SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
( ) 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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
26 HARBOR PARK DRIVE, PORT WASHINGTON, NEW YORK 11050
----------------------------------------------- --------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(516) 626-0007
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
ON WHICH REGISTERED
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ____
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
STATE THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING COMMON EQUITY
HELD BY NON-AFFILIATES OF THE REGISTRANT. THE AGGREGATE MARKET VALUE SHALL BE
COMPUTED BY REFERENCE TO THE PRICE AT WHICH THE COMMON EQUITY WAS SOLD, OR THE
AVERAGE BID AND ASKED PRICES OF SUCH COMMON EQUITY, AS OF A SPECIFIED DATE
WITHIN 60 DAYS PRIOR TO THE DATE OF FILING: $5,009,309 AS OF SEPTEMBER 22, 2000.
(APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT.
YES NO
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
INDICATE THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK,
AS OF THE LATEST PRACTICABLE DATE: 7,121,496 SHARES OUTSTANDING AS OF SEPTEMBER
22, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE>
INTRODUCTORY STATEMENTS
FORWARD LOOKING STATEMENTS
When used herein, the words "believe," "anticipate," "think," "intend,"
"will be," "expect" and similar expressions identify forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are not guarantees of future performance and involve certain risks
and uncertainties discussed herein, which could cause actual results to differ
materially from those in the forward-looking statements. Readers are cautioned
not to place undue reliance on the forward-looking statements which speak only
as of the date hereof. Readers are also urged to carefully review and consider
the various disclosures made by National Medical Health Card Systems, Inc.
("Health Card") which attempt to advise interested parties of the factors which
affect Health Card's business, including, without limitation, the disclosures
made under the caption "Business" in Item 1 hereof and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Item 7 hereof.
PART I
ITEM 1. BUSINESS.
GENERAL
Health Card is an independent company, incorporated in New York in 1981,
that provides comprehensive prescription benefit management services. Health
Card's programs are designed to assist prescription benefit plan sponsors by:
o monitoring the cost and quality of prescription drugs and related
services
o providing sophisticated consulting services, and
o providing disease information services.
RECENT ACQUISITION
On July 20, 2000 (the "Effective Date"), pusuant to the terms of an
Agreement and Plan of Merger, dated as of June 27, 2000 (the "Agreement"), by
and among Health Card, PAI Acquisition Corp., a wholly owned subsidiary of
Health Card ("PAI"), Pharmacy Associates, Inc. ("Pharmacy Associates") and the
shareholders of Pharmacy Associates (each a "Shareholder" and collectively the
"Shareholders"), PAI, merged with and into Pharmacy Associates. Pharmacy
Associates located in Little Rock, Arkansas is a regional prescription benefit
management company operating in Arkansas, Louisiana and Mississippi.
Pursuant to the Agreement, the Shareholders as of the Effective Date
received an aggregate of $6,000,000 in cash and 400,000 shares of unregistered
common stock of Health Card. In addition, if Pharmacy Associates' pre-tax income
for the 12 months ending on June 30, 2001 or June 30, 2002 (each an "Earn-Out
Period" and collectively, the "Earn Out Periods") is greater than $1,000,000,
then promptly following the final determination of the pre-tax income
calculation by Health Card for the applicable Earn-Out Period, Health Card shall
pay a pro rata portion of the amount described below to the Shareholders:
(i) if Pharmacy Associates achieves a pre-tax income equal to
or greater than $2,5000,000 in an Earn-Out Period, then the Contingent Payment
for such Earn-Out Period shall be $1,000,000;
(ii) if Pharmacy Associates achieves a pre-tax income of
greater than $1,000,000 but less than $2,500,000 in an Earn-Out Period, then the
Contingent Payment for such Earn-Out Period shall be equal to (x) the amount of
pre-tax income in excess of $1,000,000 achieved by Pharmacy Associates during
such Earn-Out Period (such excess amount not to exceed $1,500,000) divided by
$1,500,000, multiplied by (y) $1,000,000; and
(iii) if Pharmacy Associates does not achieve a pre-tax income
of at least $1,000,000 in an Earn-Out Period, then the Shareholders will not be
entitled to a Contingent Payment for such Earn-Out Period.
Neither the amount of pre-tax income achieved in an Earn-Out Period nor
the amount of a Contingent Payment paid in an Earn-Out Period shall affect the
calculation of pre-tax income achieved or the Contingent Payment payable, if
any, in the applicable Earn-Out Peirod. Seventy-five percent (75%) of the
Contingent Payment, if any, payable to the Shareholders shall be payable in
cash, with the remaining twenty-five percent (25%) payable in unregistered
shares of common stock of Health Card based on the Health Card Average Price
(hereinafter defined). The Health Card Average Price shall mean the average of
the last reported per share trading price of Health Card common stock over the
30 business day period immediately preceding the date of determination;
provided, that if such average is below $4.00, then the deemed Health Card
Average Price shall be $4.00, and if such average is above $6.00, the deemed
Health Card Average Price shall be $6.00.
Additionally, if 35,000 additional covered lives from a specified
account are added to `Pharmacy Associates' network under similar terms to such
specified account's existing network contract, Health Card will pay the
Shareholders a total of $16 per covered life; provided that such group must be
contracted within 90 days from the Effective Date and installation of such group
must occur within 180 days of the Effective Date.
Additionally, 200,000 shares of Health Card common stock issued to the
Shareholders as part of the merger will be held in escrow as security for the
indemnification obligations of the Shareholders under the Agreement until July
20, 2002.
Pursuant to the Agreement, all of the Shareholders agreed not to become
involved, in any manner or capacity whatsoever, with any entity or individual
that engages or proposes to engage in prescription benefit management, except
Health Card or Pharmacy Associates, until June 27, 2003. Each of the
Shareholders further agreed not to (i) seek to transact any business with or
alter the relationship in any way between any of Pharmacy Associates' customers
or prospective customers and (ii) solicit for employment or in any way alter the
relationship between Pharmacy Associates and any person who was or is an
employee of Pharmacy Associates during the period of April 20, 2000 until July
20, 2003.
INDUSTRY BACKGROUND
In response to escalating health care costs, cost containment efforts
in the health care industry have led to rapid growth in managed care and other
containment efforts. Despite these efforts, continued advances in medical
technology, new drug development and increasing drug utilization have led to
significant increases in health care costs. This has created a need for more
efficient, cost-effective drug delivery mechanisms. Prescription benefit
management companies evolved to address this need. These companies created an
opportunity for plan sponsors to provide prescription drug benefits to their
plan members in a cost-effective manner through:
o mail pharmacy services o claims management
o formulary management o drug review and analysis
while often improving patient compliance with recommended drug and treatment
guidelines. An industry source estimates that 1999 U.S. purchases for
prescription drugs increased 18% from 1998 to approximately $122 billion. The
total number of prescriptions filled in 1999 reached approximately 3.0 billion
representing a 9% increase over the prior year.
SERVICES
GENERAL
Sponsors of prescription benefit plans managed by Health Card include
managed care organizations, local governments, unions, corporations and third
party health care plan administrators. Sponsors retain Health Card to manage the
prescription drug plans that they maintain for the benefit of their plan
participants. Health Card consults with sponsors to assist them in customizing
their prescription drug plans to meet the particular sponsor's needs. Health
Card has also developed and is continuing to expand its consulting and disease
information services to meet (i) the growing needs of sponsors to address cost
management pressures, and (ii) the increasing needs of plan participants,
particularly those requiring costly long-term and recurring therapies.
Health Card's computerized on-line claims management system manages the
cost of the plan at the point of service by confirming that:
o the submitted claim is in conformity with plan terms and conditions,
o the plan participant is eligible for benefits, and pays any applicable
deductible and/or co-payment amounts, and
o only the negotiated discounts on prescription items will be paid to
participating pharmacies.
The data collected during the claims management process provides a
basis for reporting and analyses upon which recommendations are made to
sponsors. These recommendations are intended to assist sponsors in lowering the
costs of their plans while improving quality and service. See "Services -- Data
Access, Reporting and Information Analysis."
Health Card provides a wide variety of services including, but not
limited to:
o Claims Management
o Pharmacy Network
o Benefit Design Consultation
o Preferred Drug Management
o Drug Review & Analysis
o Consulting Services and Disease Information Services
o Date Access, Reporting & Information Analysis
o Physician Profiling
CLAIMS MANAGEMENT
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. 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.
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 computerized
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. Occasionally a plan participant's
claim is rejected or a prior authorization is required 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.
Pharmacy Associates currently processes claims differently than
Health Card.Pharmacy Associates has contracted with an outside provider,
ComCoTec, Inc. to process all its claims. Pharmacy Associates pays for these
services on a per claim basis. The ComCoTec agreement has been terminated
effective November 1, 2000 at which time Pharmacy Associates' sponsors' claims
will be incorporated into Health Card's computerized on-line claims management
system.
INVOICING AND PAYMENTS. Often, sponsors are charged an agreed fee for
each prescription filled plus an administrative and/or dispensing fee for
managing each claim. Sometimes sponsors are charged an adjustable monthly fee or
projected maximum fee based on the number of plan participants, utilization,
costs of drugs or other criteria. Health Card provides flexibility of invoicing
for its sponsors. Sponsors pay Health Card; Health Card pays an individually
negotiated amount to its participating independent and chain pharmacies. Plan
participants filing for direct payment receive an allowable payment which is
usually specified by the sponsor. See " Services -- Pharmacy Network."
REBATE ADMINISTRATION. Drug manufacturers may issue rebates in connection
with the use of certain prescription drugs. Health Card submits claims for
rebates for specified sponsors pursuant to an agreement with Express Scripts,
Inc ("Express") dated April 1, 2000. Based on the agreement, the payment of
rebates is contingent upon Health Card adopting Express' formulary for Health
Card's specified sponsors. Health Card submits the claims for its specified
sponsors to Express. Express submits Health Card's rebate claims, and may submit
such claims along with rebate claims of others, to the appropriate drug
manufacturer, pursuant to the agreements Express has negotiated with these drug
manufacturers. Health Card's Agreement with Express provides that Express is
obligated to pay Health Card within a specified period of time after each
quarter a per claim fee, which can vary based on certain contractual criteria.
For the claims made through December 31, 2000, Express is obligated to pay
Health Card a specified amount per claim. Subsequent to December 31, 2000, a new
baseline will be established based on Health Card's actual claims history.
Express retains a portion of the total rebates as an administrative fee. The
agreement maybe terminated at any time upon mutual agreement of the parties, or
upon ninety (90) days' notice by one party to another for any reason.
Pursuant to a verbal agreement between Health Card and Specialty Pharmacy
Care, Inc. ("Specialty"), a wholly owned subsidiary of Health Card's, Health
Card submits claims for rebates to Specialty for certain of Health Card's
specified sponsors. Specialty performs the services of a rebate administrator
for which it is paid an administrative fee. Health Card has entered into
approximately 30 separate agreements with drug manufacturers. While the terms of
each agreement between Health Card and the drug manufacturers are unique, the
basic concept is the same. Such agreements generally provide that Health Card
must list the specified products of each of the drug manufacturers on Health
Card's approved formularies with the specified sponsors. Health Card may not
prefer, either directly or indirectly, any competing products over the specified
drug manufacturer's products except for reasons of medical appropriateness. The
contracts have specified terms, but either party can terminate them within a
specified period of time depending upon the contract. The drug manufacturers are
obligated to pay rebates within a specified period of time after Health Card
submits its claims, based on agreed upon specified percentages which can vary
based on certain contractual criteria The manufacturers establish a baseline
rebate based on Health Card's initial claims and are obligated to pay
incremental rebates based on increases beyond the baseline.
Pursuant to an agreement between Pharmacy Associates and Wellpoint
Pharmacy Management ("Wellpoint"), dated October 1, 1999, Wellpoint provides
rebate administration services to Pharmacy Associates. The services, processes
and terms are similar to those covered under Health Card's agreements with its
rebate administrators as described above. The Agreement terminates as of
September 30, 2002 unless terminated sooner. 90 days' written notice must be
provided to terminate the contract. Wellpoint is obligated to pay Pharmacy
Associates a specified amount per claim submitted depending upon the level of
formulary management as described. Pursuant to the Agreement, Wellpoint has
prepaid certain estimated rebates to Pharmacy Associates. Pharmacy Associates is
obligated to repay this amount, plus interest at 8.5%, in four equal
installments at the end of four successive quarters starting December 31, 2000,
or earlier in the event the agreement is cancelled by Pharmacy Associates.
Upon receipt of rebates from the drug manufacturers or the rebate
administrators, Health Card shares certain amounts with its sponsors. 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 agreements,
written or verbal, with each sponsor. See Item 7 hereof.
PHARMACY NETWORK
Health Card maintains a pharmacy network that includes retail, mail and
e-pharmacy options. Health Card's agreements with many pharmacies do not require
it to make payments within a specified period. However, Health Card knows from
experience that timely payment is a significant consideration of the pharmacies.
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 in a timely fashion. Health Card
may be required to pay participating pharmacies whether or not it has been paid
by its sponsors. The loss of a substantial portion of the pharmacies in the
pharmacy network could have a material adverse effect on Health Card's business,
operating results and financial condition. See Item 7 hereof.
RETAIL PHARMACY NETWORK MANAGEMENT. Health Card maintains a
comprehensive multi-state network of participating pharmacies. Both the retail
and mail order components of the pharmacy network are managed by Health Card's
computerized on-line claims management system. Certain of Health Card's sponsors
require Health Card to maintain a pharmacy network with specified numbers of
pharmacies in various locations to serve plan participants. Pharmacy Associates
also maintains a network in certain states in the Southeast.
MAIL PHARMACY CLAIMS MANAGEMENT. Mail pharmacy service is generally
used by plan participants as a cost effective means of minimizing the
inconvenience resulting from repeated trips to retail pharmacies to fill
prescriptions; this is especially common when a plan participant with a chronic
condition receives long-term drug therapy. In addition, the plan participant
generally saves money through a reduction in the number of co-payments he would
have paid had the prescriptions been filled repeatedly at a retail pharmacy.
Further, with mail pharmacy service, the sponsor is charged a lower dispensing
fee for prescription ingredients compared to those charged by a retail pharmacy.
Health Card presently has a non-exclusive relationship with Eckerd
Health Services d/b/a/ Express Pharmacy Services ("Express Pharmacy") pursuant
to which Express Pharmacy acts as a participating pharmacy and dispenses drugs
to plan participants by mail. The agreement between Health Card and Express
Pharmacy is for a one year automatically renewable term. The agreement was
renewed as of June 30, 2000. Either party has the right to terminate the
agreement as of June 30, 2001 and at the end of any successive term, in each
case on 90 days' prior written notice. The agreement provides that Express
Pharmacy will:
o provide the covered drugs by mail to plan participants
o collect the appropriate co-payment and
o if required by the plan, collect any additional payment if a
brand drug is dispensed when a generic drug is available
Claims submitted by mail order pharmacies are managed using Health
Card's computerized on-line claims management system and are subject to the same
review and verification as those claims submitted by retail pharmacies.
E-PHARMACY SERVICE MANAGEMENT. Health Card maintains an e-pharmacy
website pursuant to which participants in Health Card's e-pharmacy program may
purchase over-the-counter medications, vitamins, nutritional supplements and
prescription drugs through the Internet.
In support of this e-pharmacy initiative, Health Card entered into an
agreement with The Arrow Corporation d/b/a familymeds.com ("familymeds"), a
Connecticut corporation in December, 1999. Pursuant to the terms of the
agreement, Health Card has established a website located at www.NMHCRx.com
through which familymeds acts as Health Card's exclusive provider of Internet
based sales and mail fulfillment of retail pharmacy prescription medicines,
non-prescription medicines, over-the-counter and health and beauty products.
Familymeds pays Health Card for Health Card's members registered on the site as
well as for purchases of non-prescription products bought on the site. The
agreement can be terminated with or without cause upon sixty (60) days prior
written notice to the other party. The e-pharmacy provides for:
o Health and Wellness information
o "Ask The Pharmacist" feature
o Information on patient compliance and emerging drugs
o Availability to purchase prescription drugs and over-the counter
medications.
BENEFIT DESIGN CONSULTATION
Health Card has a sales and marketing staff and pharmacists experienced
in prescription drug benefit plan design. Health Card assists sponsors in
defining their financial and employee-benefit objectives for their prescription
drug benefit plans and in developing a program to meet such objectives. Using
both sponsor-specific and general claims experience data, the sales and
marketing staff makes recommendations of benefit features such as:
o levels of co-payments
o number of days supply of medication
o covered and excluded drugs
o maximum benefit cost
o generic substitution guidelineso
maximum plan participant out-of-pocket cost
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. Health
Card does this, typically, through contacts with physicians. 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, consistent with sponsor requirements
and applicable regulations.
If a physician prescribes a specific drug and the prescription includes
a "dispense as written" ("DAW") notation, a pharmacist is not permitted to
substitute a generic drug without the physician's consent. In such event, the
pharmacist must contact the physician directly for permission to substitute a
generic equivalent or a less expensive brand name drug. Depending on state law,
if no DAW notation is made, the pharmacist must obtain the consent of only the
plan participant to dispense a generic substitute. In New York, if no DAW
notation is made and the physician does not prohibit substitution, the
pharmacist is required to dispense the generic equivalent if it is available.
Other states may have different laws, rules and regulations. Health Card's
detailed quarterly reports to sponsors assist in determining if this program is
being utilized effectively. See "Services -- Data Access, Reporting Information
and Analysis."
DRUG REVIEW AND ANALYSIS
Health Card's drug review and analysis services include prospective
reviews of potential claims and concurrent and retrospective reviews of
submitted claims. These include a series of on-line reviews which permit a
pharmacist filling a prescription to examine the plan participant's claims
history for:
o drug interactions
o geriatric or pediatric precautions
o premature refills of prescriptions
o compliance with the prescriptions
o duration or duplication of therapy
o other contraindications
o pregnancy and breast feeding precautions
Health Card transmits such information to the dispensing pharmacist for
information purposes only -- not to replace the prescribing physician's or the
dispensing pharmacist's professional judgment. Health Card's consulting
department retrospectively analyzes the drug utilization patterns of plan
participants for each sponsor. Health Card may then recommend changes in the
sponsor's plan design, preferred drug management, and disease information
systems initiatives to contain costs or to better serve the plan participants.
CONSULTING SERVICES AND DISEASE INFORMATION SERVICES
PRESCRIPTION BENEFIT PLAN CONSULTING. Health Card's consulting services
are designed to enable sponsors to enhance the quality of plan participants'
care while reducing related costs. Using data relating to the progression and
treatment of diseases, Health Card disseminates information regarding therapies
that are aimed at treating a disease in a cost-effective manner. Health Card's
information systems, which include a comprehensive database, allow Health Card
to provide (i) drug review and analysis, (ii) appropriate reports and
information, and (iii) disease information services. Health Card believes that
technology and information systems advances will allow for future integration of
health care claims information, including hospital, laboratory and clinical
costs. Health Card further believes that integration will enable it to assess
outcomes on a statistical basis and based on such statistical assessments to
make recommendations regarding effective prescribing practices. Health Card
believes this should allow for improved patient care while controlling therapy
costs.
Health Card has established a Pharmacy & Therapeutics Committee (the
"P&T Committee") currently comprised of physicians and pharmacists. The P&T
Committee's primary responsibility is to assist sponsors in designing a well
managed, therapeutically appropriate, cost-effective preferred drug listing or
"formulary." The goal of the P&T Committee is to enable sponsors to optimize
plan participant care through drug policy development and education. The P&T
Committee typically meets quarterly and performs the following functions:
o provides information to sponsors to ensure that the covered
drugs of each plan reflect the current standard of medical
practice and pharmacology,
o evaluates drugs for inclusion in a plan as a preferred drug,
o analyzes current literature for safety, efficacy and
cost-effectiveness of covered drugs,
o provides recommendations on drug therapy and utilization
o evaluates drug review and analysis programs and criteria
o determines those drugs which require prior authorization
from the sponsor, and
o reviews the associates guidelines for those drugs' proper
use.
The P&T Committee currently consists of eight members: Martin Edelstein,
M.D., Paul Cohen, M.D., Carole Moodhe, M.D., and David Grossman, 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 its
liaison with the P&T Committee. Mr. Ciufo is the only member of the P&T
Committee otherwise affiliated with Health Card. Vytra Health Plans, Health
Card's largest customer, has the right to designate one member of the P&T
Committee, but has not exercised its right. Each Committee member is requested
to disclose his or her affiliation with any drug company. Mr. Laudano and Mr.
