponsors. The loss of one of these sponsors could adversely affect our
business.'
The Fee for Service Agreement accounted for the approximate percentage of
Health Card's revenues indicated in the following table:
<TABLE>
<CAPTION>
PERCENT OF
HEALTH CARD'S
PERIOD REVENUES
- ------------------------------------------------------------------------------- -------------
<S> <C>
Year ended June 30, 1997....................................................... 11%
Year ended June 30, 1998....................................................... 9%
Nine months ended March 31, 1999............................................... 7%
</TABLE>
SUFFOLK COUNTY
Health Card has been providing prescription benefit management services to
Suffolk County, a municipal corporation of the State of New York, since 1992.
Health Card is currently providing services to Suffolk County under an oral
agreement, terminable by either party, the economic terms of which are otherwise
substantially similar to those of a written agreement that expired on December
31, 1998.
39
<PAGE>
In March 1999, Suffolk County provided us with a proposed amendment to the
written agreement which Health Card has signed but Suffolk County has not. We
cannot be certain that the proposed amendment to the agreement with Suffolk
County will be signed. See 'Risk Factors -- The majority of our revenues are
attributable to a few sponsors. The loss of one of these sponsors could
adversely affect our business.'
Suffolk County accounted for a substantial portion of Health Card's
business, as indicated in the following table:
<TABLE>
<CAPTION>
PERCENT OF NUMBER OF
PERIOD REVENUES PARTICIPANTS
- --------------------------------------------------------------------- ---------- ------------
<S> <C> <C>
Year ended June 30, 1997............................................. 19% 37,833
Year ended June 30, 1998............................................. 15% 38,893
Nine months ended March 31, 1999..................................... 14% 39,617
</TABLE>
Health Card guarantees an effective blended average wholesale price
discount per prescription and an average blended dispensing fee per
prescription. Health Card is required to pay certain percentages of rebates to
Suffolk County pursuant to a complex formula and maintain a pharmacy network at
a specified level. Health Card offers Suffolk County a minimum initial rebate
guarantee for each paid claim, which applies until the rebate per claim equals a
threshold amount. The percentage rebate to which Suffolk County is entitled
increases based on a formula tied to the per claim rebate amount.
OPERATING ENGINEERS
On December 1, 1997, Health Card began providing prescription benefit
management services to Operating Engineers Trust Funds, IUOE Local 12, a
construction workers' union, in Southern California. As of May 1, 1999,
Operating Engineers covered approximately 40,000 plan participants. As of the
date of this prospectus, Health Card is providing services pursuant to an oral
agreement but is negotiating for a written agreement. No assurances can be given
that a formal agreement will be executed, or that it will be executed on terms
favorable to Health Card. Pursuant to such oral agreement, Health Card is
required to pay a certain percentage of rebates to Operating Engineers. For the
nine months ended March 31, 1999, Operating Engineers accounted for
approximately 12% of Health Card's revenues.
In the event that any of these sponsors choose to discontinue using Health
Card's services, or if the terms of our arrangements with these sponsors
unfavorably change, Health Card's business, operating results and financial
condition will be materially adversely affected. In the event of the loss of any
of these sponsors, there can be no assurance that Health Card will be able to
replace such sponsors. See 'Risk Factors -- Consolidation and alliances among
sponsors and health care providers may result in loss of sponsors' and 'Risk
Factors -- The majority of our revenues are attributable to a few sponsors. The
loss of one of these sponsors could adversely affect our business.'
SALES AND MARKETING
Health Card markets its services through a sales and marketing department
led by the Executive Vice President of Sales and Marketing. The sales and
marketing department includes a marketing manager, marketing assistant, a
proposal writer, one regional sales manager, six sales executives, and one sales
coordinator. Health Card's sales executives target the following geographic
sales regions -- Eastern, Mid-Atlantic, Southeast, Southwest, Midwest, West and
the New York Metro area. In addition, Health Card contracts with brokers who are
retained to market Health Card's services to prospective sponsors for agreed
upon fees based on the number of plan participants enrolled in a Health
Card-supported plan and/or the number of claims processed under such plan. See
'Risk Factors -- The health care industry is highly regulated at the federal,
state and local levels. Our failure to comply with these regulations could
adversely affect our business.'
40
<PAGE>
Health Card maintains a prospect list in which each prospect is identified
by market segment and geographic sales location; the list includes sponsors
which, in the aggregate, target over 2,400,000 plan participants. Health Card
has identified various managed care organizations, local governments, unions,
corporations, and third party health plan administrators who are potential
sponsors. Health Card focuses its marketing efforts on sponsors with plans
covering up to 100,000 participants although it provides services to, and seeks
sponsors with, plans covering less or significantly more plan participants.
Health Card also markets to major employee benefit consultant groups.
Health Card attends numerous trade shows and utilizes advertising, public
relations and marketing literature for sales support. Additionally, Health Card
employs the services of a public relations and media firm for exposure and
publication in newspapers, periodicals and journals which are targeted to
employee benefit and managed care specialists.
Further, Health Card is continuing to expand its World Wide Web site.
Currently, the Web site describes Health Card's products and services and lists
frequently asked questions, among other things. It is anticipated that the Web
site will have a page dedicated to on-line services which will allow plan
participants to fill out customer service surveys and direct payment claims
forms, and to access the pharmacy network listings. The Web site is anticipated
to be available for physician access to the Health Card formulary drug listing.
Security firewalls have been developed and implemented to protect patient
confidentiality.
COMPETITION
Health Card competes with numerous companies which provide the same or
similar services, such as:
<TABLE>
<S> <C>
Express Scripts, Inc./Value'Rx' Consultec, Inc.
PCS Health Systems, Inc. National Prescription Administrators, Inc.
Merck-Medco Managed Care, LLC Advance Paradigm, Inc.
Provantage Health Services, Inc. MedImpact Health Care Systems, Inc.
MIM Corp. Pharmaceutical Care Network
</TABLE>
Many of Health Card's competitors have been in existence for longer periods
of time and are far better established than Health Card. Many of them also have:
broader public recognition,
financial and marketing resources substantially greater than Health Card,
more experienced management, and
far more extensive facilities than those available to Health Card.
In addition, some of Health Card's sponsors and potential sponsors may find it
desirable to perform for themselves those services now being rendered by Health
Card.
Health Card's ability to attract and retain sponsors is substantially
dependent on its capability to provide efficient and accurate claims management,
prescription drug program management and related reporting, auditing and
consulting services. Health Card believes that the following factors help Health
Card successfully compete:
a broad base of experience in the information technology and pharmacy
benefit management industries,
flexible and sophisticated on-line computerized information systems, and
a focus on customer service.
See 'Risk Factors -- Competition from other prescription benefit managers, and
sponsors administering their own plans, may reduce the market for our services.'
There can be no assurance that Health Card will remain competitive or
successfully market integrated prescription benefit management services and
disease information services to existing and new sponsors. Furthermore, there is
a distinct possibility that consolidation and alliances
41
<PAGE>
within the industry will adversely impact the operations and prospects for
independent prescription benefit management companies such as Health Card. See
'Risk Factors -- Competition from other prescription benefit managers, and
sponsors administering their own plans, may reduce the market for our services'
and 'Risk Factors -- Consolidation and alliances among sponsors and health care
providers may result in loss of sponsors' and 'Risk Factors -- The health care
industry is highly regulated at the federal, state and local levels. Our failure
to comply with these regulations could adversely affect our business.'
EMPLOYEES
As of May 1, 1999, Health Card had 86 employees, including:
8 officers,
a sales and marketing department of 12 employees,
an information services department of 16 employees,
an operations and network management department of 32 employees (3 of
which are part-time),
a clinical services department of 10 employees,
a financial department of 1 employee, and
a client services and implementation department of 7 employees.
Health Card's employees are not subject to collective bargaining agreements and
Health Card considers its relations with its staff to be satisfactory. See
'Certain Transactions.'
INFORMATION SYSTEMS
Health Card's information systems integrate all of the:
data input,
reporting,
analysis, and
access functions
provided by Health Card, and Health Card believes that its information systems
provide it with a competitive advantage. See 'Risk
Factors -- Business -- General.'
Health Card's on-line claims management system depends in large part on
software licensed from Prospective Health Incorporated ('PHI'). By a license
agreement dated February 18, 1998, Health Card was granted a non-exclusive and
nontransferable perpetual license to use PHI's claims adjudication software
system. This system is an integral part of Health Card's on-line claims
management system. The agreement required Health Card to pay an initial license
fee of $400,000 of which $100,000 was paid upon execution of the agreement and
$25,000 paid monthly through March 1999. In addition, if certain milestones are
met, based on the number of processed claims, as defined, the initial license
fee increases incrementally by up to an additional $500,000 over the term of the
license. As of March 31, 1999, a milestone has been met which has increased the
initial license fee by $150,000 due to increased annualized volume of claims
processed. The agreement also provides for the monthly payment of a fee for
maintenance and updating services, aggregating annually to 18% of the initial
license fee, as defined.
In addition, Health Card entered into a non-exclusive licensing agreement
on March 16, 1998 with Medi-Span, Inc. for a three-year term. This agreement
permits Health Card to use Medi-Span's master drug database, certain drug
utilization review databases, price-checking software and state claims-review
programs for New York and Virginia. Health Card pays license fees annually,
which increase as the number of claims processed and number of dedicated users
of Medi-Span's software increases. Health Card pays an annual license fee of a
minimum of $302,200. On June 1, 1998, Health Card entered into an agreement with
Sandata, of which Bert E. Brodsky is the
42
<PAGE>
Chairman of the Board, President, Treasurer and a principal stockholder. This
agreement, which was amended on the same date, relates to the hiring of 11
Sandata employees by Health Card to provide development, enhancement and
maintenance of Health Card's information systems internally. Health Card paid
Sandata $208,000 in consideration for Sandata's assigning to Health Card certain
rights relative to such employees. Health Card also assumed a liability of
$86,000 relating to these employees. Sandata is expected to continue to provide,
through it subsidiaries, consulting services related to Health Card's
information systems on such terms and conditions as may be agreed to between the
parties from time to time. Also, Sandata confirmed Health Card's proprietary
rights in certain software developed by Sandata for Health Card, among other
things.
A significant portion of Health Card's information systems has historically
been developed, enhanced, modified and maintained by Sandsport Data Services,
Inc., a wholly-owned subsidiary of Sandata. Furthermore, Health Card leases
computer hardware for its data processing center at a monthly cost of $24,000
from Sandsport pursuant to an oral agreement. See 'Certain
Transactions -- Health Card's Relationship with Sandata.'
YEAR 2000 READINESS
The Year 2000 problem is the result of computer programs being written
using two digits, rather than four, to define the applicable year. Programs that
have time-sensitive software may recognize a date using '00' as the year 1900
rather than the Year 2000, which could result in miscalculations or system
failures. Health Card has implemented a Year 2000 compliance review designed to
ensure that its computer systems, applications and embedded operating systems
will function properly beyond 1999. This compliance review involves assessing
the risks of the Year 2000 issue, and planning and instituting mitigation
actions to minimize those risks. Health Card's standard for compliance requires
that for a computer system or business process to be Year 2000 compliant, it
must be designed to operate without error in date and date-related data prior
to, on and after January 1, 2000. Health Card believes that all of its 'mission
critical' systems have been identified, and compliance testing will be completed
by August 31, 1999.
INFORMATION TECHNOLOGY SYSTEMS
Health Card recently completed a comprehensive review of its information
technology systems and is involved in a program to update its information
systems and applications in preparation for the Year 2000. Health Card will
incur internal staff costs as well as outside consulting and other expenditures
related to this initiative. Historical and anticipated expenditures related to
remediation, testing, conversion, replacement and upgrading system applications
in connection with the Year 2000 problem are expected to total approximately
$100,000. Total expenses, including depreciation and amortization of new package
systems, are not expected to have a material impact on Health Card's financial
condition during the conversion process. Year 2000 costs are expensed as
incurred.
NON-IT TECHNOLOGY
An inventory and assessment of all non-IT systems (including items
containing embedded chips, such as elevators, electronic door locks, telephones)
has been completed. The great majority of these non-IT systems are not believed
to be potential sources of significant disruption, although the contingency
plans (described below) will address non-IT Year 2000 failure as well as IT
systems failure. Health Card's telephone system was determined to be the only
non-IT system not Year 2000 compliant. A new system was purchased and installed
and certified to be Year 2000 compliant by the vendor.
Health Card's management intends to develop a 'worst-case scenario' with
respect to Year 2000 non-compliance and to develop contingency plans designed to
minimize the effects of such scenario. The contingency plans will involve
analysis of the use of alternative, non-IT methods of processing claims,
including manual processing, in the event of IT system failure on the part of
outside parties. The manual processing of claims would also be assisted, in a
worst case scenario,
43
<PAGE>
by the use of paper claim forms rather than the computer formats currently being
used. As to claims management, the worst case scenario would require that
another switching company be used to process claims. This option has already
been researched and contingency plans formulated. Switching companies
electronically route pharmacy claims to the appropriate prescription benefit
management company. Health Card is currently testing its switching network. One
major vendor of claims management services with which Health Card does business,
PHI, has certified that software licensed from it is Year 2000 compliant. All
client formats have been reviewed and have been found to be either Year 2000
compliant or very nearly so. There has also been communication between vendors
and Health Card with respect to the exchange of billing tape formats, in an
effort to be certain that our formats are acceptable to the vendors, and vice
versa. The executive management of Health Card intends to have its worst-case
scenario and contingency plans fully developed and in place by August 31, 1999.
Health Card is attempting to contact vendors and others on whom it relies
to assure that their systems will be converted in a timely fashion. However,
there can be no assurance that the systems of other companies on which Health
Card's systems rely will also be converted in a timely fashion, so that any such
failure to convert by another company would not have an adverse effect on Health
Card's information systems. Furthermore, no assurance can be given that any or
all of Health Card's information systems are or will be Year 2000 compliant, or
that the ultimate costs required to address Year 2000 issues or the impact of
any failure to achieve substantial Year 2000 compliance will not have a material
adverse effect on Health Card's business, operating results and financial
condition.
There is still uncertainty about the broader scope of the Year 2000 issue
as it may affect Health Card and third parties that are critical to our
operations. For example, lack of readiness by electrical and water utilities,
financial institutions, governmental agencies or other providers of general
infrastructure could pose significant impediments to our ability to carry on our
normal operations. In the event that we are unable to complete our remedial
actions and are unable to implement adequate contingency plans in the event that
problems are encountered, there could be a material adverse effect on our
business, operating results and financial condition.
FACILITIES
Health Card occupies approximately 14,600 square feet of space at 26 Harbor
Park Drive, Port Washington, New York 11050, under an amended lease at a monthly
cost of $31,000 (including utilities). The lessor is BFS Realty, LLC, which is
affiliated with Mr. Brodsky. The lease expires as of March 30, 2004. Rent under
the lease increases by five percent annually. The BFS lease was assigned by
Sandata, Inc. to BFS in November 1996. Mr. Brodsky is the Operating Manager and
holder of a majority of the membership interests of BFS. Health Card believes
that the terms of this lease are as fair to it as those which could be obtained
from an unaffiliated third party. Pursuant to an agreement entered into in June
1995, Health Card paid $700,000 in connection with certain allocated leasehold
improvements. See 'Certain Transactions.'
Health Card is in the process of completing a new customer service center
at its headquarters. It has initially been equipped with approximately 30
service representatives' desks, and there is space for an additional 30 service
representative work areas. The customer service center opened on May 14, 1999,
and the additional 30 service representative work areas will be equipped and
become operational as needed.
Pursuant to a lease dated August 10, 1998 and expiring on August 31, 2005,
Health Card occupies approximately 1,500 square feet at 63 Manorhaven Boulevard,
Port Washington, New York, which will be used as a pharmacy. The landlord for
these premises is 61 Manorhaven Boulevard, LLC. Bert Brodsky is the sole member.
The rent for the 12 month period ending August 31, 1999 is $1,500 per month; the
annual rent increases by 5% per year. Additional rent, in the form of certain
expenses, is also payable.
Pursuant to a lease commencing December 15, 1998, and expiring on December
14, 1999, Health Card leases an apartment, for use by two members of its
management, at premises located
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at 77 Juniper Road, Port Washington, New York. The annual rent is $20,400.
Utilities and maintenance service (if any maintenance service is contracted for)
are payable by Health Card as additional rent.
GOVERNMENT REGULATION
The activities of prescription benefit management companies such as Health
Card are subject to regulation at the federal, state and local levels. While
Health Card may not have complied in the past, it has recently reviewed its
operations for areas of non-compliance and believes that it substantially
complies with the laws and regulations material to the operation of its business
or is taking steps to identify and comply with such laws and regulations. The
laws that implement this regulation include, but are not limited to, the federal
Anti-Kickback, FDA, anti-trust and ERISA laws and the laws of various states
relating to health, insurance and utilization review, and the licensing and
regulation of professionals, including physicians, nurses, pharmacists,
pharmacies and independent practice associations. Health Card is also subject to
laws and regulations relating to business corporations in general.
Regulatory authorities have very broad discretion to interpret and enforce
these laws and to promulgate corresponding rules and regulations. Violations of
these laws and regulations may result in criminal and/or civil fines and
penalties, injunctive relief to prevent future violations, other sanctions, loss
of professional licensure and exclusion from participation in federal and state
health care programs, including Medicare and Medicaid.
The interpretation and applicability of some of the laws and regulations
applicable to Health Card's business are unclear. Health Card's business
activities and relationships with sponsors, pharmacies, Integrated, plan
participants, its IPA and brokers have not been the subject of regulatory
investigation or review on either the state or the federal level. Health Card
has not obtained or applied for any opinion of any regulatory or judicial
authority that its business operations and relationships with sponsors,
pharmacies, Integrated, its IPA, plan participants or brokers are in compliance
with applicable laws and regulations. There can be no assurance that Health Card
will be successful, that it will interpret the applicable laws and regulations
in the same way as regulatory or judicial authorities, or that the laws and
regulations and/or the interpretation thereof will not change.
See 'Risk Factors -- The health care industry is highly regulated at the
federal, state and local levels. Our failure to comply with these regulations
could adversely affect our business.'
A more detailed analysis of certain specific laws and regulations affecting
the business, operations and relationships of Health Card is set forth below.
ANTI-KICKBACK REGULATIONS
The federal Anti-Kickback Statute prohibits knowingly paying or receiving
remuneration in return for referring an individual for the furnishing of an item
or service, or for the purchasing, ordering or arranging for any item or service
for which payment may be made in whole or in part under a federal health care
program, including Medicare or Medicaid. The term 'remuneration' in the statute
expressly includes any kickback, bribe or rebate. Violation of this law is a
felony, punishable by fines up to $25,000 per violation and imprisonment for up
to five years. Violation may also give rise to civil penalties of up to $50,000
per violation and exclusion from the Medicare and Medicaid programs.
Safe harbor regulations have been adopted under the Anti-Kickback Statute
which immunize certain remuneration arrangements which might otherwise violate
that statute. Failure to fall within a safe harbor, however, does not mean that
such practice constitutes a violation of the law.
Health Card believes that it is not in violation of the Anti-Kickback
Statute because (i) it does not receive any remuneration directly from Medicare,
Medicaid or any other government sponsored health care program, and (ii) it does
not believe the payments to it from any of its sponsors, other than Vytra, are
derived from funds from Medicare, Medicaid or other federal
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government sponsored health care programs. Health Card believes that its
arrangement with Vytra falls within the HMO safe harbor exemption to the
Anti-Kickback Statute because that safe harbor applies to any written risk
sharing arrangement with an HMO. Health Card cannot be sure, however, that a
government regulatory agency or judicial tribunal would not view the receipt and
sharing of rebates as a violation of the federal Anti-Kickback Statute.
With respect to other sponsors, we cannot be sure that without our
knowledge some portion of a sponsor's payment is not derived from a government
health care program source thereby implicating the Anti-Kickback Statute.
However, even if Health Card were found to receive indirectly a benefit from
such a government sponsored health care program in the form of a rebate from
Integrated or otherwise, Health Card believes that its conduct does not violate
the Anti-Kickback Statute because it receives and shares rebates with its
sponsors and participates in the therapeutic interchange program, only to share
cost savings and reduce the cost of prescription benefit services and not to
induce referrals.
The Anti-Kickback Statute and related regulations have been broadly
interpreted by the federal courts to prohibit the payment or receipt of any form
of remuneration, even if only one purpose of such remuneration is to obtain a
referral for any item or service that is covered by a federal health care
program. Certain states other than New York have similar statutes that may
extend the prohibitions to items or services that are paid for by
non-governmental third-party payors, as well as individuals who pay directly for
their own health care.
Health Card is not aware of any instance in which the Anti-Kickback Statute
has been applied (i) to prohibit independent prescription benefit management
companies from receiving rebates from drug manufacturers based on drug sales by
pharmacies to plan participants, formulary management programs, or therapeutic
substitution programs, or (ii) to the contractual relationships between
independent prescription benefit management companies and their sponsors and
participating pharmacies. See 'Risk Factors -- The health care industry is
highly regulated at the federal, state and local levels. Our failure to comply
with these regulations could adversely affect our business.'
In the last few years, private citizens have commenced litigation, known as
Qui Tam actions, against health care providers and suppliers on behalf of the
federal government alleging that such providers and suppliers filed false claims
with the Medicare and/or Medicaid programs. While the law on the issue is still
unsettled, if Health Card's activities with respect to its receipt and sharing
of rebates were challenged as a kickback in such a Qui Tam proceeding and
determined to form the basis for a false claim under the Anti-Kickback Statute,
Health Card could be subject to substantial penalties and treble damages in
addition to the punishments described above. Health Card's exposure to
litigation and enforcement actions is increased because of the availability of
such Qui Tam actions to a broader class of plaintiffs. See 'Risk Factors -- The
health care industry is highly regulated at the federal, state and local levels.
Our failure to comply with these regulations could adversely affect our
business.'
STATE INSURANCE REGULATIONS
One of Health Card's arrangements with Vytra involves the shifting of some
of the financial risk of providing prescription benefits from Vytra to Health
Card. Under New York law, financial risk sharing arrangements may constitute
engaging in the business of insurance which requires a license from the state.
Health Card recently acquired National Medical Health Card IPA, Inc., an
independent practice association licensed in New York State. Health Card, Health
Card IPA and Vytra entered into a letter agreement in March 1999, which
contemplates that services to Vytra will be performed by Health Card IPA through
Health Card. As of the date of this prospectus Health Card is performing the
services under this arrangement with Vytra. Health Card IPA is also expected to
be the contracting party to the more formal amendment or any new agreement with
Vytra. To the extent it enters into risk sharing agreements with HMOs or
providers in the future, Health Card intends that Health Card IPA will be the
contracting party.
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In negotiating the terms of the formal amendment or new agreement, Vytra
and Health Card plan to follow the DOH drafting guidelines. However, the
existing agreement with Vytra does not follow those guidelines. Health Card
cannot be sure that its arrangement with Vytra will not be subject to a claim
that it is engaged in the unlicensed business of insurance. Health Card has not
determined, and does not believe that it could determine with any degree of
accuracy, the nature or extent of any sanctions that might be imposed on it as a
result of such a claim. See 'Risk Factors -- The health care industry is highly
regulated at the federal, state and local levels. Our failure to comply with
these regulations could adversely affect our business.'
INDEPENDENT PRACTICE ASSOCIATION REGULATIONS
Health Card IPA, is an independent practice association under the laws of
New York. Under New York law, an HMO may share risk only with reinsurers or,
pursuant to a written agreement which complies with certain drafting guidelines
issued by the DOH, with 'providers' and independent practice associations.
Health Card intends that the IPA will be the contracting party with respect to
any contracts with HMOs or providers containing financial risk sharing
provisions. Health Card IPA is subject to the regulatory authority of the DOH
and the laws, rules and regulations applicable to independent practice
associations in New York. Under such laws, rules and regulations, Health Card
IPA's contracts with HMOs and providers will be subject to the DOH's contract
drafting guidelines and must be reviewed and approved by the DOH.
In July 1998, the DOH issued new HMO and contract drafting guidelines.
These guidelines are to be used in connection with the approval process for HMO
and IPA contracts. Health Card has negotiated with Vytra to incorporate into
their anticipated more formal amendment the provisions required by the drafting
guidelines. Health Card cannot be sure that Vytra will sign the more formal
amendment which failure would have a material adverse effect on its business,
operating results and financial condition. While Health Card does not believe
that the implementation of the contract drafting guidelines will have a material
adverse effect on its business, operating results and financial condition, it
cannot be sure that DOH, in the exercise of its discretion will not withhold or
delay its approval of the more formal amendment with Vytra, which could have
such a material adverse effect.
PHARMACY REGULATIONS
New York prohibits unlicensed persons from engaging in the practice of
pharmacy. The practice of pharmacy is defined as 'the preparing, compounding,
preserving, or the dispensing of drugs, medicines and therapeutic devices on the
basis of prescriptions or other legal authority.' Health Card believes that it
is engaging in the business of providing management and administrative services
for prescription benefit plans and not in the practice of pharmacy.
As a precautionary measure, in order to preclude any possible finding that
it is engaged in the unauthorized practice of pharmacy, Health Card became a
licensed pharmacy in New York in March 1999. Health Card cannot be sure that the
New York Department of Education will not claim that Health Card had been
engaged in the practice of pharmacy without a license prior to that date. Health
Card has not determined, and does not believe that it could determine with any
degree of accuracy, the nature or extent of any sanctions that might be imposed
on it as a result of such claim.
As a licensed pharmacy, Health Card is subject to all of the laws and
regulations governing pharmacies including those regarding professional
misconduct. Professional misconduct for a pharmacy is defined to include, among
other things, (i) splitting fees in connection with the furnishing of
professional care or services, including the sale of drugs, (ii) receiving
valuable consideration as a commission, discount or gratuity in connection with
the sale of drugs, and (iii) paying or receiving any consideration to or from a
third party for referring a patient, or in connection with the performance of a
professional service.
Health Card is not aware of any interpretation by any court or governmental
agency of the laws and regulations regarding fee splitting or referral fees by
licensed professionals to any
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arrangements similar to those engaged in by Health Card nor has Health Card
obtained or applied for any opinion of any regulatory or judicial authority that
its business operations or relationships are or will be in compliance with such
laws and regulations. The following aspects of our business should be considered
in light of these laws and regulations.
Health Card receives rebates from Integrated through contracts between
Integrated and pharmaceutical companies to which Health Card has agreed to be
joined. While Health Card shares the proceeds of those rebates with its
sponsors, it does not share any rebates with pharmacies.
In connection with its formulary management program, the P&T Committee
considers the net cost of various drugs as one factor in determining which drugs
should be included in the Health Card formulary. While the determination to
include or exclude drugs from the formulary is primarily based on the quality
and efficacy of the drugs, their net cost after any available rebate is also
considered. If Health Card chooses to include certain drugs in its formulary for
which it receives rebates, it may be required under the terms of its agreements
with Integrated and the joinder agreements with pharmaceutical companies to
exclude certain other drugs from its formulary in order to receive those
rebates.
Under its therapeutic interchange program, Health Card shares savings
realized as a result of participating pharmacies' dispensing lower cost drugs
instead of more expensive prescribed drugs. Health Card also has agreements to
pay brokers to market its plan administration services to other potential
sponsors.
Although it is licensed as a pharmacy, Health Card does not believe that
its activities as a prescription benefit manager constitute the rendering of
pharmacy services that would subject it to the professional misconduct
regulations for its prescription benefit management activities. Even if it were
determined that Health Card's activities constitute the practice of pharmacy,
Health Card does not believe that any of its activities are of the type
prohibited by the pharmacy law or the rules of professional misconduct
applicable to pharmacies. Health Card cannot be sure, however, that the New York
Department of Education would not come to a different conclusion and commence a
regulatory investigation or seek to impose sanctions on it for such conduct. See
'Risk Factors -- The health care industry is highly regulated at the federal,
state and local levels. Our failure to comply with these regulations could
adversely affect our business.'
REGULATIONS REGARDING CERTAIN RIGHTS OF PRIVACY AND CONFIDENTIALITY.
It is also professional misconduct in New York for a pharmacy to
disseminate personally identifiable health information about a patient without
the patients' prior written authorization. Improper dissemination of such
information may subject a pharmacist to fines, penalties, other sanctions,
injunctive relief, professional disciplinary actions and loss of license.
In the course of its business, Health Card receives data regarding each
plan participant's prescription drug utilization history. Under some
circumstances, Health Card may also receive other medical information regarding
a plan participant. The availability of such information to Health Card may
enable it to draw certain conclusions about a plan participant's health. For
example, a plan participant receiving long-term insulin therapy may be
identified as a diabetic. Health Card calls these identifications 'inferred
disease states.'
Based on the information Health Card obtains regarding a plan participant's
inferred disease state, Health Card may make recommendations to sponsors on how
to reduce costs and improve the plan to better serve plan participants. Health
Card routinely shares such information with its sponsors through its computer
network. Under the terms of most plans, Health Card also may be required to
provide patient specific information directly to sponsors, including drug
history information that may suggest an inferred disease state. In utilizing the
data received by us in this manner, it is possible that Health Card could be
found to have violated the privacy rights of plan participants under the laws of
New York and other states in which we do business. Such a determination could
have a material adverse effect on Health Card's ability to provide disease
information services, an area of its business that Health Card believes gives it
a competitive
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advantage and is anticipated to be an important element of its future success.
See 'Risk Factors -- The health care industry is highly regulated at the
federal, state and local levels. Our failure to comply with these regulations
could adversely affect our business.'
The Secretary of Health and Human Services has circulated recommendations
regarding legislation intended to protect the privacy of personally identifiable
health information. Several legislative bills on the subject have also been
introduced in the U.S. Senate. While none of these measures have been adopted
into law, we cannot be sure that the subject will not be addressed in one manner
or another at the federal level. If federal legislation regulating access to and
dissemination of personally identifiable health information is adopted, it could
have an adverse effect on the business operations of Health Card as currently
conducted.
REGULATIONS APPLICABLE TO HEALTH CARE PROFESSIONALS
All states, including New York, regulate the practice of medicine, nursing
and other licensed health professions. Activities deemed by a state's regulatory
authority to constitute the practice of medicine, nursing, or any other licensed
health profession without the proper license would subject the actor to the
penalties provided under such state's laws.
In the course of its business, Health Card provides disease information
services, drug usage monitoring programs, preferred drug management, and
consulting services. Health Card does not believe that these or any of its other
activities as a prescription benefit management company, constitute the practice
of medicine, nursing or any other licensed health profession. Health Card cannot
assure you that a regulatory authority in New York, or any other state in which
we engage in such activities, would not assert a contrary position and subject
it to the sanctions described above.
UTILIZATION REVIEW REGULATIONS
Under the Insurance Law and Article 49 of the Public Health Law, the State
of New York regulates utilization review. Utilization review is defined as the
review to determine whether health care services that have been, are being or
will be provided are medically necessary. Health care services, for purposes of
the utilization review law, are defined to include the provision of
pharmaceutical products. In some of the contracts to which it is a party, Health
Card agrees to provide 'drug utilization review' and 'drug utilization
management.' However, Health Card believes that the drug review and analysis
services it provides to its sponsors do not involve making determinations as to
the medical necessity of the pharmaceutical products provided that would subject
it to regulation under the utilization review laws.
FDA REGULATION
The United States Food and Drug Administration has asserted general
authority to regulate promotional activities of, and materials disseminated by,
prescription benefit management companies that are owned or influenced by or
subject to contractual relationships with drug companies. In January, 1998, the
FDA published a draft guidance concerning certain promotional practices
performed by such prescription benefit management companies. Among the practices
discussed in the FDA's commentary to the draft guidance were the use of
product-specific financial incentives to influence drug selection and
prescribing decisions, disease information programs, and the use of specified or
preferred drug formularies.
Since Health Card is neither owned, nor directly controlled or influenced
by a drug company, we believe the existing regulations and draft guidelines do
not apply to Health Card. However, due to its contractual relationship with
Integrated and its joinder in agreements between Integrated and various drug
companies, there can be no assurance that some of Health Card's activities may
not be subject to FDA review and regulation as set forth in the draft guidance.
In such event, some of Health Card's activities and Integrated's rebate program
may require modification or elimination. See 'Risk Factors -- The health care
industry is highly regulated at the federal, state and local levels. Our failure
to comply with these regulations could adversely affect our business.'
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REGULATION IN OTHER STATES
Health Card is in the process of evaluating its involvement with sponsors
and plan participants located in states other than New York. Health Card is
conducting that review systematically, focusing its attention initially on those
states where it has the most sponsors and/or plan participants. As a result of
that review, Health Card has determined that it is required to become licensed
as a third party administrator of insurance benefits in several states,
including Ohio, Florida, Tennessee, Kentucky and Michigan. Health Card has
applied to become a third party administrator or is in the process of completing
such application in each of these states and has received a license in Ohio.
Health Card intends to apply for a third party administrator's license in
each state in which it determines that its business operations require it. Prior
to September 1998, Health Card conducted its activities without applying for any
such licenses. While Health Card is in the process of seeking to comply with all
such laws that are in effect in the states in which it conducts its business,
Health Card cannot be sure that it will be granted such licenses at this time or
at all, or that it will not be subject to fines and other penalties including
injunctive relief, as a result of its past non-compliance. Health Card has not
determined, and does not believe that it could determine with any degree of
accuracy, the nature or extent of any punishment that might be imposed on it as
a result of such historical non-compliance. See 'Risk Factors -- The health care
industry is highly regulated at the federal, state and local levels. Our failure
to comply with these regulations could adversely affect our business.'
New York does not regulate prescription benefit management companies.
Health Card cannot be sure that New York or any other state will not assert
regulatory authority over it or its activities as a prescription benefit
management company or otherwise, now or at any time in the future. If a state
does assert such regulatory authority, Health Card will seek to comply with all
applicable regulations, however, we cannot be sure compliance will be achieved.
If we are unable to comply we may not be permitted to conduct our activities in
those states as we currently conduct them, or at all. See 'Risk Factors -- The
health care industry is highly regulated at the federal, state and local levels.
Our failure to comply with these regulations could adversely affect our
business.'
Health Card has retained special counsel to advise it about insurance,
health, licensure and certain other regulatory matters governed by New York
State laws and federal laws. Health Card has not retained counsel, or obtained
any advisory opinion from any state administrative or regulatory agency,
regarding the laws of any other state. Health Card cannot be sure that its
activities in such other states are in compliance with all applicable laws and
regulations of such states, and thus, its activities in those other states may
subject it to judicial and regulatory review and such sanctions and/or
punishments as may be provided under the laws and regulations of such states.
LEGAL PROCEEDINGS
Health Card is involved in various legal proceedings, including the one
described in the following paragraph, incidental to the conduct of its business.
While there can be no assurance, Health Card does not expect that any such
proceedings will have a material adverse effect on its business, operations and
financial condition.
By letter dated February 9, 1999, Health Card was informed by counsel for
the West Contra Costa Unified School District that it and an individual
plaintiff had filed suit in the Superior Court of Contra Costa, in the State
of California, against Health Card. The complaint was filed with the Superior
Court on December 8, 1998, and enumerates six grounds for its claim to damages.
The case has been removed to Federal Court. The complaint alleges, among other
things, that the parties entered into a contract effective in November of 1996,
and that on December 11, 1996, Health Card unilaterally terminated that
contract, effective December 16, 1996. The complaint further alleges that this
termination was in violation of the terms of the contract and of one or more
statutory provisions; that the termination resulted in the School District
incurring
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approximately $150,000 in additional costs due to its having to enter then into
a fee for service arrangement with Health Card in order to continue providing
prescription benefits to its plan members; and that, due to the wrongful
termination of the contract, the school district was forced to secure a
replacement for the benefits and services that were to have been provided under
the contract with Health Card. The complaint alleges, in connection with this
last circumstance, that the School District incurred roughly $400,000 in
additional expenses as a result. The complaint also seeks treble damages. If
treble damages were allowable in this case, and a judgment were to be entered
against Health Card, Health Card could be liable for damages in excess of $1.5
million. Health Card denies the allegations set forth in the complaint, and
intends to vigorously defend against the allegations made in the complaint, and
has engaged local counsel in Los Angeles to assist it in such defense.
Notwithstanding the foregoing, because of the uncertainties of litigation, no
assurances can be given as to the outcome of this litigation. In the event that
Health Card were not to prevail in this litigation, Health Card could be
required to pay significant damages to the School District, which could in turn
have a material adverse affect on Health Card's business, operating results and
financial condition.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Certain information concerning the executive officers and Directors of
Health Card is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD
- --------------------------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Bert E. Brodsky.................................... 56 Chairman of the Board, Chief Executive Officer
Gerald Shapiro..................................... 68 Vice Chairman of the Board, Secretary
Marjorie G. O'Malley............................... 49 President, Chief Operating Officer
Linda Portney...................................... 54 Executive Vice President of Operations
Mary Casale........................................ 59 Executive Vice President of Sales and Marketing
John Ciufo......................................... 45 Vice President of Clinical Services
Barry Denaro....................................... 43 Treasurer and Chief Financial Officer
Kenneth J. Daley................................... 61 Director
Richard J. Strauss, M.D., F.A.C.S.................. 53 Director
Gerald Angowitz.................................... 49 Director
</TABLE>
Bert E. Brodsky has served as Chairman of the Board of Health Card since
December 7, 1998, and as Chief Executive Officer since June, 1998. Mr. Brodsky
has at various times since 1983 served as Chairman of the Board, President and a
Director of Health Card. Mr. Brodsky has served as Chairman of the Board and
Treasurer of Sandata, Inc. since June 1983 and as President of Sandata, Inc.
since December 1989. From October 1983 though December 1993, Mr. Brodsky served
as Chairman of the Board of Compuflight, Inc., a provider of computerized flight
planning services. Since August 1980, Mr. Brodsky has served as Chairman of the
Board and President of P.W. Medical Management, Inc., which provides financial
and consulting services to physicians. For more than the past five years, Mr.
Brodsky has also served as President of P.W. Capital Corp., a consulting
services firm, Chairman of Sandsport Data Services, Inc., a computer services
firm and wholly-owned subsidiary of Sandata, President of Brodsky Sibling
Realty, Inc., a real estate company and President of Document Storage and
Management, Inc., a document storage company. Mr. Brodsky has also been
Operating Manager of BFS Realty, LLC, a real estate company, since October 1996,
BFS Realty II, LLC, a real estate company, since November 1996 and Four B's
Realty, LLC, a real estate company, since July 1996. See 'Management -- Certain
Transactions.' From August, 1977 until October, 1980, Mr. Brodsky served as the
President of the medical services division of Itel Corporation, where his
responsibilities included identifying and consummating acquisitions in medical
and health related industries.
Gerald Shapiro has served as Vice Chairman of the Board of Health Card
since December 7, 1998. Mr. Shapiro has also served as Secretary since October
28, 1998. From June 1, 1998 until December 7, 1998, Mr. Shapiro served as
Chairman of the Board. From February 4, 1998 until June 1, 1998, Mr. Shapiro
served as Health Card's Vice Chairman. For more than the past five years, Mr.
Shapiro has served as a consultant to Sandata, Inc. and President of Lee
Management Associates, Inc., a physician billing and consulting firm, Chairman
and Treasurer of Mediclaim, Inc., a physician billing and consulting firm,
President of Brookhaven M.R.I., Inc., a company that operates magnetic resonance
imaging machines, Vice President of Mobile Health Management Services, Inc., a
provider of medical screening services and Treasurer of Document Storage and
Management, Inc. From 1973 to 1978 Mr. Shapiro served as President of Ally &
Gargano, Inc., an advertising agency, and from 1971 to 1973 he was President of
Hertz Corporation.
Marjorie G. O'Malley has served as President and Chief Operating Officer of
Health Card since December 7, 1998. From July 1995 to December 1998, Ms.
O'Malley was the Principal of Strategic Healthcare Consultants, a consulting
firm to various health care companies, pharmacy benefit managers, pharmacy
chains and pharmaceutical companies. Ms. O'Malley served as a consultant to
Health Card from July 1995 until July 1998. From 1980 until July 1995, Ms.
O'Malley was employed by CIGNA Corporation in a variety of positions. Ms.
O'Malley formed
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and served as President of 'Rx'Prime, CIGNA Corporation's pharmacy benefit
management business, from 1993 until July 1995. From 1990 to 1993, Ms. O'Malley
was Vice President, Finance and Planning for CIGNA HealthCare, one of the
largest health care management organizations in the United States. Prior to
joining CIGNA Corporation, Ms. O'Malley served as Senior Vice President and
Treasurer of Old Stone Bank and Old Stone Corporation, a bank holding company.
Linda Portney has served as Executive Vice President of Operations of
Health Card since June 1, 1998. Ms. Portney served as a Director of Health Card
from 1982 until May 1999, and as Secretary of Health Card from June 26, 1998
until October 28, 1998. From 1995 until June 1, 1998, Ms. Portney served as
President of Health Card, and as Vice President and Secretary of Health Card
from 1983 to 1995. Ms. Portney has been employed by Health Card since 1981.
Mary Casale has served as Executive Vice President of Sales and Marketing
of Health Card since June 1, 1998 and as a Vice President of Health Card from
March 1996 to June 1, 1998. Ms. Casale previously served as Vice President of
Managed Care Sales and Union Related Accounts at Value'Rx', a prescription
benefit management company, from March 1995 to February 1996, Vice President of
Sales for the Eastern Region at Diagnostek, Inc. ('Diagnostek'), a prescription
benefit management company that was acquired by Value'Rx', from August 1994 to
March 1995, National Vice President of Customer Development for Sales and
Marketing at Diagnostek from January 1994 to August 1994 and a consultant for
special accounts for Sales and Marketing at Diagnostek from 1989 to 1993.
Barry Denaro has served as Chief Financial Officer for Health Card since
June 1997 and as Treasurer for Health Card since February 1998. Mr. Denaro
served as Controller of NDA Clinical Trial Services Inc., a provider of
laboratory testing and data collection for clinical drug trials, from April 1996
through November 1996 and served as Controller of North Shore Agency, a
collection agency, from October 1993 through July 1995. Mr. Denaro is an
attorney licensed to practice in New York State and a certified public
accountant.
John T. Ciufo joined Health Card as Vice President of Clinical Services in
December 1998. Prior to this, he served as Director of Pharmaceutical
Contracting at United Health of Wisconsin, in Appleton, Wisconsin from March
1998 until December 1998. From January 1997 until January 1998, Mr. Ciufo was
Director of Clinical Services with Provantage Health Services, Inc. From January
1996 until January 1997, Mr. Ciufo was Director of Clinical Services for Managed
Prescription Services, a pharmacy benefit management firm, in St. Louis,
Missouri, owned by Humana of Louisville, Kentucky. From January 1995 to April
1996, Mr. Ciufo was Director of Managed Care for Muro Pharmaceuticals in
Tewksbury, Massachusetts. Mr. Ciufo was Director of Pharmacy Services for
Pilgrim Health Care in Boston, Massachusetts from 1992 until 1994. From 1980
until 1992, Mr. Ciufo was Director of Pharmacy at Harvard Community Health Plan
in Boston, Massachusetts. Mr. Ciufo was a founder and member of Board of
Directors from 1989 through 1991 for the Academy of Managed Care Pharmacy, a
national managed care pharmacy association with over 4,500 members representing
over 600 managed care organizations.
Kenneth J. Daley has served as a Director of Health Card since May 10,
1999. For more than the five years prior to January 1999, Mr. Daley served as
Senior Vice President of Chase Manhattan Bank.
Richard J. Strauss, M.D., F.A.C.S. has served as a Director of Health Card
since June 26, 1998. Since 1979, Dr. Strauss has owned and operated the medical
practice of Richard J. Strauss, M.D., P.C. Dr. Strauss also has served as an
Associate Clinical Professor of Surgery at Albert Einstein College of Medicine
since 1990, and as an Instructor of Clinical Surgery at Cornell Medical Center
since 1978.
Gerald Angowitz has served as a Director of Health Card since June 26,
1998. Mr. Angowitz has served as Senior Vice President of Human Resources and
Administration for RJR Nabisco, Inc. ('RJR'), a consumer products manufacturer,
since March 1995. Mr. Angowitz previously served as Vice President of Human
Resources for RJR from February 1994 to March 1995 and Vice President of
employee benefits at RJR from January 1992 to February 1994. Mr. Angowitz is
53
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the brother-in-law of Hugh Freund, a Vice President, Secretary, principal
stockholder and Director of Sandata, Inc.
COMMITTEES OF THE BOARD OF DIRECTORS
Health Card has established an Audit Committee consisting of Messrs.
Shapiro, Angowitz and Dr. Strauss. The Audit Committee is responsible for making
recommendations regarding:
Health Card's retention of independent auditors,
the annual audit of Health Card's financial statements, and
Health Card's internal accounting controls, practices and policies.
Health Card has also established a Compensation Committee consisting of
Messrs. Shapiro, Angowitz and Dr. Strauss. The Compensation Committee is
responsible for making recommendations to the Board of Directors regarding
compensation arrangements for executive officers of Health Card, including
annual bonus compensation, and consults with management of Health Card regarding
compensation policies and practices. The Compensation Committee also makes
recommendations concerning the adoption of any compensation plans in which
management is eligible to participate, including the granting of stock options
or other benefits under such plans.
Following the consummation of this offering but prior to the end of the
current fiscal year, it is anticipated that Mr. Daley will replace Dr. Strauss
on such committees.
DIRECTORS' AND OFFICERS' TERMS AND DIRECTORS' FEES
Health Card's Board of Directors consists of five members. Each director is
elected for a period of one year and serves until his or her successor is duly
elected and qualified. During the last three fiscal years, no directors' fees
were paid. Each of the executive officers serves at the pleasure of Health
Card's Board of Directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to the
compensation paid or awarded by Health Card to the Chief Executive Officer and
other executive officers (the 'Named Executive Officers') whose cash
compensation exceeded $100,000 in all capacities for the fiscal years ended
June 30, 1996, 1997 and 1998, respectively:
<TABLE>
<CAPTION>
ANNUAL SECURITIES
COMPENSATION OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
- ------------------------------------------------- ---- ------------ ------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Bert E. Brodsky, Chairman of the Board and Chief
Executive Officer ............................. 1998 $751,096(1) $30,000(2) $ 47,377(3) --
1997 $474,000(1) -- $ 13,714(3) --
1996 $510,000(1) -- $ 12,000(3) --
Linda Portney, Executive Vice President of
Operations .................................... 1998 $125,000 -- $ 19,514(4) --
1997 $125,000 $50,000 $ 13,828(4) --
1996 $ 80,350 -- $ 11,671(4) --
Mary Casale, Executive Vice President of Sales
and Marketing ................................. 1998 $100,000 $50,031(5) $ 4,800(6)(7) --
1997 $100,000 $15,000(5) $ 4,800(6) 255,689(8)
1996 $ 82,543 -- $ 1,200(6) --
Kenneth Hammond, Vice President of Operations ... 1998 $100,327 -- -- --
1997 $ 13,462(9) -- -- --
1996 -- -- -- --
</TABLE>
(footnotes on next page)
54
<PAGE>
(footnotes from previous page)
(1) Represents salary and consulting fees paid to certain entities affiliated
with Mr. Brodsky. See 'Certain Transactions.'
(2) Represents one-twelfth of an annual bonus of $360,000 paid on behalf of Mr.
Brodsky to P.W. Capital Corp. This bonus was approved by the Board of
Directors on June 1, 1998.
(3) Includes automobile lease payments and life insurance premiums to an entity
affiliated with Mr. Brodsky. See 'Certain Transactions.'
(4) Represents automobile lease payments to an entity affiliated with Mr.
Brodsky and amounts for automobile insurance and travel allowance.
(5) Represents $15,000 and $15,000 in bonus and $35,031 and $0 in commissions
for the fiscal years ended June 30, 1998 and 1997, respectively. Pursuant to
Ms. Casale's current arrangement with Health Card, she is entitled to
commissions as follows: .5% of gross revenues received from direct accounts
sold and .25% of gross revenues received from accounts sold by sales people
under her management.
(6) Represents automobile allowances paid to Ms. Casale.
(7) Does not include annual payments of $20,400 made by Health Card for the
lease of an apartment for the benefit of Ms. Casale and Marjorie G.
O'Malley.
(8) Includes a currently unexercisable option granted by Bert E. Brodsky on July
1, 1997 to purchase an aggregate of 255,689 shares of Health Card common
stock from Mr. Brodsky at a price of $5.87 per share. Such option vests in
increments of 20% on the second, third, fourth, fifth and sixth
anniversaries of such option, respectively, and must be exercised, if at
all, within one year after the termination of the optionee's employment with
Health Card, or by July 1, 2005, whichever is earlier.
(9) Represents amounts paid to Mr. Hammond from the commencement of his
employment with Health Card on April 28, 1997 until June 30, 1997.
Marjorie G. O'Malley, Health Card's President and Chief Operating Officer,
was not an executive officer at the end of the last fiscal year. She has served
as President and Chief Operating Officer since December 7, 1998. Ms. O'Malley's
current annual salary is $175,000. Ms. O'Malley is entitled to participate in a
bonus pool allocated for senior executives equal to 15% of any increase in
pre-tax profits over the prior year. In addition, on December 7, 1998, Bert E.
Brodsky granted a currently unexercisable option to Ms. O'Malley to purchase
63,922 shares of Health Card common stock from Mr. Brodsky at a price of $5.87
per share. Such option vests commencing on December 7, 1999 in one third
increments on the first, second and third anniversaries of such options,
respectively, and must be exercised, if at all, within one year from the date of
the termination of the optionee's employment with Health Card, or by December 7,
2002, whichever is earlier. John T. Ciufo, Health Card's Vice President of
Clinical Services, was not an executive officer at the end of the last fiscal
year. He has served as Vice President of Clinical Services since December 1998.
Mr. Ciufo's current annual salary is $130,000. Mr. Ciufo is also entitled to
participate in the bonus pool. In addition, on December 7, 1998, Mr. Brodsky
granted a currently unexercisable option to Mr. Ciufo to purchase 25,569 shares
of common stock of Health Card from Mr. Brodsky at a price of $5.87 per share.
Such option vests in one third increments on the first, second and third
anniversaries of such option, respectively, and must be exercised, if at all,
within one year from the date of the termination of the optionee's employment,
or by December 7, 2003, whichever is earlier.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
There were no individual grants of stock options to Named Executive
Officers during the fiscal year ended June 30, 1998.
55
<PAGE>
STOCK PLANS
1999 STOCK OPTION PLAN
On May 10, 1999, Health Card's Board of Directors adopted the 1999 Stock
Option Plan (the '1999 Plan') which provides for the grant of options intended
to qualify as 'incentive stock options' ('ISOs') under Section 422 of the
Internal Revenue Code of 1986 as amended (the 'Code'), options that are not
intended to so qualify ('Nonstatutory Stock Options') as well as stock
appreciation rights. The 1999 Plan was approved by shareholders on May 10, 1999.
