##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended September 30, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
  Commission file number 000-26749
 NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
  Delaware
    
    11-2581812(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 26 Harbor Park Drive,Port Washington, NY
    
    11050(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (516) 605-6625
 
  o x
  o x o
 o x




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##### 



Table of Contents
 NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
 QUARTERLY REPORT ON FORM 10-Q
 INDEX
 PART I  FINANCIAL INFORMATIONForward Looking Statements
    
    
    3Item 1. Financial StatementsConsolidated Balance Sheets  September 30, 2007 (Unaudited) and June 30, 2007
    
    
    4Consolidated Statements of Income (Unaudited)  Fiscal Quarters ended
September 30, 2007 and 2006
    
    
    5Consolidated Statement of Stockholders Equity (Unaudited)  Fiscal Quarter
Ended September 30, 2007
    
    
    6Consolidated Statements of Cash Flows (Unaudited)  Fiscal Quarters Ended
September 30, 2007 and 2006
    
    
    7Condensed Notes to the Consolidated Financial Statements (Unaudited)
    
    
    8Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4.Controls and Procedures
    
    
    27PART II  OTHER INFORMATIONItem 1.Legal Proceedings
    
    
    29Item 1A.Risk Factors
    
    
    29Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3.Defaults Upon Senior Securities
    
    
    29Item 4.Submission of Matters to a Vote of Security Holders
    
    
    29Item 5.Other Information
    
    
    29Item 6.Exhibits
    
    
    29SIGNATURES
    
    
    32EX-10.3 SOFTWARE LICENSE AND SERVICES AGREEMENTEx-10.4 Amendment No. 4 and Waiver to Credit AgreementEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO
  2




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Forward Looking Statements
   3




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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except for share data)
 
 September 30,
    
    
    June 30,2007
    
    
    2007(unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    625
    
    
    $
    705Restricted cash
    
    
    19,220
    
    
    
    19,276Accounts receivable, net
    
    
    62,947
    
    
    
    62,465Rebates receivable
    
    
    35,107
    
    
    
    42,417Inventory
    
    
    6,614
    
    
    
    6,250Prepaid expenses and other current assets
    
    
    3,045
    
    
    
    2,758Deferred tax assets
    
    
    2,091
    
    
    
    1,913Total current assets
    
    
    129,649
    
    
    
    135,784Property and equipment, net
    
    
    13,641
    
    
    
    14,541Intangible assets, net
    
    
    2,428
    
    
    
    2,551Goodwill
    
    
    99,414
    
    
    
    99,414Other non-current assets
    
    
    551
    
    
    
    799Total Assets
    
    $
    245,683
    
    
    $
    253,089Liabilities, Redeemable Preferred Equity and Common Stockholders EquityCurrent Liabilities:Claims payable to pharmacies
    
    $
    62,479
    
    
    $
    59,508Rebates payable to customers
    
    
    41,529
    
    
    
    45,668Trade and other payables and accrued expenses
    
    
    15,374
    
    
    
    19,804Current portion of capital lease obligations
    
    
    1,002
    
    
    
    989Customer deposits payable
    
    
    12,066
    
    
    
    12,244Other current liabilities
    
    
    209
    
    
    
    954Total current liabilities
    
    
    132,659
    
    
    
    139,167Capital lease obligations, less current portion
    
    
    1,453
    
    
    
    1,486Other non-current liabilities
    
    
    1,103
    
    
    
    1,330Deferred tax liabilities
    
    
    8,790
    
    
    
    8,780Total liabilities
    
    
    144,005
    
    
    
    150,763Commitments and ContingenciesRedeemable Preferred Equity:Series A redeemable convertible preferred stock $.10 par value;
15,000,000 shares authorized, 6,956,522 issued and outstanding,
aggregate liquidation preference of $81,396,167
    
    
    76,933
    
    
    
    76,813Common Stockholders Equity:Common Stock, $.001 par value; 35,000,000 shares authorized, 10,164,125
and 10,158,221 shares issued, 5,524,225 and 5,518,321 outstanding, respectively
    
    
    10
    
    
    
    10Additional paid-in capital
    
    
    133,741
    
    
    
    133,120Accumulated deficit
    
    
    (57,127
    )
    