Rosenberg have disclosed a current affiliation with drug companies.
DISEASE INFORMATION SERVICES. Through its disease information services,
Health Card provides information to sponsors that is intended to enable them to
enhance their prescription benefit plans and to improve the treatment of plan
participants with certain medical conditions. In providing disease information
services, based upon recommended drug and treatment guidelines, Health Card:
o reviews and analyzes drugs prescribed and prescriptions
dispensed,
o recommends plan guidelines, and
o conducts plan participant and physician profiling.
By analyzing plan participants' pharmacy claims patterns, Health Card
can provide information to sponsors and health care providers, assisting in the
early identification of patients whose care might be improved through additional
or alternative treatment or medication. Health Card has developed disease
information systems covering cardiovascular and gastrointestinal conditions,
migraines, diabetes, and asthma, among others.
Health Card's disease information services utilize the recommended drug
and treatment guidelines, changes in the drug and treatment guidelines, current
medical literature and its own assessments to identify plan participants
"at-risk" for a particular disease. If the disease information services identify
participants "at-risk" for particular diseases, Health Card may provide the
recommended drug and treatment guidelines to sponsors, treating physicians and
plan participants. If requested by the sponsor, Health Card monitors a
participant's compliance with the recommended drug and treatment guidelines,
including prescription usage. If it appears, based upon Health Card's analysis
of the participant's claims history, that the recommended drug and treatment
guidelines are not being applied, Health Card may, if requested by the sponsor,
contact the physician, via either telephone or letter, suggesting additional
options. Physician performance and adherence to the recommended drug and
treatment guidelines are monitored by using Health Card's information systems.
DATA ACCESS, REPORTING AND INFORMATION ANALYSIS
Health Card's computerized on-line claims management system enables
Health Card to efficiently provide sponsors with:
o On-line system access whereby the sponsor is able to update
and maintain certain plan areas such as participant
eligibility
o Periodic utilization and financial reports, which Health
Card representatives utilize to assist sponsors regarding
benefit design, cost containment initiatives, disease
information initiatives and formularly managment
o Plan performance indicators and ad hoc reporting through
Health Card's proprietary decision support tool - HC Focus
PHYSICIAN PROFILING
Health Card will, at the request of either a physician or a sponsor,
analyze (i.e., profile) a physician's prescription history and consult with
either the physician or the sponsor about the physician's prescribing pattern.
Health Card might, for example, discuss alternatives to therapies that the
physician regularly prescribes based on the drug and treatment guidelines. This
practice is designed to enhance the therapeutic benefits received by the plan
participant and, where possible, to achieve cost savings. It is also designed to
promote conformity with plan benefits and the recommended drug and treatment
guidelines.
SPONSORS
Sponsors include managed care organizations, local governments, unions,
corporations and third party health care plan administrators of prescription
drug programs. 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 or
electronically 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 or semi-monthly 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 pay
Health Card the cost of claims to Health Card (less any cash advances paid) as
the bi-weekly or semi-monthly statements are received by the sponsor. The
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 typically agrees to make all payments within a specified
period, except that any additional charges, for which a separate fee is agreed
to by the parties, will be remitted by the contracting party within 30 days
after receipt of billing from Health Card. Health Card agrees to maintain, in
electronic form, current and complete files of all claims received, and records
to establish the cost of drugs to each sponsor. The sponsor can review these
records. While most of Health Card's larger sponsors negotiate other agreements
with Health Card, many sponsors sign the standard form or a modified version of
the standard form. The specific terms of each managerial agreement, including
any incentive arrangements, are negotiated by Health Card on a case by case
basis. While Health Card may take into account factors such as the number of
plan participants, margins and economies of scale, among others, in determining
the terms of its arrangements with sponsors, Health Card generally does not use
set guidelines when determining these terms. See Item 7 hereof.
SIGNIFICANT SPONSORS
Health Card depends on a limited number of sponsors for a significant
portion of its revenue. For the fiscal year ended June 30, 2000, Vytra Health
Plans Long Island, Inc., Vytra Health Plans Managed Systems, Inc. and Vytra
Health Services, Inc. (each individually, "Vytra" and collectively, "Vytra") and
Operating Engineers Trust Funds were the only sponsors that accounted for 10% or
more of Health Card's revenues. The loss of either one of these sponsors would
have a material adverse effect on Health Card's business, operating results and
financial condition. The business relationship with each of these sponsors is
detailed in the immediately following sections.
VYTRA
Vytra is a particularly significant sponsor, as the following table
indicates:
PERCENT OF
HEALTH CARD'S NUMBER OF
YEAR ENDED JUNE 30, REVENUES PARTICIPANTS
1998 44% 166,840
1999 37% 150,061
2000 27% 133,218
Health Card has been providing services to Vytra since 1990.
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 2001 (the "Current Arrangement").
Under the Current Arrangement, Health Card provides Vytra prescription
benefit management services and charges Vytra on a fee for service basis. Health
Card charges Vytra a fee based on the number of claims processed during each
applicable billing period. Vytra is invoiced for the processed prescription
claims of its members on a bi-weekly basis.
Pursuant to the Current 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 Current Arrangement or renegotiate the present
amounts charged to Vytra.
The Current Arrangement requires Health Card to arrange for and
maintain an adequate and accessible pharmacy network for Vytra plan participants
(i.e., a specified number of pharmacies). Health Card meets this standard if one
or more participating pharmacies are located in each zip code in the Vytra
service area, which, as of this date, includes Queens, Nassau and Suffolk
County, in the State of New York, unless either (i) no pharmacy exists within a
zip code, or (ii) a pharmacy will not participate and such non-participation is
beyond the reasonable control of Health Card. In addition, Health Card must
exercise its best efforts to maintain pharmacy network participation in
accordance with certain historical levels. Health Card is not responsible if the
number of pharmacies in the network declines because of pharmacy closings,
consolidations or changes in the pharmacy payment schedule. Health Card has
agreed with Vytra that it will not terminate a major chain of participating
pharmacies during the term of the Current Arrangement without Vytra's consent.
However, if Vytra does not consent and the inclusion of such chain results in
higher actual costs to Health Card, then Vytra will be required to pay such
increase on a quarterly basis. In addition, Vytra may require Health Card to add
specific pharmacies to the pharmacy network. Similarly, if the inclusion of such
pharmacies results in higher actual costs to Health Card, Vytra will be
responsible for the increase.
The Current Arrangement requires that Health Card maintain a Pharmacy &
Therapeutics Committee. Vytra has the right to designate one representative to
serve on the Pharmacy & Therapeutics Committee, but, as of the date of this
10-K, Vytra has not exercised this right. See "Services - Consulting Services
and Disease Information Services - - Prescription Benefit Plan Consulting."
The Current Arrangement also sets forth certain guarantees that Health
Card must meet. These include:
o processing certain percentages of claims within certain
periods,
o making all reasonable efforts to process all claims within a
maximum period,
o answering all calls within a specified average time,
o ensuring that a certain percentage of mail order
prescriptions, which do not require pharmacy or physician
intervention, are dispensed within certain periods,
o making all reasonable efforts to make sure all mail order
prescriptions are dispensed within a maximum time period,
o reaching certain generic substitution rates, and
o maintaining a certain level of rebates per claim.
The Current Arrangement further requires that Health Card establish an
irrevocable standby letter of credit in favor of Vytra for $2,000,000 in order
to ensure the fulfillment of certain of Health Card's obligations to Vytra. As
of the date of this 10-K, Vytra has not drawn against this letter of credit.
If Health Card were to lose Vytra as a sponsor, or lose a significant
portion of Vytra's business, it would have a material adverse effect on Health
Card's business, operating results and financial condition.
OPERATING ENGINEERS
On December 1, 1997, Health Card began providing prescription benefit
management services to Operating Engineers Trust Funds, IUOE Local 12
("Operating Engineers"), a construction workers' union in Southern California.
As of June 30, 2000, Operating Engineers covered approximately 45,000 plan
participants. As of the date of this Form 10-K, Health Card is providing
services pursuant to an oral agreement. Pursuant to such oral agreement, Health
Card is required to pay a certain percentage of rebates to Operating Engineers.
For the fiscal year ended June 30, 2000, Operating Engineers accounted for
approximately 12% of Health Card's revenues.
In the event that either of these sponsors choose to discontinue using
Health Card's services, or if the terms of Health Card's arrangements with these
sponsors unfavorably change, Health Card's business, operating results and
financial condition will be materially adversely affected. In the event of the
loss of either of these significant sponsors, there can be no assurance that
Health Card will be able to replace such sponsor. However, Health Card believes
that its sponsor base is growing and diversifying and expects the percentage of
total revenue contributed by its largest current customers to continue to
decline in the future.
SALES AND MARKETING
Health Card markets its services through a sales and marketing department
led by the Executive Vice President of Sales and Marketing. Health Card's sales
executives target sponsors throughout the United States. In addition, Health
Card contracts with brokers and consultants who are retained to market Health
Card's services to prospective sponsors for agreed upon fees based on the number
of plan participants enrolled in a Health Card supported plan and/or the number
of claims processed under such plan.
Health Card attends numerous trade shows and utilizes advertising,
public relations and marketing literature for sales support. Additionally,
Health Card employs the services of a public relations and media firm for
exposure and publication in newspapers, periodicals and journals which are
targeted to employee benefit and managed care specialists as well as exposure to
national media.
Furthermore, Health Card is continuing to expand its World Wide website
(www.nmhc.com). Currently, the web site describes Health Card's products and
services and lists frequently asked questions, among other things. The web site
offers a page dedicated to on-line services which allows plan participants to
fill out customer service surveys and direct payment claims forms, and to access
the pharmacy network listings. Health Card also maintains its e-pharmacy web
site (www.NMHCRx.com). Security firewalls have been developed and implemented to
protect patient confidentiality.
COMPETITION
Health Card competes with numerous companies which provide the same or
similar services. Many of Health Card's competitors have been in existence for
longer periods of time and are far better established than Health Card. Many of
them also have:
o broader public recognition
o financial and marketing resources substantially greater than
Health Card
o more experienced management
In addition, some of Health Card's sponsors and potential sponsors may
find it desirable to perform for themselves those services now being rendered by
Health Card.
Health Card's ability to attract and retain sponsors is substantially
dependent on its capability to provide efficient and accurate claims management,
prescription drug program management and related reporting, auditing and
consulting services. Health Card believes that the following factors help Health
Card successfully compete:
o a broad base of experience in the information technology and
pharmacy benefit management industries,
o flexible and sophisticated on-line computerized information
systems, and
o a focus on customer service.
There can be no assurance that Health Card will remain competitive or
successfully market integrated prescription benefit management services and
disease information services to existing and new sponsors. Furthermore, there is
a distinct possibility that consolidation and alliances within the industry will
adversely impact the operations and prospects for independent prescription
benefit management companies such as Health Card.
EMPLOYEES
As of September 22, 2000, Health Card and its subsidiaries had 146
employees: 32 of these employees are located in Little Rock, Arkansas, the
headquarters of Pharmacy Associates. Health Card's employees are not subject to
collective bargaining agreements and Health Card considers its relations with
its staff to be satisfactory. See Item 13 hereof.
INFORMATION SYSTEMS
Health Card's information systems integrate all of the:
o data input,
o reporting,
o analysis, and
o access functions
provided by Health Card, and Health Card believes that its information systems
provide it with a competitive advantage. See Item 7 hereof.
Health Card's computerized 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. The agreement required Health Card to pay an
initial license fee. In addition, if certain milestones are met, based on the
number of processed claims, as defined, the initial license fee increases
incrementally as specified over the term of the license. To date, one milestone
has been met and paid for. The agreement also provides for the annual payment of
a fee for maintenance and updating services equal to 18% of the initial license
fee, as defined. See Liquidity and Capital Resources - Item 7 hereof.
Sandata, Inc. ("Sandata") of which Bert E. Brodsky, Chairman of the
Board and Chief Executive Officer of Health Card, is the Chairman of the Board,
President and Treasurer and a principal stockholder, provides, through its
subsidiaries, consulting and other information systems services related to
Health Card's information systems on such terms and conditions as may be agreed
upon between the parties from time to time. 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 currently leases computer hardware for its
data processing center at a monthly cost of approximately $44,170 from Sandsport
pursuant to an oral agreement. See Item 13 hereof.
GOVERNMENT REGULATION
The activities of prescription benefit management companies such as Health
Card are subject to regulation at the federal, state and local levels. While
Health Card may not have complied in the past, it has recently reviewed its
operations for areas of non-compliance and believes that it substantially
complies with the laws and regulations material to the operation of its business
or is taking steps to identify and comply with such laws and regulations. The
laws that may affect Health Card's operations and relationships include, but are
not limited to, the federal Anti-Kickback, FDA, anti-trust and ERISA laws, the
Health Insurance Portability and Accountability Act and the laws of various
states relating to health, utilization review, and the licensing and regulation
of professionals, including physicians, nurses, pharmacists and pharmacies.
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, rebate
administrators, plan participants, 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, rebate administrators, plan participants or brokers are in
compliance with applicable laws and regulations. There can be no assurance that
Health Card has interpreted the applicable laws and regulations in the same way
as regulatory or judicial authorities, or that the laws and regulations and/or
the interpretation thereof will not change.
A more detailed analysis of certain specific laws and regulations
affecting the business, operations and relationships of Health Card is set forth
below.
ANTI-KICKBACK REGULATIONS
The federal Anti-Kickback Statute prohibits knowingly paying or
receiving remuneration in return for referring an individual for the furnishing
of an item or service, or for the purchasing, ordering or arranging for any item
or service for which payment may be made in whole or in part under a federal
health care program, including Medicare or Medicaid. The term "remuneration" in
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 the statute, such as properly reported discounts (including certain
rebates) received from vendors and properly disclosed payments made by vendors
to group purchasing organizations. While it is unclear whether Health Card's
conduct, operations, and relationships would fall within a safe harbor under the
Statute or regulations promulgated thereunder, failure to fall within a safe
harbor does not mean that Health Card's practices would violate the law,
although it may result in heightened scrutiny or challenge.
Health Card believes that it is not in violation of the Anti-Kickback
Statute because (i) it does not receive any remuneration directly from Medicare,
Medicaid or any other government sponsored health care program, and (ii) it does
not believe the payments to it from any of its sponsors, other than Vytra, are
derived from funds from Medicare, Medicaid or other federal government sponsored
health care programs. With respect to other sponsors, although Health Card does
not have any knowledge to the contrary, it cannot be sure that no portion of a
sponsor's payment is derived from a government health care program source.
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 a
rebate administrator or from a drug manufacturer, Health Card believes that its
conduct would 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. 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.
The Anti-Kickback Statute and related regulations have been broadly
interpreted by the federal courts to prohibit the payment or receipt of any form
of remuneration, even if only one purpose of such remuneration is to obtain a
referral for any item or service that is covered by a federal health care
program. Certain states other than New York have similar statutes that may
extend the prohibitions to items or services that are paid for by
non-governmental third-party payors, as well as individuals who pay directly for
their own health care.
Health Card is not aware of any instance in which the Anti-Kickback
Statute has been applied (i) to prohibit independent prescription benefit
management companies from receiving rebates from drug manufacturers based on
drug sales by pharmacies to plan participants, formulary management programs, or
therapeutic substitution programs, or (ii) to the contractual relationships
between independent prescription benefit management companies and their sponsors
and participating pharmacies.
In the last few years, private citizens have commenced litigation,
known as Qui Tam actions, 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.
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 was engaged
in the practice of pharmacy without a license prior to that date. Health Card
has not determined, and does not believe that it could determine with any degree
of accuracy, the nature or extent of any sanctions that might be imposed on it
as a result of such claim.
As a licensed pharmacy, Health Card is subject to all of the laws and
regulations governing pharmacies including those regarding professional
misconduct. Professional misconduct for a pharmacy is defined to include, among
other things, (i) splitting fees in connection with the furnishing of
professional care or services, including the sale of drugs, (ii) receiving
valuable consideration as a commission, discount or gratuity in connection with
the sale of drugs, and (iii) paying or receiving any consideration to or from a
third party for referring a patient, or in connection with the performance of a
professional service.
Health Card is not aware of any interpretation by any court or
governmental agency of the laws and regulations regarding fee splitting or
referral fees by licensed professionals to any arrangements similar to those
engaged in by Health Card nor has Health Card obtained or applied for any
opinion of any regulatory or judicial authority that its business operations or
relationships are or will be in compliance with such laws and regulations. The
following aspects of Health Card's business should be considered in light of
these laws and regulations.
Health Card receives rebates direct from drug manufacturers as well as from
one or more third party rebate administrators through contracts between them and
pharmaceutical companies. While Health Card shares the proceeds of those rebates
with some of its sponsors, it does not share any rebates with pharmacies.
In connection with its formulary management program, Health Card's P&T
Committee, or its formulary administrators, 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, or adapt the formulary of its formulary
administrator, for which it receives rebates, it may be required under the terms
of its agreements with rebate administrators or drug manufacturers 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 laws governing the pharmacies 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.
Health Card maintains an e-pharmacy pursuant to which plan participants
may purchase prescription drugs and other items through the Internet. Health
Card has entered into an agreement with a Connecticut based corporation to be
the exclusive provider of such Internet prescription drugs and other items. New
York State does not presently regulate out-of-state pharmacies. There is no
assurance that the New York State regulatory authorities will not determine that
Health Card, through its Internet website, is engaged in the practice of
pharmacy services within New York State, thereby subjecting Health Card to New
York State pharmacy regulations, including regulations governing electronic
transmission of prescriptions, or that regulatory authorities in the future will
not assert their jurisdiction and regulate out-of-state e-pharmacies that
deliver products into New York State. Such regulation could adversely affect
Health Card's ability to provide e-pharmacy services.
In May 2000 the Secretary of HHS presented a proposal concerning
internet drug sales to a congressional representative. The proposal would
require online pharmacies to (i) be licensed in each state in which they operate
or to which they deliver prescription drugs, (ii) comply with all applicable
state and federal laws governing the practice of pharmacy and (iii) provide
notice and certain information to the Secretary before launching a website. This
proposal has not yet proceeded in Congress for lack of a House sponsor. It is
uncertain whether this or a similar proposal will be considered by Congress in
the future and if enacted what effect such legislation would have on Health
Card's activities.
REGULATIONS REGARDING CERTAIN RIGHTS OF PRIVACY AND CONFIDENTIALITY
It is also professional misconduct in New York for a pharmacy to
disseminate personally identifiable health information about a patient without
the patient's prior written authorization. Improper dissemination of such
information may subject a pharmacist to fines, penalties, other sanctions,
injunctive relief, professional disciplinary actions and loss of license.
In the course of its business, Health Card receives data regarding each
plan participant's prescription drug utilization history. Under some
circumstances, Health Card may also receive other medical information regarding
a plan participant. The availability of such information to Health Card may
enable it to draw certain conclusions about a plan participant's health. For
example, a plan participant receiving long-term insulin therapy may be
identified as a diabetic. Health Card calls these identifications "inferred
disease states."
Based on the information Health Card obtains regarding a plan
participant's inferred disease state, Health Card may make recommendations to
sponsors on how to reduce costs and improve the plan to better serve plan
participants. Health Card routinely shares such information with its sponsors
through its computer network. Under the terms of most plans, Health Card also
may be required to provide patient specific information directly to sponsors,
including drug history information that may suggest an inferred disease state.
In utilizing the data received by Health Card in this manner, it is possible
that Health Card could be found to have violated the privacy rights of plan
participants under the laws of New York and other states in which it does
business. Such a determination could have a material adverse effect on Health
Card's ability to provide disease information services, an area of its business
that Health Card believes gives it a competitive advantage and is anticipated to
be an important element of its future success.
Confidentiality provisions of the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") required the Secretary of Health and Human
Services to issue standards concerning health information privacy if Congress
did not enact health information privacy legislation by August 1999. As Congress
did not enact such legislation, the Secretary issued a proposed rule in November
1999 and the public comment period for this proposed rule expired on February
17, 2000. It is not known when the final rule governing the privacy of health
information will be issued by HHS. The proposed rule imposes extensive
restrictions on the use and disclosure of personally identifiable health
information. It is anticipated that the health information privacy standards
would become effective two years after the final rule is issued. The final rule
is expected to preempt state laws which are less restrictive than HIPAA
regarding health information privacy, but not more restrictive state laws.