The total number of shares of common stock reserved for issuance under the 1999
Plan is 1,650,000 (subject to adjustment in the event of a stock split, stock
dividend, recapitalization or similar capital change) plus an indeterminate
number of shares of common stock issuable upon the exercise of 'reload options.'
The 1999 Plan is presently administered by the Board of Directors of Health
Card, which selects the eligible persons to whom options will be granted,
determines the number of shares of common stock subject to each option, the
exercise price therefor and the periods during which options are exercisable,
interprets the provisions of the 1999 Plan and, subject to certain limitations,
may amend the 1999 Plan. Each option granted under the 1999 Plan will be
evidenced by a written agreement between Health Card and the optionee.
Options may be granted under the 1999 Plan to all employees (including
officers) and directors of, and certain consultants and advisors to, Health Card
or any subsidiary of Health Card.
The exercise price for ISOs granted under the 1999 Plan may not be less
than the fair market value of the shares of common stock on the date the option
is granted, except for ISOs granted to 10% shareholders which must have an
exercise price of not less than 110% of the fair market value of the shares of
common stock on the date the option is granted. The exercise price and term for
Nonstatutory Stock Options is determined by the Board of Directors. ISOs granted
under the 1999 Plan have a maximum term of ten years, except for grants to 10%
shareholders which are subject to a maximum term of five years. The exercise
price of options granted under the 1999 Plan may be paid by check, note, common
stock, or any combination of the foregoing at the option of the holder. Options
granted under the 1999 Plan are not transferable, except by will and the laws of
descent and distribution. The total amount of ISOs that may be exercised by any
individual person in any calendar year is limited; however, there is no limit as
to Nonstatutory Stock Options. No options have been granted under the 1999 Plan.
It is anticipated that on or prior to the consummation of this offering,
certain officers, directors and employees of Health Card other than Mr. Brodsky
will receive options to purchase, at the offering price, up to an aggregate of
100,000 shares of common stock, as may be determined by Health Card's Board of
Directors.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Except as described below, there are no written employment or similar
agreements with any of the Named Executive Officers. See 'Certain Transactions'
for a discussion of certain fees paid and payable to Mr. Brodsky. Mr. Brodsky
has agreed with Health Card that, as of the consummation of the offering, he
will receive, as the total compensation payable to him or his affiliates for
services rendered by Mr. Brodsky in his capacity as Chairman of the Board and
Chief Executive Officer of the Company, an annual salary of $200,000 plus a
bonus and annual adjustments to be determined by the Board of Directors.
Pursuant to an agreement dated April 14, 1994 with P.W. Medical Management, Inc.
and assigned to P.W. Capital Corp., P.W. Capital provides services in connection
with the day-to-day activities of Health Card, including marketing, customer
service, financial advice and general business advice. Fees payable to P.W.
Capital are a minimum of $25,000 per year in monthly installments. Currently
actual fees are being paid at the rate of approximately $58,000 per month,
although no assurance can be given that that amount will not be higher for any
particular month or months. Although the agreement has no specified term, if
either P.W. Capital or Health Card fails materially to fulfill its obligations
under the
56
<PAGE>
agreement, following notice and an opportunity to cure, the other party has the
right to terminate this agreement. P.W. and Health Card have agreed that, upon
the effectiveness of the employment agreement discussed below, this agreement
will terminate. Pursuant to an Employment Agreement effective July 1, 1999, Mr.
Brodsky has agreed to serve as Health Card's Chairman of the Board and Chief
Executive Officer at an annual salary of $200,000, subject to adjustment by the
Board of Directors. This agreement has a term of two years, unless terminated by
Health Card for cause, or in the event Mr. Brodsky becomes permanently disabled.
The agreement provides for certain fringe benefits payable to or on behalf of
Mr. Brodsky, such as the use of a car. In addition, the agreement provides for
certain termination benefits payable to Mr. Brodsky, which depending upon the
reason for termination, can be equal to up to two years salary. Ms. O'Malley,
Ms. Portney, Ms. Casale, Mr. Ciufo and Mr. Hammond are employed by Health Card
pursuant to letters, employee covenant agreements and/or confidentiality and
non-disclosure agreements reflecting the compensation terms described under
'Management -- Executive Compensation' and/or restricting the employee from
engaging in certain competitive activity and/or disclosing certain information.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended June 30, 1998, Health Card did not have a
Compensation Committee or other committee of the Board of Directors performing
similar functions. Decisions concerning the compensation of executive officers
were made by the Board of Directors.
Gerald Shapiro, the Vice Chairman of the Board of Directors of Health Card,
and Bert E. Brodsky, Health Card's Chairman of the Board, Chief Executive
Officer, are each members of the Board of Directors and/or officers of the
following companies (unless otherwise stated, such affiliations have been
maintained for more than the past five years): (1) P.W. Capital Corp., a
consulting services firm (Brodsky since June 1996 and Shapiro since October
1994), (2) Brookhaven M.R.I., Inc., a company that operates magnetic resonance
imaging machines, (3) Mobile Health Management Services, Inc., a provider of
medical testing services, (4) 780 Bay Walk Land Co., Inc., a real estate company
(since August 1994), (5) Accutrak Media, Inc., a computer duplication disk
company, (6) Bert Brodsky Associates, Inc., an insurance consulting firm (since
February 1996), (7) Island Mermaid Restaurant Corp., a company that operates a
restaurant, (8) Wilder Woods Estates, LLC, a real estate company (since April
1997), (9) Document Storage and Management Inc., a document storage company
(since 1994), (10) Lee Management Associates, Inc., a billing and collections
firm, (11) United States Information Corp., a facsimile subscription service
company, and (12) Medical Arts Office Services, Inc., a company that provides
personnel and administrative services (since November 19, 1998). See 'Certain
Transactions.'
57
<PAGE>
CERTAIN TRANSACTIONS
HEALTH CARD'S RELATIONSHIP WITH SANDATA
On June 1, 1998, Health Card entered into an agreement with Sandata, Inc.,
of which Bert E. Brodsky is the Chairman of the Board, President, Treasurer and
a principal stockholder. This agreement, which was amended on the same date,
relates to the hiring of 11 employees of Sandata by Health Card to provide
development, enhancement and maintenance of Health Card's information systems
internally. Health Card paid Sandata $208,000 in consideration for Sandata's
assigning to Health Card certain rights relative to such employees. Health Card
also assumed a liability of $86,000 relating to these employees. Sandata,
through its subsidiaries, is expected to continue to provide consulting services
related to Health Card's information systems, on such terms and conditions as
may be agreed to between the parties from time to time. Also, Sandata confirmed
Health Card's proprietary rights in certain software developed by Sandata for
Health Card, among other things.
A significant portion of Health Card's information systems has historically
been developed, enhanced, modified and maintained by Sandsport Data Services,
Inc., a wholly-owned subsidiary of Sandata. Furthermore, Health Card leases
computer hardware for its data processing center at a monthly cost of $24,000
from Sandsport pursuant to an oral agreement, terminable at will by either
party.
The Company purchased furniture and fixtures from Sandata during the nine
months ended March 31, 1999 for approximately $127,000. The price included a 20%
purchasing and handling fee.
During the fiscal years ended June 30, 1997 and 1998 and the nine month
period ended March 31, 1999, Health Card incurred fees to Sandsport in the
aggregate amounts of approximately $2,360,000, $2,492,299 and $1,200,045. As of
May 1, 1999, Health Card owed $144,170 to Sandsport.
EMPLOYEE MANAGEMENT RELATIONSHIP WITH MEDICAL ARTS OFFICE SERVICES, INC.
Medical Arts Office Services, Inc. may be deemed an affiliate of Health
Card. Certain persons employed by companies affiliated with Mr. Brodsky are also
officers and directors of Medical Arts, of which Mr. Brodsky is the sole
shareholder. As of January 1993, Medical Arts owned 807,467 shares of common
stock of Health Card. Health Card purchased such stock from Medical Arts stock
through a series of transactions, the last of which occurred in May 1996. Health
Card paid an aggregate amount of $638,400 for such stock.
Until May 31, 1998, Medical Arts provided employee leasing and
administrative services, such as payroll processing, to Health Card, and all of
Health Card's staff (then 52 persons, excluding persons formerly employed by
Sandata) were paid through Medical Arts. Health Card would pay Medical Arts an
amount equal to each such person's salary, medical benefits, social security and
the like, as well as an administrative fee. On May 31, 1998 Health Card directly
hired these individuals that had previously been paid through Medical Arts. In
addition, Medical Arts continues to provide Health Card with accounting,
paralegal and bookkeeping services.
For the fiscal year ended June 30, 1998, the total payments made by Health
Card to Medical Arts were approximately $2,618,155, of which $2,248,331 was paid
for salaries of leased employees, $92,383 was paid for accounting services,
$33,593 was paid for bookkeeping services, $180,000 was paid for consulting
services, $31,531 was paid to a medical plan, $28,438 was paid for paralegal
services and $3,879 was paid to a pension plan.
Until May 31, 1998, Health Card employees who were paid through Medical
Arts could contribute to a 401(k) plan maintained by Sandata. As of June 1,
1998, Health Card has joined that plan. For the fiscal year ended June 30, 1998,
Health Card made matching contributions of approximately $3,879 to such plan.
It is anticipated that, following the consummation of the offering, Medical
Arts will continue to provide paralegal and bookkeeping services to Health Card,
pursuant to an oral agreement, terminable at will by either party. It is further
anticipated that the annual amounts to be paid to
58
<PAGE>
Medical Arts for paralegal and bookkeeping services will be approximately
$160,000, which amount will most likely be paid on a monthly basis. These
amounts are estimated based upon current hourly rates charged by Medical Arts
for such services. Currently, these rates are as follows: paralegal services at
$90 per hour and bookkeeping services at $6,250 per month.
CONSULTING FEES
For the fiscal year ended June 30, 1998, Health Card paid aggregate
consulting fees of $746,929 for services rendered by Mr. Brodsky. Pursuant to
agreements among Health Card, Mr. Brodsky, and the entities named below,
portions of those fees were paid as follows:
<TABLE>
<S> <C>
Medical Arts.............................. $180,000
P.W. Capital.............................. $552,000
</TABLE>
Mr. Brodsky provides managerial expertise and advice, including but not
limited to advice regarding hiring of executive management and other personnel,
marketing and sales matters, and negotiation of contracts with sponsors and
other parties. Mr. Brodsky's services are rendered in his capacities as Chairman
of the Board of Directors and Chief Executive Officer. See
'Management -- Executive Compensation.'
In addition, Health Card paid P.W. Capital $17,377, representing lease
payments for cars leased for Mr. Brodsky's benefit.
REAL ESTATE
On November 1, 1996, Health Card signed a lease with Four B's Realty, LLC,
of which Mr. Brodsky is the managing member, for office space in Southampton,
New York. Prior to occupancy by Health Card, such lease was terminated by an
agreement dated as of July 30, 1997. Prior to such termination Health Card paid
Four B's Realty, LLC an aggregate of $102,675 under such lease.
On August 1, 1997, Health Card signed a lease with BFS Realty II, LLC, of
which Mr. Brodsky is the managing member, for office space in Hicksville, New
York. Prior to occupancy by Health Card, such lease was terminated by an
agreement dated as of April 1, 1998. Prior to such termination Health Card paid
BFS II an aggregate of $91,266 under such lease.
Health Card occupies approximately 14,600 square feet of space at 26 Harbor
Park Drive, Port Washington, New York 11050, under an amended lease at a monthly
cost of $31,000 (including utilities). The lessor is BFS Realty, LLC, which is
affiliated with Mr. Brodsky. The lease expires as of March 30, 2004. Rent under
the lease increases by five percent annually. The BFS lease was assigned by
Sandata, Inc. to BFS in November 1996. Mr. Brodsky is the Operating Manager and
holder of a majority of the membership interests of BFS. Health Card believes
that the terms of this lease are as fair to it as those which could be obtained
from an unaffiliated third party. Pursuant to an agreement entered into in June
1995, Health Card paid $700,000 in connection with certain allocated leasehold
improvements. During the nine months ended March 31, 1999, Health Card paid an
affiliated party approximately $58,000 in connection with improvements to the
building in which Health Card's offices are located.
Pursuant to a lease dated August 10, 1998 and expiring on August 31, 2005,
Health Card occupies approximately 1,500 square feet at 63 Manorhaven Boulevard,
Port Washington, New York, which will be used as a pharmacy. The landlord for
these premises is 61 Manorhaven Boulevard, LLC, of which Bert Brodsky is the
sole member. The rent for the 12 month period ending August 31, 1999 is $1,500
per month; the annual rent increases by 5% per year. Additional rent, in the
form of certain expenses, is also payable.
STOCK TRANSACTIONS
On July 1, 1997, Bert E. Brodsky surrendered to Health Card currently
exercisable options to purchase 1,022,758 shares of common stock of Health Card.
On July 1, 1997, Gerald Shapiro
59
<PAGE>
surrendered to Health Card currently exercisable options to purchase 383,534
shares of common stock of Health Card.
The following transactions also occurred in connection with such
surrenders: Bert E. Brodsky purchased 1,278,447 shares of common stock of Health
Card by delivery of a promissory note made payable to the order of Health Card
in the original principal amount of $1,000,000. This note is secured by
1,278,447 shares of common stock of Health Card owned by Mr. Brodsky and
principal is without, and interest is with, recourse to Mr. Brodsky. Gerald
Shapiro purchased 383,534 shares of common stock of Health Card by delivery of a
promissory note made payable to the order of Health Card in the original
principal amount of $300,000. This note is secured by 383,534 shares of common
stock of Health Card owned by Mr. Shapiro and principal is without, and interest
is with, recourse to Mr. Shapiro.
In July 1997, Sandra Rothstein, Mr. Brodsky's administrative assistant,
purchased 51,137 shares of common stock of Health Card by delivery of a
promissory note made payable to the order of Health Card in the original
principal amount of $40,000. This note is secured by 51,137 shares of common
stock of Health Card owned by Ms. Rothstein and principal is without, and
interest is with, recourse to Ms. Rothstein. As of May 1, 1999, no principal was
outstanding with respect to Ms. Rothstein's note. Each of the promissory notes
mentioned above bears interest at the rate of 8.5% per annum, payable quarterly,
commencing October 1, 1997 and is payable 5 years from the date thereof, except
that payment of Ms. Rothstein's note may be accelerated upon termination of her
employment with Sandata.
On October 30, 1998, Bert E. Brodsky executed a promissory note made
payable on demand to the order of Marine Midland Bank in the principal amount of
$2,000,000. Mr. Brodsky used the proceeds of the loan to purchase 340,919 shares
of common stock of Health Card. In addition, Mr. Brodsky pledged a like number
of shares to the bank as security for the loan. On October 30, 1998, Health Card
executed an unlimited continuing Guaranty Agreement for the indebtedness of Mr.
Brodsky to Marine Midland Bank. By the Guaranty Agreement, Health Card
unconditionally guaranteed the full and prompt payment to Marine Midland Bank of
the indebtedness of Mr. Brodsky. On November 3, 1998, the promissory note from
Bert E. Brodsky to Marine Midland Bank, dated October 30, 1998, was converted
from a demand note to an installment note, payable in full by October 28, 1999,
bearing interest at a per annum rate of 7.72%. This note was repaid in full in
January 1999. On April 8, 1999, HSBC (formerly Marine Midland Bank), advised
Health Card that its unlimited guaranty of Mr. Brodsky's $2,000,000 loan was
released.
60
<PAGE>
INDEBTEDNESS OF MANAGEMENT
From time to time, Mr. Brodsky and certain of his affiliates (collectively
the 'Brodsky Affiliates') and other directors and affiliates of Health Card have
borrowed funds, or have incurred indebtedness in connection with the purchase of
shares, from Health Card. The following table describes certain information
relating to such indebtedness.
<TABLE>
<CAPTION>
LARGEST AGGREGATE AMOUNT
OWED BY DEBTOR DURING DEBT OWED
FISCAL YEAR ENDED AS OF
DEBTOR JUNE 30, 1998 MAY 1, 1999
- ------------------------------------------------------------------- ------------------------ -----------------
<S> <C> <C>
P.W. Capital LLC(1)(2)............................................. $4,284,902 $ 4,493,404
Port Charitable Foundation(1)(3)................................... 258,500 14,000
Sandata, Inc.(4)................................................... 550,599 0
Bert E. Brodsky(5)................................................. 1,684,700 1,036,733
P.W. Medical Management, Inc.(1)................................... 785,000 0
Medical Arts Office Services, Inc.(1).............................. 93,485 0
Wilder Woods Estates, LLC(1)....................................... 214,000 0
Document Storage & Management(1)................................... 0
Hugh Freund(3)..................................................... 8,000 0
Carol Freund(3).................................................... 8,000 0
BFS Realty II, LLC(1).............................................. 5,000 0
J&A Construction, LLC(6)........................................... 15,000 0
Gerald Shapiro(7).................................................. 325,500 308,500
Sandra Rothstein(8)................................................ 43,400 850
Mediclaim, Inc.(7)................................................. 52,866 0
Linda Portney(9)................................................... 5,394 2,374
Muriel Brodsky, as trustee under certain trusts established for the
benefit of Mr. Brodsky's children(1)............................. 78,600 0
Camp Poyntelle, Inc.(1)............................................ 12,500 0
US Information Group, Inc.(10)..................................... 7,000 0
</TABLE>
- ------------
(1) On June 1, 1998, Health Card assigned certain indebtedness aggregating
$1,636,785 in principal and accrued interest, if any, from the following
affiliates to P.W. Capital, LLC, a company affiliated with Mr. Brodsky. On
June 1, 1998, P.W. Capital, LLC executed a demand promissory note made
payable to the order of Health Card in the principal amount of $4,254,785
with interest at the rate of 8.5 percent per annum payable quarterly, such
amount reflecting the assigned debt and amounts then owed by P.W. Capital
to Health Card. On June 1, 1998, Bert E. Brodsky executed an unconditional
guaranty in favor of Health Card for the full and prompt payment to Health
Card of all amounts payable under the P.W. Capital, LLC promissory note
dated June 1, 1998. Such note is secured by 1,022,757 shares of common
stock of Health Card and is without recourse to the maker.
Bert E. Brodsky
P.W. Medical Management, Inc.
Medical Arts Office Services, Inc.
Wilder Woods Estates, LLC
Document Storage & Management, Inc.
BFS Realty II, LLC
J&A Construction, LLC
Muriel Brodsky as trustee under certain trusts established for the benefit
of Mr. Brodsky's children
Camp Poyntelle
Port Charitable Foundation
(2) As of January 2, 1999, P.W. Capital executed a demand promissory note made
payable without interest to the order of Health Card to evidence advances
to P.W. Capital in the amount of $90,100.
(3) Port Charitable Foundation is a company affiliated with Hugh Freund and
Carol Freund, who are husband and wife. Mr. Freund is an Executive Vice
President, director and principal stockholder of Sandata.
(4) Mr. Brodsky is the Managing Member of Wilder Woods Estates, LLC, and the
President, director, and the principal stockholder of Document Storage &
Management Inc.
(5) Includes principal and interest due under a non-recourse (except for
interest) promissory note dated July 1, 1997 made payable by Mr. Brodsky to
the order of Health Card in the original principal amount of $1,000,000,
secured by a pledge of 1,278,447 shares of common stock of Health Card.
Interest on such note is payable quarterly and together with principal 5
years from the date of the note.
(6) As of May 1, 1998, Mr. Brodsky was no longer an affiliate of J&A
Construction, LLC.
(7) Mr. Shapiro, Vice Chairman of the Board of Health Card, is the Chairman of
the Board and Treasurer of Mediclaim, Inc. Includes principal and interest
due under a non-recourse (except for interest) promissory note dated July
1, 1997 made payable by Mr. Shapiro to the order of Health Card in the
original principal amount of $300,000, secured by a pledge of 383,534
shares of common stock of Health Card. Interest on such note is payable
quarterly and together with principal 5 years from the date of the note.
(8) Sandra Rothstein is Mr. Brodsky's administrative assistant. As of May 1,
1999, no principal was outstanding with respect to Ms. Rothstein's note.
(9) Linda Portney is Executive Vice President of Operations of Health Card.
(10) Gerald Shapiro and Muriel Brodsky, Mr. Brodsky's wife, each own 50% of the
outstanding shares of U.S. Information Group, Inc.
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<PAGE>
The Bert E. Brodsky Revocable Trust has agreed with Health Card that,
effective upon the consummation of this offering, it will repay certain
indebtedness referred to above to the extent of the proceeds from the sale of
the shares being offered by the Brodsky Trust, net of underwriting discounts and
commissions, a non-accountable expense allowance, a financial advisory fee and
estimated gross Federal and state taxes. In addition, Mr. Brodsky has agreed to
pay in full, within one year of the consummation of this offering, the
indebtedness owed by him and P.W. Capital, LLC, reflected in the above table,
after application of the net proceeds from the sale of shares by the selling
stockholder in this offering. Mr. Shapiro has orally agreed to pay in full the
indebtedness reflected opposite his name in the above table within one year of
the consummation of this offering.
SUNSTAR HEALTHCARE, INC.
SunStar Healthcare, Inc., a Delaware corporation, is engaged in providing
managed health care services in the state of Florida by operating an HMO. Its
service territory covers fifty two counties in central, northern and other parts
of Florida, including the metropolitan areas of Tampa, Orlando, Jacksonville,
and others. As of November 1, 1998, SunStar served approximately 57,000 enrolled
plan members. On February 19, 1999, Mr. Brodsky, as trustee for the irrevocable
trusts of each of his children, subscribed for $250,000 (an aggregate of
$1,000,000) in preferred stock and warrants offered by SunStar. Effective May 1,
1999, Health Card began providing services to SunStar.
NATIONAL MEDICAL HEALTH CARD IPA, INC.
National Medical Health Card IPA, Inc. was incorporated in September 1998.
Mr. Brodsky's son was its sole shareholder. In October 1998, Mr. Brodsky's son
transferred ownership of Health Card IPA to Health Card for no consideration.
62
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information, as of May 26, 1999,
concerning the beneficial ownership of Health Card's common stock, before and as
adjusted to reflect the sale of shares offered by this prospectus, for:
each person who is known by Health Card to be the beneficial owner of more
than five (5%) percent of Health Card's shares of common stock,
each of the Named Executive Officers,
each of Health Card's directors, and
all of Health Card's executive officers and directors as a group.
Except as otherwise indicated below, each of the entities or persons named in
the table has sole voting and investment power with respect to all shares of
common stock beneficially owned.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES OF SHARES OF APPROXIMATE
COMMON COMMON PERCENTAGE OF
STOCK NUMBER OF STOCK OUTSTANDING SHARES OF
BENEFICIALLY SHARES OF BENEFICIALLY COMMON STOCK
OWNED COMMON OWNED -------------------------
BEFORE THE STOCK AFTER THE BEFORE THE AFTER THE
NAME AND ADDRESS(1) OFFERING OFFERED OFFERING OFFERING OFFERING
- ----------------------------------- ------------ --------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Bert E. Brodsky.................... 4,451,164(2) -- 3,951,164(2) 83.8%(2) 54.0%(2)
Bert E. Brodsky Revocable Trust.... 500,000 500,000 -- 9.4% --
Irrevocable Trust of David C.
Brodsky.......................... 383,559 -- 383,559 7.2% 5.3%
Gerald Shapiro..................... 383,534 -- 383,534 7.2% 5.3%
Linda Portney...................... 219,162 -- 219,162 4.1% 3.0%
Mary Casale........................ 51,138(3) -- 51,138(3) -- --
Richard J. Strauss, M.D.,
F.A.C.S.......................... -- -- -- -- --
Gerald Angowitz.................... -- -- -- -- --
All executive officers and
Directors as a group (7
persons)......................... 5,053,860(2)(3) 500,000 4,604,999 95.1% 69.1%
</TABLE>
- ------------
(1) The address of each person named in the table is c/o National Medical Health
Card Systems, Inc. at 26 Harbor Park Drive, Port Washington, New York 11050.
(2) Includes (i) an aggregate of 965,585 shares of common stock beneficially
owned by Mr. Brodsky's children's trusts, of which Mr. Brodsky is a trustee,
(ii) 500,000 shares of common stock beneficially owned by the Bert E.
Brodsky Revocable Trust, of which Mr. Brodsky's wife is the trustee, and
(iii) 1,725 shares of common stock beneficially owed by P.W. Capital Corp.,
of which Mr. Brodsky is President. Includes an aggregate of 345,179 shares
of common stock subject to options granted to certain executive officers of
Health Card. See 'Management -- Executive Compensation.'
(3) Includes 51,138 shares of common stock subject to options exercisable within
sixty days of the date of this prospectus. Does not include an aggretage of
204,551 shares of common stock subject to currently unexercisable options.
63
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Health Card consists of
25,000,000 shares of common stock, $.001 par value per share, and
10,000,000 shares of preferred stock, $.10 par value per share.
As of May 28, 1999, there were 5,312,496 shares of common stock and no shares of
preferred stock outstanding. Upon the completion of the offering there will be
7,312,496 shares of common stock and no preferred stock outstanding, excluding
250,000 shares of common stock issuable upon exercise of the representatives'
warrants and 375,000 shares of common stock issuable upon exercise of the
over-allotment option. There were 34 shareholders of record as of May 28, 1999.
The following summary of certain provisions of the capital stock is not
complete. It is qualified in its entirety by New York law, and provisions of
Health Card's Certificate of Incorporation.
COMMON STOCK
Holders of common stock are entitled to one vote for each share of common
stock held on all matters submitted to a vote of shareholders. The common stock
does not have cumulative voting rights. Holders of common stock are entitled to
receive ratably any dividends that may be declared by the Board of Directors.
Upon the liquidation, dissolution or winding up of Health Card, the holders of
common stock are entitled to receive ratably the net assets of Health Card
available after the payment of all debts and other liabilities. Holders of
common stock have no preemptive, subscription, redemption or conversion rights.
The outstanding shares of common stock are, and the shares of common stock
offered hereby, when issued and paid for will be, validly issued, fully paid and
nonassessable. Any common shares issued by Health Card are subject to the
provisions of Section 630 of the New York Business Corporation Law (the 'BCL').
The rights and privileges of common stock are subject to the rights and
privileges of any preferred stock which Health Card may issue in the future; the
common stock's rights may be diminished or impaired by such preferred stock's
rights.
In addition, the stock market has from time to time experienced price and
volume fluctuations that are often unrelated to the operating performance of
particular companies. The market price of the common stock, similar to that of
securities of other growing companies, may be highly volatile. The market price
of the common stock could be subject to significant fluctuations in response to
Health Card's operating results and other factors, and there can be no assurance
that the market price of the common stock will not decline below the offering
price.
PREFERRED STOCK
Health Card's Certificate of Incorporation authorizes 10,000,000 'blank
check' shares of preferred stock, par value $.10 per share. The Board of
Directors of Health Card will have the authority, without shareholder approval,
to:
issue shares of preferred stock in one or more series,
fix the number of shares constituting any series, and
fix the terms of any such series, including:
dividend rights,
dividend rates,
conversion or exchange rights,
voting rights,
rights and terms of redemption (including sinking fund provisions),
redemption price, and
the liquidation preference of such series.
64
<PAGE>
The issuance of preferred stock may have the effect of discouraging, delaying,
or preventing a change in control of Health Card. The rights, preferences and
privileges of holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of preferred stock Health Card may issue
in the future. Health Card has no present plans to issue any shares of preferred
stock.
REGISTRATION RIGHTS
The representatives, and other holders of the representatives' warrants,
have 'piggyback' rights to include the shares underlying the representatives'
warrants in any registration statement filed by Health Card. These rights exist
during the period commencing on the date of this prospectus and ending six (6)
years from the date of this prospectus. The representatives and other holders of
the representatives' warrants also have 'demand' rights during the period
commencing on the date of this prospectus and ending five (5) years from the
date of this prospectus. This demand right is exercisable, by holders of a
majority of the representatives' warrants, to require registration by Health
Card of the shares underlying the representatives' warrants. Furthermore, any
holder of the representatives' warrants has 'demand' rights during the same
period, to require one 'demand' registration of the shares underlying such
holder's warrants, solely at the expense of such holder.
LIMITATION ON LIABILITY OF DIRECTORS; INDEMNIFICATION
Health Card's Certificate of Incorporation eliminates the personal
liability of directors for breach of fiduciary duty as a director to the fullest
extent permitted by the BCL. The BCL itself, however, provides that the above
provision may not eliminate or limit the liability of a director for:
acts or omissions in bad faith or which involve intentional misconduct or
a knowing violation of law,
acts or omissions in violation of Section 719 of the BCL (with respect to
unlawful dividend payments, unlawful share purchases or redemption,
unlawful distributions of assets to shareholders after dissolution without
providing for known liabilities and unlawful loans to directors under BCL
Section 714 without shareholders approval), or
any transaction from which the director gained an improper personal
financial or other advantage.
Additionally, Health Card has included in its Certificate of Incorporation
and By-Laws provisions to indemnify its directors and officers, as permitted by
the BCL. The BCL provides further that the indemnification permitted thereunder
will not be deemed exclusive of any rights to which the directors or officers
may be entitled under Health Card's Certificate of Incorporation or By-Laws, and
if permitted under Health Card's Certificate of Incorporation or By-laws under
any agreement, by vote of shareholders or by vote of directors.
The effect of the foregoing is to require Health Card to indemnify the
officers and directors of Health Card, to the extent permitted by law, for any
claim arising against such persons in their official capacities if such person
acted in good faith and in a manner that he reasonably believed to be in or not
opposed to the best interests of Health Card, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Health Card's common stock is
Continental Stock Transfer and Trust Company, 200 Broadway, New York, New York
10004.
65
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, Health Card will have outstanding
7,312,496 shares of common stock. Of these shares, the 2,500,000 shares sold in
the offering (2,875,000 shares if the over-allotment option is exercised), and,
except as described below, the 4,812,496 remaining issued and outstanding shares
of common stock will be freely tradeable without restriction under the
Securities Act, unless held by 'affiliates' of Health Card as that term is
defined in Rule 144 under the Securities Act (an 'Affiliate').
In general, under Rule 144 as currently in effect, if a period of at least
one year has elapsed since the later of the date the 'restricted shares' (as
that phrase is defined in Rule 144) were acquired from Health Card and the date
they were acquired from an Affiliate, then the holder of such restricted shares
(including an Affiliate) is entitled to sell a number of shares within any
three-month period that does not exceed the greater of 1% of the then
outstanding common stock or the average weekly reported volume of trading of the
common stock on the Nasdaq National Market during the four calendar weeks
preceding such sale. The holder may only sell such shares through unsolicited
brokers' transactions or directly to market makers. Sales under Rule 144 are
also subject to certain requirements pertaining to the manner of such sales,
notices of such sales and the availability of current public information
concerning Health Card. Affiliates may sell shares not constituting restricted
shares in accordance with the foregoing volume limitations and other
requirements but without regard to the one-year holding period.
Under Rule 144(k), if a period of at least two years has elapsed between
the later of the date restricted shares were acquired from Health Card and the
date they were acquired from an Affiliate, as applicable, a holder of such
restricted shares who is not an Affiliate at the time of the sale and has not
been an Affiliate for at least three months prior to the sale would be entitled
to sell the shares immediately without regard to the volume limitations and
other conditions described above.
Except with regard to the 500,000 shares to be sold by the Bert E. Brodsky
Revocable Trust in this offering, Health Card's executive officers, directors
and certain shareholders who collectively own 5,053,860 shares of common stock
issued prior to the offering have agreed that they will not directly or
indirectly, offer to sell or otherwise encumber or dispose of any securities
issued by Health Card, whether or not beneficially owned by them, for a period
of 180 days after the effective date of this prospectus, without the prior
written consent of Ryan, Beck. However, any gift or similar transfer to a family
member or trust for the benefit thereof of shares registered in such
shareholder's name or beneficially owned by him will be exempt from the
restrictions set forth in the foregoing sentence provided that (i) no
consideration will be directly or indirectly received in connection with such
transfer, and (ii) any transferee of any such shares will deliver to the
representatives, prior to the consummation of such transfer, an agreement by
such transferee to be bound by all of the terms and conditions of such lock-up
agreement. Ryan, Beck may, in its sole discretion, and at any time without
notice, release all or any portion of the shares subject to such lock-up
agreements. After the 180 day period, all of the common stock subject to the
sale restriction will be eligible for sale in the public market pursuant to Rule
144 under the Securities Act, subject to the volume limitations and other
restrictions contained in Rule 144. 1,713,118 shares of common stock will not be
tradeable under Rule 144 until the applicable time period elapses from the time
full consideration is paid. See 'Certain Transactions.'
At the present time, there is no public market for the common stock of
Health Card and no predictions can be made as to the effect, if any, that sales
of common stock will have on the market price of the common stock prevailing
from time to time. Nevertheless, sales of significant numbers of common stock in
the public market, or the perception that such sales may occur, could adversely
affect the market price of the common stock and could impair Health Card's
future ability to raise capital through an offering of its equity securities.
See 'Risk Factors -- Shares eligible for future sale.'
In 1988, Health Card successfully completed an initial public offering of
an aggregate of 200,000 units with each unit consisting of 6.39 shares of common
stock and two-year redeemable common stock purchase warrants to purchase 3.20
shares of common stock at $1.17 per share, raising net proceeds of $830,270.
66
<PAGE>
UNDERWRITING
The underwriters named below, for whom Ryan, Beck & Co., Inc. and
Pennsylvania Merchant Group are acting as the representatives, have separately
agreed, subject to the terms and conditions of the underwriting agreement, to
purchase from Health Card and the selling stockholder, and Health Card and the
selling stockholder have agreed to sell to them, on a firm commitment basis, the
respective number of shares of common stock set forth opposite their names
below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- -------------------------------------------------------------------------- ----------------------------
<S> <C>
Ryan, Beck & Co., Inc.....................................................
Pennsylvania Merchant Group...............................................
Total................................................................
</TABLE>
The underwriters are committed to purchase all the shares of common stock
offered hereby, if any of such shares are purchased. The underwriting agreement
provides that the obligations of the underwriters are subject to the conditions
precedent specified in that agreement.
Health Card and the selling stockholder have been advised by the
representatives that the underwriters initially propose to offer the shares of
common stock (a) to the public at the offering price set forth on the cover page
of this prospectus and (b) to certain dealers at that price less concessions of
not in excess of $ per share. Such dealers may re-allow a concession not in
excess of $. per share to other dealers. After the commencement of the
offering, the public offering price, concession and reallowance may be changed.
The underwriters have been granted an option by Health Card, exercisable
within 45 days of the date of this prospectus or the date of the underwriting
agreement, as applicable, to purchase up to an additional 375,000 shares of
common stock from Health Card at the offering price, less underwriting discounts
and commissions, the non-accountable expense allowance and the financial
advisory fee. Such option may be exercised only for the purpose of covering
over-allotments, if any, incurred in the sale of the shares offered hereby. To
the extent such option is exercised, in whole or in part, each underwriter will
have a firm commitment, subject to certain conditions, to purchase the number of
the additional shares of common stock proportionate to its initial commitment.
If such option is exercised in full, the total price to the public, underwriting
discounts and commissions, and proceeds to Health Card will be $ ,
$ , and $ , respectively.
The representatives have advised Health Card that they do not anticipate
sales to discretionary accounts by the underwriters to exceed five percent of
the total number of shares of common stock offered hereby.
Health Card and the selling stockholder have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act and to contribute to payments that the underwriters may be
required to make in connection with this offering. Each of Health Card and the
selling stockholder has also agreed to pay the underwriters an expense allowance
on a non-accountable basis equal to one percent (1%), as well as a financial
advisory fee equal to one percent (1%), of the gross proceeds from the sale of
shares by Health Card and the selling stockholder, as applicable, none of which
has been paid to date.
Certain of Health Card's officers, directors and shareholders have agreed
not to, directly or indirectly, offer to sell, sell, grant any option for the
sale of, transfer, assign, hypothecate, pledge or otherwise encumber or dispose
of any beneficial interest in any securities of Health Card owned by them for a
period of 180 days after the effective date of this prospectus, without the
prior written consent of Ryan, Beck & Co., Inc. An appropriate legend shall be
marked on the face of the certificates representing all of such securities.
However, any gift or similar transfer to a family member or trust for the
benefit thereof of shares registered in such shareholder's name or beneficially
owned by him will be exempt from the restrictions set forth in the foregoing
sentence provided that (i) no consideration will be directly or indirectly
received in connection with such transfer, and (ii) any transferee of any such
shares will deliver to the representatives, prior to the consummation of such
transfer, an agreement by such transferee to be bound by all of the terms and
conditions of such lock-up agreement. See 'Shares Eligible for Future Sale.'
67
<PAGE>
THE REPRESENTATIVES' WARRANTS
In connection with the offering, Health Card has agreed to sell to the
representatives, for nominal consideration, the representatives' warrants. These
warrants entitle the representatives to purchase 250,000 shares of common stock
from Health Card. The representatives' warrants are initially exercisable at a
price per share equal to 120% of the offering price. The representatives'
warrants are exercisable for four years commencing one year after the date of
this prospectus and are restricted from sale, transfer, assignment or
hypothecation for a period of twelve months from the date of the
representatives' warrant agreement, except to officers of the representatives.
The representatives' warrants also provide for adjustment in the exercise price
and number of shares of common stock issuable upon the exercise thereof as a
result of certain subdivisions or combinations of the common stock of Health
Card. The representatives' warrants grant to the holders thereof certain rights
of registration for the securities issuable upon exercise of the
representatives' warrants. See 'Description of Capital Stock -- Registration
Rights.' The representatives will be required to deliver a prospectus in
connection with the sale of any shares underlying the representatives' warrants.
At the present time, there is no market for Health Card's shares of common
stock. Consequently, the offering price for the common stock will be determined
by negotiations between Health Card and the representatives and is not
necessarily related to Health Card's asset value, net worth or other established
criteria of value. The offering price may not be indicative of the prices that
will prevail in the public market. The factors to be considered in such
negotiations, in addition to prevailing market conditions, will include:
the history of and prospects for the industry in which Health Card
competes,
an assessment of Health Card's management,
the prospects of Health Card,
Health Card's capital structure, and
certain other factors deemed relevant.
In connection with the offering, certain underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the common stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase common stock for the purpose of stabilizing its market price. The
underwriters also may create a short position for the account of the
underwriters by selling more common stock in connection with the offering than
they are committed to purchase from Health Card, and in such case may purchase
common stock in the open market following completion of the offering to cover
all or a portion of such short position. The underwriters may also cover all or
a portion of such short position, up to 375,000 shares of common stock, by
exercising the over-allotment option. In addition, the representatives may
impose 'penalty bids' under contractual arrangements with the underwriters,
whereby they may reclaim from an underwriter (or dealer participating in the
offering) for the account of other underwriters, the selling concession with
respect to common stock that is distributed in the offering but subsequently
purchased for the account of the underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the shares of common stock at a level above that which might otherwise
prevail in the open market. None of the transactions described in this paragraph
are required, and, if they are undertaken, they may be discontinued at any time.
The foregoing is a summary of the principal terms of the underwriters
agreement and the warrant agreement and does not purport to be complete.
Reference is made to the copy of each such agreement which is filed as an
exhibit to the registration statement. See 'Available Information.'
68
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby and certain legal
matters in connection with the offering will be passed upon for Health Card by
Certilman Balin Adler & Hyman, LLP. Ruskin Moscou Evans & Faltischek, P.C. has
acted as special counsel to Health Card with respect to insurance, health,
licensure and certain other regulatory matters governed by New York State laws
and federal laws. Sonnenschein Nath & Rosenthal has acted as counsel for the
underwriters in connection with the offering.
EXPERTS
The financial statements and financial statement schedule of Health Card
included in this prospectus, and in the registration statement, have been
audited by BDO Seidman, LLP, independent public accountants, to the extent and
for the periods set forth in their reports appearing elsewhere herein and in the
registration statement, and are included in reliance upon such reports given
upon the authority of said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
Health Card has filed with the Commission a registration statement (of
which this prospectus is a part and which term shall encompass any amendments
thereto) on Form S-1 pursuant to the Securities Act with respect to the common
stock being offered. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedules thereto.
Certain portions of the registration statement, and the exhibits and schedules
thereto, are omitted as permitted by the Commission. Statements made in this
prospectus about the contents of any contract, agreement or other document
referred to are not necessarily complete; with respect to any such contract,
agreement or other document filed as an exhibit to the registration statement,
reference is made to the exhibit itself for a more complete description of the
matter involved. Each such statement shall be deemed qualified in its entirety
by reference to the registration statement exhibits filed as a part thereof.
This registration statement and all other information filed by Health Card
with the Commission may be inspected without charge at the principal reference
facilities maintained by the Commission at:
450 Fifth Street, N.W.
Washington, D.C. 20549
Citicorp Center
500 West Madison Street
Suite 1400
Chicago, Illinois 60661,
7 World Trade Center
13th Floor
New York, New York 10048.
Copies of all or any part thereof may be obtained upon payment of fees
prescribed by the Commission from the Public Reference Section of the Commission
at its principal office in Washington, D.C. set forth above. Such material may
also be accessed electronically by means of the Commission's home page on the
Internet at http://www.sec.gov.
The common stock is expected to be listed on the Nasdaq National Market
and, upon listing, copies of such reports, proxy statements and other
information concerning Health Card can also be inspected and copied at the
library of the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C.
20006.
69
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.................................................... F-2
Consolidated Financial Statements:
Balance Sheets as of June 30, 1997 and 1998, and unaudited as of March 31, 1999.................. F-3
Statements of Income for each of the years ended June 30, 1996, 1997 and 1998, and unaudited for
the nine months ended March 31, 1998 and 1999................................................... F-4
Statements of Stockholders' Equity (Deficit) for each of the years ended June 30, 1996, 1997 and
1998, and unaudited for the nine months ended March 31, 1999.................................... F-5
Statements of Cash Flows for each of the years ended June 30, 1996, 1997 and 1998, and unaudited
for the nine months ended March 31, 1998 and 1999............................................... F-6
Notes to Financial Statements......................................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
NATIONAL MEDICAL HEALTH
CARD SYSTEMS, INC. AND SUBSIDIARY
Port Washington, New York
We have audited the accompanying consolidated balance sheets of National
Medical Health Card Systems, Inc. and subsidiary as of June 30, 1997 and 1998,
and the related consolidated statements of income, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended June
30, 1998. These financial statements are the responsibility of the management of
National Medical Health Card Systems, Inc. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
Medical Health Card Systems, Inc. and subsidiary as of June 30, 1997 and 1998,
and the results of their operations and cash flows for each of the three years
in the period ended June 30, 1998 in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
Melville, New York
September 2, 1998, except for
Note 12 which is as of May 25, 1999
F-2
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE
SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-------------------------- MARCH 31,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current:
Cash and cash equivalents...................................... $ 1,782,597 $ 1,305,792 $ 2,037,150
Accounts receivable, less allowance for possible losses of
$200,000, $244,189, and $818,796............................. 3,312,329 6,079,079 10,142,378
Rebates receivable............................................. 1,487,667 4,064,868 4,419,496
Deferred income tax............................................ 120,000 141,000 382,000
Other current assets........................................... 69,376 98,514 202,675
----------- ----------- -----------
Total current assets...................................... 6,771,969 11,689,253 17,183,699
Property, equipment and software development costs, net............. 900,979 1,596,443 2,750,994
Due from affiliates................................................. 2,846,851 4,300,902 4,502,266
Due from stockholders............................................... 386,493 10,774 --
Other assets........................................................ 14,528 12,528 15,728
Deferred income tax................................................. 951,000 734,000 441,000
Deferred offering costs............................................. -- -- 407,024
----------- ----------- -----------
$11,871,820 $18,343,900 $25,300,711
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Accounts payable and accrued expenses.......................... $13,353,884 $19,730,110 $22,352,016
Current portion of long-term debt.............................. 256,221 7,137 4,691
Due to officer/stockholder..................................... -- 30,000 300,000
Due to affiliates.............................................. 560,599 451,669 245,630
Income taxes payable........................................... -- 59,881 607,083
Other current liabilities...................................... 37,360 68,780 212,911
----------- ----------- -----------
Total current liabilities................................. 14,208,064 20,347,577 23,722,331
Long-term debt, less current portion................................ 7,427 2,605 --
----------- ----------- -----------
Total liabilities......................................... 14,215,491 20,350,182 23,722,331
----------- ----------- -----------
Commitments and Contingencies (Note 7)
Stockholders' equity (deficit):
Preferred stock $.10 par value; 10,000,000 shares authorized,
none outstanding............................................. -- -- --
Common stock, $.001 par value, 25,000,000 shares authorized,
3,258,459, 4,971,577 and 5,312,496 shares issued and
outstanding.................................................. 3,259 4,972 5,313
Additional paid-in capital..................................... -- 901,128 2,900,787
Retained earnings (deficit).................................... (2,274,930) (1,458,482) 755
Notes receivable -- stockholders............................... (72,000) (1,453,900) (1,328,475)
----------- ----------- -----------
Total stockholders' equity (deficit)...................... (2,343,671) (2,006,282) 1,578,380
----------- ----------- -----------
$11,871,820 $18,343,900 $25,300,711
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH
YEARS ENDED JUNE 30, 31,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................................. $56,265,033 $71,288,411 $99,988,921 $70,978,094 $98,375,371
Cost of claims............................ 50,799,422 64,176,942 91,230,939 64,549,184 89,139,415
----------- ----------- ----------- ----------- -----------
Gross profit......................... 5,465,611 7,111,469 8,757,982 6,428,910 9,235,956
*Selling, general and administrative
expenses................................ 4,216,259 5,855,282 7,192,027 4,896,612 7,482,553
----------- ----------- ----------- ----------- -----------
Operating income.......................... 1,249,352 1,256,187 1,565,955 1,532,298 1,753,403
----------- ----------- ----------- ----------- -----------
Other income (expense):
Other income, net.................... 21,530 42,595 264,666 159,267 519,738
Public offering costs................ -- -- (445,173) (100,000) (82,904)
----------- ----------- ----------- ----------- -----------
21,530 42,595 (180,507) 59,267 436,834
----------- ----------- ----------- ----------- -----------
Income before income taxes................ 1,270,882 1,298,782 1,385,448 1,591,565 2,190,237
Provision for income taxes (benefit)...... (185,275) (189,984) 569,000 663,000 731,000
----------- ----------- ----------- ----------- -----------
Net income................................ $ 1,456,157 $ 1,488,766 $ 816,448 $ 928,565 $ 1,459,237
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Earnings per common share:
Basic................................ $ 0.47 $ 0.46 $ 0.16 $ 0.19 $ 0.28
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Diluted.............................. $ 0.35 $ 0.37 $ 0.16 $ 0.19 $ 0.28
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted average number of common shares
outstanding:
Basic................................ 3,093,085 3,258,459 4,966,885 4,965,326 5,169,411
Diluted.............................. 4,182,909 4,008,481 4,969,166 4,967,407 5,169,411
- ------------
*Includes amounts charged by affiliates
aggregating: $ 2,868,974 $ 4,511,144 $ 4,904,514 $ 3,672,165 $ 2,361,913
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NOTES PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED
RECEIVABLE ---------------- --------------------- PAID-IN EARNINGS
STOCKHOLDERS SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT)
------------ ------ ------ ---------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995.......... $ -- -- $-- 3,804,984 $3,805 $ 25,958 $(3,580,281)
Exercise stock options...... (72,000 ) -- -- 1,022,758 1,023 78,977 --
Capital distribution, net of
income taxes.............. -- -- -- -- -- (104,935) (346,051)
Purchase of treasury
stock..................... -- -- -- -- -- -- --
Treasury stock retired...... -- -- -- (1,569,283) (1,569 ) -- (1,124,209)
Net income.................. -- -- -- -- -- -- 1,456,157
--
------------ ------ ---------- ------- ---------- -----------
Balance, June 30, 1996.......... (72,000 ) -- -- 3,258,459 3,259 -- (3,594,384)
Capital distribution, net of
income taxes.............. -- -- -- -- -- -- (169,312)
Net income.................. -- -- -- -- -- -- 1,488,766
--
------------ ------ ---------- ------- ---------- -----------
Balance, June 30, 1997.......... (72,000 ) -- -- 3,258,459 3,259 -- (2,274,930)
Sale of stock............... (1,340,000 ) -- -- 1,713,118 1,713 1,338,287 --
Interest on notes
receivable................ (113,900 ) -- -- -- -- -- --
Capital distributions, net
of income taxes........... -- -- -- -- -- (437,159) --
Repayment of loan by
stockholder............... 72,000 -- -- -- -- -- --
Net income.................. -- -- -- -- -- -- 816,448
--
------------ ------ ---------- ------- ---------- -----------
Balance, June 30, 1998.......... (1,453,900 ) -- -- 4,971,577 4,972 901,128 (1,458,482)
Interest on notes receivable
(unaudited)............... (85,425 ) -- -- -- -- -- --
Interest paid on notes
receivable (unaudited).... 170,850 -- -- -- -- -- --
Principal paid on notes
receivable (unaudited).... 40,000 -- -- -- -- -- --
Sale of stock (unaudited)... -- -- -- 340,919 341 1,999,659 --
Net income (unaudited)...... -- -- -- -- -- -- 1,459,237
--
------------ ------ ---------- ------- ---------- -----------
Balance, March 31, 1999
(unaudited)................... $(1,328,475 ) -- $-- 5,312,496 $5,313 $2,900,787 $ 755
--
--
------------ ------ ---------- ------- ---------- -----------
------------ ------ ---------- ------- ---------- -----------
<CAPTION>
TREASURY STOCK
------------------------
SHARES AMOUNT
---------- ----------
<S> <C> <C>
Balance, June 30, 1995.......... 1,357,927 $ (976,728)
Exercise stock options...... -- --
Capital distribution, net of
income taxes.............. -- --
Purchase of treasury
stock..................... 211,356 (149,050)
Treasury stock retired...... (1,569,283) 1,125,778
Net income.................. -- --
---------- ----------
Balance, June 30, 1996.......... -- --
Capital distribution, net of
income taxes.............. -- --
Net income.................. -- --
---------- ----------
Balance, June 30, 1997.......... -- --
Sale of stock............... -- --
Interest on notes
receivable................ -- --
Capital distributions, net
of income taxes........... -- --
Repayment of loan by
stockholder............... -- --
Net income.................. -- --
---------- ----------
Balance, June 30, 1998.......... -- --
Interest on notes receivable
(unaudited)............... -- --
Interest paid on notes
receivable (unaudited).... -- --
Principal paid on notes
receivable (unaudited).... -- --
Sale of stock (unaudited)... -- --
Net income (unaudited)...... -- --
---------- ----------
Balance, March 31, 1999
(unaudited)................... -- $ --
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
JUNE 30, MARCH 31,
----------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Operating activities:
Net income................................ $ 1,456,157 $ 1,488,766 $ 816,448 $ 928,565 $ 1,459,237
Depreciation and amortization............. 184,708 240,744 368,644 278,113 545,087
Bad debt expense.......................... 214,046 115,000 70,000 63,201 24,607
Allowance for possible losses............. -- -- -- -- 550,000
Compensation expense accrued to
officer/stockholder..................... -- -- 30,000 -- 270,000
Deferred income taxes..................... (225,000) (200,000) 488,000 557,000 52,000
Gain on sale of investment................ (15,885) -- -- -- --
Interest accrued on stockholders' loans... -- -- (113,900) (85,425) (85,425)
Changes in assets and liabilities:
Accounts receivable....................... (651,957) (974,319) (2,836,750) (3,019,334) (4,637,906)
Other current assets...................... (22,732) (7,195) (27,138) (56,106) (107,361)
Rebates receivable........................ (1,132,195) 253,743 (2,577,201) (1,746,164) (354,628)
Due to/from affiliates.................... (2,983,896) 511,512 (1,562,981) (1,401,326) (407,403)
Accounts payable and accrued expenses..... 4,328,056 2,104,949 6,175,665 6,022,152 2,209,932
Income taxes payable...................... -- -- 59,881 91,000 547,202
Other liabilities......................... 38,900 (38,900) 31,420 (1,326) 144,131
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities...... 1,190,202 3,494,300 922,088 1,630,350 209,473
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures...................... (448,163) (444,646) (864,108) (650,754) (1,549,638)
Sale of investment........................ 25,114 -- -- -- --
Loans (to)/from stockholders.............. -- (32,093) (792,200) (743,981) 10,774
Repayment of loans by
officer/stockholder..................... 36,300 -- 1,167,919 1,000,000 --
Repayment of note by stockholder.......... -- -- 72,000 72,000 40,000
Interest received on notes from
stockholders............................ -- -- -- -- 170,850
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities.......... (386,749) (476,739) (416,389) (322,735) (1,328,014)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Sale of common stock...................... 8,000 -- -- -- 2,000,000
Purchase of treasury stock................ (149,050) -- -- -- --
Capital distribution...................... (625,986) (640,312) (728,598) (521,233) --
Repayment of debt......................... (55,909) (605,789) (253,906) (250,915) (5,051)
Deferred offering costs................... -- -- -- -- (145,050)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities................................... (822,945) (1,246,101) (982,504) (772,148) 1,849,899
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents.................................. (19,492) 1,771,460 (476,805) 535,467 731,358
Cash and cash equivalents, beginning of
period....................................... 30,629 11,137 1,782,597 1,782,597 1,305,792
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end of period....... $ 11,137 $ 1,782,597 $ 1,305,792 $ 2,318,064 $ 2,037,150
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE NINE
MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
National Medical Health Card Systems, Inc. provides comprehensive
prescription benefit management services to plan sponsors which include managed
care organizations, local governments, unions, corporations and third party
health care plan administrators through its network of licensed pharmacies
throughout the United States.
