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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended December 31, 2007
 OR
 o
    
    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.
  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
 
  x o
 o þ o 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 INFORMATION
 Forward Looking Statements
    
    
    3Item 1. Financial StatementsConsolidated Balance Sheets  December 31, 2007 (Unaudited) and June 30, 2007
    
    
    4Consolidated Statements of Income (Unaudited)  Fiscal Quarters and Six Months
Ended December 31, 2007 and 2006
    
    
    5Consolidated Statement of Stockholders Equity (Unaudited)  Fiscal Six Months
Ended December 31, 2007
    
    
    6Consolidated Statements of Cash Flows (Unaudited)  Fiscal Six Months Ended
December 31, 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
    
    
    29Item 4.Controls and Procedures
    
    
    29PART II  OTHER INFORMATIONItem 1.Legal Proceedings
    
    
    30Item 1A.Risk Factors
    
    
    30Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3.Defaults Upon Senior Securities
    
    
    30Item 4.Submission of Matters to a Vote of Security Holders
    
    
    30Item 5.Other Information
    
    
    30Item 6.Exhibits
    
    
    30SIGNATURES
    
    
    33EX-10.1 LEASE EXTENSION TO LEASEEX-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)
 
 December 31,
    
    
    June 30,2007
    
    
    2007(unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    7,620
    
    
    $
    1,925Restricted cash
    
    
    16,509
    
    
    
    19,276Accounts receivable, net
    
    
    62,458
    
    
    
    62,465Rebates receivable
    
    
    30,165
    
    
    
    42,417Inventory
    
    
    6,224
    
    
    
    6,250Prepaid expenses and other current assets
    
    
    2,109
    
    
    
    2,758Deferred tax assets
    
    
    1,952
    
    
    
    1,913Total current assets
    
    
    127,037
    
    
    
    137,004Property and equipment, net
    
    
    12,387
    
    
    
    14,541Intangible assets, net
    
    
    2,312
    
    
    
    2,551Goodwill
    
    
    99,414
    
    
    
    99,414Other non-current assets
    
    
    637
    
    
    
    799Total Assets
    
    $
    241,787
    
    
    $
    254,309Liabilities, Redeemable Preferred Equity and Common Stockholders EquityCurrent Liabilities:Claims payable to pharmacies
    
    $
    60,272
    
    
    $
    58,872Rebates payable to customers
    
    
    34,591
    
    
    
    44,326Trade and other payables and accrued expenses
    
    
    17,626
    
    
    
    22,528Current portion of capital lease obligations
    
    
    939
    
    
    
    989Customer deposits payable
    
    
    13,140
    
    
    
    12,244Other current liabilities
    
    
    214
    
    
    
    954Total current liabilities
    
    
    126,782
    
    
    
    139,913Capital lease obligations, less current portion
    
    
    1,245
    
    
    
    1,486Other non-current liabilities
    
    
    1,518
    
    
    
    1,803Deferred tax liabilities
    
    
    8,947
    
    
    
    8,781Total liabilities
    
    
    138,492
    
    
    
    151,983Commitments 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 $82,823,017
    
    
    77,052
    
    
    
    76,813Common Stockholders Equity:Common Stock, $.001 par value; 35,000,000 shares authorized, 10,198,647
and 10,158,221 shares issued, 5,558,747 and 5,518,321 outstanding, respectively
    
    
    10
    
    
    
    10Additional paid-in capital
    
    
    134,599
    
    
    
    133,120Accumulated deficit
    
    
    (56,487
    )
    
    
    (55,738
    )Treasury stock at cost, 4,639,900 shares
    
    
    (51,879
    )
    
    
    (51,879
    )Total common stockholders equity
    
    
    26,243
    
    
    
    25,513Total Liabilities, Redeemable Preferred Equity and Common Stockholders
Equity
    
    $
    241,787
    
    
    $
    254,309
 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 STATEMENTS OF INCOME
 (In thousands, except for per share data)
 (UNAUDITED)
 Quarter Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue (excludes participant co-payments retained by the
pharmacies of $54,411, $70,656, $106,799 and $145,290,
respectively)
    
