NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.AND SUBSIDIARIES
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to
Commission file number 000-26749
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
(Exact name of Registrant as Specified in Its Charter)
New York 11-2581812
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
26 Harbor Park Drive, Port Washington, NY 11050
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (516) 626-0007
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the issuer's classes of common
equity, as of May 10, 2000 was 6,741,496 shares.
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS: 3
CONSOLIDATED BALANCE SHEETS as of June 30, 1999 3
and March 31, 2000 (unaudited)
CONSOLIDATED STATEMENTS OF INCOME (unaudited) 4
for the three months and nine months
ended March 31, 1999 and 2000
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) 5
for the nine months ended March 31, 1999 and 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 12
CONDITION AND RESULTS OF OPERATIONS
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 18
MARKET RISK
PART II - OTHER INFORMATION 19
Item 1 - LEGAL PROCEEDINGS 19
Item 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS 19
Item 3 - DEFAULTS UPON SENIOR SECURITIES 19
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
Item 5 - OTHER INFORMATION 19
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K 19
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S>
<C> <C>
June 30, March 31,
1999 2000
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,815,863 $ 10,173,831
Accounts receivable,
less allowance for possible losses of $846,344 and $676,720 13,233,760 16,775,005
Rebates receivable 5,303,786 6,910,403
Deferred income tax 530,000 325,000
Other current assets 283,694 612,157
Total Current Assets 22,167,103 34,796,396
Property, equipment and software development costs, net 2,754,522 6,025,816
Due from affiliates 4,579,280 3,871,269
Other assets 15,728 4,320
Deferred income tax 166,000 ---
Deferred offering costs 1,163,378 ---
$ 30,846,011 $ 44,697,801
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 26,883,745 $ 27,643,941
Current portion of capital lease obligations 1,950 388,456
Due to officer/stockholder 390,000 30,000
Due to affiliates 750,968 38,301
Income taxes payable 704,489 352,144
Other current liabilities 116,544 169,487
Total Current Liabilities 28,847,696 28,622,329
Capital lease obligations, less current portion --- 2,104,925
Deferred tax liability --- 325,000
Total Liabilities 28,847,696 31,052,254
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Preferred stock $.10 par value;
10,000,000 shares authorized, none outstanding --- ---
Common stock, $.001 par value;
25,000,000 shares authorized, 5,312,496 and 6,912,496 shares issued,
5,312,496 and 6,801,496 shares outstanding 5,313 6,913
Additional paid-in capital 2,868,573 12,405,010
Retained earnings 480,529 2,094,707
Treasury stock --- (528,358)
Notes receivable - stockholders (1,356,100) (332,725)
Total Stockholders' Equity 1,998,315 13,645,547
$ 30,846,011 $ 44,697,801
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three months ended Nine months ended
March 31, March 31,
1999 2000 1999 2000
REVENUES $ 33,471,531 $ 44,054,704 $ 96,754,613 $ 129,328,464
Cost of claims 30,655,008 39,735,821 87,518,657 118,477,486
GROSS PROFIT 2,816,523 4,318,883 9,235,956 10,850,978
Selling, general and administrative expenses * 2,506,064 3,635,735 7,482,553 8,768,141
Operating income 310,459 683,148 1,753,403 2,082,837
Other income (expense):
Other income, net 167,934 235,637 519,738 724,341
Public Offering costs (46,000) --- (82,904) ---
121,934 235,637 436,834 724,341
Income before income taxes 432,393 918,785 2,190,237 2,807,178
Provision for income taxes 105,000 390,000 731,000 1,193,000
NET INCOME $ 327,393 $ 528,785 $1,459,237 $1,614,178
Earnings per common shares:
Basic $0.06 $0.08 $0.28 $0.24
Diluted $0.06 $0.08 $0.28 $0.24
Weighted average number of common shares
outstanding:
Basic 5,312,496 6,871,870 5,169,411 6,712,871
Diluted 5,312,496 6,871,870 5,169,411 6,712,871
* Includes amounts charged by affiliates aggregating: $997,532 $840,728 $2,361,913 $2,138,972
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<S> <C> <C>
Nine months ended
March 31,
1999 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,459,237 $1,614,178
Depreciation and amortization 545,087 851,561