Pharmacies are paid for the cost of the drugs dispensed plus dispensing
fees which are set by contracts. The Company entered into two types of payment
arrangements; fee for service and capitation. Under the fee for service
arrangement, the Company is paid by the plans for their disbursements plus a set
transaction fee. Under the capitation arrangement, the Company receives its fee
based on the number of participants per month and pays for the cost of
prescriptions filled and thus shares the risk of operating profit or loss with
these plans.
BASIS OF CONSOLIDATION
In October 1998, the Company acquired National Medical Health Card IPA,
Inc., which is an independent practice association under the laws of New York.
This wholly owned subsidiary is a recently formed inactive company acquired from
a relative of the principal stockholder for no consideration. The Company
intends that the IPA will be the contracting party with respect to any contracts
with Health Maintenance Organizations or providers containing financial risk
sharing provisions. The IPA is subject to the regulatory authority of the
Department of Health and the laws, rules and regulations applicable to
independent practice associations in New York. Activities conducted through
March 31, 1999 included organization, planning and development of the IPA's
activities and securing regulatory approvals.
The consolidated financial statements include the Company and the above
wholly owned subsidiary. All material intercompany accounts and transactions
have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments and other
short-term investments with an initial maturity date of three months or less
from purchase date to be cash equivalents.
REVENUE RECOGNITION
Revenue under the fee for service arrangement from the sales of
prescription drugs by the Company's nationwide network of pharmacies are
recognized when the claims are adjudicated. At the point-of-sale, the pharmacy
claims are adjudicated using the Company's on-line processing system. The
Company invoices plan sponsors and includes as revenues the Company's
administrative service fees and the pharmacies' dispensing fees plus the
ingredient cost of pharmaceuticals dispensed by the Company's network of
pharmacies. Cost of claims include pharmacy claims for the costs of prescription
pharmaceuticals and other direct costs associated with the dispensing of
prescriptions.
Revenues under the capitation arrangements are recognized monthly based on
the number of participants and costs under the capitation agreements are
recognized as incurred.
As part of the overall pricing arrangements with its sponsors, the Company
records as revenue a portion of the net rebate fees due from drug manufacturers.
The Company records the gross rebate receivable and the appropriate payable to
the sponsors based on estimates which are subject to final settlement. The
rebates are processed by an independent rebate administrator. For
F-7
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE NINE
MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
the years ended June 30, 1996, 1997, and 1998, net fees recorded by the Company
were $1,956,161, $883,243 and $1,460,537, respectively. For the nine months
ended March 31, 1998 and 1999, net fees were $1,224,492 and $1,620,758,
respectively.
PROPERTY, EQUIPMENT AND SOFTWARE
Office equipment and furniture and fixtures are being depreciated over five
years using accelerated recovery methods which approximate the
double-declining-balance method of depreciation.
Leasehold improvements are amortized on a straight line basis over the term
of the lease.
Expenditures relating to the development of software to be used in the
claims adjudication process are charged to expense until technological
feasibility is established upon completion of a
working model of the software. Thereafter, the remaining software development
costs up to the date such software is completed are capitalized and included on
the balance sheet as software development costs. During the years ended June 30,
1996, 1997 and 1998 $386,161, $373,884, and $422,316 in software development
costs were capitalized, respectively and $320,610 and $1,099,600 during the nine
months ended March 31, 1998 and 1999, respectively.
Amortization of capitalized amounts commences on the date the software is
placed into use and is computed using the straight-line method over the
estimated economic life of the software, primarily five years. Amortization
expense was $128,808, $182,949, and $213,340 for the years ended June 30, 1996,
1997, and 1998, respectively and $192,274 and $315,366 for the nine months ended
March 31, 1998 and 1999, respectively.
A significant portion of the Company's computer software was developed by a
company affiliated by common ownership (See Note 3(b)). The cost includes
development of software programs and enhancements which may either expand or
modify existing programs. To the extent that the Company has capitalized certain
amounts for software development and those amounts exceeded the costs incurred
by the affiliate, this excess has been charged to stockholders' equity (deficit)
as a capital distribution.
DEFERRED OFFERING COSTS
Deferred offering costs in connection with the Company's proposed public
offering are capitalized and will be charged to equity upon consummation of the
public offering or charged to operations should the public offering prove to be
unsuccessful.
LONG LIVED ASSETS
Long lived assets are evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through the estimated undiscounted future cash flows from the use of
these assets. When any such impairment exists, the related assets will be
written down to fair value. No such impairment existed through March 31, 1999.
TAXES ON INCOME
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under this standard, deferred taxes on income are
provided for those items for which the reporting period and methods for income
tax purposes differ from those used for financial statement purposes using the
asset and liability method. Deferred income taxes are recognized for the tax
consequences of 'temporary differences' by applying enacted statutory rates
F-8
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE NINE
MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
COMPUTATION OF EARNINGS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Standard No. 128
('SFAS No. 128'), Earnings per Share. SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Basic earnings per share has been computed using the weighted average
number of shares of common stock outstanding. Diluted earnings per share has
been computed using the basic weighted average shares of common stock issued
plus outstanding stock options, in accordance with Staff Accounting Bulletin No.
98.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company has adopted the intrinsic value method of accounting for
employee stock options and will disclose the pro forma impact on net income and
earnings per share.
CONCENTRATION OF CREDIT RISK
The Company may be subject to a concentration of credit risk with respect
to its trade receivables. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
allowances to cover potential or anticipated losses for uncollectible accounts.
(See Note 5.)
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash balances deposited in financial
institutions which exceed FDIC insurance limits. Amounts on deposit with
financial institutions which exceeded the FDIC insurance limits at June 30,
1997, 1998 and March 31, 1999 were $2,156,566, $2,954,241 and $2,631,516,
respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments, including cash, accounts
receivable, accounts payable and accrued liabilities, approximate fair value
because of the current nature of these instruments. The fair value of the loans
due from stockholders and affiliates is difficult to estimate due to their
related party nature. Certain amounts due to stockholders do not bear interest
and have no set repayment terms. Loans due from affiliates are due on demand
under a note receivable agreement personally guaranteed by the majority
stockholder and bear market interest rates; therefore, the Company believes that
the carrying amount approximates fair value.
INTERIM FINANCIAL INFORMATION
The consolidated financial statements and related notes thereto as of
March 31, 1999 and the nine months ended March 31, 1998 and 1999 are unaudited
and have been prepared on a basis consistent with the Company's annual
consolidated financial statements. In the opinion of management, such unaudited
consolidated financial statements include all adjustments (consisting of normal
recurring adjustments) that the Company considers necessary for a fair
presentation of such
F-9
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE NINE
MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
data. Results for the nine months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the entire year ended June
30, 1999.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards.
Statement of Financial Accounting Standards No. 130 ('SFAS No. 130'),
Reporting Comprehensive Income, establishes standards for reporting and display
of comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
Statement of Financial Accounting Standards No. 131 ('SFAS No. 131'),
Disclosures about Segments of an Enterprise and Related Information, which
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas and major customers. SFAS No.
131 defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.
Both of these new standards are effective for financial statements for
years beginning after December 15, 1997 and require comparative information for
earlier years to be restated. The Company's results of operations, financial
position, and disclosures will be unaffected by implementation of these new
standards.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 ('SFAS No. 132'), Employers'
Disclosures about Pensions and Other Postretirement Benefits, which standardizes
the disclosure requirements for pensions and other postretirement benefits. The
adoption of SFAS No. 132 in 1998 is not expected to materially impact the
Company's current disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Investments
and Hedging Activities Income ('SFAS 133'), which requires the recording of all
derivative instruments as assets or liabilities measured at fair value. Among
other disclosures, SFAS 133 requires that all derivatives be recognized and
measured at fair value regardless of the purpose or intent of holding the
derivative.
SFAS 133 is effective for financial statements for years beginning after
June 15, 1999. The Company has no derivative investments and does not
participate in hedging activities; therefore, its financial position, results of
operations and disclosures will be unaffected by the adoption of this standard.
F-10
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE NINE
MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
2. PROPERTY, EQUIPMENT AND SOFTWARE DEVELOPMENT COSTS
Property, equipment and software development costs consist of the
following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------ MARCH 31,
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Furniture and fixtures........................................ $ 284,846 $ 386,480 $ 616,433
Software...................................................... 1,183,130 2,145,606 3,402,821
Leasehold improvements........................................ -- -- 212,470
---------- ---------- ----------
1,467,976 2,532,086 4,231,724
Accumulated depreciation/amortization......................... 566,997 935,643 1,480,730
---------- ---------- ----------
$ 900,979 $1,596,443 $2,750,994
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Depreciation and amortization expense for the years ended June 30, 1996,
1997 and 1998 was $184,708, $240,744 and $368,644, respectively, and $278,113
and $545,087 for the nine months ended March 31, 1998 and 1999, respectively.
3. RELATED PARTY TRANSACTIONS
(a) DISTRIBUTIONS -- CAPITAL
The Company leases office space in Port Washington, New York from a company
affiliated by common ownership under an agreement expiring March 30, 2004 (Note
7(a)). Leasehold improvements made to this space by a company affiliated by
common ownership during the nine months ended March 31, 1999, were approximately
$58,000. The Company also leased certain space from companies affiliated by
common ownership during fiscal 1997 and fiscal 1998. These additional leases
were terminated in July 1997 and April 1998, respectively.
In September 1998 the Company leased space for a pharmacy in Port
Washington, New York, from a Company affiliated by common ownership under a
seven year agreement expiring August 31, 2005 (Note 7(a)).
Rent expense including utilities for the years ended June 30, 1996, 1997
and 1998 under operating leases amounted to $153,330, $264,727 and $304,193,
respectively, and $244,095 and $206,342 for the nine months ended March 31, 1998
and 1999, respectively.
Due to affiliates represent trade payables for developed software, other
software services, operating leases and maintenance costs. During 1998 an
affiliate charged the Company approximately $208,000, as a fee to hire
programmers, which were formerly employed by the affiliated company. The Company
assumed a liability of $86,000 relating to these employees.
In accordance with SAB 48, the Company has recorded amounts in excess of
affiliates' cost for capitalized software development and acquisition of
employees as a capital distribution, net of tax as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Software development............................................... $625,986 $640,312 $520,122
Acquisition of employees........................................... -- -- 208,476
Tax effect*........................................................ (175,000) (471,000) (291,439)
-------- -------- --------
Net charge to stockholders' equity (deficit)....................... $450,986 $169,312 $437,159
-------- -------- --------
-------- -------- --------
</TABLE>
- ------------
* Approximately $215,000 of the tax benefit for 1997 was offset by a decrease
in the deferred income tax valuation reserve. (Note 6)
F-11
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE NINE
MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(b) OTHER
Due from affiliates represents loans to companies affiliated by common
ownership or companies controlled by the majority stockholder. Effective June 1,
1998, the majority of the loan balances were consolidated into a promissory note
in the amount of $4,254,785 due from one affiliated company controlled by the
majority stockholder. Such amount bears interest at 8.5% per annum, payable
quarterly, and has no set repayment date. Due to the uncertainty of the
repayment date, this note has been classified as a non-current asset. The note
is collateralized by 1,022,758 shares of $.001 par value common stock of the
Company registered in the name of the majority stockholder and the personal
guarantee of the majority stockholder. For the year ended June 30, 1998, the
amount of interest income accrued was $30,117. For the nine months ended March
31, 1999, interest income accrued was $273,436. Interest paid by the affiliate
in December 1998 aggregated $183,000. Prior to June 1, 1998, the outstanding
balances did not bear any interest. On January 2, 1999, one of the affiliates
executed a non-interest bearing note payable to the Company in the amount of
$90,100 to evidence advances to the affiliate in the same amount.
Prior to June 1, 1998, the Company leased all of its employees from an
affiliated company at an agreed upon price equal to the affiliate's cost plus a
7% administrative fee. Effective June 1, 1998, the Company hired these employees
(which included programmers as discussed above) and paid its own payroll and
related costs. For the years ended June 30, 1996, 1997 and 1998 the
administrative fee charged by the affiliate was approximately $97,000, $131,000
and $157,000, respectively and $123,000 and $-0- for the nine months ended
March 31, 1998 and 1999, respectively.
Certain costs paid to the affiliates were capitalized as software
development costs. For the years ended June 30, 1996, 1997 and 1998, the amounts
charged by affiliates and capitalized were $386,161, $373,884 and $422,315,
respectively. For the nine months ended March 31, 1998 and 1999, the amounts
charged by affiliates and capitalized were $320,610 and $487,000, respectively.
The Company purchased furniture and fixtures from an affiliate during the
nine months ended March 31, 1999 for approximately $127,000. The price included
a 20% purchasing and handling fee.
For the periods presented certain general, administrative and other
expenses reflected in the financial statements include allocations of certain
corporate expenses from affiliates which take into consideration personnel,
estimates of the time spent to provide services or other appropriate bases.
These allocations include services and expenses for general management,
information systems maintenance, financial consulting, employee benefits
administration, legal communications and other miscellaneous services.
Management believes the foregoing allocations were made on a reasonable
basis. Although these allocations do not necessarily represent the costs which
would have been or may be incurred by the Company on the stand-alone basis,
management believes that any variance in costs would not be material.
F-12
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE NINE
MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
General and administrative expenses related to transactions with affiliates
included in the statement of income are:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
-------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Software maintenance and related
services(i).................... $ 551,083 $1,443,470 $1,124,626 $ 747,958 $ 536,871
Management and consulting
fees(ii)....................... 538,058 600,654 857,540 652,876 1,449,141
Administrative and bookkeeping
services(iii).................. 1,626,503 2,202,293 2,618,155 2,027,236 184,073
Rent and utilities............... 153,330 264,727 304,193 244,095 191,828
---------- ---------- ---------- ---------- ----------
$2,868,974 $4,511,144 $4,904,514 $3,672,165 $2,361,913
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
- ------------
(i) A company affiliated by common ownership provides a significant portion of
the Company's software maintenance (Note 1), certain other software
services, computer hardware under operating leases and maintains certain
computer hardware.
(ii) The Company incurred fees to certain other affiliated companies for
various management and consulting services. Pursuant to an agreement with
one of these affiliated companies, dated April 14, 1994, minimum fees are
$25,000 per year payable in monthly installments. Actual monthly fees
through March 31, 1999 were approximately $58,000.
(iii) A company affiliated by common ownership provides the Company with
various administrative services. The arrangement includes the leasing of
all the Company's employees through June 1, 1998 and the provision of
bookkeeping services and personnel related consulting services.
------------------------
Due from stockholders primarily represent loans to the majority
stockholder. These loans do not bear interest and have no set repayment dates.
On June 1, 1998, the Company agreed to pay the majority stockholder annual
compensation of $360,000 in the form of a bonus for continued services. The
Company accrued $30,000 for the year ended June 30, 1998 and $270,000 for the
nine months ended March 31, 1999 as a result of this agreement. At March 31,
1999 net amounts due to this officer/stockholder aggregated $300,000.
During the nine months ended March 31, 1999, the Company paid the annual
premium of $60,000 on a life insurance policy where the majority stockholder is
the owner and beneficiary.
On October 23, 1998 the Company sold 340,919 shares of common stock to the
majority stockholder at $5.87 per share. In connection with this transaction the
majority stockholder obtained a loan from a bank for $2,000,000 to pay for the
shares. The Company unconditionally guaranteed this loan which was due on
January 28, 1999, bore interest at an annual rate of 7.72% payable monthly, and
was secured by all assets of the Company. As the guarantor, the Company had to
comply with certain operational covenants as defined in the guarantee agreement
for the duration of the loan. On January 28, 1999, the loan to the bank was paid
in full by the majority stockholder and the unconditional guarantee along with
the security on the assets was terminated.
F-13
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE NINE
MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------- MARCH 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Claims payable............................................ $10,676,936 $13,571,796 $14,887,476
Rebates payable to sponsors............................... 1,891,174 4,470,404 5,377,968
Other payables............................................ 785,774 1,687,910 2,086,572
----------- ----------- -----------
$13,353,884 $19,730,110 $22,352,016
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
5. MAJOR CUSTOMERS AND PHARMACIES
For the years ended June 30, 1996, 1997 and 1998, approximately 63%, 63%
and 57% of the revenues were from two plan sponsors administering multiple
plans. Amounts due from these two customers at June 30, 1997 and 1998
approximated $925,000 and $2,751,000, respectively.
For the nine months ended March 31, 1998 and 1999, approximately 60% and
65%, respectively, of the revenues were from two and three plan sponsors,
respectively. Amounts due from the three customers at March 31, 1999
approximated $4,541,000. During the nine months ended March 31, 1999 the Company
recorded approximately $500,000 of additional revenue when the Company received
verbal acceptance of the calculations under the provisions of one of its
arrangements to adjust for the increased cost of drugs primarily related to the
prior year.
For the years ended June 30, 1996, 1997 and 1998, approximately 22%, 30%
and 25% of the cost of claims were from two pharmacy chains. Amounts payable to
these two pharmacy chains at June 30, 1997 and 1998 were approximately
$1,714,000 and $2,679,000, respectively.
For the nine months ended March 31, 1998 and 1999, approximately 25% and
27% of the cost of claims were from two pharmacy chains. Amounts payable to
these two chains at March 31, 1999 were approximately $3,727,000.
The Company evaluated its accounts receivable as of March 31, 1999 taking
into consideration the expiration of certain contracts during the period and the
status of the negotiations to renew those contracts. As consideration for the
renewal of these contracts, the Company determined that it would be necessary to
negotiate the receivable balance due from these contracts and the Company most
likely would not be able to collect the full amount. As a result the Company
estimated and recorded a reserve in the amount of $550,000 during the nine
months ended March 31, 1999.
F-14
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE NINE
MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
6. TAXES ON INCOME
Provisions (benefit) for federal, and state income taxes consist of the
following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
---------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Current:
Federal............................. $ 26,700 $ 6,038 $ 60,000 $ 91,000 $524,000
State............................... 13,025 3,978 21,000 15,000 155,000
--------- --------- -------- -------- --------
39,725 10,016 81,000 106,000 679,000
--------- --------- -------- -------- --------
Deferred:
Federal............................. (174,400) (154,900) 363,000 462,000 39,000
State............................... (50,600) (45,100) 125,000 95,000 13,000
--------- --------- -------- -------- --------
(225,000) (200,000) 488,000 557,000 52,000
--------- --------- -------- -------- --------
Total.......................... $(185,275) $(189,984) $569,000 $663,000 $731,000
--------- --------- -------- -------- --------
--------- --------- -------- -------- --------
</TABLE>
In 1996, 1997 and 1998, $175,000, $471,000 and $291,439, respectively, of
income tax benefits reduced the capital distribution in those years (Note 3(a)).
Differences between the federal statutory rate and the Company's effective
tax rate are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED JUNE 30, MARCH 31,
--------------------------- --------------
1996 1997 1998 1998 1999
----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Statutory rate....................................... 34.0% 34.0% 34.0% 34.0% 34.0%
State taxes -- net of federal taxes.................. .7 -- 7.1 7.7 5.2
Decrease in deferred income tax valuation reserve
(see Note 3(a)).................................... (49.3) (48.6) -- -- --
Utilization of net operating loss carryforward....... -- -- -- -- (8.1)
Permanent differences................................ -- -- -- -- 2.3
----- ----- ----- ---- ----
(14.6%) (14.6%) 41.1% 41.7% 33.4%
----- ----- ----- ---- ----
----- ----- ----- ---- ----
</TABLE>
Deferred income tax assets (current and non-current) resulting from
temporary differences are as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1997 1998
---------- --------
<S> <C> <C>
Accounts receivable allowances...................................... $ 120,000 $100,000
Vacation expense accrual............................................ -- 41,000
Property and equipment.............................................. 951,000 734,000
---------- --------
$1,071,000 $875,000
---------- --------
---------- --------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
(a) On December 15, 1998 the Company leased an apartment in Port
Washington, New York for use by two members of its management under an operating
lease which expires on December 14, 1999. The annual rent is $20,400. Utilities
and maintainance are payable by the Company as additional rent. Future minimum
rent payments under the noncancellable operating leases with related (Note 3)
and other parties are as follows:
F-15
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE NINE
MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
- -----------
<S> <C>
1999......................................................................... $ 286,000
2000......................................................................... 405,000
2001......................................................................... 415,000
2002......................................................................... 436,000
2003......................................................................... 458,000
Thereafter................................................................... 390,000
----------
$2,390,000
----------
----------
</TABLE>
(b) In February 1998, the Company entered into an agreement for computer
software products and professional services with an unrelated company. The
agreement requires the Company to pay an initial license fee of $400,000, of
which $100,000 was paid upon signing and $25,000 was payable monthly through
February 1999. The initial license fee of $400,000 has been capitalized and is
being amortized over three years. In addition, if certain milestones were
reached based on the number of processed claims, as defined, the license fee
increases incrementally, up to an additional $500,000 over the term of the
agreement. In February 1999 the Company met certain milestones, resulting in an
additional license fee of $150,000, which was capitalized and is being amortized
over three years. The agreement also provides for the annual payment of 18% of
the license fee, as defined, as a service maintenance fee which is expensed as
incurred.
(c) On February 9, 1999, the Company was informed by counsel that an action
was brought against it by the West Contra Costa Unified School District and an
individual plaintiff in the State of California. The case was subsequently
removed to Federal court. The complaint alleges, among other things, that the
parties entered into a contract in November 1996 for services to be provided by
the Company and, subsequently, the Company unilaterally terminated the contract
on December 16, 1996. The complaint further alleges that this termination was in
violation of the terms of the contract and one or more statutory provisions;
that the termination resulted in the school district incurring approximately
$150,000 in additional costs due to its having to enter into a fee for service
arrangement with the Company in order to continue providing prescription
benefits to its plan members; and that, due to the wrongful termination of the
contract, the school district was forced to secure a replacement for the
benefits and services that were to have been provided under the contract with
the Company. In connection with this last circumstance, the complaint alleges
that the school district incurred approximately $400,000 in additional expenses.
The complaint also seeks treble damages. If treble damages were allowable in
this case and a judgment were to be entered against the Company, the Company
would be liable for damages in excess of $1,500,000. The Company denies the
allegations and intends to vigorously defend this action. In the opinion of
management, the outcome of this litigation will not have a material adverse
effect on the Company's financial position or its results of operations.
(d) The Company has an employment arrangement with its senior executives
which entitles them to participate in a bonus pool equal to 15% of any increase
in pretax profits over the prior year. Pursuant to her employment arrangement,
the Company's Executive Vice President of Sales and Marketing is entitled to
commissions of .5% of gross revenues received from direct accounts sold and .25%
of gross revenues received from accounts sold by sales people under her
management.
8. STOCK OPTIONS
(a) The Company had an incentive stock option plan, under which it may have
granted up to 2,301,205 shares of common stock. The Company also had a
non-qualified stock option plan under which it may have granted up to 383,534
shares. Both plans have expired.
F-16
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE NINE
MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
On February 14, 1995, the Company granted the principal stockholder an
option to purchase 1,022,758 shares of common stock at $.08 per share and a
director of the Company 383,534 shares of common stock at $.08 per share which
would expire in ten years.
On November 1, 1995, the principal stockholder exercised his option to
acquire 1,022,758 shares of common stock for cash and a promissory note for
$72,000 which was paid to the Company in October 1997. Additionally, on
November 1, 1995, the Company issued to the principal stockholder a new option
for the purchase of an additional 1,022,758 shares of common stock at $.08 per
share, which would expire in five years.
(b) On July 1, 1997 the Company sold 1,713,118 shares of common stock at
$.78 per share to the principal stockholder, a director, and an individual in
exchange for notes receivable; plus the principal stockholder and the director
agreed to cancel options to purchase 1,406,292 shares of common stock at $.08
per share.
(c) On July 1, 1997 the principal stockholder granted options to an
employee of the Company to purchase 255,689 shares of the Company's common stock
at $5.87 per share from his personal holdings. In accordance with Statement of
Financial Accounting Standards No. 123 ('SFAS No. 123') Accounting for
Stock-Based Compensation, the options were accounted for as granted to the
employee directly by the Company. These options vest and become exercisable as
follows:
(i) 20% on July 1, 1999
(ii) 20% on July 1, 2000
(iii) 20% on July 1, 2001
(iv) 20% on July 1, 2002
(v) 20% on July 1, 2003
These options terminate on July 1, 2005.
On December 7, 1998 the principal stockholder granted options to an
employee of the Company to purchase 63,922 shares of the Company's common stock
at $5.87 per share from his personal holdings. In accordance with SFAS No. 123,
the options were accounted for as granted to the employee directly by the
Company. These options vest and become exercisable as follows:
(i) 1/3 on December 7, 1999
(ii) 1/3 on December 7, 2000
(iii) 1/3 on December 7, 2001
These options terminate on December 7, 2002.
On December 7, 1998 the principal stockholder granted options to an
employee of the Company to purchase 25,569 shares of the Company's common stock
at $5.87 per share from his personal holdings. In accordance with SFAS No. 123,
the options were accounted for as granted to the employee directly by the
Company. These options vest and become exercisable as follows:
(i) 1/3 on December 7, 1999
(ii) 1/3 on December 7, 2000
(iii) 1/3 on December 7, 2001
These options terminate on December 7, 2003.
There was no charge to operations for the issuance of these options.
(d) SFAS No. 123 requires the Company to provide pro forma information
regarding net income and earnings per share as if compensation cost for the
Company's stock option grants had been determined in accordance with the fair
value method prescribed in SFAS No. 123.
The Company estimates the fair value of each stock option at the grant date
by using the Black-Scholes option-pricing model with the following weighted
average assumptions used for
F-17
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE NINE
MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
grants in 1997 and 1998, respectively: no dividends paid for all years; 0.1%
expected volatility for all years; risk-free interest rates of 6.3% and 4.5%;
and expected lives of 7.0 and 4.3 years, respectively.
Based on the above calculation the weighted fair value of options granted
in 1997 and 1998 was $2.03 and $.87, respectively.
Under the provisions of SFAS No. 123, the Company's net income and earnings
per share would have been decreased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------------ ----------------------
1996 1997 1998 1998 1999
---------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net income:
As reported............................... $1,456,157 $1,488,766 $816,448 $928,565 $1,459,237
Proforma.................................. 1,456,157 1,488,766 764,466 889,579 1,411,586
Basic earnings per share:
As reported............................... $.47 $.46 $.16 $.19 $.28
Proforma.................................. .47 .46 .15 .18 .27
Diluted earnings per share:
As reported............................... $.35 $.37 $.16 $.19 $.28
Proforma.................................. .35 .37 .15 .18 .27
</TABLE>
(e) The following table summarizes information about stock options as of
March 31, 1999:
<TABLE>
<CAPTION>
SHARES OF WEIGHTED AVERAGE
COMMON STOCK EXERCISE PRICE
------------ ----------------
<S> <C> <C>
Shares under option at June 30, 1995.......................................... 2,940,428 $ .08
Granted.................................................................. 1,022,758 .08
Cancelled................................................................ (1,534,136) .08
Exercised................................................................ (1,022,758) .08
------------ ------
Shares under option at June 30, 1996.......................................... 1,406,292 .08
Granted, cancelled, exercised............................................ -- --
------------ ------
Shares under option at June 30, 1997.......................................... 1,406,292 .08
Granted.................................................................. 255,689 5.87
Cancelled................................................................ (1,406,292) .08
------------ ------
Shares under option at June 30, 1998.......................................... 255,689 5.87
Granted.................................................................. 89,491 5.87
------------ ------
Shares under option at March 31, 1999......................................... 345,180 $ 5.87
------------ ------
------------ ------
</TABLE>
None of the above outstanding options were exercisable at March 31, 1999
(Note 11).
F-18
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE NINE
MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
9. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
-------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Cash paid:
Interest...................................... $ 2,589 $ 2,254 $ 4,136 $ 1,645 $ --
Income taxes.................................. 825 48,916 20,901 15,416 147,798
Non cash investing and financing activities:
Conversion of claims payable into a
non-interest bearing note................... 900,000 -- -- -- --
Accrual for the purchase of computer
software.................................... -- -- -- 300,000 150,000
Issuance of common stock for notes from
stockholders................................ 72,000 -- 1,340,000(i) 1,340,000(i) --
</TABLE>
- ------------
(i) These non-recourse (except with regard to interest) promissory notes dated
July 1, 1997 are due and payable in five years and bear interest at 8 1/4%
per annum payable quarterly. The 1,713,118 shares issued in connection with
these notes included 1,278,447 shares to the majority stockholder. The notes
are collateralized by the shares of stock purchased.
10. EMPLOYEE BENEFIT PLAN
Effective June 1, 1998, the Company adopted a 401(k) plan covering
substantially all employees. Participants may elect to contribute to the plan a
minimum of 1% to a maximum of 18% of their annual compensation, not to exceed a
dollar limit set by law. Annually, the Company will determine a discretionary
matching contribution equal to a percentage of each participant's contribution.
Contributions made by the Company for the year ended June 30, 1998 and the nine
months ended March 31, 1999 were approximately $4,000 and $6,000, respectively.
11. EARNINGS PER SHARE
A reconciliation of shares used in calculating basic and diluted earnings
per share follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
----------------------------------- ----------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Basic................................ 3,093,085 3,258,459 4,966,885 4,965,326 5,169,411
Effect of assumed conversion of
employee stock options............. 1,089,824 750,022 2,281 2,081 --
--------- --------- --------- --------- ---------
Diluted.............................. 4,182,909 4,008,481 4,969,166 4,967,407 5,169,411
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Outstanding options to purchase shares of common stock were not included in
the computation of diluted earnings per share because upon exercise, the common
stock would be issued by the majority stockholder in accordance with the option
agreements. (See Note 8.) These options were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
----------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of options................................ -- -- 255,689 255,689 345,180
Weighted-average exercise price.................. -- -- $5.87 $5.87 $5.87
</TABLE>
F-19
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE NINE
MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
The shares held by the majority stockholder subject to employee options
have been included in the computation of basic and diluted earnings per share.
12. SUBSEQUENT EVENTS
(a) In connection with a proposed public offering ('the Offering'), the
Company signed a letter of intent with an underwriter to complete an offering of
its common stock. The Company anticipates generating net proceeds of
approximately $15.4 million upon the sale of its common stock. If the Offering
is consummated, the net proceeds will be used in whole or in part for
acquisitions, enhancement of the Company's information systems, expansion of the
Company's sales and marketing efforts and working capital.
(b) In connection with the Offering the Company on May 25, 1999, filed an
amendment to its Certificate of Incorporation to adjust its authorized preferred
stock to 10,000,000 shares, to adjust its authorized common stock to 25,000,000
shares and effect a .1278447 for-one reverse stock split. All applicable share
and per share amounts in the accompanying financial statements have been
retroactively adjusted to reflect the stock split.
(c) On May 10, 1999 the Company's Board of Directors adopted the 1999 stock
option plan which provides for the grant of options intended to qualify as
'incentive stock options' under Section 422 of the Internal Revenue Code and
options that are not intended to so qualify -- 'nonstatutory stock options', as
well as stock appreciation rights. The total number of shares of common stock
reserved for issuance under the plan is 1,650,000 plus an indeterminate number
of shares of common stock issuable upon the exercise of 'reload options'. The
1999 Stock Option Plan was approved by stockholders on May 10, 1999.
The plan is administered by the Company's Board of Directors and options
may be granted to all full-time employees (including officers) and directors of
the Company or its subsidiary. No options have been granted under this plan.
(d) The Company entered into an employment agreement with the majority
stockholder effective July 1, 1999. Pursuant to this agreement, the majority
stockholder has agreed to serve as Chairman of the Board of Directors and Chief
Executive Officer at an annual salary of $200,000, subject to adjustment by the
Board of Directors. The agreement commences on July 1, 1999 and has a term of
two years, unless terminated by the Company for cause, or in the event the
stockholder becomes permanently disabled. The agreement provides for certain
fringe benefits payable to or on behalf of the majority stockholder, such as the
use of an automobile. In addition, the agreement provides for certain
termination benefits payable to the majority stockholder, which depending upon
the reason for termination, can be equal to up to two years salary.
F-20
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
2,500,000 SHARES
[LOGO]
COMMON STOCK
------------------------------------------------
PROSPECTUS
------------------------------------------------
[LOGO]
[LOGO]
, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses (other than
underwriting discounts and commissions and the non-accountable expense allowance
and financial advisory fee) expected to be incurred in connection with the
offering described in this Registration Statement:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............................. $ 8,827
NASD filing fee................................................................. 3,675
The Nasdaq National Market listing fee.......................................... 69,375
Blue Sky fees and expenses...................................................... 20,000
Legal fees and expenses......................................................... 250,000
Accounting fees and expenses.................................................... 450,000
Printing and engraving expenses................................................. 125,000
Transfer Agent and Registrar's fees and expenses................................ 25,000
Miscellaneous expenses.......................................................... 48,123
----------
Total...................................................................... $1,000,000
----------
----------
</TABLE>
All amounts except the Securities and Exchange Commission Registration Fee, the
NASD Filing Fee and the Nasdaq National Market Listing Fee are estimated. All
expenses will be borne by the Company.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the laws of the State of New York, the officers and directors of the
Registrant are entitled to indemnification by the Registrant, under certain
circumstances, pursuant to Sections 721-726 of the New York Business Corporation
Law which authorizes the Registrant, generally, to indemnify officers and
directors against both expenses and liabilities in connection with any
proceeding in which any such officer or director is made or threatened to be
made, a party, other than in a proceeding by or in the right of the Registrant
to procure a judgment in its favor, if (i) such officer or director acted in
good faith and for a purpose he reasonably believed to be in the best interests
of the Registrant; and (ii) with respect to any criminal proceeding, such
officer or director also had no reasonable cause to believe his conduct was
unlawful. In addition, such statute authorizes the Registrant, generally subject
to certain limitations, to indemnify officers and directors against amounts paid
in settlement and their expenses in connection with any proceeding by or in the
right of the Registrant to procure a judgment in its favor which involved the
officer or director, if such officer or director acted in good faith for a
purpose which he reasonably believed to be in the best interests of the
Registrant.
The Registrant is required to indemnify an officer or director, as set
forth above, if such officer or director has been successful on the merits or
otherwise in the defense of any matter referred to herein. Otherwise,
indemnification of an officer or director, unless ordered by a court, may be
made by the Registrant only as authorized in a specific case upon a
determination that indemnification is proper in the circumstances because the
officer or director met the applicable standard of conduct or because
indemnification is permitted pursuant to Section 721 of the Business Corporation
Law. Such determination must be made generally (a) by the Board of Directors of
the Registrant, acting by a quorum consisting of directors who were not parties
to the proceeding; or (b) if a quorum is not obtainable or, even if obtainable,
a quorum of disinterested directors so directs (i) by the Board of Directors
upon the written opinion of independent legal counsel that indemnification is
proper under the circumstances, or (ii) by the shareholders.
The Registrant's Certificate of Incorporation and By-Laws, as amended,
provide that the Registrant shall, to the fullest extent permitted by law,
indemnify all its officers and directors.
The Registrant's Certificate of Incorporation contains the provisions of
Section 402(b) of the Business Corporation Law of the State of New York relating
to the elimination of directors' liability for damages for breach of duty in
such capacity.
II-1
<PAGE>
The Company expects to maintain directors' and officers' liability
insurance policies covering certain liabilities of persons serving as officers
and directors and providing reimbursement to the Company for its indemnification
of such persons.
Pursuant to the Underwriting Agreement to be entered into among the Company
and the underwriters, officers and directors of the Company are indemnified for
certain liabilities, including liabilities incurred under the Securities Act of
1933, as amended.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT MAY
BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY PURSUANT
TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT, IN THE OPINION
OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION IS AGAINST
PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT AND IS THEREFORE UNENFORCEABLE.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company sold the following shares of common stock during the past three
years. The number of shares of common stock referred to herein gives effect to a
recent .1278447-for-one reverse stock split of the Company's shares of common
stock.
On February 14, 1995, the Company granted an option to purchase 1,022,758
shares of common stock at an exercise price of $.0782 per share to Mr. Bert E.
Brodsky (the 'February Option').
On November 1, 1995, the Company granted an option to purchase 1,022,758
shares of common stock at an exercise price of $.0782 per share to Mr. Brodsky.
The February Option was exercised on November 1, 1995 by Mr. Brodsky's payment
of $8,000 and delivery of a promissory note made payable to the order of the
Company in the original principal amount of $72,000. In October, 1997, Mr.
Brodsky paid such promissory note in full.
On February 14, 1995, the Company granted an option to purchase 383,534
shares of common stock at an exercise price of $.0782 per share to Mr. Gerald
Shapiro.
On July 1, 1997, Mr. Bert E. Brodsky purchased 1,278,447 shares of common
stock by surrendering currently exercisable options to purchase 1,022,758 shares
of common stock of Health Card and by executing and delivering a non-recourse
(except for interest) promissory note made payable to the order of the Company
in the original principal amount of $1,000,000. This note is secured by
1,278,447 shares of common stock owned by Mr. Brodsky on July 1, 1997.
On July 1, 1997, Mr. Gerald Shapiro purchased 383,534 shares of common
stock by surrendering currently exercisable options to purchase 383,534 shares
of common stock of Health Card and by executing and delivering a non-recourse
(except for interest) promissory note made payable to the order of the Company
in the original principal amount of $300,000. This note is secured by 383,534
shares of common stock owned by Mr. Shapiro on July 1, 1997.
On July 1, 1997, Ms. Sandy Rothstein purchased 51,137 shares of common
stock by executing and delivering a non-recourse (except for interest)
promissory note made payable to the order of the Company in the original
principal amount of $40,000. This note is secured by 51,137 shares of common
stock owned by Ms. Rothstein on July 1, 1997.
On October 30, 1998, Mr. Bert E. Brodsky purchased 340,919 shares of common
stock for $2,000,000 cash. The funds used for this purchase were borrowed from
Marine Midland Bank. The indebtedness of $2,000,000 to Marine Midland Bank was
secured by 340,919 shares of common stock owned by Mr. Brodsky on October 30,
1998. The Company also executed an unlimited continuing Guaranty Agreement for
the indebtedness of Mr. Brodsky to Marine Midland Bank. In January 1999, Mr.
Brodsky paid such promissory note in full. On April 8, 1999, HSBC (formerly
Marine Midland Bank), advised Health Card that its unlimited guaranty of Mr.
Brodsky's $2,000,000 loan was released.
All the foregoing transactions were private transactions not involving a
public offering and were exempt from the registration provisions of the Act
pursuant to Section 4(2) thereof. Sales of the securities were without the use
of an underwriter, and the certificates evidencing the securities relating
II-2
<PAGE>
to the foregoing transactions bear restrictive legends permitting the transfer
thereof only upon registration of such securities or an exemption under the Act.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------------------------------------------------------------------------------------------
<S> <C>
1.1 -- Form of Underwriting Agreement by and between the Company and the Representatives
3.1 -- Certificate of Incorporation of the Company(2)
3.2 -- Amendment, dated January 9, 1987, to Certificate of Incorporation of the Company(2)
3.3 -- Amendment, dated April 21, 1987, to Certificate of Incorporation of the Company(2)
3.4 -- Restated Certificate of Incorporation of the Company filed May 25, 1999
3.5 -- Amendment, filed May 25, 1999, to Certificate of Incorporation of the Company
3.6 -- By-Laws of the Company
3.7 -- Amended and Restated By-Laws of the Company
4.1 -- Form of Specimen Common Stock Certificate(1)
4.2 -- Form of Warrant Agreement, including form of Representatives' Warrants
5.1 -- Opinion of Certilman Balin Adler & Hyman, LLP, counsel for the Company(1)
5.2 -- Opinion of Ruskin Moscou Evans & Faltischek, P.C.(1)
10.1 -- Agreement, dated April 1, 1990, between the Company and ChoiceCare Long Island, Inc. d/b/a Vytra
Healthcare(2)
10.2 -- Prescription Drug Service Agreement, dated December 1, 1995, between the Company and ChoiceCare Long
Island, Inc. d/b/a Vytra Healthcare(2)(3)
10.3 -- Amendment to Prescription Drug Service Agreement, dated September 25, 1998 between the Company and
Vytra Healthcare(2)
10.4 -- Letter Agreement dated March 30, 1999 among National Medical Health Card Systems IPA, Inc., the Company
and Vytra Healthcare(2)
10.5 -- Agreement, dated January 1, 1995, between the Company and Suffolk County(2)
10.6 -- Agreement, dated March 15, 1998, between the Company and Medi-Span, Inc.(2)
10.7 -- Formulary Agreement, dated January 1, 1996, between the Company and Foundation Health Pharmaceutical
Services d/b/a Integrated Pharmaceutical Services(2)(3)
10.8 -- Mail Service Provider Agreement, dated July 1, 1996, between the Company and Thrift Drug, Inc. d/b/a
Express Pharmacy Services(2)
10.9 -- Amendment to Mail Service Provider Agreement, dated January 1, 1997, between the Company and Thrift
Drug, Inc. d/b/a Express Pharmacy Services(2)
10.10 -- Agreement, dated June 1, 1998, between Sandata, Inc. and the Company(2)
10.11 -- Amendment to Agreement, dated June 1, 1998 between Sandata, Inc. and the Company(2)
10.12 -- Agreement, dated June 16, 1998 between Sandata, Inc. and the Company
10.13 -- Bill of Sale, dated June 1, 1998, between Sandata, Inc. and the Company(2)
10.14 -- Letter Agreement dated June 1, 1998 between Sandata, Inc. and the Company
10.15 -- Software License Agreement and Professional Service Agreement, dated February 18, 1998, between the
Company and Prospective Health, Inc.(2)
10.16 -- 1999 Stock Option Plan(2)
10.17 -- Letter, dated January 31, 1996, from the Company to Mary Casale
10.18 -- Employee Covenant Agreement, dated June 15, 1998, between the Company and Mary Casale
10.19 -- Stock Option Agreement, dated July 1, 1997, between Bert Brodsky and Mary Casale(2)
10.20 -- Letter, dated November 30, 1998, from the Company to Marjorie O'Malley
10.21 -- Employee Covenant Agreement, dated December 7, 1998, between the Company and Marjorie O'Malley
10.22 -- Stock Option Agreement, dated December 7, 1998, between Bert Brodsky and Marjorie O'Malley(2)
10.23 -- Letter, dated November 3, 1998, from the Company to John Ciufo
10.24 -- Confidentiality and Non-Disclosure Agreement, dated November 19, 1998, between the Company and John
Ciufo
10.25 -- Stock Option Agreement, dated December 7, 1998, between Bert Brodsky and John Ciufo(2)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------------------------------------------------------------------------------------------
<S> <C>
10.26 -- Employee Covenant Agreement, dated June 16, 1998 between the Company and Ken Hammond
10.27 -- Employee Covenant Agreement, dated June 1, 1998 between the Company and Linda Portney
10.28 -- Lease, dated January 1, 1996, between Sandata, Inc. and the Company(2)
10.29 -- Assignment, dated November 1, 1996, from Sandata, Inc., to BFS Realty, LLC(2)
10.30 -- First Amendment to BFS Realty, LLC Lease, dated June 1, 1998, between BFS Realty, LLC and the
Company(2)
10.31 -- Second Amendment to BFS Realty, LLC Lease, dated April 1, 1998, between BFS Realty, LLC and the Company
10.32 -- Lease, dated August 10, 1998, between 61 Manor Haven Boulevard, LLC and the Company(2)
10.33 -- Promissory Note, dated July 1, 1997, made payable by Bert Brodsky to the order of the Company in the
original principal amount of $1,000,000(2)
10.34 -- Letter, dated June 3, 1999, from Bert Brodsky to the Company
10.35 -- Promissory Note, dated July 1, 1997, made payable by Gerald Shapiro to the order of the Company in the
original principal amount of $300,000(2)
10.36 -- Letter, dated June 3, 1999, from Gerald Shapiro to the Company
10.37 -- Promissory Note, dated June 1, 1998, made payable by P.W. Capital, LLC to the order of the Company in
the original principal amount of $4,254,785(2)
10.38 -- Agreement of Guaranty, dated June 1, 1998, by Bert E. Brodsky in favor of the Company(2)
10.39 -- Promissory Note, dated October 30, 1998, made payable by Bert Brodsky to Marine Midland Bank in the
principal amount of $2,000,000(2)
10.40 -- Agreement of Guaranty, dated October 30, 1998, by the Company in favor of Marine Midland Bank(2)
10.41 -- Promissory Note, dated November 3, 1998, made payable by Bert Brodsky to Marine Midland Bank in the
principal amount of $2,000,000(2)
10.42 -- Letter, dated January 29, 1999, from HSBC to BDO Seidman
10.43 -- Letter, dated June 4, 1999, from HSBC to Bert E. Brodsky
10.44 -- Demand Promissory Note, dated January 2, 1999, made payable by P.W. Capital, LLC to the order of the
Company, in the original principal amount of $90,100(2)
10.45 -- Consulting Agreement, dated April 14, 1994, between P.W. Medical Management, Inc. and the Company(2)
10.46 -- Assignment, dated July 1, 1996, between P.W. Medical Management, Inc. and P.W. Capital Corp.(2)
10.47 -- Letter, dated June 8, 1999, from P.W. Capital Corp. to the Company
10.48 -- Letter, dated June 9, 1999, from Bert E. Brodsky to the Company
10.49 -- Letter, dated June 8, 1999, from the Bert E. Brodsky Revocable Trust to the Company
10.50 -- Employment Agreement, dated July 1, 1999, between the Company and Bert E. Brodsky
10.51 -- Letter, dated June 8, 1999, from Bert E. Brodsky to the Company
10.52 -- Form of Lock-up Agreement
21 -- Subsidiaries of the Company(2)
23.1 -- Consent of BDO Seidman, LLP
23.2 -- Consent of Certilman Balin Adler & Hyman, LLP (included in its opinion filed as Exhibit 5.1 hereto)(1)
23.3 -- Consent of Ruskin Moscou Evans & Faltischek, P.C. (included in its opinion filed as Exhibit 5.2
hereto)(1)
24.1 -- Powers of Attorney (included in signature page forming a part hereof)
27.1 -- Financial Data Schedule
</TABLE>
- ------------
(1) To be filed by amendment.
(2) Filed previously.
(footnotes continued on next page)
II-4
<PAGE>
(footnotes continued from previous page)
(3) Contains confidential material omitted and filed separately with the
Securities and Exchange Commission. Brackets denote such omission.
ITEM 17. UNDERTAKINGS
(a) Rule 415 Offering.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the 'Calculation of
Registration Fee' table in the effective Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement, provided, however, that paragraphs (l)(i) and (l)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the
registrant pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, as amended, each filing of the Registrant's annual
report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(b) Equity Offerings of Nonreporting Registrants.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
(c) Indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of
II-5
<PAGE>
the Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(d) Rule 430A.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective;
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Port
Washington, State of New York, on the 9th day of June, 1999.
NATIONAL MEDICAL HEALTH CARD SYSTEMS,
INC.
By: /S/ BERT E. BRODSKY
.................................
BERT E. BRODSKY
CHAIRMAN OF THE BOARD, CHIEF
EXECUTIVE OFFICER
By: /S/ BARRY DENARO
.................................
BARRY DENARO
CHIEF FINANCIAL OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Bert E. Brodsky his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all capacities to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------------ -------------------------------------------- -------------------
<S> <C> <C>
/s/ BERT E. BRODSKY Chairman of the Board and Chief Executive June 9, 1999
......................................... Officer
(BERT E. BRODSKY) (Principal Executive Officer)
/s/ GERALD SHAPIRO Vice Chairman of the Board, Secretary June 9, 1999
.........................................
(GERALD SHAPIRO)
/s/ MARJORIE G. O'MALLEY President and Chief Operating Officer June 9, 1999
.........................................
(MARJORIE G. O'MALLEY)
/s/ LINDA PORTNEY Executive Vice President of Operations June 9, 1999
.........................................
(LINDA PORTNEY)
/s/ RICHARD J. STRAUSS Director June 9, 1999
.........................................
(RICHARD J. STRAUSS, F.A.C.S. M.D)
/s/ GERALD ANGOWITZ Director June 9, 1999
.........................................
(GERALD ANGOWITZ)
/s/ KENNETH J. DALEY Director June 9, 1999
.........................................