Health Card cannot predict accurately what effect the final regulations may have
on its operations, and there can be no assurance that the restrictions and
duties imposed by the regulations will not have a material adverse effect on
Health Card's business, results of operations or financial conditions.
REGULATIONS APPLICABLE TO HEALTH CARE PROFESSIONALS
All states, including New York, regulate the practice of medicine,
nursing and other licensed health professions. Activities deemed by a state's
regulatory authority to constitute the practice of medicine, nursing, or any
other licensed health profession without the proper license would subject the
actor to the penalties provided under such state's laws.
In the course of its business, Health Card provides disease information
services, drug usage monitoring programs, preferred drug management, and
consulting services. Health Card does not believe that these or any of its other
activities as a prescription benefit management company, constitute the practice
of medicine, nursing or any other licensed health profession. Health Card cannot
assure that a regulatory authority in New York, or any other state in which it
engages in such activities, would not assert a contrary position and subject it
to the sanctions described above.
UTILIZATION REVIEW REGULATIONS
Under the Insurance Law and Article 49 of the Public Health Law, the
State of New York regulates utilization review. Utilization review is defined as
the review to determine whether health care services that have been, are being
or will be provided are medically necessary. Health care services, for purposes
of the utilization review law, are defined to include the provision of
pharmaceutical products. In some of the contracts to which it is a party, Health
Card agrees to provide "drug utilization review" and "drug utilization
management." However, Health Card believes that the drug review and analysis
services it provides to its sponsors do not involve making determinations as to
the medical necessity of the pharmaceutical products provided that would subject
it to regulation under the utilization review laws.
FDA REGULATION
The United States Food and Drug Administration has asserted general
authority to regulate promotional activities of, and materials disseminated by,
prescription benefit management companies that are owned or influenced by or
subject to contractual relationships with drug companies. In January 1998, the
FDA published a draft guidance concerning certain promotional 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. Although the FDA's draft guidance has effectively
been withdrawn, there can be no assurance that the FDA will not again attempt to
assert jurisdiction over certain aspects of Health Card's business in the
future, and in such event, the impact could materially adversely affect Health
Card's operations.
Since Health Card is neither owned, nor directly controlled or
influenced by a drug company, it believes that the existing regulations do not
apply to it. However, due to its contractual relationship with rebate
administrators 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. In
such event, some of Health Card's activities and its rebate program may require
modification or elimination.
MEDICARE PRESCRIPTION DRUG BENEFIT
Medicare reimbursement and coverage of prescription drugs could change
significantly in the near future. Medicare presently covers only a limited
number of outpatient prescription drugs, but legislative initiatives are being
considered to expand Medicare coverage of drugs, in some instances as part of a
broad reform of the Medicare program. Some proposals have included provisions
for incorporating the services of prescription benefit managers into the program
to control costs. Health Card cannot assess at this stage whether such
legislation will be approved or how it would address drug coverage or costs or
impact Health Card's business. Enactment of legislation to expand Medicare drug
coverage could create broader markets for prescription benefit managers.
Alternatively, it could regulate or limit the services of prescription benefit
managers and have an adverse impact upon Health Card's business.
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,
Health Card has applied for and became licensed as a third party administrator
in Ohio, Kansas, Kentucky and Michigan, and has applied for such licensure in
Florida, Indiana and South Carolina and is in the process of completing
applications for such licensure in Arkansas, Mississippi and Louisiana. In
addition, Pharmacy Associates has been licensed as a third party administrator
in Louisiana.
Health Card intends to apply for a third party administrator's license
in each state in which it determines that its business operations require it.
Prior to September 1998, Health Card conducted its activities without applying
for any such licenses. While Health Card is in the process of seeking to comply
with all such laws that are in effect in the states in which it conducts its
business, Health Card cannot be sure that it will be granted such licenses at
this time or at all, or that it will not be subject to fines and other penalties
including injunctive relief, as a result of its past non-compliance. Health Card
has not determined, and does not believe that it could determine with any degree
of accuracy, the nature or extent of any punishment that might be imposed on it
as a result of such historical non-compliance.
New York does not regulate prescription benefit management companies.
Health Card cannot be sure that New York or any other state will not assert
regulatory authority over it or its activities as a prescription benefit
management company or otherwise, now or at any time in the future. If a state
does assert such regulatory authority, Health Card will seek to comply with all
applicable regulations; however, Health Card cannot be sure compliance will be
achieved. If Health Card is unable to comply, it may not be permitted to conduct
its activities in those states as it currently conducts them, or at all.
Health Card has requested advice from special counsel regarding changes
in laws and regulations covering 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.
ITEM 2. PROPERTIES.
Health Card occupies approximately 14,600 square feet of space at 26
Harbor Park Drive, Port Washington, New York under an amended lease at a monthly
cost of $32,550 (including utilities). The lessor is BFS Realty, LLC, which is
affiliated with Mr. Brodsky, Health Card's Chairman. The lease expires as of
March 30, 2004. Rent under the lease increases by 5% annually. The BFS lease was
assigned by Sandata to BFS in November 1996. Mr. Brodsky is the Operating
Manager and sole holder of the membership interests of BFS. Health Card believes
that the terms of this lease are as fair to it as those which could be obtained
from an unaffiliated third party. Pursuant to an oral agreement entered into in
1994 with BFS, Health Card paid $700,000 in June 1995 in connection with certain
allocated leasehold improvements. Health Card began occupying space at 26 Harbor
Park Drive in October 1994 and began making rental payments for such space in
December 1994. See Item 13 hereof.
Pursuant to a lease dated March 4, 1996, as amended on November 2, 1998
and November 19, 1998, Pharmacy Associates occupies approximately 5,545 square
feet at 320 Executive Court, Little Rock, Arkansas.. The landlord for the
premises is Executive Park Partnership. The current monthly rent under this
lease is $7,027.08 and subsequently increases to $7,309.45 for the period from
May 1, 2001 until April 30, 2002. The lease expires on April 30, 2002.
Pursuant to a lease dated July 8, 1999, Pharmacy Associates occupies an
additional 1,435 square feet at 320 Executive Court, Little Rock, Arkansas. The
landlord for the premises is Executive Park Partnership. The current monthly
rent under this lease is $1,815.75 and subsequently increases to $1,888.38 for
the period from May 1, 2001 to April 30, 2002. The lease expires on April 30,
2002.
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 is used as a pharmacy. The landlord for these
premises is 61 Manorhaven Boulevard, LLC. Bert Brodsky is the sole member. The
current monthly rent is $1,575 per month running through August 31, 2001. The
annual rent can increase by 5% per year. Additional rent, in the form of certain
expenses, is also payable.
Pursuant to a new lease commencing December 15, 1999, and expiring on
December 14, 2000, Health Card leases an apartment, for use by a member of its
senior management, at premises located at 77 Juniper Road, Port Washington, New
York. The annual rent is $21,000. Utilities and maintenance service (if any
maintenance service is contracted for) are payable by Health Card as additional
rent.
ITEM 3. LEGAL PROCEEDINGS.
Health Card is involved in various legal proceedings, including the one
described in the following paragraph, incidental to the conduct of its business.
While there can be no assurance, Health Card does not expect that any such
proceedings will have a material adverse effect on its business, operations and
financial condition.
On February 9, 1999, Health Card 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
Health Card and, subsequently, Health Card 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 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 the services that were to have been provided under the contract
with Health Card. 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 Health Card,
Health Card would be liable for damages in excess of $1,500,000. Health Card is
currently in the process of assessing Plaintiff's alleged damages based upon
documents produced in the discovery phase and is expected to commence with
depositions shortly. Health Card 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 Health Card's financial
position or its results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
MARKET INFORMATION
Health Card's Common Stock is traded in over-the-counter market under
the symbol "NMHC" on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ"). The table below sets forth high and low bid prices
of the Common Stock, as furnished by NASDAQ. The quotations set forth below
reflect interdealer prices without retail markup, markdown or commission and may
not necessarily represent actual transactions.
BID PRICES
HIGH LOW
FISCAL YEAR ENDED
JUNE 30, 2000
First Quarter $7.75 $4.81
Second Quarter 5.63 2.75
Third Quarter 5.25 2.81
Fourth Quarter 3.13 1.88
HOLDERS
Health Card has been advised by its transfer agent (Continental Stock
Transfer & Trust Company) that the approximate number of record holders of its
common stock as of September 22, 2000 was 43.
DIVIDEND POLICY
Health Card has not declared or paid any cash dividends in the past and
does not anticipate doing so in the foreseeable future. Health Card intends to
retain any earnings to finance its growth. Any future payments of dividends will
be at the discretion of the Board of Directors and will depend upon such factors
as the Board of Directors deems relevant. No assurance can be given that Health
Card will pay dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
None.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following tables summarize certain selected financial information for
each of the years in the five year period ended June 30, 2000 and provided
certain supplemental data. The selected consolidated income statement data for
the years ended June 30, 1998, 1999 and 2000 and the selected consolidated
balance sheet data as of June 30, 1999 and 2000 have been derived from the
audited consolidated financial statements of Health Card included in Item 8
hereof. The selected consolidated income statement data for the years ended June
30, 1996 and 1997 and the selected consolidated balance sheet data as of June
30, 1996, 1997 and 1998 have been derived from the audited consolidated
financial statements of Health Card which are not included in this Form 10-K.
The information contained in this table should be read in conjunction with
Health Card's consolidated financial statements and the notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 hereof.
<TABLE>
<S>
<C> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30,
1996 1997 1998 1999 2000
INCOME STATEMENT DATA:
Revenues........................... $54,308,872 $70,405,168 $98,528,384 $134,031,026 $172,313,838
Cost of claims..................... 48,843,261 63,293,699 89,770,402 121,536,733 158,015,411
Gross profit....................... 5,465,611 7,111,469 8,757,982 12,494,293 14,298,427
Selling, general and
administrative expenses*. 4,216,259 5,855,282 7,192,027 10,171,314 12,357,819
--------- --------- --------- ---------- ----------
Operating income (loss)............ 1,249,352 1,256,187 1,565,955 2,322,979 1,940,608
Other income (expense)............. 21,530 42,595 (180,507) 592,032 922,066
------ ------ -------- ------- -------
Income before income taxes
(loss)........................... 1,270,882 1,298,782 1,385,448 2,915,011 2,862,674
Provision for income taxes
(benefit)........................... (185,275) (189,984) 569,000 976,000 1,247,000
-------- -------- ------- ------- ---------
Net income (loss)..................... $ 1,456,157 $ 1,488,766 $ 816,448 $ 1,939,011 $ 1,615,674
========= ========= ======= ========= =========
Earnings (loss) per common share:
Basic............................. $ 0.47 $ 0.46 $ 0.16 $ 0.37 $ 0.24
========= ========= ============ =========== =========
Diluted........................... $ 0.35 $ 0.37 $ 0.16 $ 0.37 $ 0.24
========= ========= ============ ========== =========
Weighted average number of common shares outstanding:
Basic............................. 3,093,085 3,258,459 4,966,885 5,205,084 6,720,104
Diluted........................... 4,182,909 4,008,481 4,969,166 5,205,084 6,720,104
------------------------
*Includes amounts charged by
affiliates aggregating.............. $ 2,868,974 $ 4,511,144 $ 4,904,514 $ 2,816,982 $ 2,985,506
</TABLE>
<PAGE>
<TABLE>
<S>
<C> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30,
1996 1997 1998 1999 2000
BALANCE SHEET DATA:
Cash and cash equivalents... $ 11,137 $ 1,782,597 $ 1,305,792 $ 2,815,863 $15,724,730
Working capital (deficit)... (7,530,351) (7,436,095) (8,658,324) (6,680,593) 6,030,219
Total assets................ 8,531,507 11,871,820 18,343,900 30,846,011 44,363,618
Long-term debt (including
current portion).......... 869,437 263,648 9,742 1,950 2,331,881
Total stockholders' equity
(deficit)................. (3,663,125) (2,343,671) (2,006,282) 1,998,315 13,425,259
</TABLE>
<TABLE>
<S>
<C> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30,
1996 1997 1998 1999 2000
SUPPLEMENTAL DATA(1):
Retail pharmacy claims
processed................... 1,675,490 1,990,976 2,405,627 3,066,098 4,058,748
Mail pharmacy processed
claims...................... 28,238 62,413 131,611 171,295 255,211
Estimated plan participants
(at period end)............. 271,784 291,446 401,226 521,150 505,401
------------
(1) This data has not been audited. See Items 1 and 7 hereof.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
Health Card derives its revenue from the provision of comprehensive
prescription benefit management services to sponsors of prescription benefit
plans. Substantially all of the services Health Card provides to its sponsors
are related to the adjudication of the drug claims at the point of service.
Health Card also recognizes administrative fees at the time of claims
adjudication.
Revenue is earned and recognized as follows: administrative fees are
agreed upon with the sponsor on either a per claim charge or a per plan
participant per month charge. Per claim fees are billed to sponsors for the
claims adjudicated during the period. Per plan participant per month fees are
generally billed to sponsors at the beginning of the month. The amount of
revenue related to the drugs dispensed by pharmacies participating in Health
Card's pharmacy network is recognized at the time of dispensing the drug, as the
cost is incurred.
The following table sets forth the breakdown of Health Card's charges
relating to pharmaceuticals dispensed and administrative fees:
YEARS ENDED JUNE 30,
1998 1999 2000
Charges relating to
Pharmaceuticals $97,558,390 $132,889.359 $169,808,763
Administrative fees and other 969,994 1,141,667 2,505,075
----------- ------------ -----------
Total Revenues $98,528,384 $134,031,026 $172,313,838
----------- ------------ ------------
Health Card does not take possession or legal ownership of the
pharmaceutical drugs dispensed by the pharmacy network, although Health Card
assumes the legal responsibility and financial risk of paying for dispensed
pharmaceuticals whether or not Health Card is paid by its sponsors.
Health Card utilizes its comprehensive prescription benefit database to
perform outcome studies and to develop disease information programs which are
used to reduce overall healthcare costs. Health Card also has access to an
e-pharmacy. These programs currently produce a small amount of revenue. Health
Card believes that these value added information based services are becoming a
more important component of managed care, and therefore these services should
provide an increasing source of revenue for Health Card in the future.
Cost of claims includes the amounts paid to network pharmacies,
including mail service pharmacies, for pharmaceutical claims, and reductions
resulting from rebates from drug manufacturers. Cost of claims are recognized as
follows: the contractual obligation of Health Card to pay for these drugs is
recorded as cost of claims at the time of dispensing of the drug by the pharmacy
network. Cost of claims is reduced by the rebates that Health Card retains net
of amounts due to the sponsors and a fee retained by the rebate administrators
as an administrative fee. Rebates are earned from drug manufacturers based on
drugs utilized by plan participants at the time of dispensing. Health Card's
portion of these rebates, which varies by sponsor, is recorded monthly based
upon the claims adjudicated in that month.
In the past Health Card relied upon third party administrators to
negotiate contracts with drug manufacturers and submit Health Card's claims
along with claims of others. Health Card would receive estimates from the rebate
administrator based on their analysis of the amount of rebates that Health
Card's claims should generate. These estimates were prepared by the rebate
administrators based on estimates of how Health Card's claims might influence
the market share of a particular drug covered under an agreement with a drug
manufacturer. Market share is generally defined as the percentage of utilization
of a certain drug or drugs within its therapeutic class. Historically, this
market share has been very predictable and consistent with the prior quarter.
Relying upon their analyses, the rebate administrators would then remit to
Health Card 80% of its estimate of the total amount to be collected 120 days
after the end of a quarter.
Starting in April 2000, Health Card began processing its rebate claims
either direct with the drug manufacturers, through its wholly-owned subsidiary,
Specialty, or through Express. For the claims made through December 31, 2000,
Express is obligated to pay Health Card a specified amount per claim. Subsequent
to December 31, 2000, a new baseline will be established based on Health Card's
actual claim history. Consequently, the total amount of rebates to be received
from Express will be known once the number of claims is known. As to the
agreements with the drug manufacturers, since Health Card now knows the criteria
that relate to the amount of rebates from these manufacturers, Health Card
computes the amount of rebates based on the actual claims data and the specified
payment schedules. The drug manufacturers, per the individual agreements, are
obligated to reimburse Health Card for the earned rebates within a specified
period of time.
Health Card, through Specialty, has submitted the majority of covered
claims to the drug manufacturers, in accordance with the agreements currently in
place, for the quarter ended June 30, 2000. Since this was Health Card's first
submission direct to the drug manufacturers, and since approximately 30
different contracts had to be analyzed and loaded into Health Card's custom
designed rebate system, certain submissions were delayed and certain submissions
still need to be made. In addition, Health Card is attempting to negotiate
agreements with several additional manufacturers and submit claims under such
agreements with respect to the period. These late submissions and submissions
under any additional manufacturer agreements might have some negative short-term
effect on cash flow, but Health Card believes it has sufficient cash reserves to
deal with any delayed reimbursements.
Manufacturer rebates have historically had a significant impact on
Health Card's financial performance as the following table shows:
YEARS ENDED JUNE 30,
1998 1999 2000
---------------------------------------
REBATES AS A:
% Of cost of claims 1.6% 2.1% 2.4%
% Of total gross profit 17% 20% 27%
% Of income before taxes 105% 87% 133%
Due to the expected continued growth and diversification of Health
Card's business, Health Card also expects rebates as a percentage of cost of
claims, to increase and continue to account for a significant percentage of
total gross profit and income before taxes. Certain of Health Card's sponsors
are entitled to all or a portion of rebates received by Health Card, which
portion varies by sponsor. If such rebate programs were to be discontinued or
adversely altered by drug manufacturers, or if the terms of Health Card's rebate
sharing arrangements with its sponsors were adversely altered, it would have a
material adverse effect on Health Card's business, operating results and
financial condition.
Due to changing market conditions and competition, it is possible that
the percentage of rebates retained by Health Card based on its arrangements with
the sponsors may change when these arrangements expire and may be lower in
arrangements with new sponsors. Any such change in the percentage of rebates
retained and recorded as a reduction of cost of claims could have a material
adverse effect on Health Card's business, operating results and financial
condition.
Credit risk relating to the rebates receivable is evaluated based on
the financial strength of the rebate administrator and the drug manufacturers.
Health Card believes that most of the drug manufacturers are Fortune 500
companies. Health Card does not believe a credit risk reserve is necessary.
The prescription benefit management industry is intensely competitive,
generally resulting in continuous pressure on Health Card's gross profit as a
percentage of total revenue. In recent years, industry consolidation and
dramatic growth in managed healthcare have led to increasingly aggressive
pricing of prescription benefit management services. Given the pressure on all
parties to reduce healthcare costs, Health Card expects this competitive
environment to continue for the foreseeable future.
Health Card plans to continue its internal growth through increased
marketing of its services and by expanding the range of services offered,
particularly to include value added consulting and information-based services
which Health Card believes to be in growing demand within the healthcare
industry. In addition, Health Card intends to continue to pursue an acquisition
program to supplement its internal growth by making acquisitions of other
prescription benefit management service providers, similar to its recent
Pharmacy Associates acquisition.
PUBLIC OFFERING
On August 2, 1999, Health Card completed the sale of 1,600,000 shares
of its common stock in an underwritten public offering (the "Public Offering").
Pursuant to the Public Offering, Health Card received net proceeds of
approximately $9,538,037. Concurrently, the Bert E. Brodsky Revocable Trust (the
"Brodsky Trust") sold 400,000 shares of common stock of Health Card in an
underwritten offering. Of the proceeds received by the Brodsky Trust, it used
approximately $1,992,900 to repay to Health Card, in part, certain indebtedness
owed by certain affiliates of the Brodsky Trust to Health Card. See Item 13
hereof.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1999
Revenues increased $38.3 million or approximately 29%, from $134.0 million
for the fiscal year ended June 30, 1999 to $172.3 million for the fiscal year
ended June 30, 2000. The increase related to revenues from new sponsors during
the fiscal year was approximately $21 million. The majority of the remaining
increase of approximately $17 million was due to other existing sponsors as a
result of several factors including: higher charges relating to increased cost
of pharmaceuticals, new drugs, plan participant growth, and an increase in the
average number of claims per plan participant. The remainder of the increase,
approximately $630,000, was due to new services offered during the year around
the e-pharmacy and clinical services.