    
    (55,738
    )Treasury stock at cost, 4,639,900 shares
    
    
    (51,879
    )
    
    
    (51,879
    )Total common stockholders equity
    
    
    24,745
    
    
    
    25,513Total Liabilities, Redeemable Preferred Equity and Common Stockholders
Equity
    
    $
    245,683
    
    
    $
    253,089
 The accompanying condensed notes are an integral part of these consolidated financial statements.
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##### Table of Contents



NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF INCOME
(In thousands, except for per share data)
(UNAUDITED)
 
 Fiscal Quarters EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006Revenue (excludes participant co-payments retained by the
pharmacies of $52,388 and $74,634, respectively)
    
    $
    164,907
    
    
    $
    188,713Cost of claims (excludes participant co-payments retained by the
pharmacies of $52,388 and $74,634, respectively)
    
    
    145,243
    
    
    
    166,512Gross profit
    
    
    19,664
    
    
    
    22,201Selling, general and administrative expenses
    
    
    21,563
    
    
    
    19,836Operating (loss) income
    
    
    (1,899
    )
    
    
    2,365Other income (expense):Interest expense
    
    
    (101
    )
    
    
    (149
    )Interest income
    
    
    571
    
    
    
    432Other income, net
    
    
    2
    
    
    
    12472
    
    
    
    295(Loss) income before (benefit) provision for income taxes
    
    
    (1,427
    )
    
    
    2,660(Benefit) provision for income taxes
    
    
    (158
    )
    
    
    1,249Net (loss) income
    
    $
    (1,269
    )
    
    $
    1,411Redeemable convertible preferred stock cash dividends
    
    
    
    
    
    
    1,412Accretion of transaction expenses
    
    
    120
    
    
    
    120Net loss available to common stockholders
    
    $
    (1,389
    )
    
    $
    (121
    )Loss per common share:Basic
    
    $
    (0.25
    )
    
    $
    (0.02
    )Diluted
    
    $
    (0.25
    )
    
    $
    (0.02
    )Weighted-average shares outstanding:Basic
    
    
    5,522
    
    
    
    5,375Diluted
    
    
    5,522
    
    
    
    5,375
 The accompanying condensed notes are an integral part of these consolidated financial statements.
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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENT
OF STOCKHOLDERS EQUITY
(In thousands)
 (UNAUDITED)
 
 AdditionalCommon Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    Treasury StockShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Shares
    
    
    Amount
    
    
    TotalBalances at June 30, 2007
    
    
    10,158
    
    
    $
    10
    
    
    $
    133,120
    
    
    $
    (55,738
    )
    
    
    4,640
    
    
    $
    (51,879
    )
    
    $
    25,513Accretion of transaction expenses
related to preferred stock offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (120
    )
    
    
    
    
    
    
    
    
    
    
    (120
    )Exercise of stock options
    
    
    2
    
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14Issuance of common stock for
consulting services
    
    
    4
    
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63Stock option income tax benefit
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    517
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    517Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,269
    )
    
    
    
    
    
    
    
    
    
    
    (1,269
    )Balances at September 30, 2007
    
    
    10,164
    
    
    $
    10
    
    
    $
    133,741
    
    
    $
    (57,127
    )
    
    
    4,640
    
    
    $
    (51,879
    )
    
    $
    24,745
 The accompanying condensed notes are an integral part of these consolidated financial statements.
 6




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands)
 (UNAUDITED)
 
 Fiscal Quarters EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006Cash flows from operating activities:Net (loss) income
    
    $
    (1,269
    )
    
    $
    1,411Adjustments to reconcile net (loss) income to net cash provided by
operating activities:Depreciation and amortization
    
    
    2,021
    
    
    
    2,276Issuance of common stock for consulting services
    
    
    63
    
    
    
    Stock-based compensation expense
    
    
    517
    
    
    
    1,024Amortization of deferred gain
    
    
    
    
    
    
    (12
    )Amortization of deferred financing costs
    
    
    28
    
    
    
    28Loss on impairment of capital assets
    
    
    95
    
    
    
    Provision for doubtful accounts
    
    
    (192
    )
    
    
    669Deferred income tax (benefit) provision
    
    
    (168
    )
    
    
    672Excess tax benefit from exercise of stock options
    
    
    (4
    )
    