(KENNETH J. DALEY)
/s/ BARRY DENARO Chief Financial Officer June 9, 1999
......................................... (Principal Accounting Officer)
(BARRY DENARO)
/s/ MARY CASALE Executive Vice President of Sales June 9, 1999
......................................... and Marketing
(MARY CASALE)
</TABLE>
II-7
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END
DESCRIPTION PERIOD EXPENSE(a) WRITE-OFFS CHANGES OF PERIOD
- ------------------------------------------------ ------------ ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Reserves and allowances deducted from asset
accounts:
Allowance for possible losses
Year ended June 30, 1996................... $100,000 $214,046 $ 214,046 $ -- $100,000
Year ended June 30, 1997................... 100,000 115,000 15,000 -- 200,000
Year ended June 30, 1998................... 200,000 70,000 70,000 -- 244,189
</TABLE>
- ------------
(a) Charged to bad debts.
S-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
The audit referred to in our report to National Medical Health Card
Systems, Inc. and Subsidiary, dated September 2, 1998, except for Note 12 which
is as of May 25, 1999, which is contained in the Prospectus constituting part of
this Registration Statement included the audit of the schedule listed under
Item 16(b) for each of the three years in the period ended June 30, 1998. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based upon our audits.
In our opinion, such schedule presents fairly, in all material respects,
the information set forth therein.
BDO SEIDMAN, LLP
September 2, 1998
S-2
<PAGE>
2,500,000 shares of Common Stock
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
UNDERWRITING AGREEMENT
New York, New York
__________, 1999
Ryan, Beck & Co., Inc.
As Representative of the
Several Underwriters listed on Schedule A hereto
200 Park Avenue, 16th Floor
New York, New York 10166
Pennsylvania Merchant Group
As Representative of the
Several Underwriters listed on Schedule A hereto
Four Falls Corporate Center
West Conshohocken, Pennsylvania 19428
Ladies and Gentlemen:
National Medical Health Card Systems, Inc., a New York corporation (the
"Company") and one of the stockholders of the Company, the Bert E. Brodsky
Revocable Trust (the "Selling Stockholder") confirm their agreement with Ryan,
Beck & Co., Inc. ("Ryan, Beck"), Pennsylvania Merchant Group ("PMG") and each of
the underwriters named in Schedule A hereto (collectively, the "Underwriters"),
which term shall also include any underwriter substituted as hereinafter
provided in Section 11), for whom Ryan, Beck and PMG are acting as
representatives (in such capacity, Ryan, Beck and PMG shall hereinafter be
collectively referred to as "you" or the "Representatives"), with respect to the
sale by the Company and the Selling Stockholder, acting severally and not
jointly, of an aggregate of 2,500,000 shares ("Shares") of the Company's common
stock, $.001 par value per share ("Common Stock"), of which 2,000,000 shares are
to be issued and sold by the Company, and 500,000 shares are to be sold by the
Selling Stockholder (the "Selling Stockholder Shares"), and the purchase by the
Underwriters, acting severally and not jointly, of the respective numbers of
Shares of Common Stock set forth on Schedule A annexed hereto. Such Shares are
collectively hereinafter referred to as the "Firm Securities." Upon your
request, as provided in Section 2(b) of this Agreement, the Company shall sell
to the Underwriters, acting severally and not jointly, up to an additional
375,000 shares of Common Stock for the purpose of covering over-allotments, if
any. Such Shares are
<PAGE>
hereinafter referred to as the "Option Securities." The Company also proposes to
issue and sell to you warrants (the "Representatives' Warrants") pursuant to the
Representatives' Warrant Agreement dated as of ______, 1999 between the Company
and the Representatives (the "Representatives' Warrant Agreement") for the
purchase of an additional 250,000 shares of Common Stock. The shares of Common
Stock issuable upon exercise of the Representatives' Warrants are hereinafter
referred to as the "Representatives' Securities." The Firm Securities, the
Option Securities, the Representatives' Warrants and the Representatives'
Securities are more fully described in the Registration Statement and the
Prospectus referred to below.
1. Representations and Warranties of the Company and the Selling Stockholder.
The Company and the Selling Stockholder hereby jointly and severally represent
and warrant to, and agree with, each of the Underwriters as of the date hereof,
and as of the Closing Date (as hereinafter defined) and each Option Closing Date
(as hereinafter defined), if any, as follows:
(a) The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form S-1 (No. 333-72209), including
any related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the Firm Securities, the Option Securities, the
Representatives' Warrants and the Representatives' Securities
(collectively, hereinafter referred to as the "Securities"), under the
Securities Act of 1933, as amended (the "Act"), which registration
statement and amendment or amendments have been prepared by the Company
in conformity with the requirements of the Act, and the rules and
regulations (the "Regulations") of the Commission under the Act. The
Company will promptly file a further amendment to said registration
statement in the form heretofore delivered to the Underwriters and will
not file any other amendment thereto to which the Underwriters shall
have objected in writing after having been furnished with a copy
thereof. Except as the context may otherwise require, such registration
statement, as amended, on file with the Commission at the time the
registration statement becomes effective (including the prospectus,
financial statements, schedules, exhibits and all other documents filed
as a part thereof or incorporated therein (including, but not limited
to, those documents or information incorporated by reference therein)
and all information deemed to be a part thereof as of such time
pursuant to paragraph (b) of Rule 430(A) of the Regulations), is
hereinafter called the "Registration Statement," and the form of
prospectus in the form first filed with the Commission pursuant to Rule
424(b) of the Regulations, is hereinafter called the "Prospectus." For
purposes hereof, "Rules and Regulations" mean the rules and regulations
adopted by the Commission under either the Act or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor, to the Company's knowledge, any state
regulatory authority has issued any order preventing or suspending the
use of any Preliminary Prospectus, the Registration Statement or the
Prospectus or any part of any thereof and no proceedings for a stop
order suspending the effectiveness of the Registration Statement or any
of the Company's securities have been instituted or are pending or
threatened. Each of the Preliminary Prospectus, the Registration
Statement and the Prospectus at the time of filing thereof conformed
with the requirements of the Act and the Rules and Regulations,
2
<PAGE>
and none of the Preliminary Prospectus, the Registration Statement or
the Prospectus at the time of filing thereof contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein and necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except that this representation and warranty does not apply
to statements made in reliance upon and in conformity with written
information furnished to the Company with respect to the Underwriters
by or on behalf of the Underwriters expressly for use in such
Preliminary Prospectus, Registration Statement or the Prospectus.
(c) When the Registration Statement becomes effective and at all times
subsequent thereto up to the Closing Date and each Option Closing Date,
if any, and during such longer period as the Prospectus may be required
to be delivered in connection with sales by the Underwriters or a
dealer, the Registration Statement and the Prospectus will contain all
statements which are required to be stated therein in accordance with
the Act and the Rules and Regulations, and will conform in all material
respects to the requirements of the Act and the Rules and Regulations;
neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, will contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided,
however, that this representation and warranty does not apply to
statements made in reliance upon and in conformity with written
information furnished to the Company with respect to the Underwriters
by or on behalf of the underwriters expressly for use in the
Preliminary Prospectus, the Registration Statement or the Prospectus or
any amendment thereof or supplement thereto.
(d) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the state of its
incorporation. Except as set forth in the Prospectus, the Company does
not own an interest in any corporation, partnership, trust, joint
venture or other business entity. The Company is duly qualified and
licensed and in good standing as a foreign corporation in each
jurisdiction in which its ownership or leasing of any properties or the
character of its operations require such qualification or licensing,
except where the failure to be so qualified would not have a material
adverse effect on the condition, financial or otherwise, or the
earnings, position, prospects, stockholders' equity, value, operation,
properties, business or results of operations of the Company. The
Company has all requisite power and authority (corporate and other),
and has obtained any and all necessary authorizations, approvals,
orders, licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including, without
limitation, those having jurisdiction over environmental or similar
matters), to own or lease its properties and conduct its business as
described in the Prospectus; the Company is and has been doing business
in compliance with all such authorizations, approvals, orders,
licenses, certificates, franchises and permits and all federal, state,
local and foreign laws, rules and regulations; and the Company has not
received any notice of proceedings relating to the revocation or
modification of any such authorization, approval, order, license,
certificate, franchise, or permit which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, would
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materially and adversely affect the condition, financial or otherwise,
or the earnings, position, prospects, value, operation, properties,
business or results of operations of the Company. The disclosures in
the Registration Statement concerning the effects of federal, state,
local, and foreign laws, rules and regulations on the Company's
businesses as currently conducted and as contemplated are correct in
all respects and do not omit to state a material fact necessary to make
the statements contained therein not misleading in light of the
circumstances in which they were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, under "Capitalization"
and "Description of Capital Stock" and will have the adjusted
capitalization set forth therein on the Closing Date and the Option
Closing Date, if any, based upon the assumptions set forth therein, and
the Company is not a party to or bound by any instrument, agreement or
other arrangement providing for it to issue any capital stock, rights,
warrants, options or other securities, except for this Agreement and as
described in the Prospectus. The Securities and all other securities
issued or issuable by the Company conform or, when issued and paid for,
will conform, in all respects to all statements with respect thereto
contained in the Registration Statement and the Prospectus. All issued
and outstanding securities of the Company have been duly authorized and
validly issued and are fully paid and non-assessable and the holders
thereof have no rights of rescission with respect thereto, and are not
subject to personal liability by reason of being such holders; and none
of such securities were issued in violation of the preemptive rights of
any holders of any security of the Company or similar contractual
rights granted by the Company. The Securities are not and will not be
subject to any preemptive or other similar rights of any stockholder,
have been duly authorized and, when issued, paid for and delivered in
accordance with the terms hereof, will be validly issued, fully paid
and nonassessable and will conform to the description thereof contained
in the Prospectus; the holders thereof will not be subject to any
liability solely as such holders; all corporate action required to be
taken for the authorization, issue and sale of the Securities has been
duly and validly taken; and the certificates representing the
Securities will be in due and proper form. The Selling Stockholder has
now and will have on the Closing Date, good, valid and marketable title
to the Selling Stockholder Shares, free and clear of any liens,
charges, claims, encumbrances, pledges, security interests, defects or
other restrictions or equities of any kind whatsoever (collectively,
"Liens"), stockholders' agreements, voting trusts or community property
rights. Upon the issuance and delivery pursuant to the terms hereof of
the Securities to be sold by the Company and the Selling Stockholder
hereunder, the Underwriters or the Representatives, as the case may be,
will acquire good and marketable title to such Securities free and
clear of any Liens, stockholders' agreements, voting trusts or
community property rights, other than such as may be created by the
Underwriters. Other than as described in the Registration Statement and
the Prospectus, there are no outstanding options, warrants, rights, or
other agreements or arrangements requiring the Selling Stockholder at
any time to transfer any Common Stock to be sold hereunder by the
Selling Stockholder.
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<PAGE>
(f) The consolidated financial statements of the Company together with
the related notes and schedules thereto, included in the Registration
Statement, each Preliminary Prospectus and the Prospectus fairly
present the consolidated financial position, income, changes in cash
flow, changes in stockholders' equity and the results of operations of
the Company at the respective dates and for the respective periods to
which they apply and such financial statements have been prepared in
conformity with generally accepted accounting principles and the Rules
and Regulations, consistently applied throughout the periods involved.
The pro forma financial statements and other pro forma financial
information (including the notes thereto) included in the Registration
Statement and the Prospectus (A) present fairly, in all material
respects, the information shown therein, (B) have been prepared, in all
material respects, in accordance with the applicable requirements of
Rule 11-02 of Regulation S-X promulgated under the Exchange Act, (C)
have been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements, and (D) have
been properly compiled on the bases described therein, and the
assumptions used in the preparation of the pro forma financial
statements and other pro forma financial information and included in
the Registration Statement and the Prospectus are reasonable and the
adjustments used therein are appropriate to give effect to the
transactions or circumstances referred to therein. There has been no
adverse change or development involving a material prospective change
in the condition, financial or otherwise, or in the earnings, position,
prospects, value, operation, properties, business, or results of
operation of the Company whether or not arising in the ordinary course
of business, since the date of the financial statements included in the
Registration Statement and the Prospectus, and the outstanding debt,
the property, both tangible and intangible, and the businesses of the
Company conform in all material respects to the descriptions thereof
contained in the Registration Statement and the Prospectus. Financial
information set forth in the Prospectus under the headings "Summary
Consolidated Financial Information," "Selected Consolidated Financial
Information," "Capitalization," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," fairly
present, on the basis stated in the Prospectus, the information set
forth therein, and have been derived from or compiled on a basis
consistent with that of the audited consolidated financial statements
included in the Prospectus.
(g) The Company (i) has paid all federal, state, local, and foreign
taxes for which it is liable, including, but not limited to,
withholding taxes and amounts payable under Chapters 21 through 24 of
the Internal Revenue Code of 1986 (the "Code"), and has furnished all
information returns it is required to furnish pursuant to the Code,
(ii) has established adequate reserves for such taxes which are not due
and payable, and (iii) does not have any tax deficiency or claims
outstanding, proposed or assessed against it.
(h) No transfer tax, stamp duty or other similar tax is payable by or
on behalf of the Underwriters in connection with (i) the issuance by
the Company or the sale by the Selling Stockholder of the Securities,
(ii) the purchase by the Underwriters of the Securities from the
Company and the Selling Stockholder, and the purchase by the
Representatives of the Representatives' Warrants from the Company,
(iii) the consummation by the Company and the Selling Stockholder of
any of its obligations
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<PAGE>
under this Agreement, the Custody Agreement or the Power of Attorney
(as such terms are hereinafter defined), or (iv) resales of the
Securities in connection with the distribution contemplated hereby.
(i) The Company maintains insurance policies, including, but not
limited to, general liability and property insurance, which insures the
Company and its employees, against such losses and risks generally
insured against by comparable businesses. The Company (A) has not
failed to give notice or present any insurance claim with respect to
any matter, including but not limited to the Company's business,
property or employees, under any insurance policy or surety bond in a
due and timely manner, (B) does not have any disputes or claims against
any underwriter of such insurance policies or surety bonds or has
failed to pay any premiums due and payable thereunder, or (C) has not
failed to comply with all conditions contained in such insurance
policies and surety bonds. There are no facts or circumstances under
any such insurance policy or surety bond which would relieve any
insurer of its obligation to satisfy in full any valid claim of the
Company.
(j) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including,
without limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, pending or threatened against
(or, to the Company's or the Selling Stockholder's knowledge,
circumstances that may give rise to the same), or involving the
properties or business of, the Company which (i) questions the validity
of the capital stock of the Company, this Agreement or the
Representatives' Warrant Agreement (as defined herein), or of any
action taken or to be taken by the Company pursuant to or in connection
with this Agreement or the Representatives' Warrant Agreement, (ii) is
required to be disclosed in the Registration Statement which is not so
disclosed (and such proceedings as are summarized in the Registration
Statement are accurately summarized in all material respects), or (iii)
would materially and adversely affect the condition, financial or
otherwise, or the earnings, position, prospects, stockholders' equity,
value, operation, properties, business or results of operations of the
Company.
(k) Each of the Company and the Selling Stockholder, as applicable, has
full legal right, power and authority to authorize, issue, deliver and
sell the Securities, to enter into this Agreement and the
Representatives' Warrant Agreement and to consummate the transactions
provided for in such agreements; and this Agreement, and the
Representatives' Warrant Agreement have each been duly and properly
authorized, executed and delivered by the Company and the Selling
Stockholder, as applicable. Each of this Agreement and the
Representatives' Warrant Agreement constitutes a legal, valid and
binding agreement of the Company and the Selling Stockholder, as
applicable, enforceable against the Company and the Selling Stockholder
in accordance with its terms, and none of the Company's and, as
applicable, the Selling Stockholder's, issue and sale of the
Securities, the execution or delivery of this Agreement or the
Representatives' Warrant Agreement, its performance hereunder and
thereunder, its consummation of the transactions contemplated herein
and therein, or the conduct of its business as described
6
<PAGE>
in the Registration Statement, the Prospectus, and any amendments or
supplements thereto, conflicts with or will conflict with or results or
will result in any breach or violation of any of the terms or
provisions of, or constitutes or will constitute a default under, or
result in the creation or imposition of any Lien of any kind whatsoever
upon, any property or assets (tangible or intangible) of the Company or
the Selling Stockholder pursuant to the terms of (i) the articles of
incorporation or by-laws of the Company, (ii) any license, contract,
indenture, mortgage, deed of trust, voting trust agreement,
stockholders agreement, note, loan or credit agreement or any other
agreement or instrument to which the Company or the Selling Stockholder
is a party or by which it is or may be bound or to which its properties
or assets (tangible or intangible) is or may be subject, or any
indebtedness, or (iii) any statute, judgment, decree, order, rule or
regulation applicable to the Company or the Selling Stockholder of any
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those
having jurisdiction over environmental or similar matters), domestic or
foreign, having jurisdiction over the Company or the Selling
Stockholder or any of its activities or properties.
(l) No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body,
domestic or foreign, is required for the issuance of the Securities
pursuant to the Prospectus and the Registration Statement, the issuance
of the Representatives' Warrants, the performance of this Agreement and
the Representatives' Warrant Agreement and the transactions
contemplated hereby and thereby, including without limitation, any
waiver of any preemptive, first refusal or other rights that any entity
or person may have for the issue and/or sale of any of the Securities,
except such as have been or may be obtained under the Act or may be
required under state securities or blue sky laws (collectively, "Blue
Sky") in connection with the Underwriters' purchase and distribution of
the Securities to be sold by the Company and the Selling Stockholder
hereunder. The Selling Stockholder does not have any registration
rights or other similar rights with respect to any securities of the
Company, and the Selling Stockholder does not have any right of first
refusal or other similar right to purchase any securities of the
Company upon the issuance or sale thereof by the Company or upon the
sale thereof by any other stockholder of the Company. The Selling
Stockholder has not since the filing of the initial Registration
Statement (i) sold, bid for, purchased, attempted to induce any person
to purchase, or paid anyone any compensation for soliciting purchases
of, Common Stock, or (ii) paid or agreed to pay to any person any
compensation for soliciting another to purchase any securities of the
Company.
(m) All executed agreements, contracts or other documents or copies of
executed agreements, contracts or other documents filed as exhibits to
the Registration Statement to which the Company is a party or by which
it may be bound or to which its assets, properties or businesses may be
subject, have been duly and validly authorized, executed and delivered
by the Company and constitute the legal, valid and binding agreements
of the Company, enforceable against the Company, in accordance with
their respective terms. The descriptions in the Registration Statement
of agreements, contracts and other documents are accurate and fairly
present the information required to be shown with respect thereto
7
<PAGE>
by Form S-1, and there are no contracts or other documents which are
required by the Act to be described in the Registration Statement or
filed as exhibits to the Registration Statement which are not described
or filed as required, and the exhibits which have been filed are
complete and correct copies of the documents of which they purport to
be copies.
(n) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and the Prospectus, and except as
may otherwise be indicated or contemplated herein or therein, the
Company has not (i) issued any securities or incurred any liability or
obligation, direct or contingent, for borrowed money, (ii) entered into
any transaction other than in the ordinary course of business
consistent with past practice, or (iii) declared or paid any dividend
or made any other distribution on or in respect of its capital stock of
any class, and there has not been any change in the capital stock, or
any change in the debt (long or short term) or liabilities or material
change in or affecting the general affairs, management, financial
operations, stockholders' equity or results of operations of the
Company.
(o) No default exists in the due performance and observance of any
term, covenant or condition of any license, contract, indenture,
mortgage, installment sale agreement, lease, deed of trust, voting
trust agreement, stockholders agreement, partnership agreement, note,
loan or credit agreement, purchase order, or any other material
agreement or instrument evidencing an obligation for borrowed money, or
any other material agreement or instrument to which the Company is a
party or by which the Company may be bound or to which the property or
assets (tangible or intangible) of the Company is subject or affected
which would materially and adversely affect the condition, financial or
otherwise, or the earnings, position, prospects, value, operation,
properties, business or results of operations of the Company.
(p) The Company has generally enjoyed a satisfactory employer-employee
relationship with its employees and is in compliance with all federal,
state, local, and foreign laws and regulations respecting employment
and employment practices, terms and conditions of employment and wages
and hours. There are no pending investigations involving the Company by
the U.S. Department of Labor, or any other governmental agency
responsible for the enforcement of such federal, state, local, or
foreign laws and regulations. There is no unfair labor practice charge
or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or
stoppage pending or threatened against or involving the Company, or any
predecessor entity, and none has ever occurred. No representation
question exists respecting the employees of the Company, and no
collective bargaining agreement or modification thereof is currently
being negotiated by the Company. No grievance or arbitration proceeding
is pending under any expired or existing collective bargaining
agreements of the Company. No labor dispute with the employees of the
Company exists, or is imminent.
8
<PAGE>
(q) Except as described in the Prospectus, the Company does not
maintain, sponsor or contribute to any program or arrangement that is
an "employee pension benefit plan," an "employee welfare benefit plan,"
or a "multiemployer plan" as such terms are defined in Sections (2),
3(1) and 3(37), respectively, of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") (the foregoing are
collectively, "ERISA Plans"). The Company does not maintain or
contribute, now or at any time previously, to a defined benefit plan,
as defined in Section 3(35) of ERISA. No ERISA Plan (or any trust
created thereunder) has engaged in a "prohibited transaction," within
the meaning of Section 406 of ERISA or Section 4975 of the Code, which
could subject the Company to any tax penalty on prohibited transactions
and which has not adequately been corrected. Each ERISA Plan is in
compliance with all material reporting, disclosure and other
requirements of the Code and ERISA as they relate to any such ERISA
Plan. Determination letters have been received from the Internal
Revenue Service with respect to each ERISA Plan which is intended to
comply with Code Section 401(a), stating that such ERISA Plan and the
attendant trust are qualified thereunder. The Company has never
completely or partially withdrawn from a "multiemployer plan."
(r) None of the Selling Stockholder, the Company, or any of its
employees, directors, stockholders, partners, or affiliates (within the
meaning of the Rules and Regulations) has taken or will take, directly
or indirectly, any action designed to or which has constituted or which
might be expected to cause or result in, under the Exchange Act, or
otherwise, stabilization or manipulation of the price of any security
of the Company to facilitate the sale or resale of the Securities or
otherwise.
(s) Except as otherwise disclosed in the Prospectus, none of the
patents, patent applications, trademarks, service marks, trade names
and copyrights, and licenses and rights to the foregoing presently
owned or held by the Company, are in dispute so far as known by the
Company and the Selling Stockholder or are in any conflict with the
right of any other person or entity. To the best of the Company's and
the Selling Stockholder's knowledge, the Company (i) owns or has the
right to use, free and clear of all Liens of any kind whatsoever, all
patents, trademarks, service marks, trade names and copyrights,
technology and licenses and rights with respect to the foregoing, used
in the conduct of its business as now conducted or proposed to be
conducted without infringing upon or otherwise acting adversely to the
right or claimed right of any person, corporation or other entity under
or with respect to any of the foregoing and (ii) except as set forth in
the Prospectus, is not obligated or under any liability whatsoever to
make any payment by way of royalties, fees or otherwise to any owner or
licensee of, or other claimant to, any patent, trademark, service mark,
trade name, copyright, know-how, technology or other intangible asset,
with respect to the use thereof or in connection with the conduct of
its business or otherwise.
(t) The Company owns and has the unrestricted right to use all trade
secrets, know-how (including all other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
inventions, designs, processes, works of authorship, computer programs
and technical data and information (collectively, "Intellectual
9
<PAGE>
Property") that are material to the development, manufacture, operation
and sale of all products and services sold or proposed to be sold by
the Company, free and clear of and without violating any right, Lien,
or claim of others, including without limitation, former employers of
its employees; provided, however, that the possibility exists that
other persons or entities, completely independently of the Company, or
its employees or agents, could have developed trade secrets or items of
technical information similar or identical to those of the Company. The
Company and the Selling Stockholder are not aware of any such
development of similar or identical trade secrets or technical
information by others.
(u) The Company has taken reasonable security measures to protect the
secrecy, confidentiality and value of all its Intellectual Property in
all material aspects.
(v) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal
property stated in the Prospectus, to be owned or leased by it free and
clear of all Liens, of any kind whatsoever, other than those referred
to in the Prospectus and Liens for taxes not yet due and payable.
(w) BDO Seidman, LLP, whose report is filed with the Commission as a
part of the Registration Statement, are independent certified public
accountants as required by the Act and the Rules and Regulations.
(x) The Company has caused to be duly executed legally binding and
enforceable agreements (the "Lock-up Agreements") pursuant to which
holders of substantially all of the shares of Common Stock outstanding
and substantially all holders of securities exchangeable or exercisable
for or convertible into shares of Common Stock, all of whose names are
set forth on Schedule B annexed hereto, have agreed not to, directly or
indirectly, offer to sell, sell, grant any option for the sale of,
assign, transfer, pledge, hypothecate or otherwise encumber or dispose
of any beneficial interest in (either pursuant to Rule 144 of the Rules
and Regulations or otherwise) any securities issued by the Company,
including without limitation any options, warrants or other securities
convertible into or exercisable or exchangeable for shares of Common
Stock, for a period of not less than 180 days following the effective
date of the Registration Statement without the prior written consent of
Ryan, Beck. Any gift or similar transfer to a family member or trust
for the benefit thereof is exempt from the restrictions set forth in
the Lock-up Agreements provided that (i) no consideration is directly
or indirectly received in connection with such transfer, and (ii) the
transferee delivers to the Representatives, prior to the consummation
of such transfer, an agreement by such transferee to be bound by all of
the terms and conditions of the Lock-up Agreements. The Company will
cause the Transfer Agent, as defined below, to mark an appropriate
legend on the face of stock certificates representing all of such
securities and to place "stop transfer" orders on the Company's stock
ledgers.
(y) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of
a finder's, consulting or origination fee with respect to the sale of
the Securities hereunder or any other arrangements, agreements,
10
<PAGE>
understandings, payments or issuances with respect to the Company or
any of its officers, directors, stockholders, partners, employees or
affiliates that may affect the Underwriters' compensation, as
determined by the National Association of Securities Dealers, Inc.
("NASD").
(z) The Securities have been approved for quotation on the National
Association of Securities Dealers, Inc. Automated Quotation
System/National Market ("NASDAQ- NM") .
(aa) Neither the Company nor any of its officers, employees, agents or
any other person acting on behalf of the Company has, directly or
indirectly, given or agreed to give any money, gift or similar benefit
(other than legal price concessions to customers in the ordinary course
of business) to any customer, supplier, employee or agent of a customer
or supplier, or official or employee of any governmental agency
(domestic or foreign) or instrumentality of any government (domestic or
foreign) or any political party or candidate for office (domestic or
foreign) or other person who was, is, or may be in a position to help
or hinder the business of the Company (or assist the Company in
connection with any actual or proposed transaction) which (a) might
subject the Company, or any other such person to any damage or penalty
in any civil, criminal or governmental litigation or proceeding
(domestic or foreign), (b) if not given in the past, might have had a
materially adverse effect on the assets, business or operations of the
Company, or (c) if not continued in the future, might adversely affect
the assets, business, operations or prospects of the Company. The
Company's internal accounting controls are sufficient to cause the
Company to comply with the Foreign Corrupt Practices Act of 1977, as
amended.
(bb) Except as set forth in the Prospectus, no officer, director,
stockholder or partner of the Company, or any "affiliate" or
"associate" (as these terms are defined in Rule 405 promulgated under
the Rules and Regulations) of any of the foregoing persons or entities
has or has had, either directly or indirectly (i) an interest in any
person or entity which (A) furnishes or sells services or products
which are furnished or sold or are proposed to be furnished or sold by
the Company, or (B) purchases from or sells or furnishes to the Company
any goods or services, or (ii) a beneficial interest in any contract or
agreement to which the Company is a party or by which it may be bound
or affected. Except as set forth in the Prospectus under "Certain
Transactions," there are no existing agreements, arrangements,
understandings or transactions, or proposed agreements, arrangements,
understandings or transactions, between or among the Company, and any
officer, director of the Company and any beneficial owner of more than
five (5%) percent of the Company's shares of Common Stock, or any
partner, affiliate or associate of any of the foregoing persons or
entities.
(cc) Any certificate signed by any officer of the Company, or by the
Selling Stockholder, and delivered to the Underwriters or to
Underwriters' Counsel (as defined herein) shall be deemed a
representation and warranty by the Company and by the Selling
Stockholder to the Underwriters as to the matters covered thereby.
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<PAGE>
(dd) The minute books of the Company have been made available to the
Underwriters and contain a complete summary of all meetings and actions
of the directors and stockholders of the Company, since the time of its
incorporation, and reflect all transactions referred to in such minutes
accurately in all material respects.
(ee) Except and to the extent described in the Prospectus, no holders
of any securities of the Company or of any options, warrants or other
convertible or exchangeable securities of the Company have the right to
include any securities issued by the Company in the Registration
Statement or any registration statement to be filed by the Company or
to require the Company to file a registration statement under the Act
and no person or entity holds any anti-dilution rights with respect to
any securities of the Company.
(ff) The Company has as of the effective date of the Registration
Statement, (i) entered into an employment agreement with Bert E.
Brodsky ("Mr. Brodsky") in the form filed as Exhibit ___ to the
Registration Statement, and (ii) purchased term key-man insurance on
the life of Mr. Brodsky in the amount of $1,000,000 which policy names
the Company as the sole beneficiary thereof.
(gg) The Selling Stockholder has duly authorized, executed and
delivered, in the form heretofore furnished to the Representative, a
Power of Attorney (the "Power of Attorney") with _____________ as
attorney-in-fact, (an "Attorney-in-Fact), and a Letter of Transmittal
and Custody Agreement (the "Custody Agreement") with Continental Stock
Transfer & Trust Company as custodian (the "Custodian"); each of the
Power of Attorney and the Custody Agreement constitutes a valid and
binding obligation of the Selling Stockholder, enforceable in
accordance with its terms; the Selling Stockholder's Attorney-in-Fact,
acting alone, is authorized to execute and deliver this Agreement on
behalf of the Selling Stockholder, to authorize the delivery of the
Selling Stockholder Shares and to duly endorse (in blank or otherwise)
the certificate or certificates representing the Selling Stockholder
Shares or a stock power or powers with respect thereto, to accept
payment therefor, and otherwise to act on behalf of the Selling
Stockholder in connection with this Agreement.
(hh) All authorizations, approvals, consents and orders necessary for
the execution and delivery by the Selling Stockholder of the Power of
Attorney and the Custody Agreement, the execution and delivery by or on
behalf of the Selling Stockholder of this Agreement, and the sale and
delivery of the Selling Stockholder Shares have been obtained and are
in full force and effect; the Selling Stockholder has full right, power
and authority to enter into and perform its obligations under this
Agreement and such Power of Attorney and Custody Agreement and to sell,
transfer and deliver the Selling Stockholder Shares.
(ii) Certificates in negotiable form for the Selling Stockholder
Shares, together with a stock power or powers duly endorsed in blank by
the Selling Stockholder, have been placed in
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<PAGE>
custody with the Custodian for the purpose of effecting delivery
hereunder and thereunder.
(jj) There is not pending or threatened against the Selling Stockholder any
action, suit or proceeding (or circumstances that may give rise to the
same) which (i) questions the validity of this Agreement, the Custody
Agreement, the Power of Attorney or any action taken or to be taken by
the Selling Stockholder pursuant to or in connection with any of the
foregoing, or (ii) which is required to be disclosed in the
Registration Statement and the Prospectus which is not so disclosed,
and such proceedings which are summarized in the Registration
Statement and the Prospectus, if any, are accurately summarized in all
material respects.
(kk) The Selling Stockholder has reviewed and will review the Prospectus
and will comply with all agreements and satisfy all conditions on its
part to be complied with or satisfied pursuant to this Agreement, the
Custody Agreement and the Power of Attorney at or prior to each of the
Closing Date and any Option Closing Date, if any.
(ll) Any certificate signed by or on behalf of the Selling Stockholder and
delivered to the Underwriters or to counsel for the Underwriters shall
be deemed a representation and warranty by the Selling Stockholder to
the Underwriters as to the matters covered thereby.
2. Purchase, Sale and Delivery of the Securities and Representatives'
Warrants.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions
herein set forth, the Company and the Selling Stockholder, severally
and not jointly, agree to sell to each Underwriter, and each
Underwriter, severally and not jointly, agrees to purchase from the
Company and the Selling Stockholder at a price of $________[___% of the
public offering price] per Share, that number of Firm Securities set
forth in Schedule A opposite the name of such Underwriter, plus any
additional number of Firm Securities which such Underwriter may become
obligated to purchase pursuant to the provisions of Section 11 hereof.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all or any part of
an additional 375,000 shares of Common Stock at a price of $________
[100% of the public offering price] per Share. The option granted
hereby will expire 45 days after (i) the date the Registration
Statement becomes effective, if the Company has elected not to rely on
Rule 430A under the Rules and Regulations, or (ii) the date of this
Agreement if the Company has elected to rely upon Rule 430A under the
Rules and Regulations, and may be exercised in whole or in part from
time to time only for the purpose of covering over-allotments which may
be made in connection with the offering and distribution of the Firm
Securities upon notice by Ryan, Beck to the Company setting forth the
number of Option Securities as to which the several Underwriters are
then
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<PAGE>
exercising the option and the time and date of payment and delivery for
any such Option Securities. Any such time and date of delivery (an
"Option Closing Date") shall be determined by Ryan, Beck, but shall not
be later than seven full business days after the exercise of said
option, nor in any event prior to the Closing Date, as hereinafter
defined, unless otherwise agreed upon by Ryan, Beck and the Company.
Nothing herein contained shall obligate the Underwriters to make any
over-allotments. No Option Securities shall be delivered unless the
Firm Securities shall be simultaneously delivered or shall theretofore
have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates
for, the Firm Securities shall be made at the offices of Ryan, Beck at
200 Park Avenue, 16th Floor, New York, New York 10166, or at such other
place as shall be agreed upon by Ryan, Beck and the Company. Such
delivery and payment shall be made at 10:00 a.m. (New York City time)
on _______________, 1999 or at such other time and date as shall be
agreed upon by Ryan, Beck and the Company, but not less than three (3)
nor more than four (4) full business days after the effective date of
the Registration Statement (such time and date of payment and delivery
being herein called "Closing Date"). In addition, in the event that any
or all of the Option Securities are purchased by the Underwriters,
payment of the purchase price for, and delivery of certificates for,
such Option Securities shall be made at the above mentioned office of
Ryan, Beck, or at such other place as shall be agreed upon by Ryan,
Beck and the Company on each Option Closing Date as specified in the
notice from Ryan, Beck to the Company. Delivery of the certificates for
the Firm Securities and the Option Securities, if any, shall be made to
the Underwriters against payment by the Underwriters, severally and not
jointly, of the purchase price for the Firm Securities and the Option
Securities, if any, by, at the discretion of the Underwriters,
certified or official bank check or checks drawn upon or by a New York
Clearing House bank and payable in next-day funds to the order of the
Company or the Selling Stockholder, as applicable, or wire transfer of
same-day funds according to instructions provided by the Company or the
Selling Stockholder, as applicable. In the event such option is
exercised, each of the Underwriters, acting severally and not jointly,
shall purchase that proportion of the total number of Option Securities
then being purchased which the number of Firm Securities set forth in
Schedule A hereto opposite the name of such Underwriter bears to the
total number of Firm Securities, subject in each case to such
adjustments as Ryan, Beck in its discretion shall make to eliminate any
sales or purchases of fractional shares. Certificates for the Firm
Securities and the Option Securities, if any, shall be in definitive,
fully registered form, shall bear no restrictive legends and shall be
in such denominations and registered in such names as the Underwriters
may request in writing at least two (2) business days prior to the
Closing Date or the relevant Option Closing Date, as the case may be.
The certificates for the Firm Securities and the Option Securities, if
any, shall be made available to the Representatives at such office or
such other place as the Representatives may designate for inspection,
checking and packaging no later than 9:30 a.m. on the last business day
prior to the Closing Date or the relevant Option Closing Date, as the
case may be.
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(d) On the Closing Date, the Company shall issue and sell to the
Representatives Representatives' Warrants at a purchase price of $.001
per warrant, which warrants shall entitle the holders thereof to
purchase an aggregate of 250,000 shares of Common Stock. The
Representatives' Warrants shall be exercisable for a period of four (4)
years commencing one (1) year from the effective date of the
Registration Statement at a price equaling one hundred twenty percent
(120%) of the public offering price of the Shares. The Representatives'
Warrant Agreement and form of Warrant Certificate shall be
substantially in the form filed as Exhibit __ to the Registration
Statement. Payment for the Representatives' Warrants shall be made on
the Closing Date.
3. Public Offering of the Shares. As soon after the Registration Statement
becomes effective as the Representatives deem advisable, the Underwriters shall
make a public offering of the Shares (other than to residents of or in any
jurisdiction in which qualification of the Shares is required and has not become
effective) at the price and upon the other terms set forth in the Prospectus.
The Representatives may from time to time increase or decrease the public
offering price after distribution of the Shares has been completed to such
extent as the Representatives, in their sole discretion deem advisable. The
Underwriters may enter into one of more agreements as the Underwriters, in each
of their sole discretion, deem advisable with one or more broker-dealers who
shall act as dealers in connection with such public offering.
4. Covenants and Agreements of the Company and the Selling Stockholder.
The Company and the Selling Stockholder covenant and agree with each of the
Underwriters as follows:
(a) Each of the Company and the Selling Stockholder shall use its best
efforts to cause the Registration Statement and any amendments thereto
to become effective as promptly as practicable and will not at any
time, whether before or after the effective date of the Registration
Statement, file any amendment to the Registration Statement or
supplement to the Prospectus or file any document under the Act or
Exchange Act before termination of the offering of the Shares by the
Underwriters of which the Representatives shall not previously have
been advised and furnished with a copy, or to which the Representatives
shall have objected or which is not in compliance with the Act, the
Exchange Act or the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge thereof, the
Company will advise the Representatives and confirm the notice in
writing (i) when the Registration Statement, as amended, becomes
effective, if the provisions of Rule 430A promulgated under the Act
will be relied upon, when the Prospectus has been filed in accordance
with said Rule 430A and when any post-effective amendment to the
Registration Statement becomes effective, (ii) of the issuance by the
Commission of any stop order or of the initiation, or the threatening,
of any proceeding, suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the
Preliminary Prospectus or the Prospectus, or any amendment or
supplement thereto, or the institution of proceedings for that
purpose, (iii) of the issuance by the Commission or by any state
securities commission of any proceedings for the suspension of the
qualification of any of
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the Securities for offering or sale in any jurisdiction or of the
initiation, or the threatening, of any proceeding for that purpose,
(iv) of the receipt of any comments from the Commission; and (v) of any
request by the Commission for any amendment to the Registration
Statement or any amendment or supplement to the Prospectus or for
additional information. If the Commission or any state securities
commission authority shall enter a stop order or suspend such
qualification at any time, each of the Company and the Selling
Stockholder will use its best efforts to obtain promptly the lifting of
such order or suspension.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representatives) or transmit the Prospectus by a
means reasonably calculated to result in filing with the Commission
pursuant to Rule 424(b)(1) (or, if applicable and if consented to by
the Representatives, pursuant to Rule 424(b)(4)) not later than the
Commission's close of business on the earlier of (i) the second
business day following the execution and delivery of this Agreement,
and (ii) the fifth business day after the effective date of the
Registration Statement.
(d) The Company will give the Representatives notice of its intention to
file or prepare any amendment to the Registration Statement (including
any post-effective amendment) or any amendment or supplement to the
Prospectus (including any revised prospectus which the Company proposes
for use by the Underwriters in connection with the offering of the
Securities which differs from the corresponding prospectus on file at
the Commission at the time the Registration Statement becomes
effective, whether or not such revised prospectus is required to be
filed pursuant to Rule 424(b) of the Rules and Regulations), and will
furnish the Representatives with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or
use, as the case may be, and will not file any such prospectus to which
the Representatives or Sonnenschein Nath & Rosenthal ("Underwriters'
Counsel"), shall object.
(e) The Company and the Selling Stockholder shall endeavor in good faith,
in cooperation with the Representatives, at or prior to the time the
Registration Statement becomes effective, to qualify the Securities for
offering and sale under the securities laws of such jurisdictions as
the Representatives may designate to permit the continuance of sales
and dealings therein for as long as may be necessary to complete the
distribution, and shall make such applications, file such documents and
furnish such information as may be required for such purpose; provided,
however, the Company shall not be required to qualify as a foreign
corporation or file a general or limited consent to service of process
in any such jurisdiction. In each jurisdiction where such qualification
shall be effected, the Company will, unless the Representatives agree
that such action is not at the time necessary or advisable, use all
reasonable efforts to file and make such statements or reports at such
times as are or may reasonably be required by the laws of such
jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be delivered under the
Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it
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<PAGE>
by the Act and the Exchange Act, as now and hereafter amended and by
the Rules and Regulations, as from time to time in force, so far as
necessary to permit the continuance of sales of or dealings in the
Securities in accordance with the provisions hereof and the Prospectus,
or any amendments or supplements thereto. If at any time when a
prospectus relating to the Securities is required to be delivered under
the Act, any event shall have occurred as a result of which, in the
opinion of counsel for the Company or Underwriters' Counsel, the
Prospectus, as then amended or supplemented, includes an untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, or if it is necessary at any time to amend the
Prospectus to comply with the Act, the Company will notify the
Representatives promptly and prepare and file with the Commission an
appropriate amendment or supplement in accordance with Section 10 of
the Act, each such amendment or supplement to be satisfactory to
Underwriters' Counsel, and the Company will furnish to the Underwriters
copies of such amendment or supplement as soon as available and in such
quantities as the Underwriters may request.
(g) As soon as practicable, but in any event not later than 45 days after
the end of the 12-month period beginning on the day after the end of
the fiscal quarter of the Company during which the effective date of
the Registration Statement occurs (90 days in the event that the end of
such fiscal quarter is the end of the Company's fiscal year), the
Company shall make generally available to its security holders, in the
manner specified in Rule 158(b) of the Rules and Regulations, and to
the Representatives, an earnings statement which will be in the detail
required by, and will otherwise comply with, the provisions of Section
11(a) of the Act and Rule 158(a) of the Rules and Regulations, which
statement need not be audited unless required by the Act, covering a
period of at least 12 consecutive months after the effective date of
the Registration Statement.
(h) During a period of three years after the date hereof, the Company will
furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public
accountants) of earnings, and will deliver to the Representatives:
i) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of
the preceding fiscal year, together with statements of
operations, stockholders equity, and cash flows of the Company
for such fiscal year, accompanied by a copy of the certificate
thereon of independent certified public accountants;
ii) as soon as they are available, copies of all reports (financial
or other) mailed to stockholders;
iii) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission,
the NASD or any securities exchange;
17
<PAGE>
iv) every press release and every material news item or article of
interest to the financial community in respect of the Company
or its affairs which was released or prepared by or on behalf
of the Company; and
v) any additional information of a public nature concerning the
Company (and any future subsidiaries) or any of its businesses
which the Representatives may request.
During such three-year period, if the Company has active
subsidiaries, the foregoing financial statements will be on a
consolidated basis to the extent that the accounts of the
Company and its subsidiaries are consolidated, and will be
accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
(i) The Company will maintain a transfer agent (the "Transfer Agent") and,
if necessary under the jurisdiction of incorporation of the Company, a
registrar (which may be the same entity as the Transfer Agent) for its
Common Stock.
(j) The Company will furnish or cause to be furnished to the
Representatives, without charge, at such place as the Representatives
may designate, copies of each Preliminary Prospectus, the Registration
Statement and any pre-effective or post-effective amendments thereto
(two of which copies will be manually signed and will include all
financial statements and exhibits), the Prospectus, and all amendments
and supplements thereto, including any prospectus prepared after the
effective date of the Registration Statement, in each case as soon as
available and in such quantities as the Representatives may request.
(k) On or before the effective date of the Registration Statement, the
Company shall provide the Representatives with true copies of the
Lock-up Agreements, which shall have been duly executed, and which
shall be legally binding and enforceable. In addition, except as
provided in paragraph 4(r) hereof, during the thirteen (13) month
period commencing with the effective date of the Registration
Statement, the Company shall not, without the prior written consent of
Ryan, Beck, sell, contract or offer to sell, issue, transfer, assign,
pledge, distribute, or otherwise dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for shares of Common Stock (a "Disposition
of Securities"). Such prior written consent of Ryan, Beck shall not be
required in connection with a Disposition of Securities by the Company
for the purpose of (i) consummating one or more acquisitions of
unaffiliated entities (an "Unaffiliated Acquisition"), or (ii)
repayment of financing related to one or more Unaffiliated Acquisitions
(an "Acquisition Financing"). On or before the Closing Date, the
Company shall deliver instructions to the Transfer Agent authorizing it
to place appropriate legends on the certificates representing the
securities subject to the Lock-up Agreements and to place appropriate
stop transfer orders on the Company's ledgers.
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(l) None of the Selling Stockholder, the Company or any of its officers,
directors, stockholders, nor any of their respective affiliates (within
the meaning of the Rules and Regulations) will take, directly or
indirectly, any action designed to, or which might in the future
reasonably be expected to cause or result in, stabilization or
manipulation of the price of any securities of the Company.
(m) The Company shall apply the net proceeds from the sale of the
Securities in the manner, and subject to the conditions, set forth
under "Use of Proceeds" in the Prospectus. No portion of the net
proceeds will be used, directly or indirectly, to acquire any
securities issued by the Company.
(n) The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, a Form SR
as may be required pursuant to Rule 463 under the Act) from time to
time, under the Act, the Exchange Act, and the Rules and Regulations,
and all such reports, forms and documents filed will comply as to form
and substance with the applicable requirements under the Act, the
Exchange Act, and the Rules and Regulations.
(o) The Company shall furnish to the Representatives as early as
practicable prior to each of the date hereof, the Closing Date and each
Option Closing Date, if any, but no later than two (2) full business
days prior thereto, a copy of the latest available unaudited interim
financial statements of the Company (which in no event shall be as of a
date more than thirty (30) days prior to the date of the Registration
Statement) which have been read by the Company's independent public
accountants as stated in their letters to be furnished pursuant to
Section 6(k) hereof.
(p) The Company shall cause the Securities to be listed on NASDAQ/NM and
for a period of three (3) years from the date hereof, use its best
efforts to maintain the NASDAQ/NM listing of the Securities to the
extent outstanding.
(q) As soon as practicable but in no event more than 10 business days
before the effective date of the Registration Statement, the Company
shall file a Form 8-A with the Commission providing for the
registration under the Exchange Act of the Securities.
(r) Except in connection with one or more Unaffiliated Acquisitions and/or
the repayment of Acquisition Financings one or more, in which case the
following restrictions shall not apply, the Company hereby agrees that
it will not for a period of 180 days from the effective date of the
Registration Statement (the "Restricted Period"), adopt, propose to
adopt or otherwise permit to exist any employee, officer, director
or consultant, compensation plan or arrangement permitting (i) the
grant, issue, sale or entry into any agreement to grant, issue or sell
any option, warrant or other contract right relating to the issuance of
shares of the Company (collectively, "Options") (x) at an exercise
price that is less than the fair market value on the date of grant or
sale or (y) to any of its executive officers or directors or to any
holder of 5% or more of the Common Stock (collectively, "Insiders"),
provided, however, that, except with regard to Mr. Brodsky,
and subject to the restriction set forth
19
<PAGE>
in paragraph (4)(r)(x) hereof, Options may be granted by the Company
and/or Insiders to Insiders during the Restricted Period as long as no
vesting of shares occurs under any such Option until a date following
the expiration of the Restricted Period; and (ii) the maximum number of
shares of Common Stock or other securities of the Company purchasable
at any time during the Restricted Period pursuant to Options issued by
the Company to exceed 1,650,000 shares. Notwithstanding the foregoing,
it is expressly agreed that the Company is permitted to grant Options
to purchase up to an aggregate of 100,000 shares of Common Stock of the
Company to persons eligible to receive Options under the Company's 1999
Stock Option Plan, other than Mr. Brodsky, on or prior to the
consummation of the offering at the public offering price.
(s) Until the completion of the distribution of the Securities, the Company
and the Selling Stockholder shall not, without the prior written
consent of the Ryan, Beck and Underwriters' Counsel, issue, directly or
indirectly any press release or other communication or hold any press
conference with respect to the Company or its activities or the
offering contemplated hereby, other than trade releases issued in the
ordinary course of the Company's business consistent with past
practices with respect to the Company's operations.
(t) For a period equal to the lesser of seven (7) years from (i) the date
hereof, and (ii) the sale to the public of the Representatives'
Securities, the Company will not take any action or actions which may
prevent or disqualify the Company's use of Form S-1 (or other
appropriate form) for the registration under the Act of the
Representatives' Securities.
5. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the Closing Date and the
Option Closing Date (to the extent not paid at the Closing Date) all
expenses and fees (other than fees of Underwriters' Counsel, except as
provided in (iv) below) incident to the performance of the obligations
of the Company under this Agreement and the Representatives' Warrant
Agreement, including, without limitation, (i) the fees and expenses of
accountants and counsel for the Company, (ii) all costs and expenses
incurred in connection with the preparation, duplication, printing
(including mailing and handling charges), filing, delivery and mailing
(including the payment of postage with respect thereto) of the
Registration Statement, and the Prospectus and any amendments and
supplements thereto and the printing, mailing (including the payment of
postage with respect thereto) and delivery of this Agreement, the
Representatives' Warrant Agreement and related documents, including the
cost of all copies thereof and of the Preliminary Prospectuses and of
the Prospectus and any amendments thereof or supplements thereto
supplied to the Underwriters and such dealers as the Underwriters may
request, in quantities as herein above stated, (iii) the printing,
engraving, issuance and delivery of the Securities including, but not
limited to (x) the purchase by the Underwriters of the Securities and
the purchase by the Representatives of the Representatives' Warrants
from the Company, (y) the consummation by the Company of any of its
obligations under this Agreement and the Representatives' Warrant
Agreement, and (z) resale of the Securities by the Underwriters
20
<PAGE>
in connection with the distribution contemplated hereby, (iv) the
qualification of the Securities under state or foreign securities or
"Blue Sky" laws and determination of the status of such securities
under legal investment laws, including the costs of printing and
mailing the "Preliminary Blue Sky Memorandum," the "Supplemental Blue
Sky Memorandum" and "Legal Investments Survey," if any, and
disbursements and fees of counsel in connection therewith, (v)
advertising costs and expenses, including but not limited to costs and
expenses in connection with the "road show," information meetings and
presentations, bound volumes and prospectus memorabilia and
"tomb-stone" advertisement expenses, (vi) costs and expenses in
connection with Company counsel's due diligence investigations,
including but not limited to the fees of any independent counsel or
consultant retained, (vii) fees and expenses of the transfer agent,
registrar and custodian, (viii) the fees payable to the Commission and
the NASD, and (ix) the fees and expenses incurred in connection with
the listing of the Securities on NASDAQ/NM and any other exchange.