Revenues grew year over year despite the loss of two key clients during the
June 30, 2000 fiscal year. One, a previous significant sponsor, terminated their
contract with Health Card as of January 1, 2000. The second was placed in
receivership by the State of Florida as of January 1, 2000, and their members
were dispersed to other plans not covered by Health Card. These two sponsors
accounted for $20.5 million and $21.4 million in revenues during the fiscal
years ended June 30, 1999 and 2000, respectively. The revenue from these two
sponsors has been replaced by the $21 million of revenue from new sponsors
described above. This helped to mitigate the overall impact of their loss on an
annual run rate basis. Two other factors influencing the year to year comparison
were: revenues of the fiscal year ended June 30, 1999 included a one-time rate
increase of $500,000 from a major client, and the revenue for the fiscal year
ended June 30, 2000 was net of an $821,000 reduction in revenue when Health Card
settled certain fees due from a major sponsor as consideration for a new two
year arrangement with this sponsor.
Cost of claims increased $36.5 million or approximately 30% from $121.5
million for the fiscal year ended June 30, 1999 to $158.0 million for the fiscal
year ended June 30, 2000. As a percentage of revenues, cost of claims increased
from 91% for the fiscal year ended June 30, 1999 to 92% for the fiscal year
ended June 30, 2000. The primary reason for the cost of claims increasing as a
percentage of revenue has to due with a risk sharing arrangement Health Card had
with a major sponsor. During the fiscal year ended June 30, 2000 the cost of
drugs covered under this arrangement were greater than the agreed upon capitated
rate, which led to a sharing of those costs between Health Card and the sponsor.
This fact along with the $821,000 revenue reduction mentioned above led to a
differential between revenue and cost under this contract of $1.6 million during
fiscal 2000. This risk sharing arrangement is no longer in effect. Partially
offsetting this increase in costs was a $540,000 increase in the amount of
manufacturer rebates estimated to be received due to the increased volume of
claims and the administrative fee to be paid to Specialty. See "Business
Services - - Claims Processing - -Rebate Administration" Rebates are treated as
a reduction in the cost of claims. In addition, during the fiscal year ended
June 30, 2000 rebates payable were reduced by $736,000 when Health Card
reevaluated its liability to a plan sponsor. Cost of claims for the fiscal year
was decreased by the same amount.
Gross profit increased $1.8 million or approximately 14% from $12.5
million for the fiscal year ended June 30, 1999 to $14.3 million for the fiscal
year ended June 30, 2000, primarily as a result of the increase in revenues,
offset by the increase in cost of claims.
Selling, general and administrative expenses, which include amounts
charged by affiliates, increased $2.2 million, or approximately 22% from $10.2
million for the fiscal year ended June 30, 1999 to $12.4 million for the fiscal
year ended June 30, 2000. $1.3 million of the increase resulted from increases
in compensation, benefits, rent, sales and marketing and other expenses related
to the continued expansion of Health Card's business. The majority of the
compensation and benefits increase is related to approximately 20 incremental
employees at June 30, 2000 compared to June 30, 1999. Depreciation and
amortization expenses have also increased by approximately $528,000, as a
function of increased hardware procurement and software development as Health
Card continues to enhance its information technology capabilities. Health Card
also evaluated its receivables due from certain sponsors, including a key
sponsor currently in receivership, as described above, and determined it should
increase its reserves and/or write-off some balances. The impact on Health Card
was an incremental $338,000 in bad debt expense in fiscal 2000 as compared to
fiscal 1999. This accounted for the majority of the remaining increase in
selling, general and administrative expenses. While selling, general and
administrative expenses increased year over year in an absolute amount they grew
at a slower rate than the increase in revenue. These expenses as a percentage of
revenue actually declined from 7.6% in fiscal year 1999 to 7.2% in fiscal year
2000.
General and administrative expenses charged by affiliates increased
$169,000, or approximately 6%, from $2,817,000 for the fiscal year ended June
30, 1999 to $2,986,000 for the fiscal year ended June 30, 2000, primarily as a
result of increased information technology services and rent to support the
business.
Other income increased $330,000, from $592,000 for the fiscal year
ended June 30, 1999 to $922,000 for the fiscal year ended June 30, 2000. The net
increase to income was due to an increase in interest income of $327,000 earned
on increased cash from the Public Offering and a $83,000 decrease in offering
costs. This addition to income was partially offset by a $80,000 increase in
interest expense from a capital lease for computer hardware.
The provision for income taxes increased $271,000 from $976,000 for the
fiscal year ended June 30, 1999 to $1,247,000 for the fiscal year ended June 30,
2000. The provision for the fiscal year ended June 30, 1999 was reduced by the
utilization of a $595,000 net operating loss carryforward. There is no remaining
net operating loss carry forward to the year ended June 30, 2000.
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998
Revenues increased $35.5 million, or approximately 36%, from $98.5
million for the fiscal year ended June 30, 1998 to $134.0 million for the fiscal
year ended June 30, 1999. The increase resulted primarily from a $6.8 million
increase in fees related to the increase in the number of plan participants
under an arrangement with one of Health Card's major sponsors and includes
approximately $500,000 in additional revenue recorded in September 1998 when the
amount of the adjustment became determinable, upon Health Card receiving verbal
acceptance of the calculation under the provisions of the arrangement to adjust
for the increased cost of drugs primarily related to the prior year. Claims
under the plan of another major sponsor increased by 190,190 claims which
resulted in an increase in revenues of approximately $8.3 million. The remaining
increase of approximately $20.4 million was due primarily to other existing
sponsors as a result of higher charges relating to pharmaceuticals, new drugs,
plan participant growth and an increase in the average number of claims per plan
participant. New business, as a percentage of revenue growth, increased
throughout the fiscal year ended June 30, 1999.
Cost of claims increased $31.8 million, or approximately 35%, from
$89.8 million for the fiscal year ended June 30, 1998 to $121.5 million for the
fiscal year ended June 30, 1999. As a percentage of revenues, cost of claims
remained unchanged at approximately 91%.
Gross profit increased $3.7 million, from $8.8 million for the fiscal
year ended June 30, 1998 to $12.5 million for the fiscal year ended June 30,
1999, primarily as a result of the increase in revenues, offset by the increase
in the cost of claims.
Selling, general and administrative expenses, which include amounts
charged by affiliates, increased $3 million, or approximately 42%, from $7.2
million for the fiscal year ended June 30, 1998 to $10.2 million for the fiscal
year ended June 30, 1999. The increase resulted primarily from an increase of
$550,000 representing additional reserves against certain receivables. Health
Card evaluated its accounts receivable as of June 30, 1999 taking into
consideration the expiration of certain contracts during the period and the
status of negotiations to renew those contracts. As consideration for the
renewal of these contracts, Health Card determined that it would be necessary to
negotiate the receivable balance due from these contracts and that Health Card
most likely would not be able to collect the full amount. As a result, Health
Card estimated and recorded a reserve for the amount that may not be
collectible. In prior periods, due to the status of these contracts, these
additional reserves were not required based upon Health Card's analysis. The
remaining increase in selling, general and administrative expenses resulted from
an increase of $37,500 in the bad debt reserve, a $170,000 bonus to certain
officers/stockholders, a $360,000 compensation accrual to an officer/stockholder
and a $1.9 million increase in compensation, benefits, sales and marketing and
other expenses related to the expansion of Health Card's business.
General and administrative expenses charged by affiliates decreased $2.1
million, or approximately 43%, from $4.9 million for the fiscal year ended June
30, 1998 to $2.8 million for the fiscal year ended June 30, 1999. The decrease
resulted primarily from a decrease of $2.1 million due to compensation of
employees hired by Health Card who were previously engaged through an affiliated
service vendor and a decrease of $905,000 for software maintenance, offset by
increases of $340,000 for equipment rental, $200,000 for data processing related
charges and $362,000 for other operating expenses.
Other income increased $773,000 from a net expense of $181,000 for the
fiscal year ended June 30, 1998 to income of $592,000 for the fiscal year ended
June 30, 1999, due to a $382,000 increase in interest accrued on a loan due from
an affiliate, a $29,000 increase in interest earned on short term investments of
excess cash balances and a $362,000 decrease in public offering costs.
The provision for income taxes increased $407,000 from $569,000 for the
fiscal year ended June 30, 1998 to $976,000 for the fiscal year ended June 30,
1999, as a result of increased taxable income after utilization of a net
operating loss carryforward in the amount of approximately $595,000.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, Health Card had working capital of $6.0 million. This
represented an $12.7 million improvement in working capital over the $6.7
million working capital deficiency as of June 30, 1999. $12.2 million of the
improvement was due to increased current assets: $34.4 million in fiscal 2000
vs. $22.2 million in fiscal 1999. Cash and cash equivalents balances accounted
for this increase as these balances were up $12.9 million at the end of fiscal
2000 over the balance at the end of June 30, 1999. Concurrently, current
liabilities were approximately $500,000 lower at the end of fiscal 2000 than at
the end of fiscal 1999. This was primarily due to lower amounts due for current
income taxes and lower amounts due to affiliates and officers.
Health Card has generated positive net cash provided by operating
activities in each of the last three fiscal years: $0.9 million, $1.5 million,
and $6.1 million for the fiscal years ended June 30, 1998, 1999, and 2000,
respectively. The $4.6 million improvement in net cash from operating activities
for the fiscal year ended June 30, 2000 over the fiscal year ended June 30, 1999
stemmed primarily from the following: (i) improved collections of accounts
receivables --$6.6 million positive impact, (ii) reduced rebate receivables
--$2.9 million positive impact, and (iii) offset by reductions in accounts
payables and accrued expenses - $4.6 million negative impact. The accounts
receivables balances remained virtually the same from fiscal year 1999 to fiscal
year 2000 while revenues were increasing 29%. While there was a write down of
$340,000 of old rebate receivables from a rebate administrator that Health Card
no longer utilizes, there were amounts received for older balances that were
outstanding at the beginning of fiscal year 2000. The improved cash flow from
operations along with the cash from the Public Offering described below enabled
Health Card to make payments so as to get more current with its vendors. In
contrast, for the fiscal year 1999, the majority of net cash provided by
operating activities, besides from net income, was due to increases in accounts
payable and accrued expenses, offset by increasing accounts receivable balances.
Historically, the timing of Health Card's accounts receivable and
accounts payable has generally been a net source of cash from operating
activities. This is the result of the terms of trade in place with plan sponsors
on the one hand, and Health Card's pharmacy network on the other hand. These
terms generally lead to Health Card's payments to participating pharmacies being
slower than its corresponding collections from plan sponsors. Health Card
believes that this situation is not unusual in the prescription benefit
management industry and expects to operate on similar terms for the foreseeable
future. However, there can be no assurance that such terms of trade will
continue in the future and, if they were to change materially, Health Card could
require additional working capital 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
$416,000, $1.7 million and $1.8 million for the fiscal years ended June 30,
1998, 1999 and 2000, respectively. These uses of cash resulted primarily from
capital expenditures, and advances and payments of amounts due to/from
stockholders.
During fiscal year 2000, Health Card entered into three capital lease
transactions for hardware and software. The purchase price of these capital
assets was $2,537,730. One hardware lease is for a term of 57 months with
monthly payments of $40,322. Another hardware lease is for a term of 60 months
with monthly payments of $3,245. The software lease is for a term of 33 months
with monthly payments of $13,662.
Net cash (used in) provided by financing activities amounted to
approximately ($1.0 million), $1.7 million and $8.6 million for the fiscal years
ended June 30, 1998, 1999 and 2000, respectively. These uses of cash resulted
primarily from capital distributions and repayment of debt. The cash provided by
financing activities for fiscal 1999 resulted primarily from 340,919 shares of
common stock purchased for $2 million by the principal stockholder. At the
beginning of fiscal year 2000, pursuant to Health Card's Public Offering
described below, $9.5 million of net cash was generated during the fiscal year
ended June 30, 2000. Health Card used approximately $744,000 of these funds
during the fiscal year ended June 30, 2000 to purchase some of its stock back
into the treasury.
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. In
addition, if certain milestones are met, based on the number of processed
claims, as defined, the initial license fee increases incrementally as
specified. To date one milestone has been met. The agreement also provides for
the annual payment of a fee for maintenance and updating services equal to 18%
of the initial license fee, as defined. It is anticipated that based on internal
growth and the Pharmacy Associates acquisition that at least one milestone, and
perhaps two, will be met during calendar year 2001. The financial impact to
Health Card can be between $150,000 and $250,000.
The registration statement for Health Card's Public Offering became
effective on July 28, 1999 ("the Public Offering"). Health Card 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. Health Card 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 Health
Card 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 Health Card 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. Health Card
received gross 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 Health Card. Such proceeds were reduced by
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 Health Card.
On July 20, 2000 Health Card acquired Pharmacy Associates for $6
million cash plus 400,000 shares of its common stock. The cash purchase price
represented a partial use of the proceeds of the Public Offering. It is
anticipated that based on current operations, Pharmacy Associates should
generate enough net cash to fund its own operations. See, "Business - -
General."
Health Card anticipates that the remaining net proceeds of the Public
Offering and the repayment of certain affiliate and shareholder debt, together
with anticipated cash flow from operations from both Health Card and Pharmacy
Associates, will be sufficient to satisfy Health Card's contemplated cash
requirements for at least 24 months. This is based upon current levels of
capital expenditures and anticipated operating results for the next 24 months.
However, it is one of Health Card's stated goals to acquire other prescription
benefit management companies. This will require cash. Depending on Health Card's
evaluation of future acquisitions, additional cash may be required. Therefore,
revolving credit lines for acquisitions and/or operations and debt financing are
being evaluated as backups to anticipated cash needs. In the event that Health
Card's plans change or its assumptions prove to be inaccurate or the proceeds of
the Public Offering otherwise prove to be insufficient to fund operations and
acquisitions, 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.
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INVESTMENTS
AND HEDGING ACTIVITIES INCOME ("SFAS No. 133"), which requires the recording of
all derivative instruments as assets or liabilities measured at fair value.
Among other disclosures, SFAS No. 133 requires that all derivatives be
recognized and measured at fair value regardless of the purpose or intent of
holding the derivative.
SFAS No. 133 is effective for financial statements for years beginning
after June 15, 2000. 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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition in financial statements. Health Card is
currently assessing the impact of SAB 101 on its consolidated financial
statements, and believes that the effect, if any, will not be material to Health
Card's operating results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The audited financial statements of Health Card as of June 30, 2000 and
1999 and for the years ended June 30, 2000, 1999 and 1998 are included in this
Form 10-K following Item 14 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS AND DIRECTORS
Certain information concerning the executive officers and Directors of
Health Card is set forth below:
---------------------------------- ---------- ----------------------------------
NAME AGE POSITIONS HELD
---------------------------------- ---------- ----------------------------------
---------------------------------- ---------- ----------------------------------
Bert E. Brodsky 57 Chairman of the Board and
Chief Executive Officer
---------------------------------- ---------- ----------------------------------
---------------------------------- ---------- ----------------------------------
Gerald Shapiro 70 Vice Chairman of the Board
and Secretary
---------------------------------- ---------- ----------------------------------
---------------------------------- ---------- ----------------------------------
James Bigl 37 President and
Chief Operating Officer
---------------------------------- ---------- ----------------------------------
---------------------------------- ---------- ----------------------------------
Linda Portney 55 Executive Vice President
of Operations
---------------------------------- ---------- ----------------------------------
---------------------------------- ---------- ----------------------------------
Mary Casale 61 Executive Vice President of Sales
and Marketing
---------------------------------- ---------- ----------------------------------
---------------------------------- ---------- ----------------------------------
Barry Denaro 44 Treasurer and
Chief Financial Officer
---------------------------------- ---------- ----------------------------------
---------------------------------- ---------- ----------------------------------
David Gershen 45 Senior Vice President of Finance
---------------------------------- ---------- ----------------------------------
---------------------------------- ---------- ----------------------------------
Richard J. Strauss, M.D., F.A.C.S. 54 Director
---------------------------------- ---------- ----------------------------------
---------------------------------- ---------- ----------------------------------
Gerald Angowitz 51 Director
---------------------------------- ---------- ----------------------------------
---------------------------------- ---------- ----------------------------------
Kenneth J. Daley 63 Director
---------------------------------- ---------- ----------------------------------
Bert E. Brodsky has served as Chairman of the Board of Health Card since
December 7, 1998, and as Chief Executive Officer since June, 1998. Mr. Brodsky
has at various times since 1983 served as Chairman of the Board, President and a
Director of Health Card. Mr. Brodsky has served as Chairman of the Board and
Treasurer of Sandata, Inc., a provider of computerized data processing services
and custom software and programming services, since June 1983 and as President
of Sandata from December 1989 through January 2000. Sandata's shares of common
stock are publicly traded. From October 1983 though December 1993, Mr. Brodsky
served as Chairman of the Board of Compuflight, Inc., a provider of computerized
flight planning services. Since August 1980, Mr. Brodsky has served as Chairman
of the Board and President of P.W. Medical Management, Inc., which provides
financial and consulting services to physicians. For more than the past five
years, Mr. Brodsky has also served as President of P.W. Capital Corp., a
consulting services firm and Chairman of Sandsport Data Services, Inc., a
computer services firm and wholly-owned subsidiary of Sandata. Mr. Brodsky has
also been the 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
4 B's Realty, LLC, a real estate company, since July 1996. See Item 13 hereof.
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 present, Mr. Shapiro served
as Health Card's Vice Chairman. For more than the past five years, Mr. Shapiro
has been an employee of Sandata, President of Lee Management Associates, Inc., a
physician billing and consulting firm, Chairman and Treasurer of Mediclaim,
Inc., a physician billing and consulting firm, President of Brookhaven M.R.I.,
Inc., a company that operates magnetic resonance imaging machines, Vice
President of Mobile Health Management Services, Inc., a provider of medical
screening services. 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.
James Bigl has served as President and Chief Operating Officer of
Health Card since June 12, 2000. Immediately prior to joining Health Card, Mr.
Bigl served as President and CEO of York HealthNet, SelectPro and USI Care
Management("USI"). In late 1998, Mr. Bigl directed the sale of the Prescription
Benefit Management he founded at Yale-New Haven to USI. In October of 1994, Mr.
Bigl oversaw the wide ranging operations, including home infusion, health care
collections, real estate and retail pharmacy at Yale-New Haven Health's
for-profit division. For the last fifteen years, Mr. Bigl has been working in
the retail pharmacy and Pharmacy Benefit Management industries.
Linda Portney has served as Executive Vice President of Operations of
Health Card since June 1998. Ms. Portney served as a Director of Health Card
from 1982 until May 1999, and as Secretary of Health Card from June 26, 1998
until October 28, 1998. From 1995 until December 1998, Ms. Portney served as
President of Health Card, and as Vice President and Secretary of Health Card
from 1983 to 1995. Ms. Portney has been employed by Health Card since 1981.
Mary Casale has served as Executive Vice President of Sales and
Marketing of Health Card since June 1, 1998. She served as a Vice President of
Health Card from March 1996 to June 1, 1998. Ms. Casale previously served as
Vice President of Managed Care Sales and Union Related Accounts at ValueRx, a
prescription benefit management company, from March 1995 to February 1996, Vice
President of Sales for the Eastern Region at Diagnostek, Inc., a prescription
benefit management company that was acquired by ValueRx, from August 1994 to
March 1995, National Vice President of Customer Development for Sales and
Marketing at Diagnostek from January 1994 to August 1994 and a consultant for
special accounts for Sales and Marketing at Diagnostek from 1989 to 1993.
Barry Denaro has served as Chief Financial Officer for Health Card
since June 1997 and as Treasurer for Health Card since February 1998. Mr. Denaro
served as Controller of NDA Clinical 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.
David Gershen has served as Senior Vice President of Finance for Health
Card since May 2000. From July 1996 until April 2000, Mr. Gershen served as the
Vice President of Finance and Administration of CSC Healthcare Inc., a
subsidiary of Computer Sciences Corporation ("CSC"), a healthcare information
services company. Prior thereto, and since 1985, Mr. Gershen held various
financial positions with APM, Inc., which was acquired by CSC in 1996.