    
    Net changes in assets and liabilities:Restricted cash
    
    
    56
    
    
    
    2,074Accounts receivable, net
    
    
    (290
    )
    
    
    (6,306
    )Rebates receivable
    
    
    7,310
    
    
    
    5,857Inventory
    
    
    (364
    )
    
    
    (722
    )Prepaid expenses and other current assets
    
    
    (287
    )
    
    
    (3,051
    )Other non-current assets
    
    
    220
    
    
    
    20Claims payable to pharmacies
    
    
    2,971
    
    
    
    (1,796
    )Rebates payable to customers
    
    
    (4,139
    )
    
    
    681Trade and other payables and accrued expenses
    
    
    (4,449
    )
    
    
    (2,810
    )Customer deposits payable
    
    
    (178
    )
    
    
    Other current liabilities
    
    
    (718
    )
    
    
    3,412Other non-current liabilities
    
    
    (227
    )
    
    
    95Net cash provided by operating activities
    
    
    996
    
    
    
    3,522Cash flows from investing activities:Capital expenditures
    
    
    (836
    )
    
    
    (1,178
    )Acquisition of PPP
    
    
    
    
    
    
    (901
    )Acquisition of MPP
    
    
    
    
    
    
    (100
    )Proceeds from sale of capital assets
    
    
    
    
    
    
    5Net cash used in investing activities
    
    
    (836
    )
    
    
    (2,174
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    14
    
    
    
    1,616Excess tax benefit from exercise of stock options
    
    
    4
    
    
    
    Repayments of capital lease obligations
    
    
    (258
    )
    
    
    (1,165
    )Net cash (used in) provided by financing activities
    
    
    (240
    )
    
    
    451Net (decrease) increase in cash and cash equivalents
    
    
    (80
    )
    
    
    1,799Cash and cash equivalents at beginning of period
    
    
    705
    
    
    
    8,410Cash and cash equivalents at end of period
    
    $
    625
    
    
    $
    10,209
 The accompanying condensed notes are an integral part of these consolidated financial statements.
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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (All in thousands, except share amounts)
 (UNAUDITED)
 
 1. BUSINESS AND BASIS OF PRESENTATION
    2. RECENTLY ADOPTED FINANCIAL ACCOUNTING STANDARD
   8




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All in thousands, except share amounts)
(UNAUDITED)
  3. RECENT ACCOUNTING PRONOUNCEMENTS
   4. MEDICARE PRESCRIPTION DRUG PLAN SPONSOR
   9




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All in thousands, except share amounts)
(UNAUDITED)
  5. NEW MOUNTAIN TRANSACTION
      10




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All in thousands, except share amounts)
(UNAUDITED)
   6. BUSINESS ACQUISITIONS
 Maintenance
Prescriptions Programs, Inc.
 Pharmaceutical
Care Network.
  11




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All in thousands, except share amounts)
(UNAUDITED)
  Ascend.
  7. GOODWILL AND INTANGIBLE ASSETS, NET
  12




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All in thousands, except share amounts)
(UNAUDITED)
  September 30, 2007
    
    
    June 30, 2007Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Net Book
    
    
    Carrying
    
    
    Accumulated
    
    
    Net BookAmount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValueIntangible assets:PBM (1)
    
    $
    7,034
    
    
    $
    4,725
    
    
    $
    2,309
    
    
    $
    7,034
    
    
    $
    4,619
    
    
    $
    2,415Specialty (2)
    
    
    595
    
    
    
    476
    
    
    
    119
    
    
    
    595
    
    
    
    459
    
    
    
    136Total
    
    $
    7,629
    
    
    $
    5,201
    
    
    $
    2,428
    
    
    $
    7,629
    
    
    $
    5,078
    
    
    $
    2,551
 
   8. LINE OF CREDIT
     9. SEGMENT REPORTING
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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All in thousands, except share amounts)
(UNAUDITED)
   Specialty
    
    
    IntersegmentFiscal quarter ended September 30, 2007
    
    PBM
    
    
    Service
    
    
    Elimination
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    158,901
    
    
    $
    14,541
    
    
    $
    (8,535
    )
    
    $
    
    
    
    $
    164,907Cost of claims
    
    
    140,085
    
    
    
    12,477
    
    
    