(b) If this Agreement is terminated by the Underwriters in accordance with
the provisions of Section 6, 10(a) or 12, the Company shall reimburse
and indemnify the Representatives for all of their actual out-of-pocket
expenses, including the fees and disbursements of Underwriters'
Counsel, less any amounts already paid pursuant to Section 5(c) hereof.
(c) The Company further agrees that, in addition to the expenses payable
pursuant to subsection (a) of this Section 5, it will pay to the
Representatives on the Closing Date and on each Option Closing Date, if
any, by certified or bank cashiers check or, at the election of the
Representatives, by deduction from the proceeds of the offering
contemplated herein, a non-accountable expense allowance equal to one
percent (1%) and a financial advisor's fee equal to one percent (1%) of
the gross proceeds received from the sale of the Firm Securities and
the Option Securities, if any, as applicable, no portion of which has
been paid to date. The Selling Stockholder agrees to pay to the
Representatives on the Closing Date (by certified or bank cashiers
check or, at the Representative's election, by deduction from the
proceeds of the sale of the Selling Stockholder Shares) a
non-accountable expense allowance equal to one percent (1%) and a
financial advisor's fee equal to one percent (1%) of the gross proceeds
received from the sale of the Selling Stockholder Shares.
6. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company and the Selling Stockholder herein
as of the date hereof and as of the Closing Date and each Option Closing Date,
if any, as if they had been made on and as of the Closing Date or each Option
Closing Date, as the case may be; the accuracy on and as of the Closing Date or
Option Closing Date, if any, of the statements of the Selling Stockholder and
officers of the Company made pursuant to the provisions hereof; and the
performance by the Company and the Selling Stockholder on and as of the Closing
Date and each Option Closing Date, if any, of its covenants and obligations
hereunder and to the following further conditions:
(a) The Registration Statement shall have become effective not later than
12:00 A.M., New York time, on the date of this Agreement or such later
date and time as shall be consented
21
<PAGE>
to in writing by the Representatives, and, at the Closing Date and each
Option Closing Date, if any, no stop order suspending the effectiveness
of the Registration Statement shall have been issued and no proceedings
for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the
Commission for additional information shall have been complied with to
the reasonable satisfaction of Underwriters' Counsel. If the Company
has elected to rely upon Rule 430A of the Rules and Regulations, the
price of the Shares and any price-related information previously
omitted from the effective Registration Statement pursuant to such Rule
430A shall have been transmitted to the Commission for filing pursuant
to Rule 424(b) of the Rules and Regulations within the prescribed time
period, and prior to Closing Date the Company shall have provided
evidence satisfactory to the Representatives of such timely filing, or
a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the
requirements of Rule 430A of the Rules and Regulations.
(b) The Representatives shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue
statement of fact which, in the Representatives' opinion, is material,
or omits to state a fact which, in the Representatives' opinion, is
material and is required to be stated therein or is necessary to make
the statements therein not misleading, or that the Prospectus, or any
supplement thereto, contains an untrue statement of fact which, in the
Representatives' opinion, is material, or omits to state a fact which,
in the Representatives' opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the Representatives shall have
received from Underwriters' Counsel, such opinion or opinions with
respect to the organization of the Company, the validity of the
Securities, the Registration Statement, the Prospectus and other
related matters as the Representatives may request and Underwriters'
Counsel shall have received such papers and information as they request
to enable them to pass upon such matters.
(d) At the Closing Date, the Underwriters shall have received the favorable
opinion of Certilman Balin Adler & Hyman, LLP, counsel to the Company
("Company Counsel"), dated the Closing Date, addressed to the
Underwriters and in form and substance satisfactory to Underwriters, to
the effect that:
i) the Company (A) has been duly organized and is validly
existing as a corporation in good standing under the laws of
its jurisdiction, (B) is duly qualified and in good standing
as a foreign corporation in each jurisdiction in which its
ownership or leasing of any properties or the character of
its operations requires such qualification, except where the
failure to be so qualified would not have a material adverse
effect on the condition, financial or otherwise, or the
earnings, position, prospects, stockholders' equity, value,
operation, properties, business or results of operations of
the Company, and (C) other than with respect to health and
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insurance law, as to which such counsel does not express an
opinion, has all requisite corporate power and authority, and
has obtained any and all necessary authorizations, approvals,
orders, licenses, certificates, franchises and permits of and
from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its
properties and conduct its business as described in the
Prospectus; to the best of such counsel's knowledge, except as
set forth in the Prospectus the Company is and has been doing
business in compliance with all such authorizations, approvals,
orders, licenses, certificates, franchises and permits and all
federal, state and local laws, rules and regulations; and, to
the best of such counsel's knowledge, the Company has not
received any notice of proceedings relating to the revocation
or modification of any such authorization, approval, order,
license, certificate, franchise, or permit which, singly or in
the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially adversely affect the
business, operations, condition, financial or otherwise, or the
earnings, business affairs, position, prospects, value,
operation, properties, business or results of operations of the
Company. Other than with respect to health and insurance law,
as to which such counsel does not express an opinion, the
disclosures in the Registration Statement concerning the
effects of federal and New York State laws, rules and
regulations on the Company's business as currently conducted
and as contemplated are correct in all material respects and do
not omit to state a material fact necessary to make the
statements contained therein not misleading in light of the
circumstances in which they were made.
ii) to the best of such counsel's knowledge, except as set forth in
the Prospectus the Company does not own an interest in any
corporation, partnership, joint venture, trust or other
business entity;
iii) the Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, and any
amendment or supplement thereto, under "Capitalization," and
"Description of Capital Stock" and the Company is not a party
to or bound by any instrument, agreement or other arrangement
providing for it to issue any capital stock, rights, warrants,
options or other securities, except for this Agreement and the
Representatives' Warrant Agreement and as described in the
Prospectus. The Securities and all other securities issued or
issuable by the Company conform in all respects to all
statements with respect thereto contained in the Registration
Statement and the Prospectus. All issued and outstanding
securities of the Company have been duly authorized and validly
issued and are fully paid and non-assessable; the holders
thereof have no rights of rescission with respect thereto, and
are not subject to personal liability by reason of being such
holders; and, to the best of such counsel's knowledge, none of
such securities were issued in violation of the preemptive
rights of any holders of any security of the Company. The
Securities to be sold by the Company hereunder and under the
Representatives' Warrant Agreement are not and will not be
subject to any preemptive or other similar rights of any
stockholder, have been duly authorized
23
<PAGE>
and, when issued, paid for and delivered in accordance with the
terms hereof, will be validly issued, fully paid and
non-assessable and conform to the description thereof contained
in the Prospectus; the holders thereof will not be subject to
any liability solely as such holders; all corporate action
required to be taken for the authorization, issue and sale of
the Securities has been duly and validly taken; and the
certificates representing the Securities are in due and proper
form. The Representatives' Warrants constitute valid and
binding obligations of the Company to issue and sell, upon
exercise thereof and payment therefor, the number and type of
securities of the Company called for thereby. Upon the issuance
and delivery pursuant to this Agreement of the Securities to be
sold by the Company, the Underwriters and the Representatives,
respectively, will acquire good and marketable title to the
Securities free and clear of any Lien of any kind whatsoever,
except for any Lien granted by the Underwriters or the
Representatives, as applicable. No transfer tax is payable by
or on behalf of the Underwriters in connection with (A) the
issuance by the Company of the Securities, (B) the purchase by
the Underwriters and the Representatives of the Securities from
the Company, (C) the consummation by the Company of any of its
obligations under this Agreement or the Representatives'
Warrant Agreement, or (D) resales of the Securities in
connection with the distribution contemplated hereby.
iv) the Registration Statement is effective under the Act, and, if
applicable, filing of all pricing information has been timely
made in the appropriate form under Rule 430A, and, to the best
of such counsel's knowledge, no stop order suspending the use
of the Preliminary Prospectus, the Registration Statement or
the Prospectus or any part of any thereof or suspending the
effectiveness of the Registration Statement has been issued,
and, to the best of such counsel's knowledge, no proceedings
for that purpose have been instituted or are pending or, to the
best of such counsel's knowledge, threatened or contemplated
under the Act;
v) each of the Preliminary Prospectus, the Registration Statement,
and the Prospectus and any amendments or supplements thereto
(other than the financial statements and other financial and
statistical data included therein, as to which no opinion need
be rendered) comply as to form in all material respects with
the requirements of the Act and the Rules and Regulations. Such
counsel shall state that such counsel has participated in
conferences with officers and other representatives of the
Company and representatives of the independent public
accountants for the Company, at which conferences such counsel
made inquiries of such officers, representatives and
accountants and discussed the contents of the Preliminary
Prospectus, the Registration Statement, the Prospectus, and
related matters were discussed and, although such counsel is
not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained
in the Preliminary Prospectus, the Registration Statement, and
the Prospectus, on the basis of the foregoing, no facts have
come to the attention of such counsel which lead them to
believe that either the Registration Statement or
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any amendment thereto, at the time such Registration Statement
or amendment became effective or the Preliminary Prospectus or
the Prospectus or amendment or supplement thereto as of the
date of such opinion contained any untrue statement of a
material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements therein
not misleading in light of the circumstances in which they were
made (it being understood that such counsel need express no
opinion with respect to the financial statements and schedules
and other financial and statistical data included in the
Preliminary Prospectus, the Registration Statement or the
Prospectus).
vi) to the best of such counsel's knowledge after due inquiry, (A)
there are no agreements, contracts or other documents required
by the Act to be described in the Registration Statement and
the Prospectus and filed as exhibits to the Registration
Statement other than those described in the Registration
Statement (or required to be filed under the Exchange Act if
upon such filing they would be incorporated, in whole or in
part, by reference therein) and the Prospectus and filed as
exhibits thereto, and the exhibits which have been filed are
correct copies of the documents of which they purport to be
copies; (B) the descriptions in the Registration Statement and
the Prospectus and any supplement or amendment thereto of
contracts and other documents to which the Company is a party
or by which it is bound, including any document to which the
Company is a party or by which it is bound, incorporated by
reference into the Prospectus and any supplement or amendment
thereto, are accurate and fairly represent the information
required to be shown by Form S-l in all material respects; (C)
there is not pending or threatened against the Company any
action, arbitration, suit, proceeding, inquiry, investigation,
litigation, governmental or other proceeding (including,
without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, pending
or threatened against (or circumstances that may give rise to
the same), or involving the properties or business of the
Company which (x) is required to be disclosed in the
Registration Statement which is not so disclosed (and such
proceedings as are summarized in the Registration Statement are
accurately summarized in all respects), (y) questions the
validity of the capital stock of the Company or this Agreement
or the Representatives' Warrant Agreement, or of any action
taken or to be taken by the Company pursuant to or in
connection with any of the foregoing; (D) other than with
respect to health and insurance law, as to which such counsel
does not express an opinion, no statute or regulation or legal
or governmental proceeding required to be described in the
Prospectus is not described as required; and (E) there is no
action, suit or proceeding pending or threatened against or
affecting the Company before any court or arbitrator or
governmental body, agency or official (or any basis thereof
known to such counsel) in which there is a reasonable
possibility of an adverse decision which may result in a
material adverse change in the condition, financial or
otherwise, or the earnings, position, prospects, stockholders
equity, value, operation, properties, business or results of
operations of the Company which could adversely affect the
present or prospective ability of
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the Company to perform its obligations under this Agreement or
the Representatives' Warrant Agreement or which in any manner
draws into question the validity or enforceability of this
Agreement or the Representatives' Warrant Agreement.
vii) the Company has full corporate power and authority to enter
into each of this Agreement and the Representatives' Warrant
Agreement, and to consummate the transactions provided for
therein; and each of this Agreement and the Representatives'
Warrant Agreement has been duly authorized, executed and
delivered by the Company. Each of this Agreement and the
Representatives' Warrant Agreement, assuming due authorization,
execution and delivery by each other party thereto, constitutes
a legal, valid and binding agreement of the Company enforceable
against the Company in accordance with its terms (except as
such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors'
rights and the application of equitable principles in any
action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law), and none of
the Company's execution or delivery of this Agreement or the
Representatives' Warrant Agreement, its performance hereunder
or thereunder, its consummation of the transactions
contemplated herein or therein, or the conduct of its business
as described in the Registration Statement, the Prospectus, and
any amendments or supplements thereto, conflicts with or will
conflict with or results or will result in any breach or
violation of any of the terms or provisions of, or constitutes
or will constitute a default under, or result in the creation
or imposition of any Lien, of any kind whatsoever upon, any
property or assets (tangible or intangible) of the Company
pursuant to the terms of (A) the articles of incorporation or
by-laws of the Company, (B) any license, contract, indenture,
mortgage, deed of trust, voting trust agreement, stockholder's
agreement, note, loan or credit agreement or any other
agreement or instrument to which the Company is a party or by
which it is or may be bound or to which any of its properties
or assets (tangible or intangible) is or may be subject, or any
indebtedness, known to such counsel, or (C) other than with
respect to health and insurance law, as to which such counsel
does not express an opinion, any statute, judgment, decree,
order, rule or regulation applicable to the Company of any
arbitrator, court, regulatory body or administrative agency or
other governmental agency or body (including, without
limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, having jurisdiction over
the Company or any of its activities or properties.
viii) except as described in the Prospectus, no consent, approval,
authorization or order, and no filing with, any court,
regulatory body, government agency or other body (other than
such as may be required under Blue Sky laws, as to which no
opinion need be rendered) is required in connection with the
issuance of the Securities pursuant to the Prospectus or the
Registration Statement, the performance of this
26
<PAGE>
Agreement and the Representatives' Warrant Agreement and the
transactions contemplated hereby and thereby;
ix) the properties and business of the Company conform to the
description thereof contained in the Registration Statement and
the Prospectus in all material respects; and to the best of
such counsel's knowledge, the Company has good and marketable
title to, or valid and enforceable leasehold estates in, all
items of real and personal property stated in the Prospectus to
be owned or leased by it, in each case free and clear of all
Liens of any kind whatsoever, other than those referred to in
the Prospectus and Liens for taxes not yet due and payable;
x) the statements in the Prospectus under "RISK FACTORS,"
"BUSINESS," "MANAGEMENT," "PRINCIPAL AND SELLING STOCKHOLDERS,"
"CERTAIN TRANSACTIONS," "DESCRIPTION OF CAPITAL STOCK," and
"SHARES ELIGIBLE FOR FUTURE SALE" have been reviewed by such
counsel, and, other than with respect to health and insurance
law, as to which such counsel does not express an opinion,
insofar as they refer to statements of law, descriptions of
statutes, licenses, rules or regulations or legal conclusions,
are correct in all material respects;
xi) the Securities have been accepted for quotation by NASDAQ/NM;
xii) to the best of such counsel's knowledge, the Company owns or
possesses, free and clear of all Liens and rights thereto or
therein by third parties, the requisite licenses or other
rights to use all trademarks, service marks, copyrights,
service names, trade names, patents, patent applications and
licenses necessary to conduct its business (including, without
limitation any such licenses or rights described in the
Prospectus as being owned or possessed by the Company), and to
the best of such counsel's knowledge after due inquiry, there
is no claim or action by or against any person pertaining to,
or proceeding, pending, or threatened, which challenges the
exclusive rights of the Company with respect to any trademarks,
service marks, copyrights, service names, trade names, patents,
patent applications and the licenses used in the conduct of the
Company's businesses (including, without limitation, any such
licenses or rights described in the Prospectus as being owned
or possessed by the Company);
xiii) to the best of such counsel's knowledge, the persons listed
under the caption "PRINCIPAL AND SELLING STOCKHOLDERS" in the
Prospectus are the respective "beneficial owners" (as such
phrase is defined in Rule 13d-3 under the Rules and
Regulations) of the securities set forth opposite their
respective names thereunder as and to the extent set forth
therein;
xiv) to the best of such counsel's knowledge, except as described in
the Prospectus, no person, corporation, trust, partnership,
association or other entity has the right to include and/or
register any securities of the Company in the Registration
27
<PAGE>
Statement, require the Company to file any registration
statement or, if filed, to include any security in such
registration statement;
xv) to the best of such counsel's knowledge, except as described in
the Prospectus, there are no claims, payments, issuances,
arrangements or understandings for services in the nature of a
finders or origination fee with respect to the sale of the
Securities hereunder or financial consulting arrangement or any
other arrangements, agreements, understandings, payments or
issuances that may affect the Underwriters' compensation, as
determined by the NASD;
xvi) assuming due execution by the parties thereto other than the
Company, the Lock-up Agreements are legal, valid and binding
obligations of the parties thereto, enforceable against such
parties and any subsequent holders of the securities subject
thereto in accordance with their terms; and
xvii) such counsel has reviewed the opinion (the "Regulatory
Opinion") of Ruskin Moscou Evans & Faltischek, P.C., special
counsel to the Company with respect to health, insurance,
licensing and certain other regulatory matters, dated the
Closing Date and addressed to the Underwriters, such counsel
believes that the Underwriters are justified in relying on the
Regulatory Opinion.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws
of the United States and jurisdictions in which they are
admitted, to the extent such counsel deems proper and to the
extent specified in such opinion, if at all, upon an opinion or
opinions (in form and substance satisfactory to Underwriters'
Counsel) of other counsel acceptable to Underwriters' Counsel,
familiar with the applicable laws; (B) as to matters of fact,
to the extent they deem proper, on certificates and written
statements of responsible officers of the Company and
certificates or other written statements of officers of
departments of various jurisdictions having custody of
documents respecting the corporate existence or good standing
of the Company, provided that copies of any such statements or
certificates shall be delivered to Underwriters' Counsel, if
requested. The opinion of such counsel for the Company shall
state that the opinion of any such other counsel is in form
satisfactory to such counsel and that the Representatives and
they are justified in relying thereon.
(e) At the Closing Date, the Underwriters shall have received the favorable
opinion of Ruskin Moscou Evans & Faltischek, P.C., special counsel to
the Company with respect to health, insurance, licensing and certain
other regulatory matters ("Regulatory Counsel"), dated the Closing
Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel to the effect that:
28
<PAGE>
i) the Company is duly licensed in each jurisdiction in which its
ownership or leasing of any properties or the character of its
operations requires such licensing, and has obtained any and
all necessary authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including,
without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its
properties and conduct its business as described in the
Prospectus; except as set forth in the Prospectus, the Company
is and has been doing business in compliance with all such
authorizations, approvals, orders, licenses, certificates,
franchises and permits and all federal, state and local laws,
rules and regulations; and, the Company has not received any
notice of proceedings relating to the revocation or
modification of any such authorization, approval, order,
license, certificate, franchise, or permit which, singly or in
the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially adversely affect the
business, operations, condition, financial or otherwise, or the
earnings, business affairs, position, prospects, value,
operation, properties, business or results of operations of the
Company;
ii) the disclosures in the Registration Statement concerning the
effects of federal, state and local laws, rules and regulations
on the Company's business as currently conducted and as
contemplated are correct in all material respects and do not
omit to state a fact necessary to make the statements contained
therein not misleading in light of the circumstances in which
they were made;
iii) to the best of such counsel's knowledge after due inquiry, no
statute or regulation or legal or governmental proceeding
required to be described in the Prospectus is not described as
required;
iv) none of the Company's execution or delivery of this Agreement
or the Representatives' Warrant Agreement, its performance
hereunder or thereunder, its consummation of the transactions
contemplated herein or therein, or the conduct of its business
as described in the Registration Statement, the Prospectus, and
any amendments or supplements thereto, conflicts with or will
conflict with or results or will result in any breach or
violation of any of the terms or provisions of, or constitutes
or will constitute a default under, or result in the creation
or imposition of any Lien, of any kind whatsoever upon, any
property or assets (tangible or intangible) of the Company
pursuant to the terms of any statute, judgment, decree, order,
rule or regulation applicable to the Company of any arbitrator,
court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation,
those having jurisdiction over environmental or similar
matters), domestic or foreign, having jurisdiction over the
Company or any of its activities or properties.
v) the statements in the Prospectus under the "RISK FACTORS" and
"BUSINESS" headings have been reviewed by such counsel, and
insofar as they relate to health, insurance, licensing and
regulatory matters (including, without limitation, federal
29
<PAGE>
health care law and the laws and applicable regulations of the
State of New York regarding the health care and insurance
industry), descriptions of statutes, licenses, rules or
regulations, or legal conclusions, are correct in all respects;
and
vi) the statements in the Prospectus under the "RISK FACTORS" and
"BUSINESS" headings have been reviewed by such counsel, and
insofar as they relate to health, insurance, licensing and
regulatory matters (including, without limitation, federal
health care law and the laws and applicable regulations of the
State of New York regarding the health care and insurance
industry) do not contain any untrue statement of a material
fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading in light of the circumstances in which they were
made.
(f) At each Option Closing Date, if any, the Underwriters shall have
received the favorable opinions of Company Counsel and Regulatory
Counsel, dated the Option Closing Date, addressed to the Underwriters
and in form and substance satisfactory to Underwriters' Counsel
confirming as of each Option Closing Date the statements made by each
of Company Counsel and Regulatory Counsel in their respective opinions
delivered on the Closing Date.
(g) On or prior to each of the Closing Date and the Option Closing Date, if
any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to
in subsection (c) of this Section 6, or in order to evidence the
accuracy, completeness or satisfaction of any of the representations,
warranties or conditions of the Company, or herein contained.
(h) Prior to each of the Closing Date and each Option Closing Date, if any
(i) there shall have been no adverse change or development involving a
prospective change in the condition, financial or otherwise, prospects,
stockholders equity or the business activities of the Company, whether
or not in the ordinary course of business consistent with past
practice, from the latest dates as of which such condition is set forth
in the Registration Statement and the Prospectus; (ii) there shall have
been no transaction, not in the ordinary course of business, consistent
with past practice, entered into by the Company, from the latest date
as of which the financial condition of the Company is set forth in the
Registration Statement and the Prospectus which is adverse to the
Company; (iii) the Company shall not be in default under any provision
of any instrument relating to any outstanding indebtedness; (iv) the
Company shall not have issued any securities (other than the
Securities) or declared or paid any dividend or made any distribution
in respect of its capital stock of any class and there has not been any
change in the capital stock or any change in the debt (long or short
term) or liabilities or obligations of the Company (contingent or
otherwise); (v) no material amount of the assets of the Company shall
have been pledged or mortgaged, except as set forth in the Registration
Statement and the Prospectus; (vi) no action, suit or proceeding, at
law or in equity, shall have been pending or threatened (or
circumstances giving rise to same) against the Company, or affecting
30
<PAGE>
any of its properties or businesses before or by any court or federal,
state or foreign commission, board or other administrative agency
wherein an unfavorable decision, ruling or finding may adversely affect
the business, operations, prospects or financial condition or income of
the Company, except as set forth in the Registration Statement and the
Prospectus; and (vii) no stop order shall have been issued under the
Act and no proceedings therefor shall have been initiated, threatened
or contemplated by the Commission.
(i) At each of the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received a certificate of the Company signed by
the principal executive officer and by the chief financial or chief
accounting officer of the Company, and a certificate of the Selling
Stockholder, each dated the Closing Date or Option Closing Date, as the
case may be, to the effect that each of such persons has carefully
examined the Registration Statement, the Prospectus and this Agreement,
and that:
i) The representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the
Closing Date or the Option Closing Date, as the case may be,
and the Company has complied with all agreements and covenants
and satisfied all conditions contained in this Agreement on its
part to be performed or satisfied at or prior to the Closing
Date or Option Closing Date, as the case may be;
ii) No stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued, and no
proceedings for that purpose have been instituted or are
pending or, to the best of each of such person's knowledge
after due inquiry, are contemplated or threatened under the
Act;
iii) The Registration Statement and the Prospectus and, if any, each
amendment and each supplement thereto, contain all statements
and information required to be included therein, and none of
the Registration Statement, the Prospectus nor any amendment or
supplement thereto includes any untrue statement of a material
fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading and neither the Preliminary Prospectus or any
supplement thereto included any untrue statement of a material
fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading; and
iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (a) the
Company has not incurred up to and including the Closing Date
or the Option Closing Date, as the case may be, other than in
the ordinary course of its business consistent with past
practice, any material liabilities or obligations, direct or
contingent; (b) the Company has not paid or declared any
dividends or other distributions on its capital stock; (c) the
Company has not entered into any transactions not in the
ordinary course of
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<PAGE>
business consistent with past practice; (d) there has not been
any change in the capital stock or long-term debt or any
increase in the short-term borrowings (other than any increase
in the short-term borrowings in the ordinary course of business
consistent with past practice) of the Company; (e) the Company
has not sustained any loss or damage to its property or assets,
whether or not insured; (f) there is no litigation which is
pending or threatened (or circumstances giving rise to same)
against the Company or any affiliated party of the Company
which is required to be set forth in an amended or supplemented
Prospectus which has not been set forth; and (g) there has
occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in
this subsection (i) are to such documents as amended and
supplemented at the date of such certificate.
(j) By the Closing Date, the Underwriters will have received clearance from
the NASD as to the amount of compensation allowable or payable to the
Underwriters, as described in the Registration Statement.
(k) At the time this Agreement is executed, the Underwriters shall have
received a letter, dated the date hereof, addressed to the Underwriters
in form and substance satisfactory (including the non-material nature
of the changes or decreases, if any, referred to in clause (iii) below)
in all respects to the Underwriters and Underwriters' Counsel, from BDO
Seidman, LLP:
i) confirming that they are independent certified public
accountants with respect to the Company within the meaning of
the Act and the applicable Rules and Regulations;
ii) stating that it is their opinion that the consolidated
financial statements and supporting schedules of the Company
included in the Registration Statement comply as to form in all
material respects with the applicable accounting requirements
of the Act and the Rules and Regulations thereunder and that
the Representatives may rely upon the opinion of BDO Seidman,
LLP with respect to the financial statements and supporting
schedules included in the Registration Statement;
iii) stating that, on the basis of a limited review which included a
reading of the latest available unaudited interim consolidated
financial statements of the Company (with an indication of the
date of the latest available unaudited interim financial
statements), a reading of the latest available minutes of the
stockholders and board of directors and the various committees
of the boards of directors of the Company, consultations with
officers and other employees of the Company responsible for
financial and accounting matters and other specified procedures
and inquiries,
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<PAGE>
nothing has come to their attention which would lead them to
believe that (A) the pro forma financial information contained
in the Registration Statement and the Prospectus does not
comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and
Regulations or is not fairly presented in conformity with
generally accepted accounting principles applied on a basis
consistent with that of the audited consolidated financial
statements of the Company or the unaudited pro forma financial
information included in the Registration Statement, (B) the
unaudited financial statements and supporting schedules of the
Company included in the Registration Statement do not comply as
to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations or are
not fairly presented in conformity with generally accepted
accounting principles applied on a basis substantially
consistent with that of the audited consolidated financial
statements of the Company included in the Registration
Statement, or (C) at a specified date not more than five (5)
days prior to the effective date of the Registration Statement,
there has been any change in the capital stock or long-term
debt of the Company, or any decrease in the stockholders'
equity or net current assets or net assets of the Company as
compared with amounts shown in the balance sheet included in
the Registration Statement, other than as set forth in or
contemplated by the Registration Statement, or, if there was
any change or decrease, setting forth the amount of such change
or decrease, and (D) during the period from ________ to a
specified date not more than five (5) days prior to the
effective date of the Registration Statement, there was any
decrease in net revenues, net earnings or increase in net
earnings per common share of the Company, in each case as
compared with the corresponding period beginning
__________other than as set forth in or contemplated by the
Registration Statement, or, if there was any such decrease,
setting forth the amount of such decrease;
iv) setting forth at a date not later than five (5) days prior to
the date of the Registration Statement, the amount of
liabilities of the Company (including a break-down of any notes
payable);
v) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings,
statements and other financial information pertaining to the
Company set forth in the Prospectus in each case to the extent
that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records,
including work sheets, of the Company and excluding any
questions requiring an interpretation by legal counsel, with
the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance with
generally accepted auditing standards), set forth in the letter
and found them to be in agreement;
vi) stating that they have not during the immediately preceding
five (5) year period brought to the attention of any of the
Company's management any "weakness," as
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<PAGE>
defined in Statement of Auditing Standard No. 60 "Communication
of Internal Control Structure Related Matters Noted in an
Audit," in any of the Company's internal controls;
vii) stating that they have in addition carried out certain
specified procedures, not constituting an audit, with respect
to certain pro forma financial information which is included in
the Registration Statement and the Prospectus and that nothing
has come to their attention as a result of such procedures that
caused them to believe such unaudited pro forma financial
information does not comply in form in all respects with the
applicable accounting requirements of Rule 11-02 of Regulation
S-X or that the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of that
information; and
viii) statements as to such other matters incident to the transaction
contemplated hereby as the Representatives may request.
(l) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from BDO Seidman, LLP a letter, dated
as of the Closing Date or the Option Closing Date, as the case may be,
to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (k) of this Section, except that the
specified date referred to shall be a date not more than five days
prior to Closing Date or the Option Closing Date, as the case may be,
and, if the Company has elected to rely on Rule 430A of the Rules and
Regulations, to the further effect that they have carried out
procedures as specified in clause (v) of subsection (k) of this Section
with respect to certain amounts, percentages and financial information
as specified by the Representatives and deemed to be a part of the
Registration Statement pursuant to Rule 430A(b) and have found such
amounts, percentages and financial information to be in agreement with
the records specified in such clause (v).
(m) On each of the Closing Date and each Option Closing Date, if any, there
shall have been duly tendered to the Representatives for the several
Underwriters' accounts the appropriate number of Securities.
(n) No order suspending the sale of the Securities in any jurisdiction
designated by the Representatives pursuant to subsection (e) of Section
4 hereof shall have been issued on either the Closing Date or the
Option Closing Date, if any, and no proceedings for that purpose shall
have been instituted or shall be contemplated.
(o) On or before the Closing Date, the Company shall have executed and
delivered to the Representatives (i) the Representatives' Warrant
Agreement substantially in the form filed as Exhibit ______ to the
Registration Statement in final form and substance satisfactory to the
Representatives, and (ii) the Representatives' Warrants in such
denominations and to such designees as shall have been provided to the
Company.
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(p) On or before Closing Date, the Securities shall have been duly approved
for quotation on NASDAQ/NM, subject to official notice of issuance.
(q) On or before Closing Date, there shall have been delivered to the
Representatives all of the Lock-up Agreements, in form and substance
satisfactory to Underwriters' Counsel.
(r) At the Closing Date the Underwriters shall have received the favorable
opinion of Certilman Balin Adler & Hyman, LLP, with respect to the
Selling Stockholder, dated the Closing Date, addressed to the
Underwriters and in form and substance satisfactory to Underwriters'
Counsel, to the effect that:
i) this Agreement, the Power of Attorney and the Custody Agreement
have been duly and validly executed and delivered by the
Selling Stockholder, and are the valid and binding obligation
of the Selling Stockholder, enforceable against the Selling
Stockholder in accordance with their terms;
ii) the execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby,
including the issuance, sale and delivery of the Securities,
will not result in a breach or violation of, or constitute a
default under, any will, license, contract, indenture,
mortgage, voting trust agreement, stockholders' agreement, deed
of trust, note, loan or credit agreement, or other agreement or
instrument to which the Selling Stockholder is a party or by
which the Selling Stockholder is or may be bound or to which
any of the Selling Stockholder's property is or may be subject
or any indebtedness, statute, judgment, decree, order, rule or
regulation applicable to the Selling Stockholder of any
arbitrator, court, regulatory body or administrative agency or
other governmental agency or body (including, without
limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, having jurisdiction over
the Selling Stockholder or any of its activities or properties;
iii) to the best of such counsel's knowledge, no consent, approval,
authorization, order, registration, filing, qualification,
license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction
over the Selling Stockholder, or any of its properties or
assets is required for the execution, delivery and performance
of this Agreement, and the consummation of the transactions
contemplated hereby, including the issuance, sale and delivery
of the Securities, except the registration under the Act of the
Securities and such consents, approvals, authorizations,
orders, registrations, filings, qualifications, licenses and
permits as may be required under state securities or Blue Sky
laws in connection with the purchase and distribution of the
Securities to be sold by the Underwriters; and
iv) upon delivery of the Securities, and the receipt of payment
therefor pursuant hereto, good, valid and marketable title to
such Securities, free and clear of all
35
<PAGE>
Liens, stockholders' agreements, voting trusts, community
property rights, or defects in title whatsoever will pass to
the Underwriters.
(s) At the Closing Date and each Option Closing Date, if any, the
Representatives shall have received a certificate of the
Attorney-in-Fact for the Selling Stockholder, dated as of such date, to
the effect that (i) the representations and warranties of the Selling
Stockholder contained herein and in the Custody Agreement are true and
correct with the same force and effect as though expressly made at and
as of such Closing Date or Option Closing Date, as the case may be,
(ii) the Selling Stockholder has reviewed the Prospectus, and any
supplements thereto, and the information that is set forth in the
Prospectus, and any supplements thereto, does not contain any untrue
statement of a material fact or omit to state any material fact
necessary to make such information not misleading, and all of the
information furnished by or on behalf of the Selling Stockholder for
use in the Prospectus is true, correct and complete in all respects.
If any condition to the Underwriters' obligations hereunder to be fulfilled
prior to or at the Closing Date or the relevant Option Closing Date, as the case
may be, is not so fulfilled, the Representatives may terminate this Agreement
or, if the Representatives so elect, they may waive any such conditions which
have not been fulfilled or extend the time for their fulfillment.
7. Indemnification.
(a) The Company and the Selling Stockholder jointly and severally agree to
indemnify and hold harmless each of the Underwriters (for purposes of
this Section 7 "Underwriter" shall include the officers, directors,
stockholders, partners, employees, agents and counsel of the
Underwriter, including specifically each person who may be substituted
for an Underwriter as provided in Section 11 hereof), and each person,
if any, who controls the Underwriter (a "controlling person") within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, from and against any and all losses, claims, damages, expenses or
liabilities, joint or several (and actions in respect thereof),
whatsoever (including but not limited to any and all expenses
whatsoever incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever), as
such are incurred, to which the Underwriter or such controlling person
may become subject under the Act, the Exchange Act or any other statute
or at common law or otherwise or under the laws of foreign countries,
arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained (i) in any Preliminary
Prospectus, the Registration Statement or the Prospectus (as from time
to time amended and supplemented); (ii) in any post-effective amendment
or amendments or any new registration statement and prospectus in which
is included securities of the Company issued or issuable upon exercise
of the Securities; or (iii) in any application or other document or
written communication (in this Section 7 collectively called
"application") executed by the Company or based upon written
information furnished by the Company in any jurisdiction in order to
qualify the Securities under the securities laws thereof or filed with
the Commission, any state securities commission or agency, NASDAQ/NM or
any other securities exchange; or the omission or alleged omission
36
<PAGE>
therefrom of a material fact required to be stated therein or necessary
to make the statements therein not misleading (in the case of the
Prospectus, in the light of the circumstances under which they were
made), unless such statement or omission was made exclusively in
reliance upon and in conformity with written information furnished to
the Company with respect to any Underwriter by or on behalf of such
Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment thereof or
supplement thereto, or in any application, as the case may be, or if
the Company sustains the burden of proving that such person was not
sent or given a copy of the Prospectus (or the Prospectus as amended or
supplemented) at or prior to the written confirmation of the sale of
such Securities to such person and the untrue statement contained in or
omission from such Preliminary Prospectus was corrected in the
Prospectus (or the Prospectus as amended or supplemented).
The indemnity agreement in this subsection (a) shall be in addition to
any liability which the Company or the Selling Stockholder may have at
common law or otherwise.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Selling Stockholder and/or the Company,
each of its directors, each of its officers who has signed the
Registration Statement, and each other person, if any, who controls the
Company within the meaning of the Act, to the same extent as the
foregoing indemnity from the Company and the Selling Stockholder to the
Underwriters but only with respect to statements or omissions, if any,
made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any amendment thereof or supplement thereto or in any
application made in reliance upon, and in strict conformity with,
written information furnished to the Company with respect to any
Underwriter by such Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or the Prospectus or any
amendment thereof or supplement thereto or in any such application,
provided that such written information or omissions only pertain to
disclosures in the Preliminary Prospectus, the Registration Statement
or the Prospectus directly relating to the transactions effected by the
Underwriters in connection with this offering. Each of the Company and
the Selling Stockholder acknowledge that the statements with respect to
the public offering of the Securities set forth under the heading
"Underwriting" in the Prospectus have been furnished by the
Underwriters expressly for use therein and constitute the only
information furnished in writing by or on behalf of the Underwriters
for inclusion in the Prospectus.
(c) Promptly after receipt by an indemnified party under this Section 7 of
notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made
against one or more indemnifying parties under this Section, notify
each party against whom indemnification is to be sought in writing of
the commencement thereof (but the failure so to notify an indemnifying
party shall not relieve it from any liability which it may have under
this Section 7 except to the extent that it has been prejudiced in any
material respect by such failure or from any liability which it may
have otherwise). In case any such action is brought against any
indemnified party, and it notifies an indemnifying party or parties of
the commencement thereof, the
37
<PAGE>
indemnifying party or parties will be entitled to participate therein,
and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from
such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party. Notwithstanding the
foregoing, the indemnified party or parties shall have the right to
employ its or their own counsel in any such case but the fees and
expenses of such counsel shall be at the expense of such indemnified
party or parties unless (i) the employment of such counsel shall have
been authorized in writing by the indemnifying party in connection with
the defense of such action at the expense of such indemnifying party,
(ii) the indemnifying party shall not have employed counsel reasonably
satisfactory to such indemnified party to have charge of the defense of
such action within a reasonable period of time after notice of
commencement of the action, or (iii) such indemnified party or parties
shall have reasonably concluded that there may be defenses available to
it or them which are different from or additional to those available to
one or all of the indemnifying parties (in which case the indemnifying
parties shall not have the right to direct the defense of such action
on behalf of the indemnified party or parties), in any of which events
such fees and expenses of additional counsel shall be borne by the
indemnifying parties. Anything in this Section 7 to the contrary
notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its written consent;
provided, however, that such consent was not unreasonably withheld.
(d) In order to provide for just and equitable contribution in any case in
which (i) an indemnified party makes a claim for indemnification
pursuant to this Section 7, but it is judicially determined (by the
entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in
such case notwithstanding the fact that the express provisions of this
Section 7 provide for indemnification in such case, or (ii)
contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the
amount paid as a result of such losses, claims, damages, expenses or
liabilities (or actions in respect thereof) (A) in such proportion as
is appropriate to reflect the relative benefits received by each of the
contributing parties, on the one hand, and the party to be indemnified
on the other hand, from the offering of the Securities or (B) if the
allocation provided by clause (A) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above, but also the
relative fault of each of the contributing parties, on the one hand,
and the party to be indemnified on the other hand, in connection with
the statements or omissions that resulted in such losses, claims,
damages, expenses or liabilities, as well as any other relevant
equitable considerations. In any case where each of the Company and the
Selling Stockholder is a contributing party and the Underwriters are
the indemnified party, the relative benefits received by each of the
Company and the Selling Stockholder on the one hand, and the
Underwriters, on the other, shall be deemed to be in the same
proportion as the total net proceeds from the offering of the
Securities (before deducting expenses) bear to the total underwriting
discounts received by the Underwriters hereunder, in each case as set
forth in the table on the cover page of the Prospectus. Relative fault
shall be determined by reference to,
38
<PAGE>
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information supplied by the Company, the Selling
Stockholder or by the Underwriters, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, expenses
or liabilities (or actions in respect thereof) referred to above in
this subdivision (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim.
Notwithstanding the provisions of this subdivision (d) the Underwriters
shall not be required to contribute any amount in excess of the
underwriting discount applicable to the Securities purchased by the
Underwriters hereunder. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section 7, each
person, if any, who controls the Company within the meaning of the Act,
each officer of the Company who has signed the Registration Statement,
and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to this subparagraph
(d). Any party entitled to contribution will, promptly after receipt of
notice of commencement of any action, suit or proceeding against such
party in respect to which a claim for contribution may be made against
another party or parties under this subparagraph (d), notify such party
or parties from whom contribution may be sought, but the omission so to
notify such party or parties shall not relieve the party or parties
from whom contribution may be sought from any obligation it or they may
have hereunder or otherwise than under this subparagraph (d), or to the
extent that such party or parties were not adversely affected by such
omission. The contribution agreement set forth above shall be in
addition to any liabilities which any indemnifying party may have at
common law or otherwise.
8. Representations and Agreements to Survive Delivery. All representations,
warranties and agreements contained in this Agreement or contained in
certificates of the Selling Stockholder or officers of the Company submitted
pursuant hereto, shall be deemed to be representations, warranties and
agreements at the Closing Date and the Option Closing Date, as the case may be,
and such representations, warranties and agreements of the Company and the
Selling Stockholder, and the respective indemnity agreements contained in
Section 7 hereof, shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any Underwriter, the Company, or
any controlling person of any Underwriter or the Company, or the Selling
Stockholder, and shall survive termination of this Agreement or the issuance and
delivery of the Securities to the Underwriters and the Representatives, as the
case may be.
9. Effective Date.
(a) This Agreement shall become effective at 10:00 a.m., New York City time, on
the next full business day following the date hereof, or at such earlier time
after the Registration Statement becomes effective as the Representatives, in
their discretion, shall release the Securities for the sale to the public;
provided, however, that the provisions of Sections 5, 7 and 10 of this
39
<PAGE>
Agreement shall at all times be effective. For purposes of this Section 9, the
Securities to be purchased hereunder shall be deemed to have been so released
upon the earlier of dispatch by the Representatives of telegrams to securities
dealers releasing such shares for offering or the release by the Representatives
for publication of the first newspaper advertisement which is subsequently
published relating to the Securities.
10. Termination.
(a) Subject to subsection (b) of this Section 10, the Representatives shall
have the right to terminate this Agreement if (i) any domestic or
international event or act or occurrence has disrupted, or in the
Representatives' opinion will in the immediate future disrupt the
financial markets; or (ii) any material adverse change in the financial
markets shall have occurred; or (iii) trading on the New York Stock
Exchange, the American Stock Exchange, NASDAQ/NM, or in the
over-the-counter market shall have been suspended, or minimum or
maximum prices for trading shall have been fixed, or maximum ranges for
prices for securities shall have been required on the over-the-counter
market by the NASD or by order of the Commission or any other
government authority having jurisdiction; or (iv) the United States
shall have become involved in a war or major hostilities, or if there
shall have been an escalation in an existing war or major hostilities
or a national emergency shall have been declared in the United States;
or (v) a banking moratorium has been declared by a state or federal
authority; or (vi) a moratorium in foreign exchange trading has been
declared; or (vii) the Company shall have sustained a loss material or
substantial to the Company by fire, flood, accident, hurricane,
earthquake, theft, sabotage or other calamity or malicious act which,
whether or not such loss shall have been insured, will, in the
Representatives' opinion, make it inadvisable to proceed with the
delivery of the Securities; or (viii) there shall have been such a
material adverse change in the conditions or prospects of the Company,
or such material adverse change in the general market, political or
economic conditions, in the United States or elsewhere as in the
Representatives' judgment would make it inadvisable to proceed with the
offering, sale and/or delivery of the Securities or (ix) if Bert E. Mr.
Brodsky shall no longer serve the Company in his present capacity.
(b) If this Agreement is terminated by the Representatives in accordance
with the provisions of Section 10(a), the Company shall promptly
reimburse and indemnify the Representatives for all of their actual
out-of-pocket expenses, including the fees and disbursements of counsel
for the Underwriters (less amounts previously paid pursuant to Section
5(c) above). Notwithstanding any contrary provision contained in this
Agreement, if this Agreement shall not be carried out within the time
specified herein, or any extension thereof granted to the
Representatives, by reason of any failure on the part of the Company or
the Selling Stockholder to perform any undertaking or satisfy any
condition of this Agreement by it to be performed or satisfied
(including, without limitation, pursuant to Sections 6 or 12) then, the
Company shall promptly reimburse and indemnify the Representatives for
all of their actual out-of-pocket expenses, including the fees and
disbursements of counsel for the Underwriters (less amounts previously
paid
40
<PAGE>
pursuant to Section 5(c) above). In addition, the Company shall remain
liable for all Blue Sky counsel fees and expenses and Blue Sky filing
fees. Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to Sections 6, 10, 11 and 12
hereof), and whether or not this Agreement is otherwise carried out,
the provisions of Sections 5 and 7 shall not be in any way affected by
such election or termination or failure to carry out the terms of this
Agreement or any part hereof.
11. Substitution of the Underwriters. If one or more of the Underwriters
shall fail (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 6, Section 10 or Section 12
hereof) to purchase the Securities which it or they are obligated to purchase on
such date under this Agreement (the "Defaulted Securities"), the Representatives
shall have the right, within 24 hours thereafter, to make arrangements for one
or more of the non-defaulting Underwriters, or any other underwriters, to
purchase all, but not less than all, of the Defaulted Securities in such amounts
as may be agreed upon and upon the terms herein set forth; if, however, the
Representatives shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the total
number of Firm Securities to be purchased on such date, the
non-defaulting Underwriters shall be obligated to purchase the full
amount thereof in the proportions that their respective underwriting
obligations hereunder bear to the underwriting obligations of all non-
defaulting Underwriters; or
(b) if the number of Defaulted Securities exceeds 10% of the total number
of Firm Securities, this Agreement shall terminate without liability on
the part of any nondefaulting Underwriters.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of any default by such
Underwriter under this Agreement.
In the event of any such default which does not result in a termination
of this Agreement, the Representatives shall have the right to postpone
the Closing Date for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus
or in any other documents or arrangements.
12. Default by the Company or the Selling Stockholder. If the Company or the
Selling Stockholder shall fail at the Closing Date or any Option Closing Date,
as applicable, to sell and deliver the number of Securities which it is
obligated to sell hereunder on such date, then this Agreement shall terminate
(or, if such default shall occur with respect to any Option Securities to be
purchased on an Option Closing Date, the Underwriters' may, at the
Representatives' option, by notice from the Representatives to the Company,
terminate the Underwriters' obligation to purchase Option Securities from the
Company on such date) without any liability on the part of any non-defaulting
party other than pursuant to Section 5, 7 and 10 hereof. No action taken
41
<PAGE>
pursuant to this Section shall relieve the Company or the Selling Stockholder
from liability, if any, in respect of such default.
13. Notices. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representatives at Ryan, Beck & Co., Inc., 200 Park Avenue, 16th Floor, New
York, New York 10166, Attention: __________________, and at Pennsylvania
Merchant Group, Four Falls Corporate Center, West Conshohocken, Pennsylvania
19428, Attention: __________________, with a copy to Sonnenschein Nath &
Rosenthal, 1221 Avenue of the Americas, New York, New York 10020, Attention:
Dennis N. Berman, Esq. Notices to the Company shall be directed to the Company
at National Medical Health Card Systems, Inc., 26 Harbor Park Drive, Port
Washington, New York 11050, Attention: Bert E. Brodsky, with a copy to
Certilman, Balin, Adler & Hyman, LLP, 90 Merrick Avenue, East Meadow, New York
11514, Attention: Steven J. Kuperschmid, Esq. Notices to the Selling Stockholder
shall be directed to the Bert E. Brodsky Revocable Trust,
________________________, Attention: __________________, with a copy to
Certilman, Balin, Adler & Hyman, LLP, 90 Merrick Avenue, East Meadow, New York
11514, Attention: Steven J. Kuperschmid, Esq.
14. Parties. This Agreement shall inure solely to the benefit of and shall
be binding upon, the Underwriters, the Company and the controlling persons,
directors and officers referred to in Section 7 hereof, and their respective
successors, legal representatives and assigns, and the Selling Stockholder and
its successors, legal representatives and assigns, and no other person shall
have or be construed to have any legal or equitable right, remedy or claim under
or in respect of or by virtue of this Agreement or any provisions herein
contained. No purchaser of Securities from any Underwriter shall be deemed to be
a successor by reason merely of such purchase.
15. Construction. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York, without giving
effect to its choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
17. Entire Agreement: Amendments. This Agreement and the Representatives'
Warrant Agreement constitute the entire agreement of the parties hereto and
supersede all prior written or oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may not be amended
except in a writing, signed by the Representatives, the Company and the Selling
Stockholder.
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<PAGE>
If the foregoing correctly sets forth the understanding between the
Underwriters, the Company and the Selling Stockholder, please so indicate in the
space provided below for that purpose, whereupon this letter shall constitute a
binding agreement among us.
Very truly yours,
NATIONAL MEDICAL HEALTH CARD
SYSTEMS, INC.
By: _______________________________
Name: Bert E. Brodsky
Title: Chairman of the Board and
Chief Executive Officer
BERT E. BRODSKY
REVOCABLE TRUST
______________________________________
Name: Bert E. Brodsky
Title: Trustee
RYAN, BECK & CO., INC.
For itself and as Representative
of the several Underwriters named
in Schedule A hereto.
By: ________________________________
Name:
Title:
PENNSYLVANIA MERCHANT GROUP
For itself and as Representative
of the several Underwriters named
in Schedule A hereto.
By: ________________________________
Name:
Title:
43
<PAGE>
Schedule A
Name of Underwriter Number of Firm Securities to be
Purchased
Ryan, Beck & Co., Inc.
Pennsylvania Merchant Group
44
<PAGE>
SCHEDULE B
Name of Stockholder Number of Shares Subject to Lock-up Agreements
45
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
Under Section 807 of the
Business Corporation Law
Pursuant to the provisions of Section 807 of the Business Corporation Law,
the undersigned, being respectively the President and Secretary of the
Corporation, do hereby certify and set forth:
FIRST: The name of the corporation is NATIONAL MEDICAL HEALTH CARD SYSTEMS,
INC. (the "Corporation").
SECOND: The Certificate of Incorporation of the Corporation was filed by
the Department ofState of the State of New York on July 23, 1981.
THIRD: The Certificate of Incorporation of the Corporation is hereby
deleted in its entirety and amended to effect amendments relating to (a) the
restatement of the corporate purposes of the Corporation; (b) the location of
the office of the Corporation in the State of New York; (c) a change of address
to which the Secretary of State shall mail a copy of any process against the
Corporation; (d) a restatement of the affirmative denial of pre-emption rights
to shareholders of the Corporation; (e) the vesting of authority in the Board of
Directors to provide for the issuance of Preferred Shares and elections by the
Board of Directors relating to (i) non-pro rata distributions of dividends
and/or amounts payable upon liquidation with respect to shares of all series in
the same class of Preferred Shares and (ii) distributions of any class or series
of shares to holders of any other class or series of shares; (f) a deletion of
(i) a limitation on the number of directors of the Corporation; (ii) the
duration of the Corporation; (iii) the number of directors of the Corporation as
provided by the By-Laws; (iv) participation in board meetings via telephone
conference; and (v) adoption, amendment or repeal of the By-Laws by the Board of
Directors; (g) indemnification of directors and officers of the Corporation; (h)
limitations on director liability; (i) an election by the Corporation to allow
shareholders or directors of the Corporation to approve loans made by the
Corporation to its directors; (j) an election by the Corporation to allow
shareholders of the Corporation to authorize corporate actions by less than
unanimous written consent and (k) an election by the Corporation to allow
shareholders of the Corporation to authorize various material corporate actions
by the written consent of the holders of a majority of the votes of all
outstanding shares entitled to vote thereon instead of a two-thirds vote. The
text of the Certificate of Incorporation is hereby restated, as amended, to read
as herein set forth in full:
"CERTIFICATE OF INCORPORATION
OF
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
1. The name of the corporation is NATIONAL MEDICAL HEALTH CARD SYSTEMS,
INC. (the "Corporation")
2. The Corporation is formed to engage in any lawful act or activity for
which corporations may be organized under the Business Corporation Law of the
State of New York (the "BCL"), provided that it is not formed to engage in any
act or activity which requires the consent or approval of any state official,
department, board, agency or other body, without such approval or consent first
being obtained.