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 presently serves as a Management Consultant through the
Angowitz Company, which provides consulting services. Mr. Angowitz had served as
Senior Vice President of Human Resources and Administration for RJR Nabisco,
Inc. ("RJR"), a consumer products manufacturer, from March 1995 until December
1999. Mr. Angowitz previously served as Vice President of Human Resources for
RJR from February 1994 to March 1995 and Vice President of employee benefits at
RJR from January 1992 to February 1994. Mr. Angowitz is the brother-in-law of
Hugh Freund, a Vice President, Secretary, principal stockholder and Director of
Sandata.
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.
Each of Health Card's Directors is elected for a period of one year and
serves until his successor is duly elected and qualified. During the last three
fiscal years, no Directors' fees were paid.
Each of the executive officers serves at the pleasure of Health Card's
Board of Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of the Securities Exchange Act of 1934, as amended ("Section
16"), requires that reports of beneficial ownership of capital stock and changes
in such ownership be filed with the Securities and Exchange Commission (the
"SEC") by Section 16 "reporting persons," including directors, certain officers,
holders of more than 10% of the outstanding Common Stock and certain trusts of
which reporting persons are trustees. Health Card is required to disclose in
this 10-K each reporting person whom it knows to have failed to file any
required reports under Section 16 on a timely basis during the fiscal year ended
June 30, 2000 or prior fiscal years.
To Health Card's knowledge, based solely on a review of copies of Forms 3,
4 and 5 furnished to it and written representations that no other reports were
required, during the fiscal year ended June 30, 2000, Health Card's officers,
Directors and 10% stockholders complied with all Section 16(a) filing
requirements applicable to them except: Mr. Angowitz failed to timely file two
reports relative to one transaction. Mr. Bigl failed to timely file one report.
Mr. Brodsky failed to timely file three reports relative to four transactions.
Ms. Casale failed to timely file two reports relative to two transactions. Mr.
Daley failed to timely file two reports. Mr. Denaro failed to timely file three
reports relative to two transactions. Ms. O'Malley failed to timely file three
reports relative to two transactions. Ms. Portney failed to timely file one
report. Mr. Shapiro failed to timely file one report. Dr. Strauss failed to
timely file two reports relative to one transaction.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to the
compensation paid or awarded by Health Card to the Chief Executive Officer and
other executive officers, (collectively, the "Named Executive Officers"), whose
salary and bonus exceeded $100,000 in all capacities for the fiscal year ended
June 30, 2000:
<PAGE>
<TABLE>
<S>
<C> <C> <C> <C> <C> <C> <C> <C> <C>
=========================== ======= ===================================== ================================== =============
Annual Compensation Long-Term Compensation
--------------------------- ------- ------------------------------------- ---------------------------------- -------------
--------------------------- ------- ------------ ---------- ------------- ------------------------- -------- -------------
Awards Payouts
--------------------------- ------- ------------ ---------- ------------- ------------------------- -------- -------------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
Other Restricted Securities All Other
Annual Stock Underlying LTIP Com-
Salary Bonus Compensa- Awards Options/ Payouts pensation
Name and Principal Year ($) ($) Tion ($) SARs (#) ($) ($)
Position ($)
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
Bert E. Brodsky, Chairman 2000 182,114 (1) 120,000 97,310 (5) -0- -0- -0- -0-
of the Board (3)
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
1999 403,867 (2) 487,500 90,717 (5) -0- -0- -0- -0-
(3)
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
1998 751,096 (2) 30,000 47,377 (5) -0- -0- -0- -0-
(3)
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
Linda Portney, Executive 2000 125,000 -0- 20,140 (6) -0- -0- -0- 499(15)
Vice President of 512(16)
Operations
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
1999 125,000 -0- 20,027 (7) -0- -0- -0 - 952(16)
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
1998 125,000 -0- 19,514 (7) -0- -0- -0- 1170(16)
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
Mary Casale, Executive 2000 100,000 226,936 4,800 (8)(9) -0- 255,689(10) -0- 523(15)
Vice President of Sales (4) 538(16)
and Marketing
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
1999 100,000 103,300 4,800 (8)(9) -0- -0- -0-
(4)
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
1998 100,000 50,031 4,800 (8)(9) -0- 255,690(10) -0- 987(16)
(4)
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
586(16)
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
Kenneth Hammond, Vice 2000 114,231 10,250 -0- -0- 10,000 (12) -0- 393(15)
President of Operations (12) 347(16)
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
1999 103,135 10,250 -0- -0- -0- -0- 656(16)
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
1998 100,327 -0- -0- -0- -0- -0- -0-
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
John Ciufo, Vice 2000 141,730 20,000 -0- -0- 35,568(13) -0- 508(15)
President of Clinical
Services
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
1999 59,000 5,000 -0- -0- 25,568(14) -0- -0-
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------- -------- -------------
1998 -0- -0- -0- -0- -0- -0- -0-
=========================== ======= ============ ========== ============= =========== ============= ======== =============
</TABLE>
<PAGE>
(1) Represents salary paid to Mr. Brodsky.
(2) Represents salary and consulting fees paid to certain entities affiliated
with Mr. Brodsky. See Item 13 hereof.
(3) For the fiscal year ending June 30, 2000, reflects a $120,000 bonus awarded
to Mr. Brodsky in January 2000. Such bonus is to be paid in twelve equal
monthly installments of $10,000. As of June 30, 2000, no amounts have been
paid to Mr. Brodsky with regards to this bonus. Also includes a bonus of
$360,000 for the fiscal year ended June 30, 1999 and a bonus of $30,000 for
the fiscal year ended June 30, 1998.
(4) Represents $0, $0 and $15,000 in bonus and $226,936, $103,300 and $35,031
in commissions for the fiscal years ended June 30, 2000, 1999 and 1998,
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.
(5) Includes automobile lease payments to an entity affiliated with Mr. Brodsky
and life insurance premiums. See Item 13 hereof.
(6) Represents automobile lease payments to an unaffiliated entity and amounts
for automobile insurance and travel allowance.
(7) Represents automobile lease payments to an entity affiliated with Mr.
Brodsky and amounts for automobile insurance and travel allowance.
(8) Represents automobile allowances paid to Ms. Casale.
(9) Does not include annual payments of $20,400 made by Health Card for the
lease of an apartment for the benefit of Ms. Casale.
(10) Includes an option granted by Health Card on February 1, 2000 to purchase
255,689 shares of common stock, of which 51,138 were exercisable as of June
30, 2000. As of September 22, 2000, 102,276 shares of such option were
currently exercisable.
(11) Includes an option granted by Mr. Brodsky on July 1, 1997 to purchase an
aggregate of 255,690 shares of Health Card common stock from Mr. Brodsky at
a price of $5.87 per share. Such option was surrendered by Ms. Casale on
February 1, 2000.
(12) Includes an option granted on August 3, 1999 to purchase 10,000 shares of
common stock at an exercise price of $7.50, of which 4,000 shares were
exercisable as of June 30, 2000. As of September 22, 2000, 7,000 shares of
such option were currently exercisable.
(13) Includes an option granted on August 3, 1999 to purchase 10,000 shares of
common stock at an exercise price of $7.50, of which 3,400 shares were
exercisable as of June 30, 2000. As of September 22, 2000, 6,700 shares
were currently exercisable. Also includes an option granted on February 1,
2000 to purchase 25,568 shares of common stock at an exercise price of
$5.87, of which 8,530 shares of such option were exercisable as of June 30,
2000 and September 22, 2000.
(14) Includes an option granted by Mr. Brodsky on December 7, 1998 to purchase
an aggregate of 25,568 shares of Health Card common stock from Mr. Brodsky
at a price of $5.87 per share. Such option was surrendered by Mr. Ciufo on
February 1, 2000.
(15) Represents amounts anticipated to be contributed by Health Card under
Health Card's 401(k) Plan. Such amounts have not yet been contributed and
the obligation to pay these amounts is at the discretion of Health Card.
(16) Represents amounts contributed by Health Card under Health Card's 401(k)
Plan as of June 30, 2000.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning individual
grants of stock options during the fiscal year ending June 30, 2000:
<TABLE>
<S>
<C> <C> <C> <C> <C> <C> <C>
======================================================================================== ============================
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
---------------------------------------------------------------------------------------- ----------------------------
------------------- ----------------- ------------------ ---------------- -------------- ------------- --------------
Number of Percent of Total
Securities Options/SARs
Underlying Granted to
Options/ Employees in Exercise or
SARs Granted Fiscal Year Base Price Expiration
Name (#) (%) ($/Sh) Date 5% ($) 10% ($)
------------------- ----------------- ------------------ ---------------- -------------- ------------- --------------
------------------- ----------------- ------------------ ---------------- -------------- ------------- --------------
Bert E. Brodsky -0- -0- -0- -0- -0- -0-
------------------- ----------------- ------------------ ---------------- -------------- ------------- --------------
------------------- ----------------- ------------------ ---------------- -------------- ------------- --------------
Mary Casale 255,689 (1) 38.9 5.87 7/1/05 -0- -0-
------------------- ----------------- ------------------ ---------------- -------------- ------------- --------------
------------------- ----------------- ------------------ ---------------- -------------- ------------- --------------
Kenneth Hammond 10,000 (2) 1.5 7.50 8/3/04 11,104.15 23,999.78
------------------- ----------------- ------------------ ---------------- -------------- ------------- --------------
------------------- ----------------- ------------------ ---------------- -------------- ------------- --------------
John Ciufo 10,000 (3) 1.5 7.50 8/3/04 11,104.15 23,999.78
25,568 (4) 3.9 5.87 2/1/05 -0- -0-
------------------- ----------------- ------------------ ---------------- -------------- ------------- --------------
</TABLE>
(1) Exercisable over a five year period to the extent of 51,138 shares of
Common Stock in each of July 1999, July 2000, July 2001, July 2002 and
51,137 shares of Common Stock in July 2004.
(2) Exercisable over a three year period to the extent of 4,000 shares of
Common Stock in August 1999 and 3,000 shares of Common Stock in each of
August 2000 and August 2001.
(3) Exercisable over a three year period to the extent of 3,400 shares of
Common Stock in August 1999 and 3,300 shares of Common Stock in each of
August 2000 and August 2001.
(4) Exercisable over a three year period to the extent of 8,530 shares of
Common Stock in February 2000 and 8,519 shares of Common Stock in each of
February 2001 and December 2001.
<PAGE>
AGGREGATED OPTION/SAR EXERCISE IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUE TABLE
The following table sets forth certain information concerning the value
of unexercised options and warrants for the fiscal year ended June 30, 2000:
<TABLE>
<S>
<C> <C> <C> <C> <C>
===================== ======================= ================= ========================== ==========================
Number of Securities Value of Unexercised
Underlying Unexercised in-the-Money Options and
Options and Warrants at Warrants at June 30,
Name Shares Acquired on Value Realized June 30, 2000(#) 2000($)
Exercise(#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
--------------------- ----------------------- ----------------- -------------------------- --------------------------
--------------------- ----------------------- ----------------- -------------------------- --------------------------
Bert E. Brodsky -0- -0- -0- -0-
--------------------- ----------------------- ----------------- -------------------------- --------------------------
--------------------- ----------------------- ----------------- -------------------------- --------------------------
Mary Casale -0- -0- 51,138/204,551 -0-/-0-
--------------------- ----------------------- ----------------- -------------------------- --------------------------
--------------------- ----------------------- ----------------- -------------------------- --------------------------
Kenneth Hammond -0- -0- 4,000/6,000 -0-/-0-
--------------------- ----------------------- ----------------- -------------------------- --------------------------
--------------------- ----------------------- ----------------- -------------------------- --------------------------
John Ciufo -0- -0- 3,400/6,600 -0-/-0-
-0- -0- 8,530/17,038 -0-/-0-
===================== ======================= ================= ========================== ==========================
</TABLE>
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Except as described below, there are no written employment or similar
agreements with any of the Named Executive Officers. See Item 13 hereof for a
discussion of certain fees paid and payable to Mr. Brodsky.
Health Card entered into an employment agreement with the majority
stockholder, Mr. Brodsky effective July 1, 1999. Pursuant to this agreement, Mr.
Brodsky 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 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 an automobile. In addition,
the agreement provides for certain termination benefits payable to Mr. Brodsky,
which depending upon the reason for termination, can equal up to two years
salary. It is anticipated that Mr. Brodsky may devote a portion of his business
time to business affairs unrelated to Health Card, provided that such activities
do not prevent him from fulfilling his obligations under the agreement. The
agreement does not quantify the amount of time that Mr. Brodsky must devote to
Health Card. However, it is contemplated that Mr. Brodsky will devote a
substantial portion of his business time to the affairs of Health Card.
In January 2000, the Board of Directors authorized the payment to Mr.
Brodsky of a bonus in the amount of $120,000. Such bonus is payable in equal
monthly installments of $10,000.
Health Card entered into an employment agreement with James Bigl
effective June 12, 2000. Pursuant to this agreement, Mr. Bigl has agreed to
serve as President and Chief Operating Officer at an annual salary of $188,000,
in addition to (i) a $25,000 signing bonus upon execution of the agreement and
(ii) the ability to participate in the bonus pool for senior executives. The
agreement also provides for certain termination benefits, which, depending upon
the reason for termination, can equal up to one year of salary. In connection
with the employment agreement, Health Card granted to Mr. Bigl an incentive
stock option to purchase 100,000 shares of common stock at $5.00 per share. Such
option vests over a three year period commencing on June 12, 2001. The option
expires on June 12, 2005.
Health Card entered into an employment agreement with David Gershen
effective May 1, 2000. Pursuant to this agreement, Mr. Gershen has agreed to
serve as Senior Vice President of Finance at an annual salary of $150,000, in
addition to (i) a $25,000 bonus upon the completion of one full year of
employment with Health Card and (ii) the ability to participate in the bonus
pool for senior executives. The agreement also provides for certain termination
benefits, including, but not limited to, a change of control, which, depending
upon the reason for termination, can equal up to one year of salary. In
connection with the employment agreement, Health Card granted to Mr. Gershen an
incentive stock option to purchase 35,000 shares of common stock at $5.00 per
share. Such option vests over a three year period commencing on May 1, 2001. The
option expires on May 1, 2005.
Ms. Portney, Ms. Casale, Mr. Ciufo and Mr. Hammond are employed by Health
Card pursuant to letters, employee covenant agreements and/or confidentiality
and non-disclosure agreements reflecting the compensation terms described under
Item 11 hereof and/or restricting the employee from engaging in certain
competitive activity and/or disclosing certain information.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until May 10, 1999, Health Card did not have a Compensation Committee
or other committee of the Board of Directors performing similar functions.
Decisions concerning the compensation of executive officers were made by the
Board of Directors.
Effective May 10, 1999, Health Card established a Compensation
Committee consisting of Messrs. Shapiro and Angowitz and Dr. Strauss. The
Compensation Committee is responsible for making recommendations to the Board of
Directors regarding compensation arrangements for executive officers of Health
Card, including annual bonus compensation, and consults with management of
Health Card regarding compensation policies and practices. The Compensation
Committee also makes recommendations concerning the adoption of any compensation
plans in which management is eligible to participate, including the granting of
stock options or other benefits under such plans. Effective October 27, 1999,
Mr. Daley replaced Dr. Strauss on such committees.
Gerald Shapiro, the Vice Chairman of the Board of Directors of Health Card,
and Bert E. Brodsky, Health Card's Chairman of the Board and Chief Executive
Officer, are each either or both members of the Board of Directors and/or
officers of the following companies (unless otherwise stated, such affiliations
have been maintained for more than the past five years): (i) P.W. Capital Corp.,
a consulting services firm (Mr. Brodsky since June 1996 and Mr. Shapiro since
October 1994), (ii) Brookhaven M.R.I., Inc., a company that operates magnetic
resonance imaging machines, (iii) Mobile Health Management Services, Inc., a
provider of medical testing services, (iv) 780 Bay Walk Land Co., Inc., a real
estate company (since August 1994), (v) Accutrak Media, Inc., a computer
duplication disk company, (vi) Bert Brodsky Associates, Inc., an insurance
consulting firm (since February 1996), (vii) Island Mermaid Restaurant Corp., a
company that operates a restaurant, (viii) Wilder Woods Estates Corporation, a
real estate company (since April 1994), (ix) Lee Management Associates, Inc., a
billing and collections firm, (x) United States Information Corp., a facsimile
subscription service company, and (xii) Medical Arts Office Services, Inc., a
company that provides personnel and administrative services (since November
1998). See Item 13 hereof.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information, as of September 22,
2000, concerning the beneficial ownership of Health Card's common stock for:
o each person who is known by Health Card to be the beneficial owner of
more than five (5%) percent of Health Card's shares of common stock,
o each of the Named Executive Officers,
o each of Health Card's Directors, and
o all of Health Card's Executive Officers and Directors as a group.
Except as otherwise indicated below, each of the entities or persons named
in the table has sole voting and investment power with respect to all shares of
common stock beneficially owned.
============================================= ==================================
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NAME OF MANAGEMENT PERSON AND NAME AND NUMBER OF SHARES OF OUTSTANDING SHARES
ADDRESS OF BENEFICIAL OWNER (1)
--------------------------------------------- ----------------------------------------- ------------------------------------------
Bert E. Brodsky 4,051,160 (2) 56.9%
--------------------------------------------- ----------------------------------------- ------------------------------------------
Irrevocable Trust of 383,579 5.4%
David Craig Brodsky
--------------------------------------------- ----------------------------------------- ------------------------------------------
Gerald Shapiro 383,534 5.4%
--------------------------------------------- ----------------------------------------- ------------------------------------------
James Bigl 2,000 (3) *
--------------------------------------------- ----------------------------------------- ------------------------------------------
Linda Portney 219,162 3.1%
--------------------------------------------- ----------------------------------------- ------------------------------------------
Mary Casale 102,276 (4) 1.4%
--------------------------------------------- ----------------------------------------- ------------------------------------------
David Gershen -0- (5) *
--------------------------------------------- ----------------------------------------- ------------------------------------------
Barry Denaro 7,010 (6) *
--------------------------------------------- ----------------------------------------- ------------------------------------------
Kenneth Hammond 7,000 (7) *
--------------------------------------------- ----------------------------------------- ------------------------------------------
John Ciufo 15,230 (8) *
--------------------------------------------- ----------------------------------------- ------------------------------------------
Kenneth J. Daley 6,700 (9) *
6 Glen Avenue
Glen Head, NY 11545
--------------------------------------------- ----------------------------------------- ------------------------------------------
Richard J. Strauss, M.D. 6,700 (9) *
1000 Northern Boulevard
Great Neck, NY 11021
--------------------------------------------- ----------------------------------------- ------------------------------------------
Gerald Angowitz 6,700 (9) *
37 Fieldstone Lane
Oyster Bay, NY 11771
--------------------------------------------- ----------------------------------------- ------------------------------------------
All executive officers and Directors as a
group (10 persons) 4,785,242 (2)(3)(4)(5)(6)(9) 66.0%
============================================= ========================================= ==========================================
</TABLE>
---------------
* Less than 1%.
(1) With the exception of the addresses specifically noted, 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, NY 11050.
(2) Includes (i) an aggregate of 997,583 shares of common stock beneficially
owned by Mr. Brodsky's children's trusts, (ii) 100,000 shares of common
stock beneficially owned by the Bert E. Brodsky Revocable Trust, and (iii)
1,725 shares of common stock beneficially owned by P.W. Capital Corp., of
which Mr. Brodsky is President.
(3) Does not include an aggregate of 100,000 shares of common stock subject to
currently unexercisable options.
(4) Includes 102,276 shares of common stock subject to options that are
currently exercisable. Does not include an aggregate of 153,413 shares of
common stock subject to currently unexercisable options.
(5) Does not include an aggregate of 35,000 shares of common stock subject to
currently unexercisable options.
(6) Includes 7,000 shares of common stock subject to options that are currently
exercisable. Does not include an aggregate of 3,000 shares of common stock
subject to currently unexercisable options.
(7) Includes 7,000 shares of common stock subject to options that are currently
exercisable. Does not include an aggregate of 3,000 shares of common stock
subject to currently unexercisable options.
(8) Includes 6,700 shares of common stock subject to options that are currently
exercisable. Does not include an aggregate of 3,300 shares of common stock
subject to currently unexercisable options. Also includes 8,530 shares
subject to options that are currently exercisable. Does not include an
aggregate of 17,038 shares of common stock subject to currently
unexercisable options.