    (7,319
    )
    
    
    
    
    
    
    145,243Gross profit
    
    
    18,816
    
    
    
    2,064
    
    
    
    (1,216
    )
    
    
    
    
    
    
    19,664Selling, general and
administrative expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,563
    
    
    
    21,563Interest and other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    573
    
    
    
    573Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (101
    )
    
    
    (101
    )Loss before benefit from
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,427
    )Benefit from income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (158
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,269
    )Total identifiable assets
    
    $
    235,638
    
    
    $
    115,150
    
    
    $
    (105,105
    )
    
    
    
    
    
    $
    245,683
 Specialty
    
    
    IntersegmentFiscal quarter ended September 30, 2006
    
    PBM
    
    
    Service
    
    
    Elimination
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    184,224
    
    
    $
    10,162
    
    
    $
    (5,673
    )
    
    $
    
    
    
    $
    188,713Cost of claims
    
    
    162,589
    
    
    
    8,884
    
    
    
    (4,961
    )
    
    
    
    
    
    
    166,512Gross profit
    
    
    21,635
    
    
    
    1,278
    
    
    
    (712
    )
    
    
    
    
    
    
    22,201Selling, general and
administrative expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,836
    
    
    
    19,836Interest and other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    444
    
    
    
    444Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (149
    )
    
    
    (149
    )Income before provision for
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,660Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,249Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,411Total identifiable assets
    
    $
    270,038
    
    
    $
    50,981
    
    
    $
    (41,527
    )
    
    
    
    
    
    $
    279,492
 10. EARNINGS PER SHARE
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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All in thousands, except share amounts)
(UNAUDITED)
 11. STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFIT PLAN
 Employee Stock Option Plan
    Expected volatility
    
    
    58.2
    %Risk-free interest rate
    
    
    4.73
    %Expected dividend yield
    
    
    0.0
    %Expected life (years)
    
    5.5 yearsPost-vesting terminations
    
    
    1.0
    %Sub-optimal exercise factor
    
    
    3.82
  Weighted-AverageRemaining
    
    
    AggregateNumber of
    
    
    Weighted-Average
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Exercise Price
    
    
    Term (in years)
    
    
    ValueOutstanding at June 30, 2007
    
    
    1,144,136
    
    
    $
    22.22
    
    
    
    6.22
    
    
    $
    1,204Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (1,561
    )
    
    
    8.70
    
    
    
    
    
    
    
    Cancelled/forfeited
    
    
    (146,384
    )
    
    
    22.76
    
    
    
    
    
    
    
    Outstanding
at September 30, 2007
    
    
    996,191
    
    
    $
    22.16
    
    
    
    5.91
    
    
    $
    90Exercisable
at September 30, 2007
    
    
    433,182
    
    
    $
    22.67
    
    
    
    3.89
    
    
    $
    90
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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All in thousands, except share amounts)
(UNAUDITED)
  Weighted-AverageNumber of
    
    
    Grant Date FairOptions
    
    
    ValueNonvested at June 30, 2007
    
    
    659,659
    
    
    $
    11.60Granted
    
    
    
    
    
    
    Vested
    
    
    (62,024
    )
    
    
    11.85Cancelled/forfeited
    
    
    (34,626
    )
    
    
    11.45Nonvested at September 30, 2007
    
    
    563,009
    
    
    $
    11.59
   Restricted Stock Grant Plan
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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All in thousands, except share amounts)
(UNAUDITED)
  Weighted Average
    
    
    AggregateGrant Date
    
    
    IntrinsicShares
    
    
    Fair Value
    
    
    ValueOutstanding at June 30, 2007
    
    
    42,540
    
    
    $
    19.75
    
    
    $
    840Granted
    
    
    
    
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    
    
    
    
    Cancelled/forfeited
    
    
    (700
    )
    
    
    14.96
    
    
    
    Outstanding at September 30, 2007
    
    
    41,840
    
    
    $
    19.03
    
    
    $
    796
   12. SUPPLEMENTAL CASH FLOW INFORMATION
 Fiscal quarter ended September 30,
    
    2007
    
    
    2006Cash paid:Interest
    
    $
    85
    
    
    $
    11Income taxes
    
    $
    4
    
    
    $
    104
  13. MAJOR CUSTOMERS AND PHARMACIES
   14. COMMITMENTS AND CONTINGENCIES
  17




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All in thousands, except share amounts)
(UNAUDITED)
  15. MANAGEMENT CHANGES
  18




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##### Table of Contents



NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  
    
    Rebate error which resulted in a $1,017 reduction in our gross profit and a
corresponding reduction in our operating income (Rebate Error).
    