3. The office of the Corporation in the State of New York shall be located
in the County of Nassau.
4. (a) The Corporation shall be authorized to issue the following
shares:
<TABLE>
<CAPTION>
Class Number of Shares Par Value
<S> <C> <C>
COMMON 200,000,000 $.001
PREFERRED 10,000,000 $.10
</TABLE>
(b) No holder of any shares of the Corporation shall, because of his
ownership of shares of the Corporation, have a pre-emptive or other right to
purchase, subscribe for, or take any part of any shares of the Corporation, or
any part of any notes, debentures, bonds or other securities convertible into or
providing for options or warrants to purchase shares of the Corporation which
are issued, offered, or sold by the Corporation, whether the shares, notes,
debentures, bonds, or other securities, be authorized by this Certificate of
<PAGE>
Incorporation or by an amended certificate duly filed and in effect at the time
of the issuance, offer, or sale of such shares, notes, debentures, bonds or
other securities. Any part of the shares authorized by this Certificate of
Incorporation or by an amended certificate duly filed and any part of any notes,
debentures, bonds or other securities convertible into or providing for options
or warrants to purchase shares of the Corporation may at any time be issued,
offered for sale, and sold or disposed of by the Corporation, pursuant to a
resolution of its Board of Directors and to such persons and upon such terms and
conditions as the Board of Directors may, in its sole discretion, deem proper
and advisable, without first offering the existing shareholders any part of such
shares, notes, debentures, bonds or other securities.
(c) The Board of Directors hereby is vested with the authority to provide
for the issuance of the Preferred Shares, at any time and from time to time, in
one or more series, each of such series to have such voting powers,
designations, preferences and relative participating, optional, conversion and
other rights, and such qualifications, limitations or restrictions thereon as
expressly provided in the resolution or resolutions duly adopted by the Board of
Directors providing for the issuance of such shares or series thereof. The
authority which hereby is vested in the Board of Directors shall include, but
not be limited to, the authority to provide for the following matters relating
to each series of the Preferred Shares:
(i) The designation of any series.
(ii) The number of shares initially constituting any such series.
(iii) The increase to a number not greater than the total number of
authorized shares of the class which such series is a part, and the
decrease, to a number not less than the number of the outstanding shares of
any such series, of the number of of shares constituting such series
theretofore fixed.
(iv) The rate or rates and the times at which dividends on the
Preferred Shares or any series thereof shall be paid, and whether or not
such dividends shall be cumulative, and, if such dividends shall be
cumulative, the date or dates from and after which they shall accumulate.
(v) Whether or not the Preferred Shares or series thereof shall be
redeemable, and, if such shares shall be redeemable, the terms and
conditions of such redemption, including but not limited to the date or
dates upon or after which such shares shall be redeemable and the amount
per share which shall be payable upon such redemption, which amount may
vary under different conditions and at different redemption dates.
(vi) The amount payable on the Preferred Shares or series thereof in
the event of the voluntary or involuntary liquidation, dissolution or
winding up of the Corporation; provided, however, that (a) if the stated
dividends and amounts payable in liquidation are not paid in full, the
shares of all series of the same class shall not be required to share
ratably in the payment of dividends including accumulations, if any, in
accordance with the sums which would be payable in such shares if all
dividends were declared and paid in full, and in any distribution of assets
other than by way of dividends in accordance with the sums which would be
payable on such distribution if all sums payable were discharged in full;
and (b) the holders of shares ranking senior to other shares shall be
entitled to be paid, or to have set apart for payment, not less than the
liquidation value of such shares before the holders of the Common Shares or
the holders of any other series of Preferred Shares ranking junior to such
senior-ranking shares.
(vii) Whether or not the Preferred Shares or series thereof shall have
voting rights, in addition to the voting rights provided by law, and, if
such shares shall have such voting rights, the terms and conditions
thereof, including but not limited to the right of the holders of such
shares to vote as a separate class either alone or with the holders of
shares of one or more other class or series of Preferred Shares and the
right to have more than one vote per share.
(viii) Whether or not a sinking fund shall be provided for the
redemption of the Preferred Shares or series thereof, and, if such a
sinking fund shall be provided, the terms and conditions thereof.
(ix) Whether or not a purchase fund shall be provided for the
Preferred Shares or series thereof, and, if such a purchase fund shall be
provided, the terms and conditions thereof.
(x) Whether or not the Preferred Shares or series thereof shall
<PAGE>
have conversionprivileges, and, if such shares shall have conversion
privileges, the terms and conditions of conversion, including but not
limited to any provision for the adjustment of the conversion rate or the
conversion price.
(xi) Whether or not distributions of any class or series of shares may
be made to holders of another class or series of shares.
(xii) Any other relative rights, preferences, qualifications,
limitations and restrictions.
5. The Secretary of State is designated as the agent of the Corporation
upon whom process against the Corporation may be served, and the address to
which the Secretary of State shall mail a copy of any process against the
Corporation served upon him is c/o the Corporation, 26 Harbor Park Drive, Port
Washington, New York 11050, Attention: President.
6. (a) The Corporation shall, to the fullest extent permitted by Section
721 through 726 of the BCL, indemnify any and all directors and officers whom it
shall have power to indemnify under the said sections from and against any and
all of the expenses, liabilities or other matters referred to in or covered by
such sections, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which the persons so indemnified may be
entitled under any By-Law, agreement, vote of shareholders or disinterested
directors or otherwise, both as to any action in his or her official capacity
and as to any action in another capacity by holding such office, and shall
continue as to a person who has ceased to be a director or officer and shall
inure to the benefits of the heirs, executors and administrators of such a
person.
(b) A director of this Corporation shall not be personally liable to the
Corporation or its shareholders for damages for any breach of duty in his or her
capacity as a director, unless a judgment or other final adjudication adverse to
him or her establishes that (i) his or her acts or omissions were in bad faith
or involved intentional misconduct or a knowing violation of law, or (ii) he or
she personally gained in fact a financial profit or other advantage to which he
or she was not legally entitled or (iii) his or her acts violated Section 719 of
the BCL.
7. The Corporation may not lend money to or guarantee the obligation of a
director of the Corporation unless (i) the particular loan or guarantee is
approved by the shareholders, with the holders of a majority of the shares
entitled to vote thereon constituting a quorum, but shares held of record or
beneficially by directors who are benefitted by such loan or guarantee shall not
be entitled to vote or to be included in the determination of a quorum; or (ii)
the Board of Directors determines that the loan or guarantee benefits the
Corporation and either approves the specific loan or guarantee or a general plan
authorizing loans and guarantees.
8. Whenever shareholders of the Corporation are required or permitted to
take any action by vote, such action may be taken without a meeting on written
consent, setting forth the action so taken, signed by the holders of outstanding
shares having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted.
9. Whenever shareholders of the Corporation shall be entitled to vote on
(a) an amendment to strike out a provision authorized by paragraph 620(b) of the
BCL, (b) an amendment of the Certificate of Incorporation which changes or
strikes out a provision permitted by Section 709 of the BCL, (c) a plan of
merger or consolidation involving the Corporation, (d) a proposed sale, lease,
exchange or other disposition of all or substantially all the assets of the
Corporation, if not made in the usual or regular course of the business actually
conducted by the Corporation, (e) a plan for binding share exchanges relating to
the Corporation or (f) a plan of dissolution of the Corporation, such vote shall
be authorized by a majority of the votes of all outstanding shares entitled to
vote thereon."
FOURTH: The amendments to the Certificate of Incorporation were
authorized by the unanimous written consent of all of the directors of the
Corporation and the vote of the holders of a majority of the outstanding shares
of the Corporation at a meeting of shareholders duly called for such purpose.
IN WITNESS WHEREOF, we hereunto sign our names and affirm that the
statements made herein are true under the penalty of perjury, this 10th day of
May, 1999.
/s/ Marjorie G. O'Malley
------------------------
Marjorie G. O'Malley, President
/s/ Gerald Shapiro
------------------
Gerald Shapiro, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
Under Section 805 of the
Business Corporation Law
Pursuant to the provisions of Section 805 of the Business Corporation Law,
the undersigned, being respectively the President and Secretary of the
Corporation, do hereby certify and set forth:
FIRST: The name of the Corporation is NATIONAL MEDICAL HEALTH CARD
SYSTEMS, INC. (the"Corporation").
SECOND: The Certificate of Incorporation of the Corporation was filed
by the Department of State on July 23, 1981.
THIRD: The Certificate of Incorporation of the Corporation is hereby
amended to effect the following amendments: (a) to reduce the number of
authorized but unissued Common Shares of the Corporation from 200,000,000 with a
par value of $.001 per share to 25,000,000 Common Shares with a par value of
$.001 per share; (b) to reduce the number of issued and outstanding Common
Shares of the Corporation from 41,554,302 Common Shares with a par value of
$.001 per share into 5,312,497 Common Shares with a par value of $.001 per share
at a rate of .1278447 Common Shares, par value of $.001 per share, for each one
Common Share with a par value of $.001 per share; and (c) to reduce the number
of presently authorized Common Shares of the Corporation from 158,445,698 Common
Shares with a par value of $.001 per share into 19,687,503 Common Shares with a
par value of $.001 per share at a rate of .12425394471 Common Shares, par value
of $.001 per share, for each one Common Share with a par value of $.001 per
share upon the filing of this certificate.
FOURTH: Paragraph 4(a) of the Certificate of Incorporation, relating
to the number and kind of shares authorized to be issued by the Corporation, is
amended to read as follows:
"4. (a) The Corporation shall be authorized to issue the following
shares:
<TABLE>
<CAPTION>
Class Number of Shares Par Value
<S> <C> <C>
COMMON 25,000,000 $.001
PREFERRED 10,000,000 $0.10
</TABLE>
FIFTH: The stated capital of the Corporation is reduced by $36,241
from $41,554 to $5,313 by virtue of the foregoing change in the number of issued
and outstanding Common Shares of the Corporation.
SIXTH: The amendments to the Certificate of Incorporation were
authorized by the unanimous written consent of all of the directors of the
Corporation and the vote of the holders of a majority of the outstanding shares
of the Corporation at a meeting of shareholders duly called for such purpose.
IN WITNESS WHEREOF, we hereunto sign our names and affirm that the
statements made herein are true under the penalty of perjury, this 10th day of
May, 1999.
/s/ Marjorie G. O'Malley
------------------------
Marjorie G. O'Malley, President
/s/ Gerald Shapiro
------------------
Gerald Shapiro, Secretary
<PAGE>
BY LAWS
OF
National Medical Health Card Systems, Inc.
ARTICLE I - OFFICES
The office of the Corporation shall be located in the City, County and State
designated in the Certificate of Incorporation. The Corporation may also
maintain offices at such other places within or without the United States as the
Board of Directors may, from time to time, determine.
ARTICLE II - MEETING OF SHAREHOLDERS
Section 1 - Annual Meeting:
The annual meeting of the shareholders of the Corporation shall be held within
five months after the close of the fiscal year of the Corporation, for the
purpose of electing directors, and transacting such other business as may
properly come before the meeting.
Section 2 - Special Meetings:
Special meetings of the shareholders may be called at any time by the Board of
Directors or by the President, and shall be called by the President or the
Secretary at the written request of the holders of ten per cent (10%) of the
shares then outstanding and entitled to vote thereat, or as otherwise required
under the provisions of the Business Corporation Law.
Section 3 - Place of Meeting:
All meetings of shareholders shall be held at the principal office of the
Corporation, or at such other places within or without the State of New York as
shall be designated in the notices or waivers of notice of such meetings.
Section 4 - Notice of Meetings:
(a) Written notice of each meeting of shareholders, whether annual or special,
stating the time when and place where it is to be held, shall be served either
personally or by mail, not less than ten or more than fifty days before the
meeting, upon each shareholder of record entitled to vote at such meeting, and
to any other shareholder to whom the giving of notice may be required by law.
Notice of a special meeting shall also state the purpose or purposes for which
the meeting is called, and shall indicate that it is being issued by, or at the
direction of , the person or persons calling the meeting. If, at any meeting,
action is proposed to be taken that would, if taken, entitle shareholders to
receive payment for their shares pursuant to the Business Corporation Law, the
notice of such meeting shall include a statement of that purpose and to that
effect. If mailed, such notice shall be directed to each such shareholder at his
address, as it appears on the records of the shareholders of the Corporation,
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<PAGE>
unless he shall have previously filed with the Secretary of the Corporation a
written request that notices intended for him be mailed to some other address,
in which case, it shall be mailed to the address designated in such request.
(b) Notice of any meeting need not be given to any person who may become a
shareholder of record after the mailing of such notice and prior to the meeting,
or to any shareholder who attends such meeting, in person or by proxy, or to any
shareholder who, in person or by proxy, submits a signed waiver of notice either
before or after such meeting. Notice of any adjourned meeting of shareholders
need not be given, unless otherwise required by statute.
Section 5 - Quorum:
(a) Except as otherwise provided herein, or by statue, or in the Certificate of
Incorporation (such Certificate and any amendments thereof being hereinafter
collectively referred to as the "Certificate of Incorporation"), at all meetings
of shareholders of the Corporation, the presence at the commencement of such
meetings in person or by proxy of shareholders holding of record a majority of
the total number of shares of the Corporation then issued and outstanding and
entitled to vote, shall be necessary and sufficient to constitute a quorum for
the transaction of any business. The withdrawal of any shareholder after the
commencement of a meeting shall have no effect on the existence of a quorum,
after a quorum has been established at such meeting.
(b) Despite the absence of a quorum at any annual or special meeting of
shareholders, the shareholders, by a majority of the votes cast by the holders
of shares entitled to vote thereon, may adjourn the meeting. At any such
adjourned meeting at which a quorum is present, any business may be transacted
which might have been transacted at the meeting as originally called if a quorum
had been present.
Section 6 - Voting:
(a) Except as otherwise provided by statute or by the Certificate of
Incorporation, any corporate action, other than the election of directors to be
taken by vote of the shareholders, shall be authorized by a majority of votes
cast at a meeting of shareholders by the holders of shares entitled to vote
thereon.
(b) Except as otherwise provided by statute or by the Certificate of
Incorporation, at each meeting of shareholders, each holder of record of stock
of the Corporation entitled to vote thereat, shall be entitled to one vote for
each share of stock registered in his name on the books of the Corporation.
(c) Each shareholder entitled to vote or to express consent or dissent without a
meeting, may do so by proxy; provided, however, that the instrument authorizing
such proxy to act shall have been executed in writing by the shareholder
himself, or by his attorney-in-fact thereunto duly authorized in writing. No
proxy shall be valid after the expiration of eleven months from the date of its
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<PAGE>
execution, unless the persons executing it shall have specified therein the
length of time it is to continue in force. Such instrument shall be exhibited to
the Secretary at the meeting and shall be filed with the records of the
Corporation.
(d) Any resolution in writing, signed by all of the shareholders entitled to
vote thereon, shall be and constitute action by such shareholders to the effect
therein expressed, with the same force and effect as if the same had been duly
passed by unanimous vote at a duly called meeting of shareholders and such
resolution so signed shall be inserted in the Minute Book of the Corporation
under its proper date.
ARTICLE III - BOARD OF DIRECTORS
Section 1 - Number, Election and Term of Office:
(a) The number of the directors of the Corporation shall be three (3), unless
and until otherwise determined by vote of a majority of the entire Board of
Directors. The number of Directors shall not be less than three, unless all of
the outstanding shares are owned beneficially and of record by less than three
shareholders, in which event the number of directors shall not be less than the
number of shareholders.
(b) Except as may otherwise be provided herein or in the Certificate of
Incorporation, the members of the Board of Directors of the Corporation, who
need not be shareholders, shall be elected by a majority of the votes cast at a
meeting of shareholders, by the holders of shares entitled to vote in the
election.
(c) Each director shall hold office until the annual meeting of share
shareholders next succeeding his election, and until his successor is elected
and qualified, or until his prior death, resignation or removal.
Section 2 - Duties and Powers:
The Board of Directors shall be responsible for the control and management of
the affairs, property and interests of the Corporation, and may exercise all
powers of the Corporation, except as are in the Certificate of Incorporation or
by statute expressly conferred upon or reserved to the shareholders.
Section 3 - Annual and Regular Meetings; Notice:
(a) A regular annual meeting of the Board of Directors shall be held immediately
following the annual meeting of the shareholders, at the place of such annual
meeting of shareholders.
(b) The Board of Directors, from time to time, may provide by resolution for the
holding of other regular meetings of the Board of Directors, and may fix the
time and place thereof.
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<PAGE>
(c) Notice of any regular meeting of the Board of Directors shall not be
required to be given and, if given, need not specify the purpose of the meeting;
provided, however, that in case the Board of Directors shall fix or change the
time or place of any regular meeting, notice of such action shall be given to
each director who shall not have been present at the meeting at which such
action was taken within the time limited, and in the manner set forth in
paragraph (b) of Section 4 of this Article III, with respect to special
meetings, unless such notice shall be waived in the manner set forth in
paragraph (c) of such Section 4.
Section 4 - Special Meetings; Notice:
(a) Special meetings of the Board of Directors shall be held whenever called by
the President or by one of the directors, at such time and place as may be
specified in the respective notices or waivers of notice thereof.
(b) Notice of special meeting shall be mailed directly to each director,
addressed to him at his residence or usual place of business, at least two (2)
days before the day on which the meeting is to be held, or shall be sent to him
at such place by telegram, radio or cable, or shall be delivered to him
personally or given to him orally, not later than the day before the day on
which the meeting is to be held. A notice, or waiver of notice, except as
required by Section 8 of this Article III, need not specify the purpose of the
meeting.
(c) Notice of any special meeting shall not be required to be given to any
director who shall attend such meeting without protesting prior thereto or at
its commencement, the lack of notice to him, or who submits a signed waiver of
notice, whether before or after the meeting. Notice of any adjourned meeting
shall not be required to be given.
Section 5 - Chairman:
(a) At all meetings of the Board of Directors, the Chairman of the Board, if any
and if present, shall preside. If there shall be no Chairman, or he shall be
absent, then the President shall preside, and in his absence, a Chairman chosen
by the Directors shall preside.
Section 6 - Quorum and Adjournments:
(a) At all meetings of the Board of Directors, the presence of a majority of the
entire Board shall be necessary and sufficient to constitute a quorum for the
transaction of business, except as otherwise provided by law, by the Certificate
of Incorporation, or by these By-Laws. Participation of any one or more members
of the Board by means of a conference telephone or similar communications
equipment, allowing all persons participating in the meeting to hear each other
at the same time, shall constitute presence in person at any such meeting.
(b) A majority of the directors present at the time and place of any regular or
special meeting, although less than a quorum, may adjourn the same form time to
time without notice, until a quorum
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<PAGE>
shall be present.
Section 7 - Manner of Acting:
(a) At all meetings of the Board of Directors, each director present shall have
one vote, irrespective of the number of shares of stock, if any, which he may
hold.
(b) Except as otherwise provided by statute, by the Certificate of
Incorporation, or these ByLaws, the action of a majority of the directors
present at any meeting at which a quorum is present shall be the act of the
Board of Directors. Any action authorized, in writing, by all of the directors
entitled to vote thereon and filed with the minutes of the Corporation shall be
the act of the Board of Directors with the same force and effect as if the same
had been passed by unanimous vote at a duly called meeting of the Board.
Section 8 - Vacancies:
Any vacancy in the Board of Directors occurring by reason of an increase in the
number of directors, or by reason of the death, resignation, disqualification,
removal (unless a vacancy created by the removal of a director by the
shareholders shall be filled by the shareholders at the meeting at which the
removal was effected) or inability to act of any director, or otherwise, shall
be filled for the unexpired portion of the term by a majority vote of the
remaining directors, though less than a quorum, at any regular meeting or
special meeting of the Board of Directors called for that purpose.
Section 9 - Resignation:
Any director may resign at any time by giving written notice to the Board of
Directors, the President or the Secretary of the Corporation. Unless otherwise
specified in such written notice, such resignation shall take effect upon
receipt thereof by the Board of Directors or such officer, and the acceptance of
such resignation shall not be necessary to make it effective.
Section 10 - Removal:
Any director may be removed with or without cause at any time by the
shareholders, at a special meeting of the shareholders called for that purpose,
and may be removed for cause by action of the Board.
Section 11 - Salary:
No stated salary shall be paid to directors, as such, for their services, but by
resolution of the Board of Directors a fixed sum and expenses of attendance, if
any, may be allowed for attendance at each regular or special meeting of the
Board; provided, however, that nothing herein contained shall be construed to
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor.
5
<PAGE>
Section 12 - Contracts:
(a) No contract or other transaction between this Corporation and any other
Corporation shall be impaired, affected or invalidated, nor shall any director
be liable in any way be reason of the fact that any one or more of the directors
of this Corporation is or are interested in, or is a director or officer, or are
directors or officers of such other Corporation, provided that such facts are
disclosed or made known to the Board of Directors.
(b) Any director, personally and individually, may be a party to or may be
interested in any contract or transaction of this Corporation, and no director
shall be liable in any way be reason of such interest, provided that the fact of
such interest be disclosed or made known to the Board of Directors, and provided
that the Board of Directors shall authorize, approve or ratify such contract or
transaction by the vote (not counting the vote of any such director) of a
majority of a quorum, notwithstanding the presence of any such director or
directors may be counted in determining the presence of a quorum at such
meeting. This Section shall not be construed to impair or invalidate or in any
way affect any contract or other transaction which would otherwise be valid
under the law (common, statutory or otherwise) applicable thereto.
Section 13 - Committees:
The Board of Directors, by resolution adopted by a majority of the entire Board,
may from time to time designate from among its members an executive committee
and such other committees, and alternate members thereof, as they deem
desirable, each consisting of three or more members, with such powers and
authority (to the extent permitted by law) as may be provided in such
resolution. Each such committee shall serve at the pleasure of the Board. At all
meetings of a committee, the presence of all members of the committee shall be
necessary to constitute a quorum for the transaction of business, except as
otherwise provided by said resolution or by these By-laws. Participation of any
one ore more members of the committee by means of a conference telephone or
similar communications equipment allowing all persons participating in the
meeting to hear each other at the same time, shall constitute presence in
persons at any such meeting. Any action authorized in writing by all of the
members of a committee entitled to vote thereon and filed with the minutes of
the Committee shall be the act of the committee with the same force and effect
as if the same had been passed by unanimous vote at a duly called meeting of the
committee.
ARTICLE IV - OFFICERS
Section 1 - Number, Qualifications, Election and Term of Office:
(a) The officers of the Corporation shall consist of a President, a Secretary, a
Treasurer, and such other officers, including a Chairman of the Board of
Directors, and one or more Vice Presidents, as the Board of Directors may from
time to time deem advisable. Any officer other than the Chairman of the Board of
Directors may be, but is not required to be, a director of the Corporation. Any
two or more offices may be held by the same person.
6
<PAGE>
(b) The officers of the Corporation shall be elected by the Board of Directors
at the regular annual meeting of the Board following the annual meeting of
shareholders.
(c) Each officer shall hold office until the annual meeting of the Board of
Directors next succeeding his election, and until his successor shall have been
elected and qualified, or until his death, resignation or removal.
Section 2 - Resignation:
Any officer may resign at any time by giving written notice of such resignation
to the Board of Directors, or to the President or the Secretary of the
Corporation. Unless otherwise specified in such written notice, such resignation
shall take effect upon receipt thereof by the Board of Directors or by such
officer, and the acceptance of such resignation shall not be necessary to make
it effective.
Section 3 - Removal:
Any officer may be removed, either with or without cause, and a successor
elected by the Board at any time.
Section 4 - Vacancies:
A vacancy in any office by reason of death, resignation, inability to act,
disqualification, or any other cause, may at any time be filled for the
unexpired portion of the term by the Board of Directors.
Section 5 - Duties of Officers:
Officers of the Corporation shall, unless otherwise provided by the Board of
Directors, each have such powers and duties as generally pertain to their
respective offices as well as such powers and duties as may be set forth in
these by-laws, or may from time to time be specifically conferred or imposed by
the Board of Directors. The President shall be the chief executive officer of
the Corporation.
Section 6 -Sureties and Bonds:
In case the Board of Directors shall so require, any officer, employee or agent
of the Corporation shall execute to the Corporation a bond in such sum, and with
such surety or sureties as the Board of Directors may direct, conditioned upon
the faithful performance of his duties to the Corporation, including
responsibility for negligence and for the accounting for all property, funds or
securities of the Corporation which may come into his hands.
7
<PAGE>
Section 7 - Shares of Other Corporations:
Whenever the Corporation is the holder of shares of any other corporation, any
right or power of the Corporation as such shareholder (including the attendance,
acting and voting at shareholders' meetings and execution of waivers, consents,
proxies or other instruments) may be exercised on behalf of the Corporation by
the President, and Vice President, or such other person as the Board of
Directors may authorize.
ARTICLE V - SHARES OF STOCK
Section 1 - Certificate of Stock:
(a) The certificates representing shares of the Corporation shall be in such
form as shall be adopted by the Board of Directors, and shall be numbered and
registered in the order issued. They shall bear the holder's name and the number
of shares, and shall be signed by (i) the Chairman of the Board or the President
or a Vice President, and (ii) the Secretary or Treasurer, or any Assistant
Secretary or Assistant Treasurer, and may bear the corporate seal.
(b) No certificate representing shares shall be issued until the full amount of
consideration therefor has been paid, except as otherwise permitted by law.
(c) The Board of Directors may authorize the issuance of certificates for
fractions of a share which shall entitle the holder to exercise voting rights,
receive dividends and participate in liquidating distributions, in proportion to
the fractional holdings; or it may authorize the payment in cash of the fair
value of fractions of a share as of the time when those entitled to receive such
fractions are determined; or it may authorize the issuance, subject to such
conditions as may be permitted by law, of scrip in registered or bearer form
over the signature of an officer or agent of the Corporation, exchangeable as
therein provided for full shares, but such scrip shall not entitle the holder to
any rights of a shareholder, except as therein provided.
Section 2 - Lost or Destroyed Certificates:
The holder of any certificate representing shares of the Corporation shall
immediately notify the Corporation of any loss or destruction of the certificate
representing the same. The Corporation may issue a new certificate in the place
of any certificate theretofore issued by it, alleged to have been lost of
destroyed. On production of such evidence of loss or destruction as the Board of
Directors in its discretion may require, the Board of Directors may, in its
discretion, require the owner of the lost of destroyed certificate, or his legal
representatives, to give the Corporation a bond in such sum as the Board may
direct, and with such surety or sureties as may be satisfactory to the Board, to
indemnify the Corporation against any claims, loss, liability or damage it may
suffer on account of the issuance of the new certificate. A new certificate may
be issued without requiring any such evidence or bond when, in the judgment of
the Board of Directors, it is proper so to do.
8
<PAGE>
Section 3 - Transfers of Shares:
(a) Transfers of shares of the Corporation shall be made on the share records of
the Corporation only by the holder of record thereof, in person or by his duly
authorized attorney, upon surrender for cancellation of the certificate or
certificates representing such shares, with an assignment or power of transfer
endorsed thereon or delivered therewith, duly executed, with such proof of the
authenticity of the signature and of authority to transfer and of payment of
transfer taxes as the Corporation or its agents may require.
(b) The Corporation shall be entitled to treat the holder of record of any share
or shares as the absolute owner thereof for all purposes and, accordingly, shall
not be bound to recognize any legal, equitable or other claim to, or interest
in, such share or shares on the part of any other person, whether or not it
shall have express or other notice thereof, except as otherwise expressly
provided by law.
Section 4 - Record Date:
In lieu of closing the share record of the Corporation, the Board of Directors
may fix, in advance, a date not exceeding fifty days, nor less than ten days, as
the record date for the determination of shareholders entitled to receive notice
of, or to vote at, any meeting of shareholders or to consent to any proposal
without a meeting, or for the purpose of determining shareholders entitled to
receive payment of any dividends, or allotment of any rights, or for the purpose
of any other action. If no record date is fixed, the record date for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the date next preceding the
day on which notice is given, or, if no notice is given, the day on which the
meeting is held; the record date for determining shareholders for any other
purpose shall be at the close of business on the date on which the resolution of
the directors relating thereto is adopted. When a determination of shareholders
of record entitled to notice of or to vote at any meeting of shareholders has
been made as provided for herein, such determination shall apply to any
adjournment thereof, unless the directors fix a new record date for the
adjourned meeting.
ARTICLE VI - DIVIDENDS
Subject to applicable law, dividends may be declared and paid out of any funds
available therefor, as often, in such amounts, and at such time or times as the
Board of Directors may determine.
ARTICLE VII - FISCAL YEAR
The fiscal year of the Corporation shall be fixed by the Board of Directors from
time to time, subject to applicable law.
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ARTICLE VIII - CORPORATE SEAL
The corporate seal, if any, shall be in such form as shall be approved from time
to time by the Board of Directors.
ARTICLE IX - AMENDMENTS
Section 1 - By Shareholders:
All by-laws of the Corporation shall be subject to alternation or repeal, and
new by-laws may be made, by a majority vote of the shareholders at the time
entitled to vote in the election of directors.
Section 2 - By Directors:
The Board of Directors shall have power to make, adopt, alter, amend and repeal,
from time to time, by-laws of the Corporation; provided, however, that the
shareholders entitled to vote with respect thereto as in the is Article IX
above-provided may alter, amend or repeal by-laws made by the Board of
Directors, except that the Board of Directors shall have no power to change the
quorum for meeting of shareholders or of the Board of Directors, or to change
any provisions of the by-laws with respect to the removal of directors or the
filling of vacancies in the Board resulting from the removal by the
shareholders. If any by-law regulating an impending election of directors is
adopted, amended or repealed by the Board of Directors, there shall be set forth
in the notice of the next meeting of shareholders for the election of directors,
the by-law so adopted, amended or repealed, together with a concise statement of
the changes made.
The undersigned Incorporator certifies that he has adopted the
foregoing by-laws as the first by-laws of the Corporation, in accordance with
the requirements of the Business Corporation Law.
Dated:___________________________
/s/ Raymond S. Evans
---------------------
Incorporator
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<PAGE>
BY-LAWS
OF
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
ARTICLE I
OFFICES
SECTION 1. PRINCIPAL OFFICE
The principal office of the Corporation shall be determined by the Board of
Directors in its sole discretion.
SECTION 2. ADDITIONAL OFFICES
The Corporation may also have offices and places of business at such other
places, within or without the State of New York, as the Board of Directors may
from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 1. ANNUAL MEETING
The annual meeting of shareholders shall be held within five months after
the close of each year on such date as the Board of Directors shall determine,
or on such other date as the Board of Directors shall determine, and the
shareholders shall then elect a Board of Directors and transact such other
business as may properly be brought before the meeting. To be properly brought
before an annual meeting, business must be (a) specified in the notice of
meeting (or any supplement thereto) given by, at the direction of or upon
authority granted by the Board of Directors, (b) otherwise brought before the
meeting by, at the direction of or upon authority granted by the Board of
Directors, or (c) subject to Article II, Section 10 hereof, otherwise properly
brought before the meeting by a shareholder. For business to be properly brought
before an annual meeting by a shareholder, the shareholder must have given
timely notice thereof in writing to the Secretary of the Corporation. To be
timely, a shareholder's notice must be received at the principal executive
offices of the Corporation not less than 60 days nor more than 90 days prior to
the meeting; provided, however, that, in the event that less than 70 days'
notice of the date of the meeting is given to shareholders and public disclosure
of the meeting date, pursuant to a press release, is either not made or is made
less than 70 days prior to the meeting date, then notice by the shareholder to
be timely must be so received not later than the close of business on the tenth
day following the earlier of (a)
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the day on which such notice of the date of the annual meeting was mailed to
shareholders or (b) the day on which any such public disclosure was made.
A shareholder's notice to the Secretary must set forth as to each matter
the shareholder proposes to bring before the annual meeting (a) a brief
description of the business desired to be brought before the annual meeting, and
the reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the Corporation's books, of the shareholder proposing
such business, (c) the class and number of shares of the Corporation which are
beneficially owned by the shareholder, and (d) any material interest of the
shareholder in such business. Notwithstanding anything in the By-Laws to the
contrary, but subject to Article II, Section 10 hereof, no business shall be
conducted at an annual meeting except in accordance with the procedures set
forth in this Section 1. The Chairman of an annual meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting in accordance with the provisions of this Section 1,
and, if he should so determine, he shall so declare to the meeting, and any such
business not properly brought before the meeting shall not be transacted.
SECTION 2. TIME AND PLACE
The annual meeting of the shareholders of the Corporation and all special
meetings of shareholders may be held at such time and place within or without
the State of New York as shall be stated in the notice of the meeting or in a
duly executed waiver of notice thereof.
SECTION 3. NOTICE OF ANNUAL MEETING
Written notice of the place, date and hour of the annual meeting of
shareholders shall be given personally or by mail to each shareholder entitled
to vote thereat, not less than ten (10) nor more than sixty (60) days prior to
the meeting.
SECTION 4. SPECIAL MEETINGS
Special meetings of the shareholders, for any purposes, unless otherwise
prescribed by law or by the Certificate of Incorporation, may be called by the
President, Chairman of the Board or any Director of the Corporation. Such
request shall state the purpose or purposes of the proposed meetings.
SECTION 5. NOTICE OF SPECIAL MEETING
Written notice of a special meeting of shareholders stating the place, date
and hour of the meeting, the purpose or purposes for which the meeting is
called, and by or at whose direction it is being issued, shall be given
personally or by mail to each shareholder entitled to vote thereat, not less
than ten (10) nor more than sixty (60) days prior to the meeting.
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SECTION 6. QUORUM
Except as otherwise provided by the Certificate of Incorporation, the
holders of a majority of the shares of the Corporation issued and outstanding
and entitled to vote thereat shall be necessary to and shall constitute a quorum
for the transaction of business at all meetings of the shareholders. If a quorum
shall not be present at any meeting of the shareholders, the shareholders
entitled to vote thereat present in person or represented by proxy shall have
power to adjourn the meeting from time to time until a quorum shall be present.
At any such adjourned meeting at which a quorum may be present, any business may
be transacted which might have been transacted at the meeting as originally
called.
SECTION 7. VOTING
(a) At any meeting of the shareholders, every shareholder having the
right to vote shall be entitled to vote in person or by proxy. Except as
otherwise provided in the Certificate of Incorporation, each shareholder
shall have one (1) vote for each share of stock having voting power which
is registered in his name on the books of the Corporation.
(b) Except as otherwise provided by law or by the Certificate of
Incorporation or these By-Laws, all elections of Directors shall be decided
by a plurality of the votes cast and all other matters shall be decided by
a majority of the votes cast.
(c) At each meeting of the shareholders, the polls shall be opened and
closed, the proxies and ballots shall be received and be taken in charge,
and all questions touching the qualification of voters, the validity of
proxies and the acceptance or rejection of votes shall be decided by one
(1) or more inspectors. Such inspector(s) shall be appointed by the Board
of Directors or the chairman of the meeting. If, for any reason, any
inspector(s) appointed shall fail to attend or refuse or be unable to
serve, inspectors in place of any so failing to attend or refusing or
unable to serve shall be appointed in like manner. Such inspector(s),
before entering upon the discharge of his/their duties, shall be sworn
faithfully to execute the duties of inspector(s) at such meeting with
strict impartiality and according to the best of his/their ability, and the
oath so taken shall be subscribed by him/them.
SECTION 8. PROXIES
A proxy, to be valid, shall be executed in writing by the shareholder or by
his attorney-in-fact. No proxy shall be valid after the expiration of eleven
(11) months from the date thereof unless otherwise provided in the proxy. Every
proxy shall be revocable at the pleasure of the shareholder executing it, except
in those cases where an irrevocable proxy is permitted by law.
SECTION 9. CONSENTS
Unless otherwise provided by the Certificate of Incorporation or by
applicable New
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York law, any action required to be taken at any annual or special meeting of
shareholders, or any action which may be taken at any annual or special meeting,
may be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding shares having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those shareholders who have not consented in writing.
SECTION 10. NOTICE AND QUALIFICATION OF SHAREHOLDER NOMINEES TO BOARD
Only persons who are nominated in accordance with the procedures set forth
in this Section 10 shall be qualified for election as Directors. Nominations of
persons for election to the Board of Directors of the Corporation may be made at
a meeting of shareholders by or at the direction of the Board of Directors or by
any shareholder of the Corporation entitled to vote for the election of
Directors at the meeting who complies with the procedures set forth in this
Section 10. In order for persons nominated to the Board of Directors, other than
those persons nominated by or at the direction of the Board of Directors, to be
qualified to serve on the Board of Directors, such nomination shall be made
pursuant to timely notice in writing to the Secretary of the Corporation. To be
timely, a shareholder's notice must be received at the principal executive
offices of the Corporation not less than 60 days nor more than 90 days prior to
the meeting, provided, however, that, in the event that less than 70 days'
notice of the date of the meeting is given to shareholders and public disclosure
of the meeting date, pursuant to a press release, is either not made or is made
less than 70 days prior to the meeting date, then notice by the shareholder to
be timely must be so received not later than the close of business on the tenth
day following the earlier of (a) the day on which such notice of the date of the
meeting was mailed to shareholders or (b) the day on which such public
disclosure was made.
A shareholder's notice to the Secretary must set forth (a) as to each
person whom the shareholder proposes to nominate for election or re-selection as
a Director (i) the name, age, business address and residence address of such
person, (ii) the principal occupation or employment of such person, (iii) the
class and number of shares of the Corporation which are beneficially owned by
such person and (iv) any other information relating to such person that is
required to be disclosed in solicitation of proxies for election of Directors,
or is otherwise required, in each case pursuant to Regulation 14A promulgated
under the Securities Exchange Act of 1934, as amended from time to time
(including, without limitation, such documentation as is required by Regulation
14A to confirm that such person is a bona fide nominee); and (b) as to the
shareholder giving the notice (i) the name and address, as they appear on the
Corporation's books, of such shareholder and (ii) the class and number of shares
of the Corporation which are beneficially owned by such shareholder. At the
request of the Board of Directors, any person nominated by the Board of
Directors for election as a Director shall furnish to the Secretary of the
Corporation that information required to be set forth in a shareholder's notice
of nomination which pertains to the nominee. No person shall be qualified for
election as a Director of the Corporation unless nominated in accordance with
the procedures set
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forth in this Section 10. The Chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with procedures prescribed by the By-Laws, and, if he should so
determine, he shall so declare to the meeting, and the defective nomination
shall be disregarded.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER; TENURE
(a) The number of Directors constituting the entire Board of Directors
shall be fixed from time to time by resolution of the Board.
(b) Directors shall be elected at the annual meeting of the
shareholders, except as provided in Section 3 of this Article III, and each
Director shall be elected to serve until his successor has been elected and
has qualified.
SECTION 2. RESIGNATION; REMOVAL
Any Director may resign at any time. The Board of Directors may remove a
Director for cause. Any or all of the Directors may be removed with or without
cause by a vote of the shareholders.
SECTION 3. VACANCIES
If any vacancies occur in the Board of Directors by reason of the death,
resignation, retirement, disqualification or removal from office of any Director
with or without cause or if any new directorships are created, the Directors
then in office may choose successors, or fill the newly created directorships,
and the Directors so chosen shall hold office until the next annual meeting of
the shareholders and until their successors shall be duly elected and qualified,
unless sooner displaced.
SECTION 4. EXECUTIVE COMMITTEE AND OTHER COMMITTEES
The Board of Directors, by resolution adopted by a majority of the entire
Board, may designate from among its members an Executive Committee and other
committees, each consisting of one or more Directors, which committees shall
serve at the pleasure of the Board of Directors. The Board of Directors may
designate one or more Directors as alternate members of any such committee, who
may replace any absent member or members of such committee. The Board of
Directors, by resolution adopted by a majority of the entire Board, may remove a
member of any such committee with or without cause. To the extent provided in
said resolution and to the extent permitted by the laws of the State of New
York, each such committee shall have and may exercise
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the powers of the Board of Directors. Each of such committees shall keep regular
minutes of its proceedings and shall report thereon to the Board from time to
time as required.
ARTICLE IV
MEETINGS OF THE BOARD
SECTION 1. PLACE
The Board of Directors of the Corporation may hold meetings, both regular
and special, either within or without the State of New York.
SECTION 2. REGULAR MEETINGS
Regular meetings of the Board of Directors may be held without notice at
such time and at such place as shall from time to time be determined by the
Board.
SECTION 3. SPECIAL MEETINGS
Special meetings of the Board of Directors may be called by the Chairman of
the Board or by the President on twenty-four (24) hours notice to each Director,
either personally, by telegram, by telecopier or by telephone.
SECTION 4. QUORUM
At all meetings of the Board of Directors, a majority of the Directors then
in office, shall be necessary to constitute a quorum for the transaction of
business. If a quorum shall not be present at any meeting of the Board of
Directors, a majority of the Directors present thereat may adjourn the meeting
from time to time until a quorum shall be present. Twenty-four (24) hours notice
of any such adjournment shall be given, either personally, by telegram, by
telecopier or by telephone to each Director who was not present and, unless
announced at the meeting, to the other Directors.
SECTION 5. ACTION OF THE BOARD
Unless otherwise required by law, the vote of a majority of the Directors
present at the time of the vote, if a quorum is present at such time, shall be
the act of the Board.
SECTION 6. PARTICIPATION IN MEETING BY ELECTRONIC MEANS
Any one or more members of the Board of Directors or any committee thereof
may participate in a meeting of the Board of Directors or any committee thereof
by means of a conference telephone or similar communication equipment allowing
all persons participating in such meeting
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to hear each other at the same time. Participation by such means shall
constitute presence in person at such meeting.
SECTION 7. ACTION IN LIEU OF MEETING
Any action required or permitted to be taken by the Board of Directors or
any committee thereof may be taken without a meeting if all members of the Board
of Directors or the committee consent in writing to the adoption of a resolution
authorizing the action. The resolution and the written consents thereto by the
members of the Board of Directors or committee shall be filed with the minutes
of the proceedings of the Board of Directors or committee.
SECTION 8. COMPENSATION
Directors, as such, shall not receive any stated salary for their services,
but, by resolution of the Board of Directors, a fixed fee and expenses of
attendance, if any, may be allowed for attendance at each regular or special
meeting of the Board; provided, however, that nothing herein contained shall be
construed to preclude any Director from serving the Corporation in any other
capacity and receiving compensation therefor.
SECTION 9. INTERESTED DIRECTORS
No contract or other transaction between this Corporation and any other
Corporation shall be impaired, affected or invalidated, nor shall any director
be liable in any way by reason of the fact that any one or more of the directors
of this Corporation is or are interested in, or is a director or officer, or are
directors or officers of such other corporation, provided that such facts are
disclosed or made known to the Board of Directors. Any director, personally and
individually, may be a party to or may be interested in any contract or
transition of this Corporation, and no director shall be liable in any way by
reason of such interest, provided that the fact of such interest be disclosed or
made known to the Board of Directors, and provided that the Board of Directors
shall authorize, approve or ratify such contract or transaction by the vote (not
counting the vote of any such director) of a majority of a quorum,
notwithstanding the presence of any such director at the meeting at which such
action is taken. Such director or directors may be counted in determining the
presence of a quorum at such a meeting. This Section shall not be construed to
impair or invalidate or in any way affect any contract or other transaction
which would otherwise be valid under the law (common, statutory or otherwise)
applicable thereto.
ARTICLE V
NOTICES
SECTION 1. FORM; DELIVERY
Notices to Directors and shareholders shall be in writing (except as
provided herein)
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and may be delivered personally or by mail or, with respect to Directors only,
by telegram, telecopier or telephone. Such notice is deemed to be given, if by
mail, when deposited in the United States mail with postage thereon prepaid and,
if by telegram, when ordered or, if a delayed delivery is ordered, as of such
delayed delivery time and, if by telecopier, when transmitted and directed to
Directors at their addresses as they appear on the records of the Corporation.
SECTION 2. WAIVER
Whenever a notice is required to be given by any statute, the Certificate
of Incorporation or these By-Laws, a waiver thereof in writing, signed by the
person or persons entitled to such notice, whether before or after the tune
stated therein, shall be deemed equivalent to such notice. In addition, any
shareholder attending a meeting of shareholders in person or by proxy without
protesting prior to the conclusion of the meeting the lack of notice thereof to
him, and any Director attending a meeting of the Board of Directors or committee
thereof without protesting prior to the meeting or at its commencement such lack
of notice shall be conclusively deemed to have waived notice of such meeting.
ARTICLE VI
OFFICERS
SECTION 1. OFFICERS
The officers of the Corporation shall be a President, a Vice-President, a
Secretary, a Treasurer, and such other officers as may be determined by the
Board of Directors, including a Chairman of the Board, a Vice-Chairman of the
Board and additional Vice-Presidents.
SECTION 2. AUTHORITY AND DUTIES
All officers, as between themselves and the Corporation, shall have such
authority and perform such duties in the management of the Corporation as may be
provided in these By-Laws, or, to the extent not so provided, by the Board of
Directors.
SECTION 3. TERM OF OFFICE: REMOVAL
All officers shall be elected by the Board of Directors and shall hold
office for such time as may be prescribed by the Board. Any officer or agent
elected or appointed by the Board may be removed with or without cause at any
time by the Board.
SECTION 4. VACANCIES
If an office becomes vacant for any reason, the Board of Directors may fill
the vacancy. Any officer so appointed or elected by the Board shall serve only
until the unexpired term
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of his predecessor shall have expired unless re-elected by the Board.
SECTION 5. THE CHAIRMAN OF THE BOARD
The Chairman of the Board of Directors, if elected, shall preside at all
meetings of the Board of Directors and shareholders; he shall be ex-officio a
member of all standing committees and shall perform such other duties as from
time to time may be assigned to him by the Board of Directors.
SECTION 6. THE VICE CHAIRMAN OF THE BOARD
The Vice-Chairman of the Board of Directors shall, in the absence or
disability of the Chairman of the Board, perform the duties and exercise the
powers of the Chairman of the Board, and shall generally assist the Chairman of
the Board and perform such other duties as the Board or the Chairman of the
Board shall prescribe.
SECTION 7. THE PRESIDENT
The President shall be the Chief Operating Officer of the Corporation; he
shall have general and active management and control of the day-to-day business
and affairs of the Corporation, subject to the control of the Board of
Directors, and shall see that all orders and resolutions of the Board are
carried into effect.
SECTION 8. THE VICE-PRESIDENT
The Vice-President, or if there shall be more than one, the Vice-Presidents
in the order determined by the Board of Directors, shall, in the absence or
disability of the President, perform the duties and exercise the powers of the
President and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe. The Board of Directors shall
determine the duties and powers of the Executive Vice-President and the Senior
Vice-President.
SECTION 9. THE SECRETARY
The Secretary shall attend all meetings of the Board of Directors and all
meetings of the shareholders and record all votes and the minutes of all
proceedings in a book to be kept for that purpose and shall perform like duties
for the standing committees when required. He shall give, or cause to be given,
notice of all meetings of the shareholders and special meetings of the Board,
and shall perform such other duties as may be prescribed by the Board, the
Chairman of the Board or the President, under whose supervision he shall act. He
shall keep in safe custody the seal of the Corporation and, when authorized by
the Board, affix the same to any instrument requiring it and, when so affixed,
it shall be attested by his signature or by the signature of the Treasurer or an
Assistant Treasurer or Assistant Secretary. He shall keep in safe custody the
certificate books and
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shareholder records and such other books and records as the Board may direct and
shall perform all other duties incident to the office of the Secretary.
SECTION 10. THE ASSISTANT SECRETARY
During the absence or disability of the Secretary, any Assistant Secretary,
or if there be more than one, the one so designated by the Secretary or by the
Board of Directors, shall have all the powers and functions of the Secretary.
SECTION 11. THE TREASURER
The Treasurer shall have the care and custody of the corporate funds and
other valuable effects, including securities, and shall keep full and accurate
accounts or receipts and disbursements in books belonging to the Corporation and
shall deposit all monies and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by the Board
of Directors. The Treasurer shall disburse the funds of the Corporation as may
be ordered by the Board, taking proper vouchers for such disbursements, and
shall render the Directors, at the regular meeting of the Board, or whenever
they may require it, an account of all his transactions as Treasurer and of the
financial condition of the Corporation.
SECTION 12. THE ASSISTANT TREASURER
During the absence or disability of the Treasurer, any Assistant Treasurer,
of if there be more than one, the one so designated by the Treasurer or by the
Board of Directors, shall have all the powers and functions of the Treasurer.
SECTION 13. BONDS
In case the Board of Directors shall so require, any officer or agent of
the Corporation shall give the Corporation a bond for such term, in such sum and
with such surety or sureties as shall be satisfactory to the Board for the
faithful performance of the duties of his office, and for the restoration to the
Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation.
ARTICLE VII
SHARE CERTIFICATES
SECTION 1. FORM; SIGNATURE
The certificates for shares of the Corporation shall be in such form as
shall be determined by the Board of Directors and shall be numbered
consecutively and entered in books of
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the Corporation as they are issued. Each certificate the registered holders name
and the number and class of shares, and shall be signed by the Chairman of the
Board, the President or a Vice-President and by the Treasurer or the Assistant
Treasurer or the Secretary or an Assistant Secretary, and shall bear the seal of
the Corporation or a facsimile thereof. Where any such certificate is
counter-signed by a transfer agent or registered by a registrar, the signature
of any such officer may be a facsimile signature. In case any officer who signed
or whose facsimile signature or signatures was placed on any such certificate
shall have ceased to be such officer before such certificate is issued, it may
nevertheless be issued by the Corporation with the same effect as if he were
such officer at the date of issue.
SECTION 2. LOST CERTIFICATES
The Board of Directors may direct a new share certificate or certificates
to be issued in place of any certificate or certificates theretofore issued by
the Corporation alleged to have been lost or destroyed upon the making of an
affidavit of that fact by the person claiming the certificate to be lost or
destroyed. When authorizing such issue of a new certificate or certificates, the
Board may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost or destroyed certificate or
certificates, or his legal representative, to give the Corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost or destroyed.
SECTION 3. REGISTRATION OF TRANSFER
Upon surrender to the Corporation or any transfer agent of the Corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
Corporation or such transfer agent to issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction upon its
books.