Bad debt expense 24,607 600,000
Allowance for possible losses 550,000 ---
Compensation expenses accrued to officer/stockholder 270,000 30,000
Deferred income taxes 52,000 696,000
Interest accrued on stockholders' loans (85,425) (12,750)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (4,637,906) (4,141,246)
Other current assets (107,361) (328,463)
Rebates receivable (354,628) (1,606,617)
Due to/from affiliates (407,403) (4,656)
Other assets --- 11,408
Increase (decrease) in:
Accounts payable and accrued expenses 2,209,932 760,196
Due to officer/stockholder --- (390,000)
Income taxes payable 547,202 (352,345)
Other liabilities 144,131 52,943
Net cash provided by (used in) operating activities 209,473 (2,219,791)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,549,638) (1,586,124)
Loans from stockholders 10,774 ---
Interest received on notes from stockholder 170,850 ---
Repayment of note by stockholder 40,000 1,036,125
Net cash used in investing activities (1,328,014) (549,999)
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 2,000,000 10,701,415
Repayment of debt and capital lease obligations (5,051) (45,299)
Treasury stock --- (528,358)
Deferred offering costs (145,050) ---
Net cash provided by financing activities 1,849,899 10,127,758
Net increase in cash and cash equivalents 731,358 7,357,968
Cash and cash equivalents, beginning of period 1,305,792 2,815,863
Cash and cash equivalents, end of period $2,037,150 $10,173,831
Non cash investing activities:
</TABLE>
During the nine months ended March 31, 2000, the Company incurred capital lease
obligations for equipment in the amount of $2,537,730.
See accompanying notes to consolidated financial statements
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
National Medical Health Card Systems, Inc. and its wholly owned
subsidiaries, National Medical Health Card IPA, Inc. and Specialty Pharmacy
Care, Inc., (the "Company") and have been prepared as if the entities had
operated as a single consolidated group since inception. All material
intercompany balances and transactions have been eliminated in the
consolidation.
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and substantially in the form
prescribed by the Securities and Exchange Commission in instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
the Company's management, the March 31, 2000 and 1999 unaudited interim
financial statements include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of results for
these interim periods. In the opinion of the Companys management, the
disclosures contained in this Form 10-Q are adequate to make the
information presented not misleading when read in conjunction with the
Notes to Consolidated Financial Statements included in the Company's Form
10-K for the year ended June 30, 1999. The results of operations for the
three and nine month periods ended March 31, 2000 are not necessarily
indicative of the results to be expected for the full year or for any
future period.
2. PUBLIC OFFERING
The registration statement for the Company's Public Offering became
effective on July 28, 1999 ("the Public Offering"). The Company consummated
the Public Offering on August 2, 1999 and issued 1,600,000 shares of common
stock at an offering price of $7.50 per share. The Company granted the
underwriters of the Public Offering 200,000 warrants for nominal
consideration. The warrants entitle the underwriters to purchase 200,000
shares of common stock from the Company at $9.00 per share. The warrants
are exercisable for four years commencing on July 29, 2000. In addition,
the underwriters were granted an overallotment option by the Company to buy
300,000 shares of common stock at $7.50 per share exercisable by September
11, 1999. The underwriters did not exercise this option. Concurrent with
the Public Offering, the Selling Stockholder sold 400,000 shares of common
stock from his holdings at $7.50 per share. The Company received proceeds
of $12,883,100 representing payment for the sale of the 1,600,000 shares
plus 73% of the proceeds from the sale of the 400,000 shares by the Selling
Stockholder for repayment of $1,992,900 of indebtedness owed by the Selling
Stockholder and affiliates to the Company. Such proceeds were net of
underwriting discounts and commissions, a non-accountable expense allowance
and a financial advisory fee paid to the underwriters plus certain fees and
expenses paid by the Company.