    Claims payable error which resulted in a $692 increase in our operating income. The
claims payable error consisted of a $1,523 increase in our gross profit offset by an $831
increase in our selling, general and administrative expenses (Claims Payable Error).
    
    Lease error which resulted in a $584 decrease in our selling, general and
administrative expenses and a corresponding increase in our operating income (Lease
Error).
    
    Other errors (none of which were individually significant) which resulted in a $14
reduction in our gross profit and a corresponding reduction in our operating income.
    19




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
 OPERATING (LOSS) INCOME
 Increase/2007
    
    
    (Decrease)
    
    
    2006Revenue
    
    $
    164,907
    
    
    
    (12.6
    %)
    
    $
    188,713Cost of claims
    
    
    145,243
    
    
    
    (12.8
    %)
    
    
    166,512Gross profit
    
    
    19,664
    
    
    
    (11.4
    %)
    
    
    22,201Selling, general and
administrative expenses
    
    
    21,563
    
    
    
    8.7
    %
    
    
    19,836Operating (loss) income
    
    $
    (1,899
    )
    
    
    (180.3
    %)
    
    $
    2,365
 Results of Operations
 Fiscal Quarter Ended September 30, 2007 Compared to Fiscal Quarter Ended September 30, 2006
      20




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
         Liquidity and Capital Resources
  21




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
     22




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
   Line of Credit
  EBITDA
   23




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
   Fiscal Quarters Ended September 30,2007
    
    
    2006Net cash provided by operating
activities
    
    $
    996
    
    
    $
    3,522(Benefit) provision for income taxes
    
    
    (158
    )
    
    
    1,249Interest (income) expense, net
    
    
    (470
    )
    
    
    (283
    )Net change in assets and liabilities
    
    
    95
    
    
    
    2,546Non-cash items to reconcile net cash from operations
to net (loss) income
    
    
    (339
    )
    
    
    (2,381
    )EBITDA
    
    $
    124
    
    
    $
    4,653Adjusted prescriptions (1)
    
    
    5,607
    
    
    
    6,929EBITDA per adjusted prescription
    
    $
    0.02
    
    
    $
    0.67
 (1)
    
    Estimated adjusted prescription volume equals the Mail Service prescriptions
multiplied by 3, plus retail and Specialty prescriptions. These Mail Service prescriptions are
multiplied by 3 to adjust for the fact that they include approximately 3 times the amount of
product days supplied compared with retail prescriptions.
 Contractual Obligations
   Payments Due by Period
 Total
    
    
    2008
    
    
    2009-2010
    
    
    2011-2012
    
    
    ThereafterCapital lease obligations
    
    $
    2,455
    
    
    $
    1,002
    
    
    $
    1,267
    
    
    $
    186
    
    
    $
    Operating leases
    
    
    9,033
    
    
    
    3,027
    
    
    
    3,415
    
    
    
    1,454
    
    
    
    1,137Total contractual cash
obligations
    
    $
    11,488
    
    
    $
    4,029
    
    
    $
    4,682
    
    
    $
    1,640
    
    
    $
    1,137
 Off-Balance Sheet Arrangements
  24




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
 Commitments and Contingencies
        25




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
    Other Matters
 Inflation
  Critical Accounting Policies and Estimates
  26




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
 Recent Accounting Pronouncements
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
   27




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
   
    
    The Company has partially outsourced and implemented a new system surrounding the
collection of rebates from pharmaceutical manufacturers which has materially enhanced the
internal controls surrounding this area.
   28




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
 
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
   Exhibit 10.3 Exhibit 10.4
 
 Item 6. Exhibits
 Number
    
    Description of Exhibit2.1+
    
    Stock Purchase Agreement dated as of July 31, 2003 by and among NMHC and Portland
Professional Pharmacy, Portland Professional Pharmacy Associates and the individuals
listed on Schedule I thereto (3)2.2+
    