(9) Includes for each of Mr. Daley, Dr. Strauss and Mr. Angowitz 6,700 shares
of common stock subject to options that are currently exercisable. Does not
include for each of them 3,300 shares of common stock subject to currently
unexercisable options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
From time to time, Mr. Brodsky and his affiliates have engaged in
numerous transactions with Health Card.
HEALTH CARD'S RELATIONSHIP WITH SANDATA
Health Card has entered into various verbal and written agreements,
with Sandata, and its wholly-owned subsidiaries, of which Mr. Brodsky is the
Chairman of the Board, Treasurer and a principal stockholder. The majority of
the services which are provided by wholly-owned subsidiaries, Sandsport Data
Services, Inc. and Sandata Home Health Systems, Inc. are related to database and
operating system support, hardware leasing, maintenance and related
administrative services. Health Card purchases services from Sandata, and its
subsidiaries, on an as needed basis based upon negotiated hourly or monthly
rates. Sandata also procures the majority of Health Card's computer equipment
and furniture and fixtures. Sandata resells these items to Health Card at their
cost plus a 10-20% servicing fee depending on the level of up-front consulting
required to develop the proper specifications for the equipment. Approximately
$181,000 of computer equipment and furniture and fixtures were purchased on
Health Card's behalf during the fiscal year ended June 30, 2000. In addition,
Sandata, through another wholly-owned subsidiary, Santrax Systems, Inc. resells
its telephone services to Health Card based on actual usage.
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. During the fiscal year
ended June 30, 2000, Sandsport billed Health Card approximately $478,000 for
quality assurance testing of software programs developed by Health Card along
with network support and approximately $147,000 for help desk services.
Furthermore, Health Card currently leases computer hardware for its data
processing center at a monthly cost of approximately $44,170 from Sandsport
pursuant to an oral agreement, terminable at will by either party. Lease
payments under this lease for the fiscal years ended June 30, 1999 and 2000
totaled $350,287 and $490,214 respectively. Management of Health Card believes
that the terms of such lease and the negotiated billing rates are as fair to
Health Card as those that could be obtained from an unaffiliated third party,
although no independent fee quotes have been obtained.
During the fiscal years ended June 30, 1998, 1999 and 2000, Health Card
incurred fees to Sandata, or its subsidiaries, in the aggregate amounts of
approximately $2,626,781, $2,151,415 and $2,331,000 respectively. As of June 30,
2000, Health Card owed $172,379 to Sandata, or its subsidiaries, which has been
paid subsequently.
As of June 30, 2000, Sandata owed Health Card $503,958 pursuant to a
promissory note, dated May 31, 2000, made payable by Sandata to the order of
Health Card in the original principal amount of $500,000 plus interest at the
rate of 9-1/2%; interest on such note is payable quarterly and such note is due
on June 1, 2001.
EMPLOYEE MANAGEMENT RELATIONSHIP WITH MEDICAL ARTS OFFICE SERVICES, INC.
Medical Arts Office Services, Inc. may be deemed an affiliate of Health
Card. Certain persons employed by companies affiliated with Mr. Brodsky are also
officers and Directors of Medical Arts, of which Mr. Brodsky is the sole
shareholder.
Medical Arts provides Health Card with paralegal, bookkeeping and
administrative services (including payroll processing) pursuant to an oral
agreement, terminable at will by either party.
During the fiscal year ended June 30, 2000, the total payments made by
Health Card to Medical Arts were approximately $262,147 of which $66,725 was
paid for bookkeeping services, $80,491 was paid for paralegal services and
$114,931 was paid for administrative services.
The hourly rates charged by Medical Arts for such services currently
are as follows: paralegal services at $125 per hour, bookkeeping services at
$6,650 per month, and administrative services at various rates per hour
depending upon the provider of the service. Management believes that the hourly
rates charged by Medical Arts are as fair to Health Card as those that could be
obtained from an unaffiliated third party, although no independent fee quotes
have been obtained.
CONSULTING FEES
For the fiscal year ended June 30, 2000, Health Card paid aggregate
consulting fees to P.W. Capital of $58,111 for services rendered by Mr. Brodsky.
Prior to the consummation of the Public Offering, in consideration of
consulting fees, Mr. Brodsky provided managerial expertise and advice, including
but not limited to advice regarding the hiring of executive management and other
personnel, marketing and sales matters, and negotiation of contracts with
sponsors and other parties. Mr. Brodsky's services were rendered in his
capacities as Chairman of the Board of Directors and Chief Executive Officer.
Pursuant to an agreement with Mr. Brodsky, payment of the above consulting fees
ceased upon consummation of the Public Offering and, in consideration of the
provision of such executive services, Mr. Brodsky began to receive, and
continues to receive, remuneration as an employee of Health Card. See Item 11
hereof.
In addition, during the fiscal year ended June 30, 2000, Health Card
paid P.W. Capital $28,000 representing lease payments for cars leased for Mr.
Brodsky's benefit.
REAL ESTATE
Health Card occupies approximately 14,600 square feet of space at 26
Harbor Park Drive, Port Washington, New York under an amended lease at a monthly
cost of $32,550 (including utilities). The lessor is BFS Realty, LLC, which is
affiliated with Mr. Brodsky. The lease expires as of March 30, 2004. Rent under
the lease increases by 5% annually. The BFS lease was assigned by Sandata to BFS
in November 1996. Mr. Brodsky is the Operating Manager and holder of a majority
of the membership interests of BFS. Health Card believes that the terms of this
lease are as fair to it as those which could be obtained from an unaffiliated
third party, although no independent fee quotes have been obtained. Pursuant to
an agreement entered into in 1994, Health Card paid $700,000 in June 1995 in
connection with certain allocated leasehold improvements. Health Card began
occupying space at 26 Harbor Park Drive in October 1994 and began making rental
payments for such space in December 1994. In addition, during the fiscal years
ended June 30, 1999 and 2000, Health Card paid another affiliated party
approximately $15,833 and $10,200, respectively, in connection with improvements
to the building in which Health Card's offices are located. Sandata also
occupies space at 26 Harbor Park Drive. Except for certain common areas, Sandata
and Health Card do not share space in such facility.
Pursuant to a lease dated August 10, 1998 and expiring on August 31,
2005, Health Card occupies approximately 1,500 square feet of space at 63
Manorhaven Boulevard, Port Washington, New York, which is licensed as a
pharmacy. The landlord for these premises is 61 Manorhaven Boulevard, LLC, of
which Mr. Brodsky is the sole member. The current rent is $1,575 per month; the
annual rent increases by 5% per year. Additional rent, in the form of certain
expenses, is also payable.
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.
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LARGEST AGGREGATE
AMOUNT OWED BY DEBTOR DEBT OWED
DURING FISCAL YEAR AS OF
DEBTOR ENDED JUNE 30, 2000 JUNE 30, 2000
------------------------ ---------------
P.W. Capital LLC(1).............................. $4,609,664 $3,872,996
Port Charitable Foundation(2)..................... 14,000 14,000
Bert E. Brodsky(3)................................ 1,050,900 -0-
Gerald Shapiro(4)................................. 338,250 338,250
Sandra Rothstein(5)............................... 850 850
Linda Portney(6).................................. 2,374 2,374
Sandata,Inc. (7).................................. 503,958 503,958
</TABLE>
(1) On June 1, 1998, Health Card assigned certain indebtedness aggregating
$1,636,785 in principal and accrued interest, if any, from certain persons
and entities, including Mr. Brodsky, to P.W. Capital, LLC, a company
affiliated with Mr. Brodsky. On June 1, 1998, P.W. Capital executed a
demand promissory note made payable to the order of Health Card in the
principal amount of $4,254,785 with interest at the rate of 8.5% per annum,
payable quarterly, such amount reflecting the assigned debt and amounts
then owed by P.W. Capital to Health Card. On June 1, 1998, Mr. Brodsky
executed an unconditional guaranty in favor of Health Card for the full and
prompt payment to Health Card of all amounts payable under the P.W. Capital
promissory note dated June 1, 1998. Such note is secured by 1,022,758
shares of common stock of Health Card and is without recourse to the maker.
Such note was restructured by a new non-recourse promissory note dated July
31, 2000, made payable by P.W. Capital to the order of Health Card in the
amount of $3,890,940. Such note is payable in annual installments of
$400,000 consisting of principal and interest at the rate of 8 1/2% per
annum on each of the first and second anniversary date, with the total
remaining balance of principal and interest due and payable on July 31,
2003. This note is collateralized by 1,000,000 shares of $.001 par value
common stock of Health Card.
As of January 2, 1999, P.W. Capital executed a demand promissory note
made payable without interest to the order of Health Card to evidence
advances to P.W. Capital in the amount of $90,100.
(2) Port Charitable Foundation is a company affiliated with Hugh Freund and
Carol Freund, who are husband and wife. Mr. Freund is an Executive Vice
President, Director and principal stockholder of Sandata.
(3) Includes principal and interest due under a non-recourse (except for
interest) promissory note dated July 1, 1997 made payable by Mr. Brodsky to
the order of Health Card in the original principal amount of $1,000,000,
secured by a pledge of 1,278,447 shares of common stock of Health Card.
Interest on such note, at the rate of 8.5% per annum, is payable quarterly.
The principal amount of the note is payable five years from the date of the
note. This note has been paid in full.
(4) Mr. Shapiro, Vice Chairman of the Board of Health Card, is the Chairman of
the Board and Treasurer of Mediclaim, Inc. The amount due includes
principal and interest due under a non-recourse (except for interest)
promissory note dated July 1, 1997 made payable by Mr. Shapiro to the order
of Health Card in the original principal amount of $300,000, secured by a
pledge of 383,534 shares of common stock of Health Card. Interest on such
note, at the rate of 8.5% per annum, is payable quarterly. The principal
amount of the note is payable five years from the date of the note. $38,250
of interest was paid by Mr. Shapiro in July, 2000.
(5) Sandra Rothstein is Mr. Brodsky's administrative assistant. In July 1997,
Ms. Rothstein purchased 51,137 shares of common stock of Health Card by
delivery of a promissory note made payable to the order of Health Card in
the original principal amount of $40,000. This note is secured by 51,137
shares of common stock of Health Card owned by Ms. Rothstein and principal
was without, and interest is with, recourse to Ms. Rothstein. As of June
30, 2000, no principal was outstanding with respect to Ms. Rothstein's
note, and $850 of interest was outstanding under such note. $850 of
interest was paid by Ms. Rothstein in July 2000.
(6) Linda Portney is Executive Vice President of Operations of Health Card.
(7) Sandata, Inc. is a company affiliated with Health Card, of which Mr.
Brodsky is Chairman of the Board, Treasurer and principal stockholder. On
May 31, 2000 Sandata, Inc. executed a promissory note made payable to the
order of Health Card in the principal amount of $500,000 with interest at
9-1/2% per annum, payable quarterly. The principal amount of the note is
payable on June 1, 2001.
The Brodsky Revocable Trust has repaid certain of the indebtedness
reflected above to the extent of approximately $1,992,900 (representing 73% of
the proceeds from the sale of shares by the Brodsky Trust pursuant to the Public
Offering, net of underwriting discounts and commissions, a non-accountable
expense allowance and a financial advisory fee payable to the representatives of
the Public Offering). The net proceeds from the sale of shares by the Brodsky
Trust were applied first 100% to amounts owed by Mr. Brodsky to Health Card and
the balance to amounts owed by P.W. Capital to Health Card. In addition, Mr.
Brodsky had agreed to pay in full, within one year of the consummation of the
Public Offering, the remaining indebtedness owed by P.W. Capital, reflected in
the above table, after application of the net proceeds from the sale of shares
by the Brodsky Trust in the Public Offering. However, in July 2000, Health Card
restructured such indebtedness with a new promissory note dated July 31, 2000,
and made payable by P.W. Capital to the order of Health Card in the amount of
$3,890,940. Such note is payable in annual installments of $400,000 consisting
of principal and interest at the rate of 8 1/2% per annum on each of the first
and second anniversary date with the total remaining balance of principal and
interest due and payable on July 31, 2003. In the event that P.W. Capital does
not pay amounts due as and when required under this promissory note, Health
Card's recourse will be to exercise its legal remedies with respect to the
Health Card shares held by Health Card as collateral and pursue legal action
against Mr. Brodsky under a related guaranty. Such note does not provide for
default interest or penalties. Mr. Shapiro had 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. However, in July 2000, Health Card allowed
Mr. Shapiro to comply with the payment schedule reflected in footnote 4 to the
table above. In the event that Mr. Shapiro does not pay amounts due as and when
required under his July 1997 promissory note, Health Card's recourse will be to
exercise its legal remedies with respect to the Health Card shares held by
Health Card as collateral and pursue legal action against Mr. Shapiro for unpaid
interest. Such note does not provide for default interest or penalties. It is
not anticipated that additional advances to or on behalf of Mr. Brodsky or his
affiliates will be permitted in the future, unless approved by a majority of
Health Card's disinterested Directors.
SUNSTAR HEALTHCARE, INC.
SunStar Healthcare, Inc., ("SunStar") a Delaware corporation, was
engaged in providing managed health care services in the state of Florida by
operating an HMO. Its service territory covered 52 counties in central, northern
and other parts of Florida, including the metropolitan areas of Tampa, Orlando,
Jacksonville, and others. As of November 1, 1998, SunStar served approximately
57,000 enrolled plan members. On February 19, 1999, Mr. Brodsky, as trustee for
the irrevocable trusts of each of his children, purchased for $250,000 (an
aggregate of $1,000,000) preferred stock and warrants offered by SunStar.
Effective May 1, 1999, Health Card began providing services to SunStar. On
February 1, 2000, Health Card was notified that SunStar was placed in
receivership under the Department of Insurance of the State of Florida. There is
an outstanding receivable from SunStar for the month of January, 2000 of
approximately $1.2 million. Health Card intends to file a claim for this amount
with the Department of Insurance of the State of Florida. There is no guarantee
that the full amount will be collected so Health Card has made an assessment of
amounts that might be collected and has reserved for the difference. During the
fiscal year ended June 30, 2000, Health Card billed SunStar approximately $10.5
million. See Item 7 hereof.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
------- ----------------------------------------------------------------
(a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements of Health Card
are included herein:
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of June 30, 1999 and 2000 F-3
Consolidated Statements of Income for each of the years ended F-4
June 30, 1998, 1999 and 2000
Consolidated Statements of Stockholders' Equity (Deficit) for each F-5
of the years ended June 30, 1998, 1999 and 2000
Consolidated Statements of Cash Flows for each of the years ended F-6
June 30, 1998, 1999 and 2000
Notes to Consolidated Financial Statements F-7
2. FINANCIAL STATEMENT SCHEDULES
Schedule II: Valuation and Qualifying Accounts S-1
3. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
3.1 Restated Certificate of Incorporation of Health Card(1)
3.2 Certificate of Amendment, filed May 25, 1999, to Certificate of Incorporation of Health
Card(1)
3.3 Restated Certificate of Incorporation of Health Card, as amended(2)
3.4 Amended and Restated By-Laws of Health Card(1)
4.1 Form of Specimen Common Stock Certificate(1)
4.2 Form of Warrant Agreement, including form of Representatives' Warrants(1)
10.1 Mail Service Provider Agreement, dated July 1, 1996, between Health Card and Thrift Drug,
Inc. d/b/a Express Pharmacy Services(1)
10.2 Amendment to Mail Service Provider Agreement, dated January 1, 1997, between Health Card and
Thrift Drug, Inc. d/b/a Express Pharmacy Services(1)
10.3 Software License Agreement and Professional Service Agreement, dated February 18, 1998,
between Health Card and Prospective Health, Inc.(1)
10.4 1999 Stock Option Plan(1)
10.5 Letter, dated January 31, 1996, from Health Card to Mary Casale(1)
10.6 Employee Covenant Agreement, dated June 15, 1998, between Health Card and Mary Casale(1)
10.7 Stock Option Agreement, dated July 1, 1997, between Bert Brodsky and Mary Casale(1)
10.8 Letter, dated February 1, 2000, from Mary Casale to Bert E. Brodsky
10.9 Stock Option Agreement, dated February 1, 2000, between Health Card and Mary Casale
10.10 Letter, dated November 30, 1998, from Health Card to Marjorie O'Malley(1)
10.11 Employee Covenant Agreement, dated December 7, 1998, between Health Card and Marjorie O'Malley (1)
10.12 Stock Option Agreement, dated December 7, 1998, between Bert Brodsky and Marjorie O'Malley(1)
10.13 Letter, dated February 1, 2000, from Marjorie O'Malley to Bert E. Brodsky
10.14 Stock Option Agreement, dated February 1, 2000, between Health Card and Marjorie O'Malley
10.15 Letter, dated November 3, 1998, from Health Card to John Ciufo(1)
10.16 Confidentiality and Non-Disclosure Agreement, dated November 19, 1998, between Health Card and John Ciufo(1)
10.17 Stock Option Agreement, dated December 7, 1998, between Bert Brodsky and John Ciufo(1)
10.18 Stock Option Agreement, dated August 3, 1999, between Health Card and John Ciufo
10.19 Letter, dated February 1, 2000, from John Ciufo to Bert E. Brodsky
10.20 Stock Option Agreement, dated February 1, 2000, between Health Card and John Ciufo
10.21 Employee Covenant Agreement, dated June 16, 1998, between Health Card and Ken Hammond(1)
10.22 Stock Option Agreement, dated August 3, 1999, between Health Card and Ken Hammond
10.23 Employee Covenant Agreement, dated June 1, 1998, between Health Card and Linda Portney(1)
10.24 Employment Agreement, dated March 27, 2000, between Health Card and David Gershen
10.25 Stock Option Agreement, dated May 1, 2000, between Health Card and David Gershen
10.26 Employment Agreement, dated May 3, 2000, between Health Card and James Bigl
10.27 Stock Option Agreement, dated June 12, 2000, between Health Card and James Bigl
10.28 Stock Option Agreement, dated August 3, 1999, between Health Card and Kenneth J. Daley
10.29 Stock Option Agreement, dated August 3, 1999, between Health Card and Gerald Angowitz
10.30 Stock Option Agreement, dated August 3, 1999, between Health Card and Richard J. Strauss, M.D.
10.31 Lease, dated January 1, 1996, between Sandata, Inc. and Health Card(1)
10.32 Assignment, dated November 1, 1996, from Sandata, Inc., to BFS Realty, LLC(1)
10.33 First Amendment to BFS Realty, LLC Lease, dated June 1, 1998, between BFS Realty, LLC and Health Card(1)
10.34 Second Amendment to BFS Realty, LLC Lease, dated April 1, 1999, between BFS Realty, LLC and Health Card(1)
10.35 Lease, dated August 10, 1998, between 61 Manor Haven Boulevard, LLC and Health Card(1)
10.36 Promissory Note, dated July 1, 1997, made payable by Bert Brodsky to the order of Health Card
in the original principal amount of $1,000,000(1)
10.37 Letter, dated June 3, 1999, from Bert Brodsky to Health Card(1)
10.38 Promissory Note, dated July 1, 1997, made payable by Gerald Shapiro to the order of Health Card
in the original principal amount of $300,000(1)
10.39 Letter, dated June 3, 1999, from Gerald Shapiro to Health Card(1)
10.40 Promissory Note, dated June 1, 1998, made payable by P.W. Capital, LLC to the order of Health Card
in the original principal amount of $4,254,785(1)
10.41 Agreement of Guaranty, dated June 1, 1998, by Bert E. Brodsky in favor of Health Card(1)
10.42 Demand Promissory Note, dated January 2, 1999, made payable by P.W. Capital, LLC to the order
of Health Card, in the original principal amount of $90,100(1)
10.43 Promissory Note, dated July 31, 2000, made payable by P.W. Capital, LLC to the order of
Health Card, in the amount of $3,890,940.