3. STOCK OPTIONS
On August 3, 1999, and after, the Company granted incentive options to
employees under the 1999 Stock Option Plan (the "Plan") to purchase shares
of common stock at $7.50 per share. These options vest within a three year
period commencing upon the completion of one year of employment with the
Company. These options terminate after five years. As of March 31, 2000
140,800 options had been granted.
On August 3, 1999, the Company granted non-statutory options to three
outside directors under the Plan to purchase an aggregate of 30,000 shares
of common stock at $7.50 per share. These options vest within a three year
period commencing August 3, 1999 and terminate on August 3, 2004.
On February 1, 2000, the Company granted incentive options to employees
under the Plan to purchase shares of common stock at $5.87 per share. These
options vest within a two and four year period commencing on the date of
grant. These options terminate on December 7, 2003, July 1, 2005 and
December 7, 2005. As of March 31, 2000, 345,179 options had been granted.
Simultaneously with this grant was the surrender of 345,179 options that
were granted by the principal stockholder. The terms of the new options are
identical to those of the options surrendered.
4. EMPLOYMENT AGREEMENT
The Company entered into an employment agreement with the majority
stockholder effective July 1, 1999. Pursuant to this agreement, the
majority stockholder has agreed to serve as Chairman of the Board of
Directors at an annual salary of $200,000, subject to adjustment by the
Board of Directors. The agreement commenced on July 1, 1999 and has a term
of two years, unless terminated by the Company for cause, or in the event
the stockholder becomes permanently disabled. The agreement provides for
certain fringe benefits payable to or on behalf of the majority
stockholder, such as the use of an automobile. In addition, the agreement
provides for certain termination benefits payable to the majority
stockholder, which depending upon the reason for termination, can equal up
to two years salary.
In January 2000 the Board of Directors agreed to pay a bonus of $60,000 to
this officer/stockholder for the year ended June 30, 2000.
5. EARNINGS PER SHARE
Outstanding options and warrants issued by the Company are excluded from
the calculation of diluted earnings per share for the three months and nine
months ended March 31, 2000 as they are antidilutive. Options issued by the
majority stockholder that were outstanding for the three and nine months
ended March 31, 1999 are excluded from the computation of diluted earnings
per share since, upon exercise, the underlying common stock would be issued
by the majority stockholder in accordance with the option agreements.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<S> <C> <C>
June 30, March 31,
1999 2000
Claims payable $17,553,036 $20,282,256
Rebates payable to sponsors 7,062,159 6,262,139
Other payables 2,268,550 1,099,546
$26,883,745 $27,643,941
</TABLE>
During September 1999 rebates payable were reduced by $736,000 when the
Company reevaluated its liability to a plan sponsor. Cost of claims were
decreased by the same amount.
7. RELATED PARTY TRANSACTIONS
Certain costs paid to the affiliates were capitalized as software
development costs. For the nine months ended March 31, 2000 the amount
charged by affiliates and capitalized was $388,757.
The Company purchased furniture and fixtures from an affiliate during the
nine months ended March 31, 2000 for approximately $143,729. 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.
General and administrative expenses related to transactions with affiliates
included in the statement of income are:
<TABLE>
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Three months ended March 31,
1999 2000
Software maintenance and related services $ 196,967 $ 260,944
Management and consulting fees 651,870 436,308
Administrative and bookkeeping services 64,138 59,957
Rent and utilities 84,557 83,519
$ 997,532 $ 840,728
Nine months ended March 31,
1999 2000
Software maintenance and related services $ 536,871 $ 717,944
Management and consulting fees 1,449,141 960,952
Administrative and bookkeeping services 184,073 190,557
Rent and utilities 191,828 269,519
$ 2,361,913 $ 2,138,972
</TABLE>
8. MAJOR CUSTOMERS AND PHARMACIES
For the three months ended March 31, 1999, approximately 61% of the
revenues were from three plan sponsors administering multiple plans. For
the three months ended March 31, 2000, approximately 38% of the revenues
were from two plan sponsors administering multiple plans. For the nine
months ended March 31, 1999 and 2000, approximately 66% and 47%,
respectively, of the revenues were from three plan sponsors administering
multiple plans. Amounts due from these three customers at March 31, 2000
approximated $3,845,000.