SECTION 4. REGISTERED SHAREHOLDERS
Except as otherwise provided by law, the Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends or other distributions and to vote as such owner,
and to hold liable for calls and assessments a person registered on its books as
the owner of shares, and shall not be found to recognize any equitable or legal
claim to or interest in such share or shares on the part of any other person,
whether or not it has actual or other notice thereof.
SECTION 5. RECORD DATE
For the purpose of determining the shareholders entitled to notice of or to
vote at any meeting of shareholders or any adjournment thereof, or to express
consent to or dissent from any proposal without a meeting, or for the purpose of
determining shareholders entitled to receive payment of any dividend or the
allotment of any rights, or for the purpose of any other action
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affecting the interest of shareholders, the Board of Directors may fix, in
advance, a record date. Such date shall not be more than sixty (60) nor less
than ten (10) days before the date of any such meeting, nor more than sixty (60)
days prior to any other action.
In each such case, except as otherwise provided by law, only such persons
as shall be shareholders of record on the date so fixed shall be enticed to
notice of, and to vote at, such meeting and any adjournment thereof, or to
express such consent or dissent, or to receive payment of such dividend or such
allotment or rights, or otherwise to be recognized as shareholders for the
related purpose, notwithstanding any registration or transfer of shares on the
books of the Corporation after any such record date so fixed.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 1. FISCAL YEAR
The fiscal year of the Corporation shall be fixed by resolution of the
Board of Directors.
SECTION 2. DIVIDENDS
Dividends upon the capital stock of the Corporation may be declared by the
Board of Directors at any regular or special meeting and may be paid in cash, in
property, in shares of the capital stock or any combination thereof, subject to
the provisions of the laws of the State of New York.
SECTION 3. RESERVES
Before payment of any dividend, there may be set aside out of any funds of
the Corporation available for dividends such sum or sums as the Directors from
time to time, in their absolute discretion, think proper as a reserve fund to
meet contingencies, or for equalizing dividends, or for repairing or maintaining
any property of the Corporation, or for such other purposes as the Board shall
deem conducive to the interests of the Corporation, and the Board may modify or
abolish any such reserve in the manner in which it was created.
SECTION 4. CHECKS
All checks or demands for money and notes of the Corporation shall be
signed by such officer or officers or such other person or persons as the Board
of Directors may from time to time designate.
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SECTION 5. SEAL
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization and the words 'Corporate Seal -- New
York'. The seal may be used by causing it or a facsimile thereof to be impressed
or affixed or otherwise reproduced.
ARTICLE IX
INDEMNIFICATION
SECTION 1. ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
Any person made, or threatened to be made a party to an action by or in the
right of the Corporation to procure a judgment in its favor by reason of the
fact that he, his testator or intestate, is or was a Director or officer of the
Corporation, or is or was serving at the request of the Corporation as a
Director or officer of any other corporation of any type or kind, domestic or
foreign, of any partnership, joint venture, trust, employee benefit plan or
other enterprise, shall be indemnified by the Corporation against amounts paid
in settlement and reasonable expenses, including attorneys' fees, actually and
necessarily incurred by him in connection with the defense or settlement of such
action, or in connection with an appeal therein, to the fullest extent permitted
by the laws of State of New York.
SECTION 2. ACTION OR PROCEEDING OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION
Any person made, or threatened to be made, a party to an action or
proceeding (other than one by or in the right of the Corporation to procure a
judgment in its favor), whether civil or criminal, including an action by or in
the right of any other corporation of any type or kind, domestic or foreign, or
any partnership, joint venture, trust, employee benefit plan or other
enterprise, which any Director or officer of the Corporation served in any
capacity at the request of the Corporation, by reason of the fact that he, his
testator or intestate, was a Director or officer of the Corporation, or served
such other corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise in any capacity, shall be indemnified by the Corporation
against judgments, fines, amounts paid in settlement and reasonable expenses,
including attorney's fees actually and necessarily incurred as a result of such
action or proceeding, or any appeal therein, to the fullest extent permitted by
the laws of the State of New York.
SECTION 3. OPINION OF COUNSEL
In taking any action or making any determination pursuant to this Article,
the Board of Directors and each Director, officer or employee, whether or not
interested in any such action or determination, may rely upon an opinion of
counsel selected by the Board.
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SECTION 4. OTHER INDEMNIFICATION; LIMITATION
The Corporation's obligation under this Article shall not be exclusive or
in limitation of, but shall be in addition to, any other rights to which any
such person may be entitled by (i) a resolution of shareholders, (ii) a
resolution of Directors or (iii) an agreement providing for such
indemnification. All of the provisions of this Article IX of the By-Laws shall
be valid only to the extent permitted by the Certificate of Incorporation and
the laws of the State of New York.
ARTICLE X
AMENDMENTS
SECTION 1. POWER TO AMEND
These By-Laws shall be subject to amendment or repeal, and additional
By-Laws may be adopted, either by the Board of Directors at any regular or
special meeting of the Board or by written consent in lieu of a meeting, or by
the shareholders at any regular or special meeting of the shareholders, or by
written consent in lieu of a meeting.
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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
AND
RYAN, BECK & CO., INC.
PENNSYLVANIA MERCHANT GROUP
REPRESENTATIVES'
WARRANT AGREEMENT
Dated as of _________, 1999
<PAGE>
REPRESENTATIVES' WARRANT AGREEMENT dated as of ________, 1999 by and
among NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC., a New York corporation (the
"Company"), and RYAN, BECK & CO., INC. ("Ryan, Beck") and PENNSYLVANIA MERCHANT
GROUP ("PMG"; Ryan, Beck and PMG are hereinafter collectively referred to
variously as the "Holders" or the "Representatives").
WITNESSETH
WHEREAS, the Company proposes to issue to the Representatives warrants
("Warrants") to purchase up to an aggregate of 250,000 shares of common stock
(the "Shares"), $.001 par value, of the Company (the "Common Stock"); and
WHEREAS, the Representatives have agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof by and
among the Representatives and the Company, to act as the Representatives in
connection with the Company's proposed public offering of up to 2,500,000 shares
of Common Stock at a public offering price of __________ per share of Common
Stock (the "Public Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representatives in consideration for, and as
part of the Representatives' compensation in connection with, the
Representatives acting as the Representatives pursuant to the Underwriting
Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Representatives to the Company of an aggregate of two hundred and fifty dollars
($250), the agreements herein set forth and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Grant. The Holder is hereby granted the right to purchase, at any
time from _________, 2000 until 5:30 P.M., New York time, on ________, 2004, up
to an aggregate of 250,000 shares of Common Stock at an initial exercise price
(subject to adjustment as provided in Section 8 hereof) of $______ [120% of the
public offering price per share] per share of Common Stock subject to the terms
and conditions of this Agreement. Except as expressly set forth herein, the
shares issuable upon exercise of the Warrants are in all respects identical to
the shares of Common Stock being purchased by the Representatives for resale to
the public pursuant to the terms and provisions of the Underwriting Agreement.
2. Warrant Certificates. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
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3. Exercise of Warrant.
3.1 Method of Exercise. The Warrants initially are exercisable
at an exercise price (subject to adjustment as provided in Section 8 hereof) per
share of Common Stock set forth in Section 6 hereof payable by certified or
official bank check in New York Clearing House funds. Upon surrender of a
Warrant Certificate with the annexed Form of Election to Purchase duly executed,
together with payment of the Exercise Price (as hereinafter defined) for the
shares of Common Stock purchased at the Company's principal offices in Port
Washington, New York (presently located at 26 Park Harbor Drive) the registered
holder of a Warrant Certificate ("Holder" or "Holders") shall be entitled to
receive a certificate or certificates for the shares of Common Stock so
purchased. The purchase rights represented by each Warrant Certificate are
exercisable at the option of the Holder thereof, in whole or in part (but not as
to fractional shares of the Common Stock underlying the Warrants). In the case
of the purchase of less than all the shares of Common Stock purchasable under
any Warrant Certificate, the Company shall cancel said Warrant Certificate upon
the surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the shares of Common Stock purchasable thereunder.
3.2 Exercise by Surrender of Warrant. In addition to the
method of payment set forth in Section 3.1 hereof and in lieu of any cash
payment required thereunder, the Holder(s) of the Warrants shall have the right
at any time and from time to time to exercise the Warrants in full or in part by
surrendering the Warrant Certificate in the manner specified in Section 3.1 in
exchange for the number of shares of Common Stock equal to the product of (x)
the number of shares as to which the Warrants are being exercised multiplied by
(y) a fraction, the numerator of which is the Market Price (as defined below) of
the Common Stock less the Exercise Price, and the denominator of which is such
Market Price. Solely for the purposes of this paragraph, Market Price shall be
calculated either (i) on the date which the form of election attached hereto is
deemed to have been sent to the Company pursuant to Section 13 hereof (the
"Notice Date"), or (ii) as the average of the Market Prices for each of the five
trading days immediately preceding the Notice Date, whichever of (i) or (ii) is
greater.
3.3 Definition of Market Price. As used herein, the phrase
"Market Price" at any date shall be deemed to be the last reported sale price,
or, in case no such reported sale takes place on such day, the average of the
last reported sale prices for the last three (3) trading days, in either case as
officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to trading or by the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ"), or, if the
Common Stock is not listed or admitted to trading on any national securities
exchange or quoted by NASDAQ, the average closing bid price as furnished by the
NASD through NASDAQ or similar organization if NASDAQ is no longer reporting
such information, or if the Common Stock is not quoted on NASDAQ, as determined
in good faith by resolution of the Board of Directors of the Company, based on
the best information available to it.
4. Issuance of Certificates. Upon the exercise of the Warrants, the
issuance of certificates for shares of Common Stock or other securities,
properties or rights underlying such Warrants, shall be made forthwith (and in
any event within five (5) business days thereafter) without charge to the Holder
thereof including, without limitation, any tax which may be payable in respect
of the issuance
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thereof, and such certificates shall (subject to the provisions of Sections 5
and 7 hereof) be issued in the name of, or in such names as may be directed by,
the Holder thereof; provided, however, that the Company shall not be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any such certificates in a name other than that of the
Holder and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the Common
Stock (and/or other securities, property or rights issuable upon the exercise of
the Warrants) shall be executed on behalf of the Company by the manual or
facsimile signature of the then present Chairman or Vice Chairman of the Board
of Directors or President or Vice President of the Company under its corporate
seal reproduced thereon, attested to by the manual or facsimile signature of the
then present Secretary or Assistant Secretary of the Company. Warrant
Certificates shall be dated the date of execution by the Company upon initial
issuance, division, exchange, substitution or transfer.
5. Restriction On Transfer of Warrants. The Holder of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
are being acquired as an investment and not with a view to the distribution
thereof; and that the Warrants may not be sold, transferred, assigned,
hypothecated or otherwise disposed of, in whole or in part, for a period of one
(1) year from the date hereof, except to officers of the Representatives.
6. Exercise Price.
6.1 Initial and Adjusted Exercise Price. Except as otherwise provided
in Section 8 hereof, the initial exercise price of each Warrant shall be
[$_____] [120% of the public offering price] per share of Common Stock. The
adjusted exercise price shall be the price which shall result from time to time
from any and all adjustments of the initial exercise price in accordance with
the provisions of Section 8 hereof.
6.2 Exercise Price. The term "Exercise Price" herein shall mean the
initial exercise price or the adjusted exercise price, depending upon the
context.
7. Registration Rights.
7.1 Registration Under the Securities Act of 1933. The Warrants, the
Shares and any securities issuable upon exercise of the Warrants have not been
registered under the Securities Act of 1933, as amended (the "Act"). Upon
exercise, in part or in whole, of the Warrants, certificates representing the
Common Stock underlying the Warrants and any of the other securities issuable
upon exercise of the Warrants (collectively, the "Warrant Shares") shall bear
the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended
("Act"), and may not be offered or sold except pursuant to (i)
an effective registration statement under the Act, (ii) to the
extent applicable, Rule 144 under the Act (or any similar rule
under such Act relating to the
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disposition of securities), or (iii) an opinion of counsel, if
such opinion shall be reasonably satisfactory to counsel to
the issuer, that an exemption from registration under such Act
is available.
7.2 Piggyback Registration. For a period commencing on the effective
date (the "Effective Date") of the Company's registration statement on Form S-1
(Registration No. 333-72209), and ending six (6) years from the Effective Date,
if the Company proposes to register any of its securities under the Act (other
than in connection with a merger registered on Form S-4 or any registration
pursuant to Form S-8) it will give written notice by registered mail, at least
thirty (30) days prior to the filing of each such registration statement, to the
Representatives and to all other Holders of the Warrants and/or the Warrant
Shares of its intention to do so. If the Representatives or other Holders of the
Warrants and/or Warrant Shares notify the Company within twenty (20) days after
receipt of any such notice of its or their desire to include any such securities
in such proposed registration statement, the Company shall afford each of the
Representatives and such Holders of the Warrants and/or Warrant Shares the
opportunity to have any such Warrant Shares registered under such registration
statement.
Notwithstanding the provisions of this Section 7.2, the Company shall
have the right at any time after it shall have given written notice pursuant to
this Section 7.2 (irrespective of whether a written request for inclusion of any
such securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
7.3 Demand Registration.
(a) For a period commencing on the Effective Date, and ending
five (5) years from the Effective Date, the Holders of the Warrants and/or
Warrant Shares representing a "Majority" (as hereinafter defined) of such
securities (assuming the exercise of all of the Warrants) shall have the right
(which right is in addition to the registration rights under Section 7.2
hereof), exercisable by written notice to the Company, to have the Company
prepare and file with the Securities and Exchange Commission (the "Commission"),
on one occasion, a registration statement and such other documents, including a
prospectus, as may be necessary in the opinion of both counsel for the Company
and counsel for the Representatives and Holders, in order to comply with the
provisions of the Act, so as to permit a public offering and sale of their
respective Warrant Shares for nine (9) consecutive months by such Holders and
any other Holders of the Warrants and/or Warrant Shares who notify the Company
within ten (10) days after receiving notice from the Company of such request.
(b) The Company covenants and agrees to give written notice of
any registration request under this Section 7.3 by any Holder or Holders to all
other registered Holders of the Warrants and the Warrant Shares within ten (10)
days from the date of the receipt of any such registration request.
(c) In addition to the registration rights under Section 7.2
and subsection (a) of this Section 7.3, for a period commencing on the Effective
Date, and ending five (5) years from the
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Effective Date, unless all of the Warrants issued and issuable have been
exercised and the Holders of the Warrant shares have received a written opinion
of Company counsel, reasonably satisfactory in form and substance to such
Holders, to the effect that all of the Warrant Shares are freely resalable
pursuant to Rule 144(k) promulgated under the Act, any Holder of Warrants and/or
Warrant Shares shall have the right, exercisable by written request to the
Company, to have the Company prepare and file, on one occasion, with the
Commission a registration statement so as to permit a public offering and sale
for nine (9) consecutive months by any such Holder of its Warrant Shares
provided, however, that the provisions of Section 7.4(b) hereof shall not apply
to any such registration request and registration and all costs incident thereto
shall be at the expense of the Holder or Holders making such request.
(d) Notwithstanding anything to the contrary contained herein,
if the Company shall not have filed a registration statement for the Warrant
Shares within the time period specified in Section 7.4(a) hereof pursuant to the
written notice specified in Section 7.3(a) of a Majority of the Holders of the
Warrants and/or Warrant Shares, upon the written notice of election of a
Majority of the Holders of the Warrants and/or Warrant Shares it shall have the
option to repurchase (i) any and all Warrant Shares at the higher of the Market
Price per share of Common Stock on (x) the date of the notice sent pursuant to
Section 7.3(a) or (y) the expiration of the period specified in Section 7.4(a),
and (ii) any and all Warrants at such Market Price less the Exercise Price of
such Warrant. Such repurchase shall be in immediately available funds and shall
close within two (2) days after the later of (i) the expiration of the period
specified in Section 7.4(a) or (ii) the delivery of the written notice of
election specified in this Section 7.3(d).
7.4 Covenants of the Company With Respect to Registration. In
connection with any registration under Sections 7.2 or 7.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a
registration statement within forty-five (45) days of receipt of any demand
therefor, shall use its best efforts to have any registration statements
declared effective at the earliest possible time, and shall furnish each Holder
desiring to sell Warrant Shares such number of prospectuses as shall reasonably
be requested.
(b) The Company shall pay all costs (excluding fees and
expenses of Holder(s)' counsel and any underwriting or selling commissions),
fees and expenses in connection with all registration statements filed pursuant
to Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, blue sky fees and expenses. The
Holder(s) will pay all costs, fees and expenses in connection with any
registration statement filed pursuant to Section 7.3(c).
(c) The Company will take all necessary action which may be
required in qualifying or registering the Warrant Shares included in a
registration statement for offering and sale under the securities or blue sky
laws of such states as reasonably are requested by the Holder(s), provided that
the Company shall not be obligated to execute or file any general consent to
service of process or to qualify as a foreign corporation to do business under
the laws of any such jurisdiction.
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(d) The Company shall indemnify and hold harmless the
Holder(s) of the Warrant Shares to be sold pursuant to any registration
statement and each person, if any, who controls such Holders within the meaning
of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of
1934, as amended ("Exchange Act"), from and against any and all loss, claim,
damage, expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever including,
without limitation, the fees and expenses of legal counsel) to which any of them
may become subject under the Act, the Exchange Act or otherwise, arising from
such registration statement but only to the same extent and with the same effect
as the provisions pursuant to which the Company has agreed to indemnify the
Representatives contained in Section 7 of the Underwriting Agreement.
(e) The Holder(s) of the Warrant Shares to be sold pursuant to
a registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, from and against any and all loss, claim,
damage or expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
they may become subject under the Act, the Exchange Act or otherwise, arising
from information furnished in writing by or on behalf of such Holders, or their
successors or assigns, for specific inclusion in such registration statement to
the same extent and with the same effect as the provisions contained in Section
7 of the Underwriting Agreement pursuant to which the Representatives have
agreed to indemnify the Company.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Warrants prior to the initial filing
of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any
securities other than the Warrant Shares to be included in any registration
statement filed pursuant to Section 7.3 hereof, or permit any other registration
statement to be or remain effective during the effectiveness of a registration
statement filed pursuant to Section 7.3 hereof, without the prior written
consent of the Holders of the Warrants and Warrant Shares representing a
Majority of such securities.
(h) The Company shall furnish to each Holder participating in
the offering and to each underwriter, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date (and, if such registration includes an underwritten public
offering, an opinion dated the date of the closing under the underwriting
agreement), and (ii) a "cold comfort" letter dated the effective date (and, if
such registration includes an underwritten public offering, a letter dated the
date of the closing under the underwriting agreement) signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities.
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(i) The Company shall as soon as practicable after the
effective date of the registration statement, and in any event within 15 months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Act) an earnings statement (which need not be
audited) complying with Section 11 (a) of the Act and covering a period of at
least 12 consecutive months beginning after the effective date.
(j) The Company shall deliver promptly to each Holder
participating in the offering requesting the correspondence and memoranda
described below and to the managing underwriters, copies of all correspondence
between the Commission and the Company, its counsel or auditors and all
memoranda relating to discussions with the Commission or its staff with respect
to the registration statement and permit each Holder and underwriters to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or the rules and regulations
of the National Association of Securities Dealers, Inc. ("NASD"). Such
investigation shall include access to books, records and properties and
opportunities to discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at such reasonable times
and as often as any such Holder or underwriter shall reasonably request.
(k) The Company shall enter into an underwriting agreement
with the underwriters selected for such underwriting by the Holders of a
Majority of the Warrant Shares requested to be included in such underwriting,
which may be Ryan, Beck and/or PMG. Such agreement shall be satisfactory in form
and substance to the Company, each Holder and such managing underwriters, and
shall contain such representations, warranties and covenants by the Company and
such other terms as are customarily contained in agreements of that type used by
the managing underwriter. The Holders shall be parties to any underwriting
agreement relating to an underwritten sale of their Warrant Shares and may, at
their option, require that any or all the representations, warranties and
covenants of the Company to or for the benefit of such underwriters shall also
be made to and for the benefit of such Holders. Such Holders shall not be
required to make any representations or warranties to or agreements with the
Company or the underwriters except as they may relate to such Holders and their
intended methods of distribution.
(l) In addition to the Warrant Shares, upon the written
request therefor by any Holder(s), the Company shall include in the registration
statement any other securities of the Company held by such Holder(s) as of the
date of filing of such registration statement, including without limitation
restricted shares of Common Stock, options, warrants or any other securities
convertible into shares of Common Stock.
(m) For purposes of this Agreement, the term "Majority" in
reference to the Holders of Warrants or Warrant Shares, shall mean in excess of
fifty percent (50%) of the then outstanding Warrants or Warrant Shares that (i)
are not held by the Company, an affiliate, officer, creditor, employee or agent
thereof or any of their respective affiliates, members of their family, persons
acting as nominees or in conjunction therewith and (ii) have not been resold to
the public.
8. Adjustments to Exercise Price and Number of Securities.
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8.1 Subdivision and Combination. In case the Company shall at
any time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
8.2 Stock Dividends and Distributions. In case the Company
shall pay a dividend in, or make a distribution of, shares of Common Stock or of
the Company's capital stock convertible into Common Stock, the Exercise Price
shall forthwith be proportionately decreased. An adjustment made pursuant to
this Section 8.2 shall be made as of the record date for the subject stock
dividend or distribution.
8.3 Adjustment in Number of Securities. Upon each adjustment
of the Exercise Price pursuant to the provisions of this Section 8, the number
of Securities issuable upon the exercise at the adjusted exercise price of each
Warrant shall be adjusted to the nearest whole number by multiplying a number
equal to the Exercise Price in effect immediately prior to such adjustment by
the number of Warrant Shares issuable upon exercise of the Warrants immediately
prior to such adjustment and dividing the product so obtained by the adjusted
Exercise Price.
8.4 Definition of Common Stock. For the purpose of this
Agreement, the term "Common Stock" shall mean (i) the class of stock designated
as Common Stock in the Certificate of Incorporation of the Company as may be
amended as of the date hereof, or (ii) any other class of stock resulting from
successive changes or reclassifications of such Common Stock consisting solely
of changes in par value, or from par value to no par value, or from no par value
to par value.
8.5 Merger or Consolidation. In case of any consolidation of
the Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental warrant agreement providing that the holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the number
of shares of Common Stock of the Company for which such warrant might have been
exercised immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in Section 8. The above provision of this
subsection shall similarly apply to successive consolidations or mergers.
8.6 No Adjustment of Exercise Price in Certain Cases. No
adjustment of the Exercise Price shall be made:
(a) Upon the issuance or sale of the Warrants or the
shares of Common Stock issuable upon the exercise of the Warrants; or
(b) If the amount of said adjustment shall be less
than two cents ($.02) per Warrant Share, provided, however, that in such case
any adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time of and together with
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the next subsequent adjustment which, together with any adjustment so carried
forward, shall amount to at least two cents ($.02) per Warrant Share.
9. Exchange and Replacement of Warrant Certificates. Each Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any Warrant Certificate, and,
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Warrants, nor shall it be required to issue scrip or
pay cash in lieu of fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any fraction up to
the nearest whole number of shares of Common Stock or other securities,
properties or rights.
11. Reservation and Listing of Securities. The Company shall at all
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issuance upon the exercise of the Warrants, such
number of shares of Common Stock or other securities, properties or rights as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price therefor,
all shares of Common Stock and other securities issuable upon such exercise
shall be duly and validly issued, fully paid, non-assessable and not subject to
the preemptive rights of any stockholder. As long as the Warrants shall be
outstanding, the Company shall use its best efforts to cause all shares of
Common Stock issuable upon the exercise of the Warrants to be listed (subject to
official notice of issuance) on all securities exchanges on which the Common
Stock issued to the public in connection herewith may then be listed and/or
quoted.
12. Notices to Warrant Holders. Nothing contained in this Agreement
shall be construed as conferring upon the Holders the right to vote or to
consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the following
events shall occur:
(a) the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a dividend
or distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or distribution on the
books of the Company; or
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(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the Company, or
any option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed; then, in any one or more of said events, the Company shall give
written notice of such event at least fifteen (15) days prior to the date fixed
as a record date or the date of closing the transfer books for the determination
of the stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable securities, or
subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
13. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return receipt
requested:
(a) If to the registered Holder of the Warrants, to the
address of such Holder as shown on the books of the Company; or
(b) If to the Representatives, to Ryan, Beck & Co., Inc., 200
Park Avenue, 16th Floor, New York, New York 10166, and to Pennsylvania Merchant
Group, Four Falls Corporate Center, West Conshohocken, Pennsylvania 19428; or
(c) If to the Company, to the address set forth in Section 3
hereof or to such other address as the Company may designate by notice to the
Holders.
14. Supplements and Amendments. The Company and the Representatives
may from time to time supplement or amend this Agreement without the approval of
any Holders of Warrant Certificates (other than the Representatives) in order to
cure any ambiguity, to correct or supplement any provision contained herein
which may be defective or inconsistent with any provisions herein, or to make
any other provisions in regard to matters or questions arising hereunder which
the Company and the Representatives may deem necessary or desirable and which
the Company and the Representatives deem shall not adversely affect the
interests of the Holders of Warrant Certificates.
15. Successors. All the covenants and provisions of this Agreement
shall be binding upon and inure to the benefit of the Company, the Holders and
their respective successors and assigns hereunder.
16. Termination. This Agreement shall terminate at the close of
business on ________, 2006. Notwithstanding the foregoing, the indemnification
provisions of Section 7 shall survive such termination until the close of
business on ________ , 2012.
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17. Governing Law: Submission to Jurisdiction. This Agreement and
each Warrant Certificate issued hereunder shall be deemed to be a contract made
under the laws of the State of New York and for all purposes shall be construed
in accordance with the laws of said State without giving effect to its rules
governing the conflicts of laws.
The Company and the Representatives hereby agree that any action,
proceeding or claim against it or them arising out of, or relating in any way
to, this Agreement shall be brought and enforced in the courts of the State of
New York or of the United States of America for the Southern District of New
York, and irrevocably submit to such jurisdiction, which jurisdiction shall be
exclusive. The Company and the Representatives hereby irrevocably waive any
objection to such exclusive jurisdiction or inconvenient forum. Any such process
or summons to be served upon the Company or the Representatives (at the option
of the party bringing such action, proceeding or claim) may be served by
transmitting a copy thereof, by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address provided for in
Section 13 hereof. Such mailing shall be deemed personal service and shall be
legal and binding upon the party so served in any action, proceeding or claim.
The Company and the Representatives agree that the prevailing party(ies) in any
such action or proceeding shall be entitled to recover from the other party(ies)
all of its/their reasonable legal costs and expenses relating to such action or
proceeding and/or incurred in connection with the preparation therefor.
18. Entire Agreement: Modification. This Agreement (including the
Underwriting Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and may not be modified or amended except by a writing
duly signed by the party against whom enforcement of the modification or
amendment is sought.
19. Severability. If any provision of this Agreement shall be held to
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
20. Captions. The caption headings of the Sections of this Agreement
are for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
21. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Representatives and any other registered Holder(s) of the Warrant Certificates
or Warrant Shares any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole and exclusive benefit of the
Company, the Representatives and the Holder(s) of the Warrant Certificates or
Warrant Shares.
22. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
NATIONAL MEDICAL HEALTH CARD
SYSTEMS, INC.
By:
------------------------------
Name:
Title:
Attest:
-----------------
Secretary
RYAN, BECK & CO., INC.
By:
------------------------------
Name:
Title:
PENNSYLVANIA MERCHANT GROUP
By:
------------------------------
Name:
Title:
12
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE HEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE 5:30 P.M.,
NEW YORK TIME, ___________ , 2004
No. W-_______
WARRANT CERTIFICATE
This Warrant Certificate certifies that ________, or registered assigns, is the
registered holder of _________ Warrants, each Warrant entitling the holder to
purchase initially, at any time from _______ 2000 [one year from the effective
date of the Registration Statement] until 5:30 p.m. New York time on ________,
2004 [five years from the effective date of the Registration Statement]
("Expiration Date"), one fully-paid and non-assessable share of common stock,
$.001 par value ("Common Stock") of National Medical Health Card Systems, Inc.,
a New York corporation (the "Company"), at the initial exercise price, subject
to adjustment in certain events (the "Exercise Price"), of $__________ [120% of
the public offering price] per share of Common Stock upon surrender of this
Warrant Certificate and payment of the Exercise Price at an office or agency of
the Company, but subject to the conditions set forth herein and in the warrant
agreement dated as of__________ , 1999 by and among the Company, Ryan, Beck &
Co., Inc. and Pennsylvania Merchant Group (the "Warrant Agreement"). Payment of
the Exercise Price shall be made by certified or official bank check in New York
Clearing House funds payable to the order of the Company or by surrender of this
Warrant Certificate.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
13
<PAGE>
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
14
<PAGE>
IN WITNESS WHEREOF the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
Dated as of __________, 1999
NATIONAL MEDICAL HEALTH CARD
SYSTEMS, INC.
[SEAL] By:
----------------------------
Name:
Title:
Attest:
- ---------------------------
Secretary
15
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase _____________ shares of
Common Stock and herewith tenders in payment for such securities a certified or
official bank check payable in New York Clearing House Funds to the order of
National Medical Health Card Systems, Inc. in the amount of $_________, all in
accordance with the terms of Section 3.1 of the Representatives' Warrant
Agreement, dated as of __________, 1999, among National Medical Health Card
Systems, Inc., and Ryan, Beck & Co., Inc. and Pennsylvania Merchant Group. The
undersigned requests that a certificate for such securities be registered in the
name of ____________ whose address is _____________________ and that such
Certificate be delivered to _________________ whose address is ________________.
Dated: ____________________
Signature ____________________________
(Signature must conform in all respects to name of holder as
specified on the face of the Warrant Certificate.)
(Insert Social Security or Other Identifying Number of Holder)
16
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right, represented by
this Warrant Certificate, to purchase _____________ shares of Common Stock all
in accordance with the terms of Section 3.2 of the Representatives' Warrant
Agreement, dated as of __________ 1999, among National Medical Health Card
Systems, Inc., and Ryan, Beck & Co., Inc. and Pennsylvania Merchant Group. The
undersigned requests that a certificate for such securities be registered in the
name of ______________ whose address is_____________ and that such Certificate
be delivered to ___________ whose address is ________________.
Dated: __________________________
Signature ____________________________
(Signature must conform in all respects to name of holder as
specified on the face of the Warrant Certificate. )
(Insert Social Security or Other Identifying Number of Holder)
17
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder desires to transfer the
Warrant Certificate.)
FOR VALUE RECEIVED, __________________________ hereby sells, assigns and
transfers unto _________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _____________ Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: ____________________
Signature:_____________________
(Signature must conform in all respects to name of holder as
specified on the face of the Warrant Certificate.)
(Insert Social Security or Other Identifying Number of Assignee)
18
<PAGE>
[LETTERHEAD OF NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.]
Prescription Benefit Manager
June 16, 1998
Mr. Bert E. Brodsky
Sandata, Inc.
26 Harbor Park Drive
Port Washington, NY 11050
Dear Mr. Brodsky:
From time to time prior to the date hereof, Sandata, Inc. ("Sandata") and
National Medical Health Card Systems, Inc. ("Health Card") have entered into one
or more verbal or written agreements (collectively "Agreements") pursuant to
which, among other things, Sandata developed certain computer software and
related documentation (collectively "Software") for Health Card. This letter
agreement (the "Letter Agreement") supersedes and is an amendment to the
Agreements.
1. Notwithstanding anything contained in the Agreements, all ideas,
processes, methods, devices, business concepts, Software, inventions,
improvements, discoveries, know-how and other creative achievements (hereinafter
referred to collectively as "Discoveries") which were produced and/or developed
by Sandata and all patent, copyright, trademark, trade secret and other
proprietary rights in all Discoveries created by (i) Sandata or (ii) Sandata and
Health Card jointly, during the course of the Agreements, was and is hereby
deemed the property of Health Card. Sandata agrees to sign and execute, and will
require its personnel to sign and execute, all assignments and other documents
necessary to convey and vest the entire right, title, and interest in such
property in Health Card, or its successors and assigns at Health Card's request,
and to do all lawful acts and sign all assignments and other papers Health Card
reasonably requests relating to applications for patents, copyrights,
trademarks, trade secrets and other proprietary rights throughout the world, in
the providing of protection of Health Card's interest in such property.
2. Sandata will defend at its own expenses and will hold Health Card
harmless from all claims, suits, proceedings. losses, damages, deficiencies,
liabilities, exposure, penalties actions, investigations, demands, assessments,
audits, fines and judgments relating to any patent, copyright, trademark, trade
secret or other intellectual property rights of a third party anywhere
throughout the world asserted or brought against Health Card, based on a claim
that any Discovery developed by Sandata for Health Card, or Sandata and Health
Card jointly, during the course of its performance under Agreements constitutes
an infringement of any patent, copyright, trademark, trade secret or other
intellectual property rights through the world. Health Card shall provide prompt
written notice to Sandata of any such claim; provided, however, that the failure
to give such notice shall not be deemed a waiver or otherwise limit Health
Card's rights to indemnification hereunder. Sandata shall not, without the prior
written consent of Health Card, consent to the entry of any judgment against
Health Card or enter into any settlement or compromise which does not include,
as an
<PAGE>
unconditional term thereof (i.e., there being no requirement that Health Card
pay any amount of money or give any other consideration), the giving by the
claimant or plaintiff to Health Card of a release in form and substance
satisfactory to the Health Card from all liability in respect of such claim or
litigation. Sandata will not be responsible for any compromise made without its
consent, which shall not be unreasonably withheld or delayed. If such discovery
is held to constitute infringment and its use is enjoined, Sandata may, at its
election and expense, either obtain for Health Card the right to continue using
such Discovery, modify it so that it is not infringing, or accept Health Card's
return of the Discovery and grant Health Card a credit thereafter. Sandata will
not be liable to Health Card for indemnity to the extent that a claim of
infringement is based upon the use of such Discovery in combination with
equipment, other Discovery, or other devices for which such Discovery was not
designed. Sandata hereby consents to jurisdiction in any forum in which Health
Card may be sued on a claim subject to indemnification under this Letter
Agreement.
3. Sandata hereby represents and warrants that the Software is compatible
with Health Card's computer system (the "System") so that all functions of the
System will be able to utilize the Software both prior to and following January
1, 2000. Health Card shall not experience termination errors and/or invalid
and/or incorrect results from the Software in the operation of Health Card's
business. To ensure year 2000 compatibility, the design and performance
capability of the Software includes, but shall not be limited to, date data
century recognition, calculations which accommodate same century and
multi-century formulas and date values, and date data interface values which
reflect the correct century. In the events that at any time the Software is
found by Health Card not to function as required as a result of the date change
from December 31, 1999 or any date prior thereto to January 1, 2000 or any date
thereafter, notwithstanding any other obligation of Sadata contained in this
Agreement, at no additional charge to Health Card, Sandata shall immediately
upon receipt of a report form Health Card, correct any such defect so at to
enable the Software to fully function as required.
4. This Letter Agrement constitutes the entire agreement of the parties
with respect to the subject matter hereof.
5. This Letter Agreement shall be binding upon and inure to the benefit of
the parties and their respective successors and assigns.
6. No change, modification, amendment, addition, waiver or termination of
this Letter Agreement or any part thereof shall be valid unless in writing and
signed by or on behalf of the party to be charged therewith.
7. This Letter Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, and all of which taken together shall
constitute one and the same instrument.
8. This Letter Agreement shall be governed by, and interpreted and
construed in accordance with, the laws of the State of New York, excluding
choice of law principles thereof. In the event any clause, section or part of
this Agreement shall be held or declared to be void, illegal or invalid for any
reason, all other clauses, sections or parts of this Letter Agreement
[ILLEGIBLE]
[LOGO]
<PAGE>
effected without such void, illegal or invalid clause, section or part shall
nevertheless continue in full force and effect.
9. Sandata agrees that it has held, and at all times hereafter will hold in
a fiduciary capacity and in strict confidence all information, data and
documents received from Health Card with respect to the Agreements and this
Letter Agreement (collectively, "Information") and will not, without the consent
of Health Card, use or disclose, directly or indirectly, the Information in any
manner whatsoever, in whole or in part. Notwithstanding the foregoing, the
obligations under this Section 9 to maintain such confidentiality shall not
apply to any Information (a) that is in the public domain at the time furnished
by Health Card, (b) that becomes in the public domain thereafter through any
means other than as a result of any act of Sandata or of its agents, officers,
directors or shareholders which constitutes a breach of this Letter Agreement,
or (c) that is required by applicable law to be disclosed.
[LOGO]
<PAGE>
Please acknowledge your agreement to the foregoing by countersigning a copy
of this letter in the space provided and returning it to the undersigned.
Very truly yours,
NATIONAL MEDICAL HEALTH CARD
SYSTEMS, INC.
By: Linda Portney
-------------------------------
Name: Linda Portney
(Please Print)
Title: President
AGREED TO AND ACCEPTED:
SANDATA, INC.
By: /s/ Bert E. Brodsky
---------------------
Name: BERT E. BRODSKY
(Please Print)
Title: Chairman
[LOGO]
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
26 Harbor Park Drive
Port Washington, New York 11050
January 31, 1996
Ms. Mary T. Casale
822 Cedar Avenue
Haddonfield, NJ 08033
Personal & Confidential
Dear Mary:
It is with great pleasure that we offer you the position of Director of Sales
and Marketing with National Medical Health Card Systems, Inc., which reports
directly to Linda Portney.
Pursuant to our recent discussion and mutual understanding, this letter
delineates the terms and conditions of your employment.
COMPENSATION
Salary: You will receive an annual base salary of
$100,000 payable on a bi-weekly basis.
Commission: You will receive one-half of 1% of
gross revenues received from direct
accounts sold and one-quarter of 1% of
gross revenues received from accounts
sold by sales people under your
management.
Benefits: You will be eligible to participate in
all qualified benefit programs at your
capacity after 90 days of employment.
Starting Date: Your employment with National Medical
Health Card Systems, Inc. shall begin
Friday March 1, 1996.
Auto Allowance: A $400 per month auto allowance will be
provided to you.
<PAGE>
We welcome you to National Medical Health Card Systems, Inc. and look forward to
seeing on Friday March 1, 1996. Please sign both copies in the designated area
below and return it to my attention.
Sincerely,
/s/ Lorraine Elshiekh
Lorraine Elshiekh
Director, Human Resources
Acceptance of Employment
/s/ Mary T. Casale 2/7/96
Marcy T. Casale Date
<PAGE>
EMPLOYEE COVENANTS
This Agreement dated 6/15, 1998 by and between Mary Casale residing at 822 Cedar
Avenue, Haddonfield, N.J. 08033 hereinafter referred to as Employee and National
Medical Health Card Systems, Inc. located at 26 Harbor Park Drive, Port
Washington, N.Y. 11050, hereinafter referred to as Employer.
Whereas, Employer shares its premises with various affiliates including but not
limited to Sandata, Inc. and Medical Arts Office Services Inc. Employee will
have access to Confidential Matter as set forth in section 6 hereof (currently
existing and/or hereafter created parents, subsidiaries, and affiliates,
including but not limited to those mentioned in the pre-existing sentence shall
be referred to herein each individually and collectively as "Affiliates") not
only of Employer, but of Affiliates as well; and
Whereas, Employer, and Affiliates, are in the businesses involving the
application of innovative computer technology to solve business problems by
reviewing operations, defining needs, recommending solutions, developing,
installing, and supporting computer systems and software, and providing computer
related services; and
Whereas, Employee is to provide services to Employer,in a position of confidence
and trust; and
Whereas, Employer, shall provide Employee with valuable training and experience;
and
Whereas, Employee will have access to Confidential Matter, as hereinafter
defined, including, but not limited to, trade secrets and proprietary
information of Employer, and Affiliates; and
Now, therefore, Employer and Employee agree, in consideration of the mutual
covenants and agreements contained herein and other valuable consideration, as
follows.
1. PROVISION OF SERVICES:
On the terms and conditions herein set forth, Employer, hereby engages
Employee, and Employee agrees to be so engaged, as part of the staff of
Employer. Employee shall perform such duties and discharge such
responsibilities as shall be assigned to him/her from time to time by the
management of Employer, in a manner satisfactory to Employer. Employee
hereby agrees to devote his/her full business time to the business of
Employer.
2. COMPENSATION:
Employer, agrees to compensate Employee for the services which are
rendered satisfactorily at a mutually agreed upon rate and as long as there
is no violation of this Agreement. Such compensation shall be subject to
periodic review and adjusted by Employer, in such manner and amount as
Employer, deems proper, without necessity for a written amendment or
modification hereto.
3. FRINGE BENEFITS:
Employer, shall provide Employee fringe benefits of the same nature
and kind as are provided to other staff at a similar level of experience
and responsibility. Such fringe benefits shall be subject to periodic
review and adjustment by the management of Employer, in such manner and
amount as it deems proper and are subject to change by Employer as long as
such change affects employees similarly situated in a similar manner.
4. TERMINATION:
Either party hereto may terminate this Agreement with or without cause
at any time upon notice to the other. The time from beginning of employment
until termination of employment shall be referred to as the Employment
Period.
5. REPRESENTATIONS AND WARRANTIES OF EMPLOYEE:
Employee represents and warrants to Employer that Employee is
<PAGE>
under no contract, restriction or obligation which is inconsistent with
execution of this Agreement or the performance of his/her duties hereunder.
Employee hereby agrees to indemnify Employer and Affiliates in connection
with any of the following:
(1) Any breach of the foregoing representations and warranties; (ii)
any lawsuit or other legal proceeding in which it is claimed that the
employee has breached any trust, confidence or duty of loyalty, etc.; (iii)
any action or matter relating to the above representations and warranties.
6. CONFIDENTIAL INFORMATION:
Employee hereby acknowledges that in the course of Employee's
employment by Employer, Employee will be exposed to valuable confidential
and trade secret information of Employer and Affiliates ("Confidential
Matter"). Employee agrees to treat all such information as confidential and
to take all necessary precautions against disclosure of such information to
third parties.
All confidential information which Employee may now possess or may
obtain during the Employment Period relating to the business of the
Employer or Affiliates, their customers or suppliers shall not be
published, disclosed or made accessible by him/her to any other person firm
or corporation either during or after termination of his/her employment, or
be used by him/her except in the business and for the benefit of the
Employer or Affiliates unless the Employer or Affiliates as the case may
be, shall have given its prior written permission. employee shall deliver
all tangible evidence of such confidential information to the Employer or
Affiliates prior to or at the termination or his/her employment.
7. LOYALTY TO EMPLOYER:
In consideration of (a) the unique and valuable services it is
expected that Employee will render to Employer and (b) the knowledge
Employee will obtain of the business, services, customers, trade secrets
and other proprietary information relating to the business of the Employer
and Affiliates and their customers and suppliers, including, without
limitation, computer programs, Employee agrees that he/she will not during
the Employment Period, and for a period of one (1) year following, whether
his/her employment terminates with or without cause, whether voluntarily or
not on the part of the Employee, participate in (as hereinafter defined in
this Section 7) any other business or organization which competes with, or
is engaged in business similar to that of the Employer or Affiliates. The
term "Participates In" shall mean "directly or indirectly, for his/her own
benefit or for, either or through any person, firm or corporation, own
manage, operate control, loan money to, or participate in the ownership,
management, operation, or control of, or be connected as a director,
officer, employee, partner, consultant, agent, independent contractor or
otherwise with, or acquiesce in the use of his/her name in."
During the Employment Period and, for a period of two (2) years
thereafter, Employee will not directly or indirectly reveal the name of,
solicit, or interfere with or endeavor to entice away from the Employer or
Affiliates any of their customers, employees or consultants. For purposes
of this Agreement, the term Customers shall mean (i) any person, firm,
corporation, joint venture, partnership or other entity which does business
with the Employer or Affiliates at any time during the Employment Period or
has done business with the Employer or Affiliates within 2 years
immediately prior to the commencement thereof (ii) any prospects which have
been or are being solicited by the Employer or Affiliates or who have
approached the Employer or Affiliates to engage their service or whose name
appears on any list of prospects maintained by the Employer or Affiliates
at any time during the Employment Period.
8. COVENANTS TO REPORT; PATENTS, ETC.:
a. The Employee shall promptly communicate and disclose to Employer
all inventions, discoveries, improvements and new writings, in any
form whatsoever, (hereinafter "Inventions") including, without
limitation, all software, programs, routines, techniques, procedures,
training aides and instructional manuals conceived, developed or made
by him/her during his/her employment by Employer, and for a period of
two years thereafter whether solely or jointly with others, and
whether or not patentable or copyrightable, (A) which relate to any
matters or business of the type carried on or being
<PAGE>
developed by Employer or Affiliates, or (B) which result from or are
suggested by any work done by him/her in the course of his/her
employment by Employer. The Employee shall also promptly communicate
and disclose to Employer all other data obtained by him/her concerning
the business or affairs of Employer or Affiliates in the course of
his/her employment by Employer.
b. The Employee will assign to Employer all right in the Inventions
and will assist Employer or its designee during and subsequent to
his/her employment, at Employer's sole expense, in filing patent
and/or copyrights for, such Inventions in any and all countries, and
will assign to the Employer all such patents and/or copyrights which
may issue thereon, said Inventions to be and remain the sole and
exclusive property of Employer or its designee whether or not patented
and/or copyrighted.
c. Any Invention which is competitive with the business conducted by
Employer or Affiliates at the date of termination or business activity
being developed by Employer or Affiliates at termination, conceived,
developed or made by the Employee within one (1) year of the
termination of his/her employment, whether such termination of
employment is voluntary or involuntary, shall be deemed to have arisen
out of and been conceived, developed or made by the Employee during
his/her employment by Employer, unless established to have been
conceived, developed or made after the termination of such employment.
9. ENFORCEMENT:
Since a breach of the provisions of this Section 6, 7 & hereof could
not adequately be compensated by money damages, the Employer and/or
Affiliates shall be entitled, in addition to any other right and remedy
available to it, to an injunction restraining such breach or a threatened
breach, and in either case, no bond or other security shall be required in
connection therewith, and Employee hereby consents to the issuance of such
injunction and in any application for injunction will not plead a defense
of adequate remedy at law. Employee agrees that the provisions of this
Section 9 are necessary and reasonable to protect the Employer and
Affiliates in the conduct of their businesses. If any restriction contained
in Sections 6, 7 & 8 shall be deemed to be invalid, illegal or
unenforceable, then the remainder of such Sections shall be enforceable to
the fullest extent deemed appropriate by such court.
10. MISCELLANEOUS:
a. This Agreement and all provisions hereof shall bind and inure to
the benefit of Employer, Employee and their respective heirs,
successors, personal representatives and assigns.
b. This Agreement and all questions arising hereunder shall be
governed by the laws of the State of New York.
c. If any provision of this Agreement shall be held to be invalid,
illegal or unenforceable, such provision may be severed and enforced
to the extent possible and such invalidity, illegality or
unenforceability shall not affect the remainder of this Agreement.
d. This constitutes the entire Agreement between the parties with
respect to the subject matter; all prior agreements, representations,
statements, negotiations and undertakings are superseded hereby.
e. No amendment to this Agreement shall be effective unless it is in
writing and signed by both parties, except as specifically provided
herein.
f. All of Employees obligations hereunder shall inure to the benefit
of Affiliates of Employer and the provisions of Sections 6, 7, 8 & 9
may be enforced by Affiliates.
<PAGE>
g. The failure by the Employer or Affiliates at any time or times to
require strict performance by Employee of any provisions hereof shall
in no manner affect its right at a later time to enforce the same. No
waiver by the Employer or its Affiliates of any condition or the
breach of any term contained in this Agreement, whether by conduct or
otherwise in any one or more instances shall be deemed to be or
construed as a further or continuing waiver of any such condition or
breach or a waiver of any other condition or breach of any other term
of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement effective the
day and year first above set forth.
National Medical Health Card Systems, Inc.
BY: /s/ Richard Wilson
Employee: /s/ Mary Casale
<PAGE>
Bert E. Brodsky
Chairman of the Board
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
26 Harbor Park Drive
Port Washington, New York 11050
November 30, 1998
Ms. Marjorie O'Malley
28 Loyal Ledge Lane
Guilford, CT 06437
Dear Marjorie:
This letter will confirm our offer to you for the full time position of
President and Chief Operating Officer for National Medical Health Card Systems,
Inc. at a starting annual salary of $175,000. In this position you will report
directly to me and be eligible for your first monetary performance review one
year from your date of hire.
You will also be entitled to all our company benefits plans including Medical,
Dental, Vacation, 401K, etc.
In addition to the above, we will provide you with stock options for 500,000
shares of National Medical Health Card stock at $.75 per share. You will also be
entitled to participate in a bonus pool allocated for Senior Executives equal to
15% of any increase in pre-tax profits over the prior year.
Marjorie, if you have any questions of any of the points above I will be happy
to answer them for you. I look forward to a favorable reply.
Cordially,
/s/ Bert E. Brodsky
Bert E. Brodsky
BEB/sr
<PAGE>
EMPLOYEE COVENANTS
This Agreement dated 12/7, 1998 by and between Marjorie G. O'Malley residing at
28 Loyal Ledge Lane, Guilford, CT. hereinafter referred to as Employee and
National Medical Health Card Systems, Inc. located at 26 Harbor Park Drive, Port
Washington, N.Y. 11050, hereinafter referred to as Employer.
Whereas, Employer shares its premises with various affiliates including but not
limited to Sandata, Inc and Medical Arts Office Services Inc. Employee will have
access to Confidential Matter as set forth in section 6 hereof (currently
existing and/or hereafter created parents, subsidiaries, and affiliates,
including but not limited to those mentioned in the pre-existing sentence shall
be referred to herein each individually and collectively as "Affiliates") not
only of Employer, but of Affiliates as well; and
Whereas, Employer, and Affiliates, are in the businesses involving the
application of innovative computer technology to solve business problems by
reviewing operations, defining needs, recommending solutions, developing,
installing, and supporting computer systems and software, and providing computer
related services; and
Whereas, Employee is to provide services to Employer,in a position of confidence
and trust; and
Whereas, Employer, shall provide Employee with valuable training and experience;
and
Whereas, Employee will have access to Confidential Matter, as hereinafter
defined, including, but not limited to, trade secrets and proprietary
information of Employer, and Affiliates; and
Now, therefore, Employer and Employee agree, in consideration of the mutual
covenants and agreements contained herein and other valuable consideration, as
follows.
1. PROVISION OF SERVICES:
On the terms and conditions herein set forth, Employer, hereby engages
Employee, and Employee agrees to be so engaged, as part of the staff of
Employer. Employee shall perform such duties and discharge such
responsibilities as shall be assigned to him/her from time to time by the
management of Employer, in a manner satisfactory to Employer. Employee
hereby agrees to devote his/her full business time to the business of
Employer.