10.44 Consulting Agreement, dated April 14, 1994, between P.W. Medical Management, Inc. and Health Card(1)
10.45 Assignment, dated July 1, 1996, between P.W. Medical Management, Inc. and P.W. Capital Corp.(1)
10.46 Letter, dated June 8, 1999, from P.W. Capital Corp. to Health Card(1)
10.47 Letter, dated June 9, 1999, from Bert E. Brodsky to Health Card(1)
10.48 Letter, dated June 8, 1999, from the Bert E. Brodsky Revocable Trust to Health Card(1)
10.49 Letter agreement, dated June 30, 1999, between the Bert E. Brodsky Revocable Trust and Health Card(1)
10.50 Employment Agreement, dated July 1, 1999, between Health Card and Bert E. Brodsky(1)
10.51 Letter, dated June 8, 1999, from Bert E. Brodsky to Health Card(1)
10.52 Form of Lock-up Agreement(1)
10.53 Acquisition and Merger Agreement, dated as of June 27, 2000, between Health Card and Pharmacy Associates, Inc.(3)
10.54 Lease Agreement, dated March 4, 1996, between Pharmacy Associates, Inc. and Executive Park Partnership
10.55 Amendment to Lease, dated November 2, 1998, between Pharmacy Associates, Inc. and Executive Park Partnership
10.56 Amendment to Lease, dated November 19, 1998, between Pharmacy Associates, Inc. and Executive Park Partnership
10.57 Lease Agreement, dated July 8, 1999, between Pharmacy Associates, Inc. and Executive Park Partnership
21 Subsidiaries of Health Card
27 Financial Data Schedule
(1) Denotes document filed as an exhibit to Health Card's Registration
Statement on Form S-1 (Registration Number: 333-72209) and incorporated
herein by reference.
(2) Denotes documentation filed as an Exhibit to Health Card's Report on Form
10-K for the fiscal year ended June 30, 1999.
(3) Denotes document filed as an exhibit to Health Card's Form 8-K for an event
dated July 20, 2000 and incorporated herein by reference.
(b) REPORTS ON FORM 8-K
No Report on Form 8-K was filed by Health Card during the three
months ended June 30, 2000.
</TABLE>
<PAGE>
NATIONAL MEDICAL HEALTH
CARD SYSTEMS, INC.
AND SUBSIDIARIES
<TABLE>
<S>
<C> <C>
CONTENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets as of June 30, 1999 and 2000 F-3
Statements of Income for each of the years ended June 30, 1998, 1999 and
2000 F-4
Statements of Stockholders' Equity (Deficit) for each of the years ended
June 30, 1998, 1999 and 2000 F-5
Statements of Cash Flows for each of the years ended June 30, 1998, 1999
and 2000 F-6
Notes to Financial Statements F-7
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
National Medical Health Card Systems, Inc. and Subsidiaries
Port Washington, New York
We have audited the accompanying consolidated balance sheets of National Medical
Health Card Systems, Inc. and Subsidiaries as of June 30, 1999 and 2000, 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, 2000. 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 Subsidiaries as of June 30, 1999 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2000 in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Melville, New York
September 19, 2000
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S>
<C> <C> <C>
June 30,
------------------------------------------------------------------------------------- --------------------------------------
1999 2000
------------------------------------------------------------------------------------- ------------------- ------------------
ASSETS
CURRENT:
Cash and cash equivalents (including cash equivalent investments of $11,181,583
on June 30, 2000) $ 2,815,863 $15,724,730
Accounts receivable, less allowance for possible losses of $846,344 and $726,551 13,233,760 13,409,219
Rebates receivable 5,303,786 3,685,576
Due from affiliates - 903,958
Deferred income tax 530,000 409,000
Other current assets 283,694 268,651
------------------------------------------------------------------------------------- ------------------- ------------------
TOTAL CURRENT ASSETS 22,167,103 34,401,134
Property, equipment and software development costs, net 2,754,522 6,424,170
Due from affiliates 4,579,280 3,486,996
Other assets 15,728 51,318
Deferred income tax 166,000 -
Deferred offering costs 1,163,378 -
------------------------------------------------------------------------------------- ------------------- ------------------
$30,846,011 $44,363,618
------------------------------------------------------------------------------------- ------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable and accrued expenses $26,883,745 $27,430,684
Current portion of capital lease obligations 1,950 456,437
Due to officer/stockholder 390,000 60,000
Due to affiliates 750,968 311,767
Income taxes payable 704,489 11,991
Other current liabilities 116,544 100,036
------------------------------------------------------------------------------------- ------------------- ------------------
TOTAL CURRENT LIABILITIES 28,847,696 28,370,915
Capital lease obligations, less current portion - 1,875,444
Deferred tax liability - 692,000
------------------------------------------------------------------------------------- ------------------- ------------------
TOTAL LIABILITIES 28,847,696 30,938,359
------------------------------------------------------------------------------------- ------------------- ------------------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
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 6,721,496 outstanding 5,313 6,913
Additional paid-in capital 2,868,573 12,405,010
Retained earnings 480,529 2,096,203
Treasury stock at cost, 191,000 shares - (743,767)
Notes receivable - stockholders (1,356,100) (339,100)
------------------------------------------------------------------------------------- ------------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 1,998,315 13,425,259
------------------------------------------------------------------------------------- ------------------- ------------------
$30,846,011 $44,363,618
------------------------------------------------------------------------------------- ------------------- ------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<S>
<C> <C> <C> <C>
Years Ended June 30,
--------------------------------------------------------------------
1998 1999 2000
------------------------------------------------------- ---------------------- ---------------------- ----------------------
Revenues $98,528,384 $134,031,026 $172,313,838
Cost of claims 89,770,402 121,536,733 158,015,411
------------------------------------------------------- ---------------------- ---------------------- ----------------------
Gross profit 8,757,982 12,494,293 14,298,427
Selling, general and administrative expenses* 7,192,027 10,171,314 12,357,819
------------------------------------------------------- ---------------------- ---------------------- ----------------------
Operating income 1,565,955 2,322,979 1,940,608
------------------------------------------------------- ---------------------- ---------------------- ----------------------
Other income (expense):
Other income, net 264,666 674,936 922,066
Public offering costs (445,173) (82,904) -
------------------------------------------------------- ---------------------- ---------------------- ----------------------
(180,507) 592,032 922,066
------------------------------------------------------- ---------------------- ---------------------- ----------------------
Income before income taxes 1,385,448 2,915,011 2,862,674
Provision for income taxes 569,000 976,000 1,247,000
------------------------------------------------------- ---------------------- ---------------------- ----------------------
Net income $ 816,448 $ 1,939,011 $ 1,615,674
------------------------------------------------------- ---------------------- ---------------------- ----------------------
Earnings per common share:
Basic $ 0.16 $ 0.37 $ 0.24
------------------------------------------------------- ---------------------- ---------------------- ----------------------
Diluted $ 0.16 $ 0.37 $ 0.24
------------------------------------------------------- ---------------------- ---------------------- ----------------------
Weighted average number of common shares outstanding:
Basic 4,966,885 5,205,084 6,720,104
Diluted 4,969,166 5,205,084 6,720,104
------------------------------------------------------- ---------------------- ---------------------- ----------------------
*Includes amounts charged by affiliates
aggregating: $ 4,904,514 $ 2,816,982 $ 2,985,506
------------------------------------------------------- ---------------------- ---------------------- ----------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S>
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Notes Retained
Receivable Additional Earnings
Stockholders Preferred Stock Common Stock Paid-in Capital (Deficit) Treasury Stock
------------ --------------- ------------ --------------- --------- --------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
BALANCE, JUNE 30, 1997 $ (72,000) - - 3,258,459 $3,259 - ($2,274,930) - -
Sale of stock (1,340,000) - - 1,713,118 1,713 $1,338,287 - - -
Interest on notes receivable (113,900) - - - - - - - -
Capital distributions, net of
income taxes - - - - - (437,159) - - -
Repayment of loan by
stockholder 72,000 - - - - - - - -
Net income - - - - - - 816,448 - -
BALANCE, JUNE 30, 1998 (1,453,900) - - 4,971,577 4,972 901,128 (1,458,482) - -
Interest on notes receivable (113,900) - - - - - - - -
Interest paid on notes
receivable 171,700 - - - - - - - -
Principal paid on notes
receivable 40,000 - - - - - - - -
Sale of stock - - - 340,919 341 1,999,659 - - -
Capital distributions, net of
Income taxes - - - - - (32,214) - - -
Net income - - - - - - 1,939,011 - -
BALANCE, JUNE 30, 1999 (1,356,100) - - 5,312,496 5,313 2,868,573 480,529 - -
Sale of stock - - - 1,600,000 1,600 9,536,437 - - -
Stock purchase - - - - - - 191,000 (743,767)
Interest paid on notes
receivable 49,583 - - - - - - - -
Principal paid on notes
receivable 1,000,000 - - - - - - - -
Interest on notes receivable (32,583) - - - - - - - -
Net income - - - - - - 1,615,674 - -
BALANCE, JUNE 30, 2000 $ (339,100) - - 6,912,496 $6,913 12,405,010 $2,096,203 $191,000 $(743,767)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<PAGE>
<TABLE>
<S>
<C> <C> <C> <C>
Years Ended
June 30,
----------------------------------------------------------- ---------------------------------------------------------
1998 1999 2000
----------------------------------------------------------- -------------------- ----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
OPERATING ACTIVITIES:
Net income $ 816,448 $1,939,011 $ 1,615,674
Depreciation and amortization 368,644 772,389 1,299,984
Bad debt expense and allowance for possible losses 70,000 602,155 995,806
Compensation expense accrued to officer/stockholder 30,000 360,000 60,000
Deferred income taxes 488,000 201,000 979,000
Interest accrued on stockholders' loans (113,900) (113,900) (32,583)
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable (2,836,750) (7,756,836) (1,171,304)
Other current assets (27,138) (188,380) 26,451
Rebates receivable (2,577,201) (1,238,918) 1,618,210
Due to/from affiliates (1,562,981) 20,921 (250,875)
Accounts payable and accrued expenses 6,175,665 6,233,083 1,663,317
Income taxes payable 59,881 644,608 (692,498)
Other liabilities 31,420 47,764 (16,508)
----------------------------------------------------------- -------------------- ----------------- ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 922,088 1,522,897 6,094,674
----------------------------------------------------------- -------------------- ----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (864,108) (1,930,468) (2,431,861)
Loans (to)/from stockholders (792,200) 10,774 (390,000)
Repayment of loans by officer/stockholder 1,167,919 - -
Repayment of note by stockholder 72,000 40,000 1,049,583
Interest received on notes from stockholders - 171,700 -
----------------------------------------------------------- -------------------- ----------------- ------------------
NET CASH USED IN INVESTING ACTIVITIES (416,389) (1,707,994) (1,772,278)
----------------------------------------------------------- -------------------- ----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock - net - 2,000,000 9,538,037
Capital distribution (728,598) (54,214) -
Repayment of debt and capital lease obligations (253,906) (7,792) (207,799)
Purchase of treasury stock - - (743,767)
Deferred offering costs - (242,826) -
----------------------------------------------------------- -------------------- ----------------- ------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (982,504) 1,695,168 8,586,471
----------------------------------------------------------- -------------------- ----------------- ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (476,805) 1,510,071 12,908,867
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,782,597 1,305,792 2,815,863
----------------------------------------------------------- -------------------- ----------------- ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,305,792 $2,815,863 $15,724,730
----------------------------------------------------------- -------------------- ----------------- ------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
1. SIGNIFICANT ACCOUNTING NATURE OF BUSINESS
POLICIES
National Medical Health Card Systems, Inc. (the "Company",
"Health Card") provides comprehensive prescription benefit management
services to plan sponsors which include managed care organizations,
local governments, unions, corporations and third party health care
plan administrators through its network of licensed pharmacies
throughout the United States. The Company's prescription benefit
management services include electronic point-of-sale pharmacy claims
management, retail pharmacy network management, mail pharmacy claims
management, benefit design consultation, preferred drug management
programs, drug review and analysis, consulting services, disease
information programs, data access, reporting and analysis and
physician profiling.
The Company enters into two types of arrangements for the payment
of administrative fees, fee for service (per claim charges) and
capitation(per plan participant per month charges). Under the fee for
service arrangement, the Company is paid by the plans for their
disbursements plus a set transaction fee. Under the capitation
arrangement, the Company receives its fee based on the number of
participants per month and pays for the cost of prescriptions filled
and thus shares the risk of operating profit or loss with these plans.
As of January 1, 2000, all services are provided on a fee for service
basis.
BASIS OF CONSOLIDATION
In October 1998, the Company acquired National Medical Health
Card IPA, Inc., ("IPA") which is an independent practice association
under the laws of New York. This wholly owned subsidiary is a recently
formed inactive company acquired from a relative of the principal
stockholder for no consideration. The Company intends that the IPA
will be the contracting party with respect to any contracts with
Health Maintenance Organizations or providers containing financial
risk sharing provisions. The IPA is subject to the regulatory
authority of the Department of Health and the laws, rules and
regulations applicable to independent practice associations in New
York. Activities conducted through June 30, 2000 included
organization, planning and development of the IPA's activities and
securing regulatory approvals.
Specialty Pharmacy Care, Inc. ("Specialty") was incorporated in
January 2000. This wholly owned subsidiary was established to provide
manufacturer rebate administration services to Health Card. Effective
as of April 2000, Health Card began to enter into rebate agreements
directly with drug manufacturers. Although these agreements are
between Health Card and drug manufacturers, Specialty administers
these contracts on behalf of Health Card. Specialty retains a
percentage of rebates collected.
Currently, Specialty does not have any full time employees.
Specialty reimburses Health Card for the use of its employees on an as
needed basis.
The consolidated financial statements include the Company and the
above wholly owned subsidiaries. All material intercompany accounts
and transactions have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments and
other short-term investments with an initial maturity date of three
months or less from purchase date to be cash equivalents. Cash
equivalents also include short-term, highly liquid investments
(primarily municipal bonds with interest rates that are re-set
monthly) which are readily convertible into cash at par value (cost).
Cash equivalents at June 30, 1999 and 2000 includes $838,000 and
$1,130,000, respectively which is restricted as to its use.
REVENUE RECOGNITION AND COST OF CLAIMS
Revenue under the fee for service arrangement related to the
sales of prescription drugs by the Company's nationwide network of
pharmacies are recognized when the claims are adjudicated. At the
point-of-sale, the pharmacy claims are adjudicated using the Company's
computerized on-line processing system. Adjudication is the process by
which the plan participant is checked for eligibility of coverage, the
prescription is compared to the plan parameters established by the
sponsor, the particular drug is reviewed for contraindications based
upon the plan participant's drug history, age and sex and the
information is placed into a database available for reporting and
query. The Company invoices plan sponsors and includes as revenues the
Company's administrative fees and charges relating to pharmaceuticals
dispensed by the Company's network of pharmacies. Cost of claims
includes the amounts paid to the Company's network of pharmacies for
pharmaceutical claims reduced by rebates from drug manufacturers. The
Company does not take possession or legal ownership of the
pharmaceutical drugs dispensed by the pharmacy network, although the
Company assumes the legal responsibility and financial risk of paying
for dispensed pharmaceuticals whether or not the Company is paid by
its sponsors.
Revenues under the capitation arrangements are recognized monthly
based on the number of participants and costs under the capitation
agreements are recognized as incurred.
The Company records the portion of the net rebates from drug
manufacturers, which it retains as a reduction of cost of claims.
These rebates are recognized when the Company is entitled to them in
accordance with the terms of the Company's arrangements with drug
manufacturers and third party rebate administrators and the Company's
sponsors and when the amount of the rebates is determinable. The
Company records the gross rebate receivable and the appropriate
payable to the sponsors based on estimates, which are subject to final
settlement. The estimates are based upon the claims submitted and the
Company`s rebate experience, and are adjusted as additional
information becomes available. Currently some rebates are processed by
a third party rebate administrator and the remaining rebates are
submitted by Specialty directly to the drug manufacturers for
reimbursement (see Note 1). For the years ended June 30, 1998, 1999
and 2000, net rebates recorded by the Company as a reduction of cost
of claims were $1,460,537, $2,541,959 and $3,817,856, respectively.
PROPERTY, EQUIPMENT AND SOFTWARE
Office equipment and furniture and fixtures are being depreciated
over five years using the straight-line method of depreciation.
Property under capital lease obligations is amortized on a
straight line basis using a useful life ranging from five to eight
years.
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, 1999 and 2000, $1,434,507 and $1,178,977 in
software development costs were capitalized, respectively.
Amortization of capitalized amounts commences on the date the
software is placed into use and is computed using the straight-line
method over the estimated economic life of the software, primarily
five years. Amortization expense was $213,340, $460,234 and $841,703
for the years ended June 30, 1998, 1999 and 2000, respectively.
A significant portion of the Company's computer software was
developed by a company affiliated by common ownership (See Note 3).
The cost includes development of software programs and enhancements,
which may either expand or modify existing programs. To the extent
that the Company has capitalized certain amounts for software
development and those amounts exceeded the costs incurred by the
affiliate, this excess has been charged to stockholders' equity
(deficit) as a capital distribution.
DEFERRED OFFERING COSTS
The Company accounts for deferred offering costs in accordance
with SAB Topic 5:A. Accordingly, only specific incremental costs
directly attributable to a proposed or actual offering are classified
as deferred offering costs.
The deferred offering costs in connection with the Company's
Public Offering consummated on August 2, 1999 were capitalized and
subsequently were charged to equity upon consummation of the Public
Offering. (See Note 13).
LONG LIVED ASSETS
Long lived assets are evaluated for impairment when events or
changes in circumstances indicate that the carrying amount of the
assets may not be recoverable through the estimated undiscounted
future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair
value. No such impairment existed through June 30, 2000.
TAXES ON INCOME
The Company accounts for income taxes in accordance with SFAS No.
109, ACCOUNTING FOR INCOME TAXES. Under this standard, deferred taxes
on income are provided for those items for which the reporting period
and methods for income tax purposes differ from those used for
financial statement purposes using the asset and liability method.
Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory rates applicable
to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
COMPUTATION OF EARNINGS PER COMMON SHARE
Basic earnings per share has been computed using the weighted
average number of shares of common stock outstanding. Diluted earnings
per share has been computed using the basic weighted average shares of
common stock issued plus outstanding stock options and warrants, in
the periods in which such options and warrants have a dilutive effect.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company has adopted the intrinsic value method of accounting
for employee stock options and will disclose the pro forma impact on
net income and earnings per share.
CONCENTRATION OF CREDIT RISK
The Company may be subject to a concentration of credit risk with
respect to its trade receivables. The Company performs ongoing credit
evaluations of its customers and generally does not require
collateral. The Company maintains allowances to cover potential or
anticipated losses for uncollectible accounts.
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash balances deposited in financial
institutions which exceed FDIC or SIPIC insurance limits. Amounts on
deposit with financial institutions which exceeded the FDIC or SIPIC
insurance limits at June 30, 1999 and 2000 were $3,177,895 and
$16,506,606, 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 a stockholder represent accrued bonuses and do
not bear interest. Loans due from affiliates bear market interest
rates; therefore, the Company believes that the carrying amount
approximates fair value.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR
DERIVATIVE INVESTMENTS AND HEDGING ACTIVITIES INCOME ("SFAS No. 133"),
which requires the recording of all derivative instruments as assets
or liabilities measured at fair value. Among other disclosures, SFAS
No. 133 requires that all derivatives be recognized and measured at
fair value regardless of the purpose or intent of holding the
derivative.
SFAS No. 133 is effective for financial statements for years
beginning after June 15, 2000. The Company has no derivative
investments and does not participate in hedging activities; therefore,
its financial position, results of operations and disclosures will be
unaffected by the adoption of this standard.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101"). "Revenue Recognition in
Financial Statements." SAB 101 provides guidance on applying generally
accepted accounting principles to revenue recognition in financial
statements. The Company is currently assessing the impact of SAB 101
on its consolidated financial statements, and believes that the
effect, if any, will not be material to the Company's operating
results.
2. PROPERTY, EQUIPMENT AND SOFTWARE DEVELOPMENT COSTS
Property, equipment and software development costs consist of the
following:
June 30,
1999 2000
----------------------------------------- ------------ ----------
Equipment $ 644,246 $999,757
Software 3,746,101 5,062,599
Leasehold improvements 72,207 109,385
Property under capital lease obligations - 2,537,730
----------------------------------------- ------------ -----------
4,462,554 8,709,471
Accumulated depreciation/amortization 1,708,032 2,285,301
----------------------------------------- ------------ -----------
$2,754,522 $6,424,170
----------------------------------------- ------------ -----------
Accumulated depreciation on property under capital lease
obligations was $140,369 as of June 30, 2000.