In October 1999 the Company entered into a new two year arrangement with
one of its major sponsors. As consideration for this arrangement the
Company settled certain fees due from this sponsor and reduced revenue by
$821,000 during September 1999.
For the three months ended March 31, 1999 and 2000, approximately 25% and
43% of the cost of claims were from two pharmacy chains. For the nine
months ended March 31, 1999 and 2000, approximately 28% and 42% of the cost
of claims were from the same two pharmacy chains. Amounts payable to these
two pharmacy chains at March 31, 2000 were approximately $8,247,000.
9. LITIGATION
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 the 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.
10. CAPITAL LEASE OBLIGATIONS
The Company leases equipment and software under capital leases. The assets
acquired under capital leases have a cost of $2,537,730 and accumulated
amortization of $52,690 as of March 31, 2000. Amortization of the leased
assets is included in depreciation expense.
The following is a schedule, by year, of future minimum lease payments
under capitalized leases, together with the present value of the net
minimum lease payments at March 31, 2000.
<TABLE>
<S>
Payments for the year ending June 30,:
<C> <C>
2000 $171,688
2001 686,754
2002 686,754
2003 632,104
2004 522,804
2005 338,851
Total minimum lease payments 3,038,955
Less: Amount representing interest 545,574
Present value of net minimum lease
payments 2,493,381
Less: Current portion 388,456
Long-term lease obligations $2,104,925
</TABLE>
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANICIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 2000
Revenues increased $10.6 million, or approximately 32%, from $33.5 million for
the three months ended March 31, 1999 to $44.1 million for the three months
ended March 31, 2000. The increase resulted primarily from $11.8 million in fees
related to new sponsors. The remaining balance representing a decrease of
approximately $1.2 million was due primarily to the loss of certain
sponsors,partially offset by other existing sponsors as a result of higher
charges relating to pharmaceuticals, new drugs, plan participant growth and an
increase in the average number of claims per plan participant.
Cost of claims increased $9 million, or approximately 29%, from $30.7 million
for the three months ended March 31, 1999 to $39.7 million for the three months
ended March 31, 2000. As a percentage of revenues, cost of claims decreased from
92% for the three months ended March 31, 1999 to 90% for the three months ended
March 31, 2000, as a result of more favorable arrangements with a sponsor.
Gross profit increased approximately $1.5 million from $2.8 million for the
three months ended March 31, 1999 to $4.3 million for the three months ended
March 31, 2000, 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 $1.1 million or approximately 44%, from $2.5 million for
the three months ended March 31, 1999 to $3.6 million for the three months ended
March 31, 2000. The increase resulted primarily from a $600,000 bad debt
expense, increases in compensation, benefits, sales and marketing and other
expenses related to the expansion of the Company's business.
General and administrative expenses charged by affiliates decreased $157,000, or
approximately 16%, from $998,000 for the three months ended March 31, 1999 to
$841,000 for the three months ended March 31, 2000.
Other income increased $114,000, from $122,000 for the three months ended March
31, 1999 to $236,000 for the three months ended March 31, 2000, due to a
$127,000 increase in interest income earned on short-term investments and a
$46,000 decrease in Public Offering costs, offset by a $42,000 decrease in
shareholder and affiliate interest income and a $17,000 increase in interest
expense.
The provision for income taxes increased $285,000, from $105,000 for the three
months ended March 31, 1999 to $390,000 for the three months ended March 31,
2000, as a result of increased taxable income.
Nine Months Ended March 31, 1999 Compared to Nine Months Ended March 31, 2000
Revenues increased $32.5 million, or approximately 34%, from $96.8 million for
the nine months ended March 31, 1999 to $129.3 million for the nine months ended
March 31, 2000. The increase resulted primarily from $25.8 million in fees
related to new sponsors. The remaining increase of approximately $6.7 million
was due primarily to other existing sponsors as a result of higher charges
relating to pharmaceuticals, new drugs, plan participant growth and an increase
in the average number of claims per plan participant. Revenues for the nine
months ended March 31, 1999 included a one-time rate increase of $500,000 from a
major client. The revenue for the nine months ended March 31, 2000 was net of an
$821,000 reduction in revenue when the Company settled certain fees due from a
major sponsor as consideration for a new two year arrangement with this sponsor.