2. COMPENSATION:
Employer, agrees to compensate Employee for the services which are
rendered satisfactorily at a mutually agreed upon rate and as long as there
is no violation of this Agreement. Such compensation shall be subject to
periodic review and adjusted by Employer, in such manner and amount as
Employer, deems proper, without necessity for a written amendment or
modification hereto.
3. FRINGE BENEFITS:
Employer, shall provide Employee fringe benefits of the same nature
and kind as are provided to other staff at a similar level of experience
and responsibility. Such fringe benefits shall be subject to periodic
review and adjustment by the management of Employer, in such manner and
amount as it deems proper and are subject to change by Employer as long as
such change affects employees similarly situated in a similar manner.
4. TERMINATION:
Either party hereto may terminate this Agreement with or without cause
at any time upon notice to the other. The time from beginning of employment
until termination of employment shall be referred to as the Employment
Period.
5. REPRESENTATIONS AND WARRANTIES OF EMPLOYEE:
Employee represents and warrants to Employer that Employee is under no
contract, restriction or obligation which is inconsistent with execution of
this Agreement or the performance of his/her duties hereunder. Employee
hereby agrees to indemnify Employer and Affiliates in connection with any
of the following:
(1) Any breach of the foregoing representations and
<PAGE>
warranties; (ii) any lawsuit or other legal proceeding in which it is
claimed that the employee has breached any trust, confidence or duty of
loyalty, etc.; (iii) any action or matter relating to the above
representations and warranties.
6. CONFIDENTIAL INFORMATION:
Employee hereby acknowledges that in the course of Employee's
employment by Employer, Employee will be exposed to valuable confidential
and trade secret information of Employer and Affiliates ("Confidential
Matter"). Employee agrees to treat all such information as confidential and
to take all necessary precautions against disclosure of such information to
third parties.
All confidential information which Employee may now possess or may
obtain during the Employment Period relating to the business of the
Employer or Affiliates, their customers or suppliers shall not be
published, disclosed or made accessible by him/her to any other person firm
or corporation either during or after termination of his/her employment, or
be used by him/her except in the business and for the benefit of the
Employer or Affiliates unless the Employer or Affiliates as the case may
be, shall have given its prior written permission. employee shall deliver
all tangible evidence of such confidential information to the Employer or
Affiliates prior to or at the termination or his/her employment.
7. LOYALTY TO EMPLOYER:
In consideration of (a) the unique and valuable services it is
expected that Employee will render to Employer and (b) the knowledge
Employee will obtain of the business, services, customers, trade secrets
and other proprietary information relating to the business of the Employer
and Affiliates and their customers and suppliers, including, without
limitation, computer programs, Employee agrees that he/she will not during
the Employment Period, and for a period of one (1) year following, whether
his/her employment terminates with or without cause, whether voluntarily or
not on the part of the Employee, participate in (as hereinafter defined in
this Section 7) any other business or organization which competes with, or
is engaged in business similar to that of the Employer or Affiliates. The
term "Participates In" shall mean "directly or indirectly, for his/her own
benefit or for, either or through any person, firm or corporation, own
manage, operate control, loan money to, or participate in the ownership,
management, operation, or control of, or be connected as a director,
officer, employee, partner, consultant, agent, independent contractor or
otherwise with, or acquiesce in the use of his/her name in."
During the Employment Period and, for a period of two (2) years
thereafter, Employee will not directly or indirectly reveal the name of,
solicit, or interfere with or endeavor to entice away from the Employer or
Affiliates any of their customers, employees or consultants. For purposes
of this Agreement, the term Customers shall mean (i) any person, firm,
corporation, joint venture, partnership or other entity which does business
with the Employer or Affiliates at any time during the Employment Period or
has done business with the Employer or Affiliates within 2 years
immediately prior to the commencement thereof (ii) any prospects which have
been or are being solicited by the Employer or Affiliates or who have
approached the Employer or Affiliates to engage their service or whose name
appears on any list of prospects maintained by the Employer or Affiliates
at any time during the Employment Period.
8. COVENANTS TO REPORT; PATENTS, ETC.:
a. The Employee shall promptly communicate and disclose to Employer
all inventions, discoveries, improvements and new writings, in any
form whatsoever, (hereinafter "Inventions") including, without
limitation, all software, programs, routines, techniques, procedures,
training aides and instructional manuals conceived, developed or made
by him/her during his/her employment by Employer, and for a period of
two years thereafter whether solely or jointly with others, and
whether or not patentable or copyrightable, (A) which relate to any
matters or business of the type carried on or being developed by
Employer or Affiliates, or (B) which result from or are suggested by
any work done by him/her in the course of his/her employment by
Employer. The Employee shall also promptly communicate and disclose to
Employer all other data obtained by him/her concerning the business or
affairs of Employer or Affiliates in the course of his/her employment
by
<PAGE>
Employer.
b. The Employee will assign to Employer all right in the Inventions
and will assist Employer or its designee during and subsequent to
his/her employment, at Employer's sole expense, in filing patent
and/or copyrights for, such Inventions in any and all countries, and
will assign to the Employer all such patents and/or copyrights which
may issue thereon, said Inventions to be and remain the sole and
exclusive property of Employer or its designee whether or not patented
and/or copyrighted.
c. Any Invention which is competitive with the business conducted by
Employer or Affiliates at the date of termination or business activity
being developed by Employer or Affiliates at termination, conceived,
developed or made by the Employee within one (1) year of the
termination of his/her employment, whether such termination of
employment is voluntary or involuntary, shall be deemed to have arisen
out of and been conceived, developed or made by the Employee during
his/her employment by Employer, unless established to have been
conceived, developed or made after the termination of such employment.
9. ENFORCEMENT:
Since a breach of the provisions of this Section 6, 7 & hereof could
not adequately be compensated by money damages, the Employer and/or
Affiliates shall be entitled, in addition to any other right and remedy
available to it, to an injunction restraining such breach or a threatened
breach, and in either case, no bond or other security shall be required in
connection therewith, and Employee hereby consents to the issuance of such
injunction and in any application for injunction will not plead a defense
of adequate remedy at law. Employee agrees that the provisions of this
Section 9 are necessary and reasonable to protect the Employer and
Affiliates in the conduct of their businesses. If any restriction contained
in Sections 6, 7 & 8 shall be deemed to be invalid, illegal or
unenforceable, then the remainder of such Sections shall be enforceable to
the fullest extent deemed appropriate by such court.
10. MISCELLANEOUS:
a. This Agreement and all provisions hereof shall bind and inure to
the benefit of Employer, Employee and their respective heirs,
successors, personal representatives and assigns.
b. This Agreement and all questions arising hereunder shall be
governed by the laws of the State of New York.
c. If any provision of this Agreement shall be held to be invalid,
illegal or unenforceable, such provision may be severed and enforced
to the extent possible and such invalidity, illegality or
unenforceability shall not affect the remainder of this Agreement.
d. This constitutes the entire Agreement between the parties with
respect to the subject matter; all prior agreements, representations,
statements, negotiations and undertakings are superseded hereby.
e. No amendment to this Agreement shall be effective unless it is in
writing and signed by both parties, except as specifically provided
herein.
f. All of Employees obligations hereunder shall inure to the benefit
of Affiliates of Employer and the provisions of Sections 6, 7, 8 & 9
may be enforced by Affiliates.
g. The failure by the Employer or Affiliates at any time or times to
require strict performance by Employee of any provisions hereof shall
in no manner affect its right at a later time to enforce the same. No
waiver by the Employer or its Affiliates of any condition or the
breach of any term contained in this
<PAGE>
Agreement, whether by conduct or otherwise in any one or more
instances shall be deemed to be or construed as a further or
continuing waiver of any such condition or breach or a waiver of any
other condition or breach of any other term of this Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement effective the
day and year first above set forth.
National Medical Health Card Systems, Inc
BY: /s/ Richard Wilson
Employee: /s/ Marjorie G. O'Malley
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
26 Harbor Park Drive
Port Washington, New York 11050
November 3, 1998
Mr. John Ciufo
20750 Vincent Drive
Brookfield, WI 53045
Dear John:
This letter will confirm our offer to you for the position of Vice President for
National Medical Health Card Systems, Inc. at a starting annual salary of
$130,000. This salary reflects an increase of $5,000 from our previous offer. In
this position you will be eligible for your first monetary performance review
one year from your date of hire.
In addition, you will be entitled to participate in all our company benefits
plans as previously explained. Further details on these benefits will be
provided as you begin employment with us or sooner if you so require.
In addition to the above, I would also like to outline several other points that
had been agreed to:
1. You will be a member of the Operating Committee.
2. You will be issued three weeks of vacation per year.
3. You will receive a sign on bonus of $5,000 thirty days after
you begin employment with us.
4. 200,000 stock options will be made available to you at .75 per
share. This will be Sandata stock. Vesting will occur per the
following schedule:
1/3 after 1 year
1/3 after 2 years
1/3 after 3 years
You will have five years to exercise this group of stock
options.
5. A bonus plan will go into effect of which you will be a
participant. This plan will allocate 15% of increases in
pre-tax earnings to be made available on a yearly basis in
the form of bonus.
6. You will be eligible for relocation assistance. This will
include, but not be limited to reimbursement of household
moving expenses, house hunting trips for you and your
family, temporary lodging expenses and cost of travel for
you back and forth until you are permanently located here.
As previously discussed, it is understood that other
unforseen expenses could occur and it is agreed that you
will come forward with these issues so we may consider
reimbursement.
<PAGE>
John, I believe this letter summarizes all of the points that we have
previously discussed. Please feel free to contact me with any questions that you
may continue to have. It's understood that you will response to our offer no
later than Friday, November 6, 1998.
All of us who met you here at National Medical Health Card are very eager to
begin working with you. I will speak to you again soon.
Sincerely,
/s/ Richard F. Wilson
Richard F. Wilson
Human Resources Director
<PAGE>
CONFIDENTIALITY AND NON-DISCLOSURE AGREEMENT
THIS AGREEMENT is made and effective as of November 19, 1998, by and
between National Medical Health Card Systems, Inc., its subsidiaries and
affiliates ("Health Card") and John Ciufo ("Ciufo"). The parties acknowledge the
following facts:
A. Health Card and Ciufo are desirous to engage in a possible relationship
between the parties which may require an examination by Ciufo of Health Card and
its business undertakings (the "Project"); and
B. In order to proceed with the Project, Health Card may disclose to Ciufo
certain Proprietary Information (as such term is hereinafter defined).
In consideration of the above promises and the covenants hereinafter set
forth, the parties agree as follows:
1. a. "Proprietary Information" means information including, but not limited to
clients, pricing and information which is related to the business of Health Card
from which Health Card (1) derives economic value, actual or potential, from not
being generally known to other persons who can obtain economic value from its
disclosure or use; and (2) is the subject of efforts by Health Card that are
reasonable under the circumstances to maintain its secrecy, including without
limitation (i) with respect to information which has been reduced to tangible
form, marking such information clearly and conspicuously with a legend
identifying its confidential or proprietary nature; (ii) with respect to any
oral presentation or communication, denominating such information as
confidential immediately before, during or after such oral presentation or
communication; or (iii) otherwise treating such information as confidential.
Assuming the criteria in clauses (1) and (2) above are met, Proprietary
Information includes, but is not limited to technical and nontechnical
information and data related to the formulas, patterns, designs, compilations,
programs, inventions, methods, techniques, drawings, processes, finances, actual
or potential customers and suppliers, research, development, existing and future
products, and employees of Health Card. Proprietary Information also includes
information which has been disclosed to Health Card by a third party, which
Health Card is obligated to treat as confidential.
b. Proprietary Information does not include any information which (1) is
already known to Ciufo at the time it is disclosed to Ciufo by Health Card,
provided that such information has been rightfully received by Ciufo from a
third party without restriction on disclosure and without breach of an
obligation of confidentiality running directly or indirectly to Health Card; (2)
is disclosed by Ciufo pursuant to a requirement of a governmental agency or is
required to be disclosed by operation of law; provided, however, that Ciufo
shall first have given written notice of such required disclosure to Health Card
to allow Health Card to seek to protect the confidentiality of the information
required to be disclosed; or (3) before being divulged by Ciufo (i) has become
generally known to the public through no wrongful act of Ciufo (ii) has been
rightfully received by Ciufo from a third party without restriction on
disclosure and without breach of an obligation of confidentiality running
directly or indirectly to Health Card; (iii) has been approved for release to
the general public by written authorization of Health Card; (iv) has been
independently developed by Ciufo without use, directly or indirectly, of the
Proprietary Information; or (v) has been furnished to a third party by Health
Card without restrictions on the third party's right to disclose the
information.
2. Ciufo (a) must receive and hold the Proprietary Information in trust and in
strictest confidence; (b) must protect the Proprietary Information from
disclosure and in no event take any action causing, or failing to take
reasonable action necessary in order to prevent, any Proprietary Information
disclosed to Ciufo to lose its character as Proprietary Information; and (c)
must not use, duplicate, reproduce, distribute, disclose or otherwise
disseminate the Proprietary Information except to perform the Project. Any and
all reproductions of the Proprietary Information must prominently contain a
confidentiality legend.
3. Disclosures of the Proprietary Information may be made only to employees,
agents, associates or independent contractors of Ciufo (a) who are directly
involved in the Project and have a specific need to know such information; and
(b) whom Ciufo has obligated to hold the Proprietary Information in trust and in
strictest confidence.
4. This Agreement and the rights and obligations of the parties under this
Agreement may be assigned only upon the prior written approval of the parties.
The rights and obligations of the parties will inure to the benefit of, will be
binding upon and will be enforceable by the parties and their lawful successors
<PAGE>
and representatives.
5. No modification of this Agreement or waiver of any of its terms will be
effective unless set forth in a writing signed by the party against whom it is
sought to be enforced.
6. This Agreement may be executed in one or more counterparts, all of which
shall be considered one and the same Agreement and shall become effective when
one or more counterparts have been signed by each of the parties and delivered
to the other parties, it being understood that all parties need not sign the
same counterpart.
7. Ciufo acknowledges and agrees that, in the event of any breach or threatened
breach of any provision of this agreement, Health Card may be without an
adequate remedy at law and, accordingly, shall be entitled to enforce such
provision by temporary or permanent injunctive or mandatory relief obtained in
an action or proceeding instituted in any court of competent jurisdiction
without the necessity of proving damages and without prejudice to any other
rights or remedies which it may have at law or in equity. Ciufo hereby agrees to
the jurisdiction of all federal and state courts within the state of the
defending party in connection with any matter relating to this Agreement. Ciufo
further agrees that service of process may be made, in addition to all other
methods permitted by law, by Certified Mail, Return Receipt Requested, sent to
the address set forth below.
8. Any notices to the parties pursuant to the terms of this Agreement shall be
hand delivered or mailed by Certified Mail, Return Receipt Requested, or
overnight courier as follows:
If to Ciufo:
John Ciufo
20750 Vincent Drive
Brookfield, WI 53045
Telephone Number - 414-797-8593
If to Health Card, at:
National Medical Health Card Systems, Inc.
26 Harbor Park Drive
Port Washington, NY 11050
Attention: Bert E. Brodsky, President
Telephone Number: (516) 484-4400
Telecopier Number: (516) 484-6084
9. All Proprietary Information furnished by Health Card to Ciufo is considered
loaned for use solely in connection with the Project, and shall be returned by
Ciufo to Health Card upon request by Health Card. Ciufo shall certify that it
has destroyed or returned all copies of the Proprietary Information in its
possession.
10. The term of this Agreement shall be from the date first above written until
the earlier of (i) three (3) years after disclosure of Proprietary Information
to Ciufo or (ii) written consent from Health Card that the Proprietary
Information no longer needs to be treated as proprietary in accordance with this
Agreement.
IN WITNESS WHEREOF the parties have executed this Agreement as of the date and
year first above written.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
By:
Bert E. Brodsky, President
<PAGE>
EMPLOYEE COVENANTS
This Agreement dated June 16, 1998 by and between Ken Hammond residing at 8
Susan Lane, Byron Twsp, N.J. 07821 hereinafter referred to as Employee and
National Medical Health Card Systems, Inc. located at 26 Harbor Park Drive, Port
Washington, N.Y. 11050, hereinafter referred to as Employer.
Whereas, Employer shares its premises with various affiliates including but not
limited to Sandata, Inc. and Medical Arts Office Services Inc. Employee will
have access to Confidential Matter as set forth in section 6 hereof (currently
existing and/or hereafter created parents, subsidiaries, and affiliates,
including but not limited to those mentioned in the pre-existing sentence shall
be referred to herein each individually and collectively as "Affiliates") not
only of Employer, but of Affiliates as well; and
Whereas, Employer, and Affiliates, are in the businesses involving the
application of innovative computer technology to solve business problems by
reviewing operations, defining needs, recommending solutions, developing,
installing, and supporting computer systems and software, and providing computer
related services; and
Whereas, Employee is to provide services to Employer,in a position of confidence
and trust; and
Whereas, Employer, shall provide Employee with valuable training and experience;
and
Whereas, Employee will have access to Confidential Matter, as hereinafter
defined, including, but not limited to, trade secrets and proprietary
information of Employer, and Affiliates; and
Now, therefore, Employer and Employee agree, in consideration of the mutual
covenants and agreements contained herein and other valuable consideration, as
follows.
1. PROVISION OF SERVICES:
On the terms and conditions herein set forth, Employer, hereby engages
Employee, and Employee agrees to be so engaged, as part of the staff of
Employer. Employee shall perform such duties and discharge such
responsibilities as shall be assigned to him/her from time to time by the
management of Employer, in a manner satisfactory to Employer. Employee
hereby agrees to devote his/her full business time to the business of
Employer.
<PAGE>
2. COMPENSATION:
Employer, agrees to compensate Employee for the services which are
rendered satisfactorily at a mutually agreed upon rate and as long as there
is no violation of this Agreement. Such compensation shall be subject to
periodic review and adjusted by Employer, in such manner and amount as
Employer, deems proper, without necessity for a written amendment or
modification hereto.
3. FRINGE BENEFITS:
Employer, shall provide Employee fringe benefits of the same nature
and kind as are provided to other staff at a similar level of experience
and responsibility. Such fringe benefits shall be subject to periodic
review and adjustment by the management of Employer, in such manner and
amount as it deems proper and are subject to change by Employer as long as
such change affects employees similarly situated in a similar manner.
4. TERMINATION:
Either party hereto may terminate this Agreement with or without cause
at any time upon notice to the other. The time from beginning of employment
until termination of employment shall be referred to as the Employment
Period.
5. REPRESENTATIONS AND WARRANTIES OF EMPLOYEE:
Employee represents and warrants to Employer that Employee is under no
contract, restriction or obligation which is inconsistent with execution of
this Agreement or the performance of his/her duties hereunder. Employee
hereby agrees to indemnify Employer and Affiliates in connection with any
of the following:
(1) Any breach of the foregoing representations and warranties; (ii)
any lawsuit or other legal proceeding in which it is claimed that the
employee has breached any trust, confidence or duty of loyalty, etc.; (iii)
any action or matter relating to the above representations and warranties.
6. CONFIDENTIAL INFORMATION:
Employee hereby acknowledges that in the course of Employee's
employment by Employer, Employee will be exposed to valuable confidential
and trade secret information of Employer and Affiliates ("Confidential
Matter"). Employee agrees to treat all such information as confidential and
to take all necessary precautions against disclosure of such information to
third parties.
All confidential information which Employee may now possess or may
obtain during the Employment Period relating to the business of the
Employer or Affiliates, their customers or suppliers shall not be
published, disclosed or made accessible by him/her to any other person firm
or corporation either during or after termination of his/her employment, or
be used by him/her except in the business and for the benefit of the
Employer or Affiliates unless the Employer or Affiliates as the case may
be, shall have given its prior written permission. employee shall deliver
all tangible evidence of such confidential information to the Employer or
Affiliates prior to or at the termination or his/her employment.
<PAGE>
7. LOYALTY TO EMPLOYER:
In consideration of (a) the unique and valuable services it is
expected that Employee will render to Employer and (b) the knowledge
Employee will obtain of the business, services, customers, trade secrets
and other proprietary information relating to the business of the Employer
and Affiliates and their customers and suppliers, including, without
limitation, computer programs, Employee agrees that he/she will not during
the Employment Period, and for a period of one (1) year following, whether
his/her employment terminates with or without cause, whether voluntarily or
not on the part of the Employee, participate in (as hereinafter defined in
this Section 7) any other business or organization which competes with, or
is engaged in business similar to that of the Employer or Affiliates. The
term "Participates In" shall mean "directly or indirectly, for his/her own
benefit or for, either or through any person, firm or corporation, own
manage, operate control, loan money to, or participate in the ownership,
management, operation, or control of, or be connected as a director,
officer, employee, partner, consultant, agent, independent contractor or
otherwise with, or acquiesce in the use of his/her name in."
During the Employment Period and, for a period of two (2) years
thereafter, Employee will not directly or indirectly reveal the name of,
solicit, or interfere with or endeavor to entice away from the Employer or
Affiliates any of their customers, employees or consultants. For purposes
of this Agreement, the term Customers shall mean (i) any person, firm,
corporation, joint venture, partnership or other entity which does business
with the Employer or Affiliates at any time during the Employment Period or
has done business with the Employer or Affiliates within 2 years
immediately prior to the commencement thereof (ii) any prospects which have
been or are being solicited by the Employer or Affiliates or who have
approached the Employer or Affiliates to engage their service or whose name
appears on any list of prospects maintained by the Employer or Affiliates
at any time during the Employment Period.
8. COVENANTS TO REPORT; PATENTS, ETC.:
a. The Employee shall promptly communicate and disclose to Employer
all inventions, discoveries, improvements and new writings, in any
form whatsoever, (hereinafter "Inventions") including, without
limitation, all software, programs, routines, techniques, procedures,
training aides and instructional manuals conceived, developed or made
by him/her during his/her employment by Employer, and for a period of
two years thereafter whether solely or jointly with others, and
whether or not patentable or copyrightable, (A) which relate to any
matters or business of the type carried on or being developed by
Employer or Affiliates, or (B) which result from or are suggested by
any work done by him/her in the course of his/her employment by
Employer. The Employee shall also promptly communicate and disclose to
Employer all other data obtained by him/her concerning the business or
affairs of Employer or Affiliates in the course of his/her employment
by Employer.
b. The Employee will assign to Employer all right in the Inventions
and will assist Employer or its designee during and subsequent to
his/her employment, at Employer's sole expense, in filing patent
and/or copyrights for, such Inventions in any and all countries, and
will assign to the Employer all such patents and/or copyrights which
may issue thereon, said Inventions to be and remain the sole and
exclusive property of Employer or its designee whether or not patented
and/or copyrighted.
c. Any Invention which is competitive with the business conducted by
Employer or Affiliates at the date of termination or business activity
being developed by Employer or Affiliates at termination, conceived,
developed or made by the Employee within one (1) year of the
termination of his/her employment, whether such termination of
employment is voluntary or involuntary, shall be deemed to have arisen
out of and been conceived, developed or made by the Employee during
his/her employment by Employer, unless established to have been
conceived, developed or made after the termination of such
<PAGE>
employment.
9. ENFORCEMENT:
Since a breach of the provisions of this Section 6, 7 & hereof could
not adequately be compensated by money damages, the Employer and/or
Affiliates shall be entitled, in addition to any other right and remedy
available to it, to an injunction restraining such breach or a threatened
breach, and in either case, no bond or other security shall be required in
connection therewith, and Employee hereby consents to the issuance of such
injunction and in any application for injunction will not plead a defense
of adequate remedy at law. Employee agrees that the provisions of this
Section 9 are necessary and reasonable to protect the Employer and
Affiliates in the conduct of their businesses. If any restriction contained
in Sections 6, 7 & 8 shall be deemed to be invalid, illegal or
unenforceable, then the remainder of such Sections shall be enforceable to
the fullest extent deemed appropriate by such court.
10. MISCELLANEOUS:
a. This Agreement and all provisions hereof shall bind and inure to
the benefit of Employer, Employee and their respective heirs,
successors, personal representatives and assigns.
b. This Agreement and all questions arising hereunder shall be
governed by the laws of the State of New York.
c. If any provision of this Agreement shall be held to be invalid,
illegal or unenforceable, such provision may be severed and enforced
to the extent possible and such invalidity, illegality or
unenforceability shall not affect the remainder of this Agreement.
d. This constitutes the entire Agreement between the parties with
respect to the subject matter; all prior agreements, representations,
statements, negotiations and undertakings are superseded hereby.
e. No amendment to this Agreement shall be effective unless it is in
writing and signed by both parties, except as specifically provided
herein.
f. All of Employees obligations hereunder shall inure to the benefit
of Affiliates of Employer and the provisions of Sections 6, 7, 8 & 9
may be enforced by Affiliates.
g. The failure by the Employer or Affiliates at any time or times to
require strict performance by Employee of any provisions hereof shall
in no manner affect its right at a later time to enforce the same. No
waiver by the Employer or its Affiliates of any condition or the
breach of any term contained in this Agreement, whether by conduct or
otherwise in any one or more instances shall be deemed to be or
construed as a further or continuing waiver of any such condition or
breach or a waiver of any other condition or breach of any other term
of this Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement effective the
day and year first above set forth.
National Medical Health Card Systems, Inc.
BY: /s/ Richard Wilson
Employee: /s/ Ken Hammond
<PAGE>
EMPLOYEE COVENANTS
This Agreement dated 6/1/98, 19 by and between Linda Portney residing at 4A
Ashwood Rd. hereinafter referred to as Employee and National Medical Health Card
Systems, Inc. located at 26 Harbor Park Drive, Port Washington, N.Y. 11050,
hereinafter referred to as Employer.
Whereas, Employer shares its premises with various affiliates including but not
limited to Sandata, Inc and Medical Arts Office Services Inc. Employee will have
access to Confidential Matter as set forth in section 6 hereof (currently
existing and/or hereafter created parents, subsidiaries, and affiliates,
including but not limited to those mentioned in the pre-existing sentence shall
be referred to herein each individually and collectively as "Affiliates") not
only of Employer, but of Affiliates as well; and
Whereas, Employer, and Affiliates, are in the businesses involving the
application of innovative computer technology to solve business problems by
reviewing operations, defining needs, recommending solutions, developing,
installing, and supporting computer systems and software, and providing computer
related services; and
Whereas, Employee is to provide services to Employer,in a position of confidence
and trust; and
Whereas, Employer, shall provide Employee with valuable training and experience;
and
Whereas, Employee will have access to Confidential Matter, as hereinafter
defined, including, but not limited to, trade secrets and proprietary
information of Employer, and Affiliates; and
Now, therefore, Employer and Employee agree, in consideration of the mutual
covenants and agreements contained herein and other valuable consideration, as
follows.
1. PROVISION OF SERVICES:
On the terms and conditions herein set forth, Employer, hereby engages
Employee, and Employee agrees to be so engaged, as part of the staff of
Employer. Employee shall perform such duties and discharge such
responsibilities as shall be assigned to him/her from time to time by the
management of Employer, in a manner satisfactory to Employer. Employee
hereby agrees to devote his/her full business time to the business of
Employer.
2. COMPENSATION:
Employer, agrees to compensate Employee for the services which are
rendered satisfactorily at a mutually agreed upon rate and as long as there
is no violation of this Agreement. Such compensation shall be subject to
periodic review and adjusted by Employer, in such manner and amount as
Employer, deems proper, without necessity for a written amendment or
modification hereto.
3. FRINGE BENEFITS:
Employer, shall provide Employee fringe benefits of the same nature
and kind as are provided to other staff at a similar level of experience
and responsibility. Such fringe benefits shall be subject to periodic
review and adjustment by the management of Employer, in such manner and
amount as it deems proper and are subject to change by Employer as long as
such change affects employees similarly situated in a similar manner.
4. TERMINATION:
Either party hereto may terminate this Agreement with or without cause
at any time upon notice to the other. The time from beginning of employment
until termination of employment shall be referred to as the Employment
Period.
5. REPRESENTATIONS AND WARRANTIES OF EMPLOYEE:
Employee represents and warrants to Employer that Employee is under no
contract, restriction or obligation which is inconsistent with execution of
this Agreement or the performance of his/her duties
<PAGE>
hereunder. Employee hereby agrees to indemnify Employer and Affiliates in
connection with any of the following:
(1) Any breach of the foregoing representations and warranties; (ii)
any lawsuit or other legal proceeding in which it is claimed that the
employee has breached any trust, confidence or duty of loyalty, etc.; (iii)
any action or matter relating to the above representations and warranties.
6. CONFIDENTIAL INFORMATION:
Employee hereby acknowledges that in the course of Employee's
employment by Employer, Employee will be exposed to valuable confidential
and trade secret information of Employer and Affiliates ("Confidential
Matter"). Employee agrees to treat all such information as confidential and
to take all necessary precautions against disclosure of such information to
third parties.
All confidential information which Employee may now possess or may
obtain during the Employment Period relating to the business of the
Employer or Affiliates, their customers or suppliers shall not be
published, disclosed or made accessible by him/her to any other person firm
or corporation either during or after termination of his/her employment, or
be used by him/her except in the business and for the benefit of the
Employer or Affiliates unless the Employer or Affiliates as the case may
be, shall have given its prior written permission. employee shall deliver
all tangible evidence of such confidential information to the Employer or
Affiliates prior to or at the termination or his/her employment.
7. LOYALTY TO EMPLOYER:
In consideration of (a) the unique and valuable services it is
expected that Employee will render to Employer and (b) the knowledge
Employee will obtain of the business, services, customers, trade secrets
and other proprietary information relating to the business of the Employer
and Affiliates and their customers and suppliers, including, without
limitation, computer programs, Employee agrees that he/she will not during
the Employment Period. The term "Participates In" shall mean "directly or
indirectly, for his/her own benefit or for, either or through any person,
firm or corporation, own manage, operate control, loan money to, or
participate in the ownership, management, operation, or control of, or be
connected as a director, officer, employee, partner, consultant, agent,
independent contractor or otherwise with, or acquiesce in the use of
his/her name in."
During the Employment Period and, for a period of two (2) years
thereafter, Employee will not directly or indirectly reveal the name of,
solicit, or interfere with or endeavor to entice away from the Employer or
Affiliates any of their customers, employees or consultants. For purposes
of this Agreement, the term Customers shall mean (i) any person, firm,
corporation, joint venture, partnership or other entity which does business
with the Employer or Affiliates at any time during the Employment Period or
has done business with the Employer or Affiliates within 2 years
immediately prior to the commencement thereof (ii) any prospects which have
been or are being solicited by the Employer or Affiliates or who have
approached the Employer or Affiliates to engage their service or whose name
appears on any list of prospects maintained by the Employer or Affiliates
at any time during the Employment Period.
8. COVENANTS TO REPORT; PATENTS, ETC.:
a. The Employee shall promptly communicate and disclose to Employer
all inventions, discoveries, improvements and new writings, in any
form whatsoever, (hereinafter "Inventions") including, without
limitation, all software, programs, routines, techniques, procedures,
training aides and instructional manuals conceived, developed or made
by him/her during his/her employment by Employer, and for a period of
two years thereafter whether solely or jointly with others, and
whether or not patentable or copyrightable, (A) which relate to any
matters or business of the type carried on or being developed by
Employer or Affiliates, or (B) which result from or are suggested by
any work done by him/her in the course of his/her employment by
Employer. The Employee shall also promptly communicate and disclose to
Employer all other data obtained by him/her concerning the business or
affairs of Employer or Affiliates in the course of his/her employment
by Employer.
<PAGE>
b. The Employee will assign to Employer all right in the Inventions
and will assist Employer or its designee during and subsequent to
his/her employment, at Employer's sole expense, in filing patent
and/or copyrights for, such Inventions in any and all countries, and
will assign to the Employer all such patents and/or copyrights which
may issue thereon, said Inventions to be and remain the sole and
exclusive property of Employer or its designee whether or not patented
and/or copyrighted.
c. Any Invention which is competitive with the business conducted by
Employer or Affiliates at the date of termination or business activity
being developed by Employer or Affiliates at termination, conceived,
developed or made by the Employee within one (1) year of the
termination of his/her employment, whether such termination of
employment is voluntary or involuntary, shall be deemed to have arisen
out of and been conceived, developed or made by the Employee during
his/her employment by Employer, unless established to have been
conceived, developed or made after the termination of such employment.
9. ENFORCEMENT:
Since a breach of the provisions of this Section 6, 7 & hereof could
not adequately be compensated by money damages, the Employer and/or
Affiliates shall be entitled, in addition to any other right and remedy
available to it, to an injunction restraining such breach or a threatened
breach, and in either case, no bond or other security shall be required in
connection therewith, and Employee hereby consents to the issuance of such
injunction and in any application for injunction will not plead a defense
of adequate remedy at law. Employee agrees that the provisions of this
Section 9 are necessary and reasonable to protect the Employer and
Affiliates in the conduct of their businesses. If any restriction contained
in Sections 6, 7 & 8 shall be deemed to be invalid, illegal or
unenforceable, then the remainder of such Sections shall be enforceable to
the fullest extent deemed appropriate by such court.
10. MISCELLANEOUS:
a. This Agreement and all provisions hereof shall bind and inure to
the benefit of Employer, Employee and their respective heirs,
successors, personal representatives and assigns.
b. This Agreement and all questions arising hereunder shall be
governed by the laws of the State of New York.
c. If any provision of this Agreement shall be held to be invalid,
illegal or unenforceable, such provision may be severed and enforced
to the extent possible and such invalidity, illegality or
unenforceability shall not affect the remainder of this Agreement.
d. This constitutes the entire Agreement between the parties with
respect to the subject matter; all prior agreements, representations,
statements, negotiations and undertakings are superseded hereby.
e. No amendment to this Agreement shall be effective unless it is in
writing and signed by both parties, except as specifically provided
herein.
f. All of Employees obligations hereunder shall inure to the benefit
of Affiliates of Employer and the provisions of Sections 6, 7, 8 & 9
may be enforced by Affiliates.
g. The failure by the Employer or Affiliates at any time or times to
require strict performance by Employee of any provisions hereof shall
in no manner affect its right at a later time to enforce the same. No
waiver by the Employer or its Affiliates of any condition or the
breach of any term contained in this Agreement, whether by conduct or
otherwise in any one
<PAGE>
or more instances shall be deemed to be or construed as a further or
continuing waiver of any such condition or breach or a waiver of any
other condition or breach of any other term of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement effective the
day and year first above set forth.
National Medical Health Card Systems, Inc.
BY: /s/ Richard Wilson
Employee: /s/ Linda Portney
<PAGE>
BERT E. BRODSKY
26 Harbor Park Drive
Port Washington, NY 11050
June 3, 1999
National Medical Health Card Systems, Inc.
26 Harbor Park Drive
Port Washington, New York 11050
Ladies and Gentlemen:
This letter will confirm the understanding of each of the undersigned with
respect to certain transactions referred to below which occurred effective as of
July 1, 1997. Bert E. Brodsky (the "Shareholder") acquired 1,278,447 common
shares of National Medical Health Card Systems, Inc. (the "Company") in
consideration of the following:
(i) the surrender and cancellation by the Shareholder of an option dated
November 1, 1995 to acquire 1,022,758 common shares of the Company at
an exercise price of $.0782; and
(ii) the execution and delivery by the Shareholder of a promissory note
dated July 1, 1997, made payable to the order of the Company in
original principal amount of $1,000,000; this will also confirm that
the obligation to pay interest under such note is with full recourse
against the Shareholder.
Please acknowledge your agreement to the foregoing by signing this letter
in the space provided below.
Very truly yours,
/s/ Bert E. Brodsky
-------------------
Bert E. Brodsky
READ AND AGREED
NATIONAL MEDICAL HEALTH
CARD SYSTEMS, INC.
By: /s/ Marjorie O'Malley
-------------------------
Marjorie O'Malley
<PAGE>
GERALD SHAPIRO
26 Harbor Park Drive
Port Washington, NY 11050
June 3, 1999
National Medical Health Card Systems, Inc.
26 Harbor Park Drive
Port Washington, New York 11050
Ladies and Gentlemen:
This letter will confirm the understanding of each of the undersigned with
respect to certain transactions referred to below which occurred effective as of
July 1, 1997. Gerald Shapiro (the "Shareholder") acquired 383,534 common shares
of National Medical Health Card Systems, Inc. (the "Company") in consideration
of the following:
(i) the surrender and cancellation by the Shareholder of an option dated
February 14, 1995 to acquire 383,534 common shares of the Company at
an exercise price of $.0782; and
(ii) the execution and delivery by the Shareholder of a promissory note
dated July 1, 1997, made payable to the order of the Company in
original principal amount of $300,000; this will also confirm that the
obligation to pay interest under such note is with full recourse
against the Shareholder.
Please acknowledge your agreement to the foregoing by signing this letter
in the space provided below.
Very truly yours,
/s/ Gerald Shapiro
------------------
Gerald Shapiro
READ AND AGREED
NATIONAL MEDICAL HEALTH
CARD SYSTEMS, INC.
By: /s/ Marjorie O'Malley
- -------------------------
Marjorie O'Malley
<PAGE>
[LETTERHEAD OF MARINE MIDLAND BANK]
January 29, 1999
Alan Frank, Partner
BDO Seidman
401 Broad Hollow Road
Melville, NY 11747
Dear Alan,
Please be advised that the loan in the name of Bert E. Brodsky, loan
number 32-7328088, note #983071 in the amount of $2,000,000.00 has been paid in
full effective 1/28/99. If there are any questions please feel free to contact
me at 755-4363.
Sincerely,
/s/ Tracey Cannon
Tracey Cannon
Regional Support Officer
Marine Midland Bank
<PAGE>
HSBC
Queens/Long Island Commercial
June 4, 1999
Bert E. Brodsky
c/o Sandata, Inc.
26 Harbor Park Drive
Port Washington, NY 11050
Dear Bert:
This letter confirms that your $2,000,000.00 promissory note dated October 30,
1998 priced variably at HSBC Bank USA's prime rate plus 1% and the replacement
note of even amount dated November 3, 1998 priced at a fixed rate 7.72% have
been repaid in full. Accordingly, the original documents taken in connection
full. Accordingly, the original documents taken in connection with said notes
have been released to you inclusive of the unlimited guaranty of National
Medical Health Card Systems, Inc.
Should you require any additional information, please don't hesitate to call.
Sincerely,
HSBC Bank USA
(f/k/a Marine Midland Bank)
/s/ Gary Sarro
--------------
Gary Sarro
HSBC Bank USA
534 Broad Hollow Road, Melville, NY 11747
<PAGE>
P.W. CAPITAL CORP.
26 Harbor Park Drive
Port Washington, New York 11050
June 8, 1999
National Medical Health Card Systems, Inc.
26 Harbor Park Drive
Port Washington, New York 11050
Ladies and Gentlemen:
Reference is made to that certain consulting agreement dated April 14,
1994 between P.W. Capital Corp.("PWC") and National Medical Health Card Systems,
Inc. (the "Company"), which effective as of July 1, 1996 was assigned by P.W.
Medical Management, Inc. to PWC (the "Consulting Agreement").
This will confirm that upon the effective date of that certain
Employment Agreement dated July 1, 1999 between Bert E. Brodsky and the Company,
the Consulting Agreement shall be deemed null and void and without further force
and effect.
Please acknowledge your agreement to the foregoing by signing this
letter below.
Very truly yours,
/s/ Bert E. Brodsky
--------------------
Bert E. Brodsky
President
AGREED TO AND ACCEPTED:
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
By:
/s/ Marjorie O'Malley
- ----------------------
Marjorie O'Malley
President
<PAGE>
Bert E. Brodsky Revocable Trust
26 Harbor Park Drive
Port Washington, New York 11050
June 8, 1999
National Medical Health Card Systems, Inc.
26 Harbor Park Drive
Port Washington, New York 11050
Ladies and Gentlemen:
This will confirm that, in the event that National Medical
Health Card Systems, Inc. (the "Company") consummates a public offering as
currently contemplated and as described in a draft Amendment No. 2 to Form S-1
Registration Statement anticipated to be filed with the Securities and Exchange
Commission, the undersigned will pay to the Company an amount equal to the
proceeds from the sale of five hundred thousand (500,000) common shares of the
Company owned by the undersigned in such offering, net of underwriting
discounts, commissions, non-accountable expense allowance, a financial advisory
fee and estimated gross federal and state taxes payable by the undersigned in
connection with the sale of such shares on account of certain indebtedness owed
by certain affiliates of the undersigned to the Company.
Very truly yours,
Bert E. Brodsky Revocable Trust
By: /s/ Bert E.Brodsky
--------------------
Bert E.Brodsky
Trustee
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of July 1, 1999, by and between NATIONAL
MEDICAL HEALTH CARD SYSTEMS, INC., a New York corporation with an office and
place of business at 26 Harbor Park Drive, Port Washington, New York 11050 (the
"Company"), and BERT E. BRODSKY, who resides at South Road, Harbor Acres, Sands
Point, New York 11050 (the "Employee").
RECITALS:
A. The Company is engaged in providing comprehensive prescription
benefit management services to the general commercial market.
B. The Company wishes to assure itself of the services of the Employee
for the period provided in this Agreement, and the Employee is willing to serve
in the employ of the Company, except for other disclosed obligations and
investments, for said period, and upon the other terms and conditions
hereinafter provided.
AGREEMENT:
1. TERM OF EMPLOYMENT.
1.1 The Company hereby employs the Employee, and the Employee hereby
accepts employment with the Company, all in accordance with the terms and
conditions hereof, for a term of two (2) years (the "Employment Period")
commencing on the Commencement Date (as defined in Subsection 1.2 hereof) and
ending (subject to the provisions of Section 5 hereof) on the date immediately
preceding the second anniversary of the Commencement Date.
1
<PAGE>
1.2 As used in this Agreement, the term "Commencement Date" shall
mean July 1, 1999.
2. DUTIES.
During the Employment Period, the Employee shall be employed by the
Company and shall serve as its Chairman of the Board and Chief Executive Officer
and shall perform such duties and have such powers relating to the Company as
shall from time to time be assigned to him by the Board of Directors of the
Company. Notwithstanding the foregoing, the Employee may, with or without the
consent of the Company, perform duties for entities other than the Company on a
part-time basis, provided, however that such duties do not interfere with the
Employee's obligations under this Agreement.
3. COMPENSATION.
3.1 As full compensation for his services and undertakings pursuant
to this Agreement, the Employee shall receive a salary at the rate of
$200,000.00 per year, subject to adjustment as hereafter provided, payable in
equal monthly installments or other more frequent installments in accordance
with the regular pay policies of the Company. In addition, the Employee shall
be entitled to receive such bonus or incentive compensation and salary
increases as the Board of Directors of the Company may, on the basis of the
Company's performance or other reasonable criteria, deem appropriate.
3.2 During the Employment Period, the Employee shall also be (a)
provided with a full-time use of a Company automobile (b) entitled to five (5)
weeks paid vacation annually and (c) entitled to participate in group medical
insurance and other benefits or programs of the Company hereafter established
and made available by the Company to its employees.
2
<PAGE>
3.3 The Company shall deduct from the Employee's salary, bonus or
incentive compensation any federal, state or city withholding taxes, social
security contributions and any other amounts which may be required to be
deducted or withheld by the Company pursuant to any federal, state or city laws,
rules or regulations.
3.4 The Company shall reimburse the Employee, or cause him to be
reimbursed, for all reasonable out-of-pocket expenses incurred by him in the
performance of his duties hereunder or in furtherance of the business and/or
interest of the Company, provided, however, that the Employee shall have
previously furnished to the Company an itemized account, satisfactory to the
Company, in substantiation of such expenditures.
4. OPTIONS.
From time to time and at the discretion of the Board of Directors, the
Employee may be granted options to purchase shares of the Company's common
stock, which may be exercised in accordance with the terms of the Company's
option plans.
5. TERMINATION.
5.1 If the Employee dies or becomes disabled during the Employment
Period, his salary and all other rights under this Agreement shall continue for
two (2) years subsequent to the date of the occurrence of such death or
disability. For the purposes of this Agreement, the Employee shall be deemed to
be "disabled" if he has been unable to perform his duties for six consecutive
months or nine months in any twelve-month period, all as determined in good
faith by the Board of Directors of the Company. Notwithstanding the definition
of disabled contained in the preceding sentence, in the event that the Employee
is receiving disability insurance benefits during any period prior to
termination of this Agreement as provided in this Section 5.1, the Employee's
salary shall be reduced by an amount equal to such disability insurance benefits
during such period.
3
<PAGE>
5.2 Company may terminate this Agreement with cause by delivering to
Employee written notice of same ten (10) weeks prior to such effective date of
termination. Employee shall be entitled to severance pay for the balance of the
Employment Period based on the annual rate of compensation in effect at the time
of termination or one year's compensation, whichever is greater.
6. WAIVERS.
A waiver by the Company or the Employee of a breach of any of the
provisions of this Agreement shall not operate or be construed as a waiver of
any subsequent breach.
7. BINDING EFFECT; BENEFITS.
This Agreement shall inure to the benefit of, and shall be binding
upon, the parties hereto and their respective successors, assigns, heirs, and
legal representatives, including any corporation or other business organization
with which the Company may merge or consolidate or to which it may transfer
substantially all of its assets. Insofar as the Employee is concerned, this
Agreement, being personal, cannot be assigned.
8. NOTICES.
All notices, requests, demands and other communications which are
required or may be given under this Agreement shall be in writing and shall be
deemed to have been duly given or made when delivered in person or four (4) days
after dispatch by registered or certified mail, postage paid, return receipt
requested, to the party to whom the same is so given or made, to the address of
such party hereinabove set forth.
9. ENTIRE AGREEMENT; AMENDMENTS; SURVIVAL COVENANTS.
This Agreement contains the entire Agreement, and supersedes all prior
agreements and understandings, oral or written, between the parties hereto with
respect to the subject matter hereof, including but not limited to that certain
Employment Agreement dated July 1, 1999, having a
4
<PAGE>
Commencement Date thirty (30) days after the date of closing of the Company's
public offering. This Agreement may not be waived, changed, amended, modified or
discharged orally, but only by an agreement in writing signed by the party
against whom any waiver, change, amendment, modification or discharge is sought.
The covenants of the Employee contained in Sections 6, 7 and 8 (insofar as they
relate to the Employment Period) of this Agreement shall survive the termination
of the Employment Period.
10. HEADINGS.
The headings contained in this Agreement are for reference purposes
only and shall not affect the construction or interpretation of this Agreement.
11. SEVERABILITY.
The invalidity of all or any part of any Section of this Agreement
shall not render invalid the remainder of this Agreement or the remainder of
such Section. If any provision of this Agreement is so broad as to be
enforceable, such provisions shall be interpreted to be only so broad as is
enforceable.
12. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of
which shall, when executed, be deemed to be an original, but all of which
together shall constitute one and the same instrument.
13. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, without giving effect to principles relating
to conflict of laws.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
By: /s/ Marjorie G. O'Malley
---------------------------------------
Marjorie G. O'Malley
President
By: /s/ Bert E. Brodsky
----------------------------------------
6
<PAGE>
BERT E. BRODSKY
26 Harbor Park Drive
Port Washington, New York 11050
June 8, 1999
National Medical Health Card Systems, Inc.
26 Harbor Park Drive
Port Washington, New York 11050
Ladies and Gentlemen:
This will confirm that as of the effective date of that
certain Employment Agreement dated July 1, 1999 between the undersigned and
National Medical Health Card Systems, Inc. (the "Company") (the "Employment
Agreement") I will receive as total compensation payable to me or to my
affiliates for services rendered by me in my capacity as Chairman of the Board
and Chief Executive Officer of the Company an annual salary of $200,000, plus a
bonus and annual adjustments to be determined by the Board of Directors during
the term of the Employment Agreement.
Very truly yours,
/s/ Bert E. Brodsky
-------------------
Bert E. Brodsky
<PAGE>
___________, 1999
Ryan, Beck & Co., Inc.
200 Park Avenue, 16th Floor
New York, New York 10166
Pennsylvania Merchant Group
Four Falls Corporate Center
West Conshohocken, Pennsylvania 19428
National Health Card Systems, Inc.
26 Harbor Drive
Port Washington, NY 11050
Gentlemen:
In order to induce Ryan, Beck & Co., Inc. ("Ryan, Beck") and
Pennsylvania Merchant Group ("PMG"; Ryan, Beck and PMG are hereinafter
collectively referred to as the "Representatives"), and National Health Card
Systems, Inc., a New York corporation, and any successor thereof (the
"Company"), to enter into an underwriting agreement with respect to the public
offering of shares of common stock of the Company and warrants issued by the
Company, I hereby agree that for a period of 180 days following the effective
date (the "Effective Date") of the Company's Registration Statement on Form S-1
(Registration No. 333-72209), I will not, directly or indirectly, offer to sell,
sell, grant any option for the sale of, transfer, assign, hypothecate, pledge or
otherwise encumber or dispose of any beneficial interest in (either pursuant to
Rule 144 of the regulations under the Securities Act of 1933, as amended, or
otherwise) any securities issued by the Company, including without limitation
any options, warrants or other securities convertible into or exercisable or
exchangeable for shares of common stock of the Company ("Securities"),
registered in my name or beneficially owned by me without the prior written
consent of Ryan, Beck. Any gift or similar transfer of Securities to a family
member or trust for the benefit thereof shall be exempt from the restrictions
set forth in the foregoing sentence provided that (i) no consideration shall be
directly or indirectly received in connection with such transfer, and (ii) any
transferee of any such Securities shall deliver to the Representatives, prior to
the consummation of such transfer, an agreement by such transferee to be bound
by all of the terms and conditions of this Agreement.
As a further inducement for the Representatives to enter into the
underwriting agreement, I hereby grant Ryan, Beck for a period of three years
from the Effective Date, a right of first refusal, on the terms and subject to
the conditions set forth herein, should I desire to sell any Securities
registered in my name or beneficially owned by me. During such period I will
consult with Ryan, Beck with regard to such sale and will offer to Ryan, Beck
the opportunity, on terms not more favorable to me than I can receive elsewhere,
to purchase or sell any such Securities. If Ryan, Beck fails to accept in
writing such proposal made by me within two business days after the receipt of a
written notice, including by telecopy or telegram, containing such proposal,
then the Representatives
<PAGE>
shall have no further claims or rights with regard to the proposal contained in
such notice. If thereafter, such proposal is materially modified, I shall again
consult with Ryan, Beck as if the modified proposal were a new proposal.
In order to enable you to enforce the aforesaid covenants, I hereby
consent to the placing of legends and stop-transfer orders with the transfer
agent of the Company's securities with respect to any of the Securities
registered in my name or beneficially owned by me.
This Agreement shall be binding on the undersigned and his, her or its
respective successors, heirs, personal representatives and assigns upon the
Effective Date.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, without giving effect to conflict of law
principles.
------------------------------
Signature
------------------------------
Print Name
------------------------------
Print Address
------------------------------
Print Social Security
Number or Taxpayer I.D.Number
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,037,150
<SECURITIES> 0
<RECEIVABLES> 10,961,174
<ALLOWANCES> 818,796
<INVENTORY> 0
<CURRENT-ASSETS> 17,183,699
<PP&E> 4,231,724
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0
0
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