Depreciation and amortization expense for the years ended June
30, 1998, 1999 and 2000 was $368,644, $772,389 and $1,299,984,
respectively.
3. RELATED PARTY
TRANSACTIONS
(A) DISTRIBUTIONS - CAPITAL
Due to affiliates represent trade payables for developed software, other
software services, operating leases and maintenance costs. During 1998, an
affiliate charged the Company approximately $208,000, as a fee to hire
programmers, which were formerly employed by an affiliated company. The Company
assumed a liability of $86,000 relating to these employees.
In accordance with SAB 48, the Company has recorded amounts
in excess of affiliates' cost for capitalized software
development and acquisition of employees as a capital
distribution, net of tax as follows:
1998 1999 2000
------------------------ ---------- --------- ---------------
Software development $ 520,122 $ 54,214 $ -
Acquisition of
employees 208,476 - -
Tax effect (291,439) (22,000) -
------------------------ --------- ---------- --------------
Net charge to
stockholders' equity
(deficit) $ 437,159 $ 32,214 $ -
------------------------------------
(B) OTHER
On May 31, 2000, the Company loaned money to a company
affiliated by common ownership in the amount of $500,000. This
amount is due on June 1, 2001. Interest is 9-1/2% per annum to be
paid quarterly. The balance of this loan at June 30, 2000 with
accrued interest was $503,959 and is included in due from
affiliates.
Due from affiliates also includes a note from another
company affiliated by common ownership. As of June 30, 2000 the
balance due from this affiliate including accrued interest was
$3,886,995. Such amount bore interest at 8.5% per annum, payable
quarterly. The note was collateralized by 1,022,758 shares of
$.001 par value common stock of the Company registered in the
name of the majority stockholder and was subject to the personal
guarantee of the majority stockholder. Such note was restructed
by a new non-recourse promissory note dated July 31, 2000, made
payable by the affiliate to the order of the Company in the
amount of $3,890,940. Such note is payable in annual installments
of $400,000 consisting of principal and interest at the rate of 8
1/2% per annum on each of the first and second anniversary dates,
with the total remaining balance of principal and interst due and
payable on July 31, 2003. The note is collaterialized by
1,000,000 shares of $.001 par value common stock of the Company
registered in the name of the majority stockholder and is subject
to the personal guarantee of the majority stockholder. For the
years ended June 30, 1998, 1999 and 2000, the amount of interest
income accrued was $0, $361,657 and $314,233, respectively.
Interest paid by the affiliate in December 1998 aggregated
$183,000.
Concurrent with the consummation of the Company's Public
Offering, on August 2, 1999 a trust controlled by the Company's
majority stockholder (the "Selling Stockholder") sold 400,000
shares of common stock from its holdings. The Company received
$1,992,900 from the sale by the Selling Stockholder of which
$1,042,500 was applied to amounts owed by the Selling Stockholder
and the balance to amounts due from the affiliate. (See Note 13).
On January 2, 1999, another affiliate 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.
Such advances were repaid during fiscal 2000.
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, 1998, 1999 and
2000, the administrative fee charged by the affiliate was
approximately $157,000, $-0- and $-0-, respectively.
Certain costs paid to the affiliates were capitalized as
software development costs. For the years ended June 30, 1999 and
2000, the amounts charged by affiliates and capitalized were
$612,906 and $477,728, respectively.
The Company purchased equipment from an affiliate during the
year ended June 30, 2000 for approximately $181,646. 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 a stand-alone basis, management believes that
any variance in costs would not be material.
General and administrative expenses related to transactions
with affiliates included in the statement of income are:
Year ended June 30,
-------------------------------------
1998 1999 2000
-------------------------------------
Software maintenance and
related services(I) $1,124,626 $ 770,396 $ 977,032
Management and consulting
fees(II) 857,540 1,524,451 1,355,482
Administrative and
bookkeeping services(III) 2,618,155 237,307 262,147
Rent and utilities 304,193 284,828 390,845
-------------------------------------
$4,904,514 $2,816,982 $2,985,506
-------------------------------------
(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.
(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 as of June 30, 2000 represents a loan
to a stockholder. This loan bears interest at 8.5% and has a
repayment date of July 1, 2002.
For the year ended June 30, 1999 and 2000, the Company paid
the annual premium of approximately $66,000 and $69,000,
respectively, on a life insurance policy where the majority
stockholder is the owner and beneficiary.
(c) Leases See note 8(a) for information regarding leases with related
parties.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the
following:
June 30
-------------------------------
1999 2000
------------------------------------------ ----------------
Claims payable $17,553,036 $22,571,928
Rebates payable to sponsors 7,062,159 3,565,258
Other payables 2,268,550 1,293,498
----------------------------------------- -------------------
$26,883,745 $27,430,684
----------------------------------------- -------------------
5. CAPITAL LEASE OBLIGATIONS
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 June 30, 2000.
Payments for the year ending June 30,
--------------------------------------------------------
2001 $ 686,754
2002 686,754
2003 632,104
2004 522,804
2005 338,800
--------------------------------------------------------
Total minimum lease payments 2,867,216
Less: Amount representing interest 535,335
-------------------------------------------------------
Present value of net minimum lease payments 2,331,881
Less: Current portion 456,437
-------------------------------------------------------
Long-term lease obligations $1,875,444
-------------------------------------------------------
6. MAJOR CUSTOMERS AND PHARMACIES
For the year ended June 30, 1998, approximately 42% and 15%
of revenues were from two plan sponsors, respectively. For the
year ended June 30, 1999, approximately 37%, 14% and 12% of
revenues were from three plan sponsors, respectively. For the
year ended June 30, 2000, approximately 27% and 12% of revenues
were from two plan sponsors, respectively. Amounts due from these
customers at June 30, 1999 and 2000 approximated $6,813,000 and
$3,859,000, respectively. The Company's arrangements with these
plan sponsors are either oral, short-term, terminable by the
sponsor or subject to continuing negotiation.
During the year ended June 30, 1999, the Company recorded
approximately $500,000 of additional revenue when the amount of
an adjustment under the provisions of one of its arrangements to
adjust for the increased cost of drugs, primarily related to the
prior year, became determinable, upon the Company receiving
verbal acceptance of the calculations.
For the years ended June 30, 1998, 1999 and 2000,
approximately 25%, 41%, and 42% of the cost of claims were from
two pharmacy chains. Amounts payable to these two pharmacy chains
at June 30, 1999 and 2000 were approximately $7,686,000 and
$9,608,000, respectively.
As specified in one of its arrangements with a major
customer, the Company has deposited with this customer an
irrevocable standby letter of credit of $2 million to insure the
fulfillment of certain obligations by the Company to the
customer. As of June 30, 2000, no claims have been made under
this letter of credit.
7. TAXES ON INCOME
Provisions for federal and state income taxes consist of the
following:
Year ended June 30,
-------------------------------------------------
1998 1999 2000
-------------------------------------------------
CURRENT:
Federal $ 60,000 $596,000 $ 199,000
State 21,000 179,000 69,000
-------------------------------------------------
81,000 775,000 268,000
-------------------------------------------------
DEFERRED:
Federal 363,000 135,000 727,000
State 125,000 66,000 252,000
----------------------------------------- -------
488,000 201,000 979,000
-------------------------------------------------
TOTAL $569,000 $976,000 $1,247,000
-------------------------------------------------
In fiscal 1998, 1999 and 2000, $291,439, $22,000 and $-0-,
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:
Year ended June 30,
-----------------------------------------------
1998 1999 2000
--------------------------------------------------------------
Statutory rate 34.0% 34.0% 34.0%
State taxes - net of federal
taxes 7.1 5.4 7.4
Utilization of net operating
loss carryforward - (7.3) -
Permanent differences - 1.4 1.5
Other - - .7
--------------------------------------------------------------
41.1% 33.5% 43.6%
--------------------------------------------------------------
Deferred income tax assets (current and non-current)
resulting from temporary differences are as follows:
JUNE 30, 1999 2000
------------------------------------------------------
Accounts receivable allowances $333,000 $309,000
Vacation expense accrual 41,000 43,000
Officer/stockholder bonus accrual 156,000 57,000
Property and equipment 166,000 -
------------------------------------------------------
$696,000 $409,000
------------------------------------------------------
Deferred income tax liabilities of $692,000 at June 30, 2000
resulted from temporary differences in property and equipment.
8. COMMITMENTS AND CONTINGENCIES
(A) The Company leases offices space in Port Washington, New
York from acompany affiliated by common ownership under an
agreement expiring March 30, 2004. Leasehold improvements made to
this space during the year ended June 30, 1999 and June 30, 2000
were $72,207 and $37,178, 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.
Rent expense charged by affiliates including utilities for
the years ended June 30, 1998, 1999 and 2000 under operating
leases amounted to $304,193, $284,828 and $390,845, respectively.
Future minimum rent payments under the noncancellable
operating leases with related and other parties at June 30, 2000
are as follows:
YEAR ENDING JUNE 30,
--------------------------------------------------
2001 $ 425,000
2002 436,000
2003 458,000
2004 362,000
2005 24,000
Thereafter 4,000
--------------------------------------------------
$1,709,000
--------------------------------------------------
Rent expense for the years ended June 30, 1998, 1999 and
2000 were $285,818, $273,937, and $411,570, respectively.
(B) In February 1998, the Company entered into an agreement
to purchase 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 Company
did not meet any additional milestones during the year ended June
30, 2000. The agreement also provides for the annual payment of
18% of the initial 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 is currently in the process of assessing
plaintiff's alleged damages based upon documents produced in the
discovery phase and is expected to commence with depositions
shortly. 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) Commencing with the year ending June 30, 2000, the
Company has an employment arrangement with its senior executives
which entitles them to participate in a bonus pool equal to 15%
of any increase in pretax profits over the prior year.
(E) The Company entered into an employment agreement with
the majority stockholder effective July 1, 1999. Pursuant to this
agreement, the majority stockholder has agreed to serve as
Chairman of the Board of Directors at an annual salary of
$200,000, subject to adjustment by the Board of Directors. The
agreement commenced on July 1, 1999 and has a term of two years,
unless terminated by the Company for cause, or in the event the
stockholder becomes permanently disabled. The agreement provides
for certain fringe benefits payable to or on behalf of the
majority stockholder, such as the use of an automobile. In
addition, the agreement provides for certain termination benefits
payable to the majority stockholder, which depending upon the
reason for termination, can be equal to up to two years salary.
(F) The Company has an employment arrangement with its
Executive Vice President of Sales and Marketing who 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.
(G) The Company entered into an employment agreement
with its President and Chief Operating Officer effective June 12,
2000. Pursuant to this agreement, an annual salary of $188,000,
in addition to (i) a $25,000 signing bonus upon execution of the
agreement and (ii) the ability to participate in the bonus pool
for senior executives, has been specified. The agreement also
provides for certain termination benefits, which depending upon
the reason for termination, can equal up to one year of salary.
In connection with the employment agreement, the Company granted
an incentive stock option to purchase 100,000 shares of common
stock at $5.00 per share such option vests over a three year
period commencing on June 12, 2001. The option expires June 12,
2005.
(H) The Company entered into an employment agreement
with its Senior Vice President of Finance effective May 1, 2000.
Pursuant to this agreement, an annual salary of $150,000, in
addition to (i) a $25,000 bonus upon the completion of one full
year of employment with the Company and (ii) the ability to
participate in the bonus pool for senior executives, has been
specified. The agreement also provides for certain termination
benefits, which depending upon the reason for termination,
including but not limited to, a change of control, can equal up
to one year of salary. In connection with the employment
agreement, the Company granted 35,000 incentive stock options to
purchase shares of common stock at $5.00 per share. Such option
vests over a three year period commencing on May 1, 2001. The
option expires on May 1, 2005.
9. STOCK OPTIONS AND WARRANTS
(A) STOCK OPTIONS
During the year ended June 30, 2000, the Company granted
incentive options under the 1999 Stock Option Plan "the Plan".
The total number of shares of common stock reserved by the
Company for issuance under the Plan is 1,650,000 plus an
indeterminable number of shares of common stock issuable upon the
exercise of "reload options". Total shares issued under the plan
total 656,469 options. Stock options outstanding have a life from
5 to 10 years as defined in Section 422 of the Internal Revenue
Code. These incentive options granted may not be for a price less
than 100% of the fair market value of the Common Stock as of the
date of the grant.
All prior option plans have expired and the options
granted by the majority stockholder have been canceled during
fiscal 2000.
The following tables summarize information about stock
option activity for the years ended June 30, 1998, 1999 and 2000:
Weighted
Average
Exercise
Price Per
Number of Options share
--------------------------------------- ------------------ ----------
Shares under option at June 30, 1997 1,406,292 $ .08
Cancelled (1,406,292) .08
Granted 255,689 5.87
--------------------------------------- ------------------ ----------
Shares under option at June 30, 1998 255,689 5.87
Granted 89,491 5.87
--------------------------------------- ------------------ ----------
Shares under option at June 30, 1999 345,180 5.87
Cancelled (345,180) 5.87
Granted 656,469 5.98
--------------------------------------- ------------------ ----------
Shares under option at June 30, 2000 656,469 $5.98
--------------------------------------- ------------------ ----------
Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "ACCOUNTING FOR STOCK-BASED COMPENSATION",
requires the Company to provide pro forma information regarding
net income and net income per common share as if compensation
costs for the Company's stock option plans had been determined in
accordance with the fair value method prescribed in SFAS No. 123.
Had compensation expense been recorded under the provisions of
SFAS No. 123, the impact on the Company's net earnings and
earnings per share would have been:
Year ended June 30,
---------------------------------------------------------------------
1998 1999 2000
---------------------------------------------------------------------
Reported net earnings $816,448 $1,939,011 $1,615,674
Pro forma compensation
expense, net of tax (51,982) (67,145) (236,664)
---------------------------------------------------------------------
Pro forma net earnings $764,466 $1,871,866 $1,379,010
---------------------------------------------------------------------
Pro forma earnings per shares:
Basic and diluted $.15 $.36 $.21
---------------------------------------------------------------------
The fair value of each option granted is estimated on the
date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions used for all grants in
the years ended June 30, 1998, 1999, 2000: dividend yield of
0.008%, risk-free interest rate ranges from 4.5% to 6.8%; an
expected life of options for 7, 4.3 and 5.0 years respectively;
and a volatility of .1%, .1% and 45.6% respectively for all
grants. The weighted average value of options granted is $2.03,
$.87 and $1.09 for the years ended June 30, 1998 , 1999 and 2000.
The following table summarizes information about stock
options outstanding at June 30, 2000:
<TABLE>
<S>
<C> <C> <C> <C> <C> <C>
Outstanding Exercisable
------------------------- ------------------------------------------------------ ------------------------------------
Weighted
Weighted Average Average Weighted Average
Option Price Range Number of Shares Remaining Life Exercise Price Number of Shares Exercise Price
------------------------- ----------------- ------------------ ----------------- ----------------- ------------------
$4.00 to $5.87 480,199 5.02 years $5.42 80,976 $5.87
$7.50 to $7.50 176,270 4.18 years 7.50 44,470 7.50
----------------- -----------------
$4.00 to $7.50 656,469 4.79 years 5.98 125,446 6.45
----------------- -----------------
</TABLE>
(B) WARRANTS
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.
10. SUPPLEMENTAL CASH FLOW INFORMATION
Year ended June 30,
-----------------------------------------
Cash paid: 1998 1999 2000
-----------------------------------------------------------------
Interest $ 4,136 $ 250 $98,496
Income taxes 20,901 131,827 960,498
Non-cash investing and
financing activities:
Issuance of common stock for
notes from stockholders 1,340,000(I) - -
Capital lease obligations
were incurred for
computer equipment and
software - - 2,537,730
-----------------------------------------------------------------
(I) These non-recourse (except with regard to interest)
promissory notes dated July 1, 1997, are due and payable in
five years and bear interest at 8.5% per annum payable
quarterly. The 1,713,118 shares issued in connection with
these notes include 1,278,447 shares to the majority
stockholder. The notes are collateralized by the shares of
stock purchased. As of June 30, 2000, $339,100 including
accrued interest remains unpaid.
11. EMPLOYEE BENEFIT PLAN
Effective June 1, 1998, the Company adopted a 401(k) plan
covering substantially all employees. Participants may elect to
contribute to the plan a minimum of 1% to a maximum of 18% of
their annual compensation, not to exceed a dollar limit set by
law. Annually, the Company will determine a discretionary
matching contribution equal to a percentage of each participant's
contribution. Contributions made by the Company for the years
ended June 30, 1999 and 2000 were approximately $7,000 and
$18,000, respectively.
12. EARNINGS PER SHARE
A reconciliation of shares used in calculating basic and
diluted earnings per share follows:
Year ended June 30,
-------------------------------------------
1998 1999 2000
-----------------------------------------------------------------
Basic 4,966,885 5,205,084 6,720,104
Effect of assumed conversion
of employee stock options 2,281 - -
-----------------------------------------------------------------
Diluted 4,969,166 5,205,084 6,720,104
-----------------------------------------------------------------
Outstanding options and warrants to purchase shares of
common stock were not included in the computation of diluted
earnings per share because they were antidilutive. (See Note 9)
These options were as follows:
Year ended June 30,
----------------------------------------------
1998 1999 2000
-----------------------------------------------------------------
Number of options and warrants 255,689 345,180 856,469
Weighted-average exercise
price $5.87 $5.87 $6.69
-----------------------------------------------------------------
13. PUBLIC OFFERING
The registration statement for the Company's Public Offering
became effective on July 28, 1999. The Company consummated the
Public Offering on August 2, 1999 and issued 1,600,000 shares, of
common stock at an offering price of $7.50 per share. In
addition, the underwriters were granted an overallotment option
by the Company to buy 300,000 shares of common stock at $7.50 per
share exercisable by September 11, 1999. The underwriters did not
exercise this option. Concurrent with the Public Offering, the
Selling Stockholder sold 400,000 shares of common stock from its
holdings at $7.50 per share. The Company received gross proceeds
of $12,883,100 representing payment for the sale of the 1,600,000
shares plus 73% of the proceeds from the sale of the 400,000
shares by the Selling Stockholder for repayment of $1,992,900 of
indebtedness owed by the Selling Stockholder in the amount of
$1,042,500 and the balance to amounts owed by affiliates of the
Selling Stockholder to the Company. Such proceeds were reduced by
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.
14. SUBSEQUENT EVENTS
On July 20, 2000 the Company acquired Pharmacy Associates,
Inc. ("PAI"), a regional prescription benefit management company
operating in Arkansas, Louisiana and Mississippi. PAI merged with
and into PAI Acquisition Corp., a wholly owned subsidiary of
Health Card. Under the terms of the merger agreement,
stockholders of PAI received an aggregate of $6 million in cash
and 400,000 shares of the Company's common stock. PAI
stockholders may also receive additional consideration of
approximately $2 million payable in a combination of cash and
common stock over a two-year period if certain financial targets
are met.
In connection with the acquisition, the Company entered into
an employment agreement with the former president of PAI. In
addition, substantially all of the former employees of PAI were
hired by the Company.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
The audits referred to in our report to the Board of Directors of National
Medical Health Card Systems, Inc. and Subsidiaries, dated September 19, 2000,
relating to the consolidated financial statements of National Medical Health
Card Systems, Inc. and Subsidiaries, included the audit of the schedule listed
under Item 14 of Form 10-K for each of the three years in the period ended June
30, 2000. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Melville, New York
September 19, 2000
<PAGE>
<TABLE>
<S>
<C> <C> <C> <C> <C> <C>
Additions
Balance at charged to
beginning of costs and Balance at end
Description period expense (A) Write-offs Other Changes of period
----------------------------------------------------------------------------------------------------------------------
Reserves and allowances
deducted from asset
accounts:
Allowance for possible
losses
Year ended June 30, 1998 $200,000 $ 70,000 $ 25,811 $ - $244,189
Year ended June 30, 1999 $244,189 $ 602,155 $ - $ - $846,344
Year ended June 30, 2000 $846,344 $ 995,806 $1,115,599 $ - $726,551
(A) Charged to bad debts.
</TABLE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
October 20, 2000 By:/s/Bert E. Brodsky
-----------------------------------
Bert E. Brodsky, Chairman of the Board and
Chief Executive Officer