Cost of claims increased $31 million, or approximately 35%, from $87.5 million
for the nine months ended March 31, 1999 to $118.5 million for the nine months
ended March 31, 2000. As a percentage of revenues, cost of claims increased from
90% for the nine months ended March 31, 1999 to 92% for the nine months ended
March 31, 2000, as a result of higher drug costs. During the nine months ended
March 31, 2000 rebates payable were reduced by $736,000 when the Company
reevaluated its liability to a plan sponsor. Cost of claims for the nine months
were decreased by the same amount.
Gross profit increased approximately $1.7 million, from $9.2 million for the
nine months ended March 31, 1999 to $10.9 million for the nine months ended
March 31, 2000, 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 $1.3 million, or approximately 17%, from $7.5 million for
the nine months ended March 31, 1999 to $8.8 million for the nine months ended
March 31, 2000. The increase resulted primarily from increases in compensation,
benefits, sales and marketing and other expenses related to the expansion of the
Company's business.
General and administrative expenses charged by affiliates decreased $223,000, or
approximately 9%, from $2,362,000 for the nine months ended March 31, 1999 to
$2,139,000 for the nine months ended March 31, 2000, primarily as a result of
lower compensation to the majority stockholder.
Other income increased $287,000, from $437,000 for the nine months ended March
31, 1999 to $724,000 for the nine months ended March 31, 2000, due to a $334,000
increase in interest income earned on short-term investments and an $83,000
decrease in Public Offering costs offset by a $112,000 decrease in shareholder
and affiliate interest income and an $18,000 increase in interest expense.
The provision for income taxes increased $462,000, from $731,000 for the nine
months ended March 31, 1999 to $1,193,000 for the nine months ended March 31,
2000, as a result of increased taxable income.
Liquidity and Capital Resources
The Company's primary cash requirements are for capital expenditures and
operating expenses including cost of pharmaceuticals, software and hardware
upgrades and the funding of accounts receivable. As of March 31, 2000, the
Company had working capital of $6.2 million. Net cash used in operating
activities was $2.2 million for the nine months ended March 31, 2000 resulting
primarily from increases in accounts receivable due to the growth of the
Company's business. Net cash used in investing activities was $550,000 for the
nine months ended March 31, 2000 resulting primarily from capital expenditures
associated with the expansion of the Company's computer systems, offset by a
repayment of a note by stockholder. Net cash provided by financing activities
was $10.1 million and resulted primarily from the Public Offering.
The registration statement for the Company's Public Offering became effective on
July 28, 1999 ("the Public Offering"). The Company consummated the Public
Offering on August 2, 1999 and issued 1,600,000 shares of common stock at an
offering price of $7.50 per share. The Company granted the underwriters of the
Public Offering 200,000 warrants for nominal consideration. The warrants entitle
the underwriters to purchase 200,000 shares of common stock from the Company at
$9.00 per share. The warrants are exercisable for four years commencing on July
29, 2000. In addition, the underwriters were granted an overallotment option by
the Company to buy 300,000 shares of common stock at $7.50 per share exercisable
by September 11, 1999. The underwriters did not exercise this option. Concurrent
with the Public Offering, the Selling Stockholder sold 400,000 shares of common
stock from his holdings at $7.50 per share. The Company received proceeds of
$12,883,100 representing payment for the sale of the 1,600,000 shares plus 73%
of the proceeds from the sale of the 400,000 shares by the Selling Stockholder
for repayment of $1,992,900 of indebtedness owed by the Selling Stockholder and
affiliates to the Company. Such proceeds were net of underwriting discounts and
commissions, a non-accountable expense allowance and a financial advisory fee
paid to the underwriters plus certain fees and expenses paid by the Company.