    Amended and Restated Preferred Stock Purchase Agreement dated November 26, 2003 by
and between NMHC and New Mountain Partners, L.P. (4)2.3+
    
    Asset Purchase Agreement dated as of April 1, 2004 among NMHC, Inteq PBM, LP,
Inteq-RX Group, LLP, and the other persons named therein (6)2.4+
    
    Stock Purchase Agreement dated March 7, 2005 by and among NMHC, PCN Acquisition
Corp., Pharmaceutical Care Network, and California Pharmacists Association (7)3.1
    
    Certificate of Incorporation of NMHC (2)3.2
    
    Certificate of Amendment of the Certificate of Incorporation of NMHC (5)
 29




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
 3.3
    
    Amended and Restated By-Laws of NMHC (8)4.1
    
    Specimen of Common Stock Certificate (9)4.2
    
    Specimen of Series A 7% Convertible Preferred Stock Certificate (9)4.3
    
    Form of Representatives Warrant Agreement by and among NMHC, Ryan, Beck & Co., Inc.
and Pennsylvania Merchant Group, including form of Warrant Certificate (1)4.4
    
    Certificate of Designations, Preferences and Rights of Series A 7% Convertible
Preferred Stock of NMHC (5)10.1#
    
    Departure Agreement and General Release between NMHC and Mr. Tery Baskin, dated
August 1, 2007 (9)10.2#
    
    Departure Agreement and General Release between NMHC and Mr. James F. Smith, dated
August 17, 2007 (9)10.3*
    
    Software License and Services Agreement between NMHC and inPharmative, Inc., dated
August 7, 2007.10.4
    
    Amendment No. 4 and Waiver to Credit Agreement, dated as of September 30, 2007 to
the Credit Agreement dated as of January 28, 2005 by and among NMHC, JPMorgan Chase Bank,
N.A., as Administrative Agent, and the Lenders party thereto.31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act32.1
    
    Section 1350 Certification of CEO as adopted by Section 906 of the Sarbanes-Oxley Act32.2
    
    Section 1350 Certification of CFO as adopted by Section 906 of the Sarbanes-Oxley Act
 *
    
    Certain information has been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with respect to the
omitted portion.#
    
    Management contract or compensatory plan or arrangement.
 +
    
    As directed by Item 601(b)(2) of Regulation S-K, certain schedules and exhibits to this
exhibit are omitted from this filing. The Company agrees to furnish supplementally a copy of
any omitted schedule or exhibit to the SEC upon request.
 (1)
    
    Denotes document filed as an Exhibit to NMHCs Registration Statement on Form S-1
(Registration Number: 333-72209) and incorporated herein by reference.
 (2)
    
    Denotes document filed as Exhibit C to NMHCs Definitive Proxy Statement on Schedule 14-A
filed on December 21, 2001 and incorporated herein by reference.
 (3)
    
    Denotes document filed as an Exhibit to NMHCs Report on Form 10-K for the fiscal year ended
June 30, 2003 and incorporated herein by reference.
 (4)
    
    Denotes document filed as Annex B to NMHCs Definitive Proxy Statement on Schedule 14-A filed
on February 19, 2004 and incorporated herein by reference.
 (5)
    
    Denotes document filed as an Exhibit to NMHCs Form 10-Q for the fiscal quarter ended March
31, 2004 and incorporated herein by reference.
 (6)
    
    Denotes document filed as an Exhibit to NMHCs Form 8-K filed on April 14, 2004 and
incorporated herein by reference.
 (7)
    
    Denotes document filed as an exhibit to NMHCs Form 8-K filed on March 11, 2005 and
incorporated herein by reference.
 (8)
    
    Denotes document filed as an exhibit to NMHCs Form 8-K filed on November 14, 2005 and
incorporated herein by reference.
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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
 (9)
    
    Denotes document filed as an exhibit to NMHCs Form 10-K for the fiscal year ended June 30,
2007 and incorporated herein by reference.
 31




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SIGNATURES
  NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
 Date: November 8, 2007
    By:
    /s/ Thomas W. EricksonThomas W. EricksonPresident and Chief Executive Officer
(Principal Executive Officer) By:
    /s/ Stuart DiamondStuart DiamondChief Financial Officer
(Principal Financial Officer) 32