The Company anticipates that the net proceeds of the Public Offering and the
repayment of certain affiliate and shareholder debt, together with anticipated
cash flow from operations, will be sufficient to satisfy the Company's
contemplated cash requirements for at least 24 months. This is based upon
current levels of capital expenditures and anticipated operating results for the
next 24 months. Alternatively, revolving credit lines and debt financing are
being evaluated as backups to anticipated cash needs. In the event that the
Company's plans change or its assumptions prove to be inaccurate or the proceeds
of the Public Offering otherwise prove to be insufficient to fund operations,
the Company could be required to seek additional financing sooner than
anticipated.
<PAGE>
Other Matters
Inflation
Management does not believe that inflation has had a material adverse impact on
the Company's net income.
Year 2000
By December 1999, the Company had carefully reviewed and upgraded all of its
management and information systems, using internal staff and outside firms
specializing in computer systems, networking, telecommunications, accounting
software and associated products, in an effort to minimize any impact of the
year 2000. While the Company's project to assess and correct Y2K related issues
regarding the year 2000 has been completed, and the Company has not experienced
any Y2K related events, interactions with other companies' systems make it
difficult to conclude there will not be future effects. The Company is
monitoring the situation carefully and at this time, management believes that
the impact of the year 2000 will have no material effect on its operations or
financial results.
Forward-Looking Statements
This report contains or may contain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934 including
statements of the Company's and management's expectations, intentions, plans and
beliefs, including those contained in or implied by "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Notes to
Consolidated Financial Statements. These forward-looking statements, as defined
in Section 21E of the Securities Exchange Act of 1934, are dependent on certain
events, risks and uncertainties that may be outside the Company's control. These
forward-looking statements may include statements of management's plans and
objectives for the Company's future operations and statements of future economic
performance; the Company's capital budget and future capital requirements, and
the Company's meeting its future capital needs; and the assumptions described in
this report underlying such forward-looking statements. Actual results and
developments could differ materially from those expressed in or implied by such
statements due to a number of factors, including, without limitation, those
described in the context of such forward-looking statements, and the factors set
forth in the Company's Form 10-K. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by this section.
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not applicable.
<PAGE>
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
See Form 10-Q for the period ended December 31, 1999.
Item 2 - Changes in Securities and Use of Proceeds
On August 3, 1999, and after, the Company granted incentive options to employees
under the 1999 Stock Option Plan (the "Plan") to purchase shares of common stock
at $7.50 per share. These options vest within a three year period commencing
upon the completion of one year of employment with the Company. These options
terminate after five years. As of March 31, 2000 140,800 options had been
granted.
On August 3, 1999, the Company granted non-statutory options to three outside
directors under the Plan to purchase an aggregate of 30,000 shares of common
stock at $7.50 per share. These options vest within a three year period
commencing August 3, 1999 and terminate on August 3, 2004.
On February 1, 2000, the Company granted incentive options to employees under
the 1999 Stock Option Plan (the "Plan") to purchase shares of common stock at
$5.87 per share. These options vest within a two and four year period commencing
on the date of grant. These options terminate on December 7, 2003, July 1, 2005
and December 7, 2005. As of March 31, 2000, 345,179 options had been granted.
Simultaneously with this grant was the surrender of 345,179 options that were
granted by the principal stockholder. The terms of the new options are identical
to those of the options surrendered.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
None.
Exhibit 27 - Financial Data Schedule (Electronic Filing Only)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
(Registrant)
Date: May 15, 2000 By: /s/ Bert E. Brodsky
Bert E. Brodsky
Chairman of the Board
and Chief Executive Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
(Registrant)
Date: May 15, 2000 By:
Bert E. Brodsky
Chairman of the Board
and Chief Executive Officer
<PAGE>
May 15, 2000
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Re: National Medical Health Card Systems, Inc.
File No: 000-26749
Dear Sir or Madam:
Transmitted herewith through the EDGAR system is Form 10-Q for the quarter
ending March 31, 2000 for National Medical Health Card Systems, Inc. If you have
any questions or comments, please contact me at (516) 484-4400, extension 215.
Very truly yours,
Linda Scarpantonio
Legal Coordinator
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