    $
    168,943
    
    
    $
    199,304
    
    
    $
    333,850
    
    
    $
    388,017Cost of claims (excludes participant co-payments
retained by the pharmacies of $54,411, $70,656, $106,799
and $145,290, respectively)
    
    
    148,393
    
    
    
    176,607
    
    
    
    293,636
    
    
    
    343,118Gross profit
    
    
    20,550
    
    
    
    22,697
    
    
    
    40,214
    
    
    
    44,899Selling, general and administrative expenses
    
    
    20,227
    
    
    
    20,208
    
    
    
    41,790
    
    
    
    40,044Operating income (loss)
    
    
    323
    
    
    
    2,489
    
    
    
    (1,576
    )
    
    
    4,855Other income (expense):Interest expense
    
    
    (75
    )
    
    
    (101
    )
    
    
    (176
    )
    
    
    (250
    )Interest income
    
    
    579
    
    
    
    380
    
    
    
    1,151
    
    
    
    811Other income, net
    
    
    
    
    
    
    8
    
    
    
    2
    
    
    
    21504
    
    
    
    287
    
    
    
    977
    
    
    
    582Income (loss) before provision (benefit) for income taxes
    
    
    827
    
    
    
    2,776
    
    
    
    (599
    )
    
    
    5,437Provision (benefit) for income taxes
    
    
    68
    
    
    
    1,262
    
    
    
    (89
    )
    
    
    2,511Net income (loss)
    
    
    759
    
    
    
    1,514
    
    
    
    (510
    )
    
    
    2,926Redeemable convertible preferred stock cash dividends
    
    
    
    
    
    
    1,411
    
    
    
    
    
    
    
    2,823Accretion of transaction expenses
    
    
    119
    
    
    
    119
    
    
    
    239
    
    
    
    239Net income (loss) available to common stockholders
    
    $
    640
    
    
    $
    (16
    )
    
    $
    (749
    )
    
    $
    (136
    )Earnings (loss) per common share:Basic
    
    $
    0.12
    
    
    $
    0.00
    
    
    $
    (0.14
    )
    
    $
    (0.03
    )Diluted
    
    $
    0.12
    
    
    $
    0.00
    
    
    $
    (0.14
    )
    
    $
    (0.03
    )Weighted average number of common shares outstanding:Basic
    
    
    5,535
    
    
    
    5,469
    
    
    
    5,528
    
    
    
    5,430Diluted
    
    
    5,535
    
    
    
    5,469
    
    
    
    5,528
    
    
    
    5,430
 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (239
    )
    
    
    
    
    
    
    
    
    
    
    (239
    )Exercise of stock options
    
    
    36
    
    
    
    
    
    
    
    266
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    266Issuance of common stock for
consulting services
    
    
    4
    
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63Stock option income tax benefit
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47Issuance of common stock in
connection with restricted stock
activity
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,103
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,103Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (510
    )
    
    
    
    
    
    
    
    
    
    
    (510
    )Balances at December 31, 2007
    
    
    10,199
    
    
    $
    10
    
    
    $
    134,599
    
    
    $
    (56,487
    )
    
    
    4,640
    
    
    $
    (51,879
    )
    
    $
    26,243
 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 STATEMENTS OF CASH FLOWS
 (In thousands)
 (UNAUDITED)
 
 Six Months EndedDecember 31,
    
    
    December 31,2007
    
    
    2006Cash flows from operating activities:Net (loss) income
    
    $
    (510
    )
    
    $
    2,926Adjustments to reconcile net (loss) income to net cash provided byoperating activities:Depreciation and amortization
    
    
    3,977
    
    
    
    4,578Issuance of common stock for consulting services
    
    
    63
    
    
    
    Stock-based compensation expense
    
    
    1,103
    
    
    
    2,068Amortization of deferred gain
    
    
    
    
    
    
    (21
    )Amortization of deferred financing costs
    
    
    182
    
    
    
    56Loss on impairment of capital assets
    
    
    95
    
    
    
    Provision for doubtful accounts
    
    
    136
    
    
    
    911Deferred income tax provision
    
    
    127
    
    
    
    1,022Excess tax benefit from exercise of stock options
    
    
    (7
    )
    
    
    Net changes in assets and liabilities:Restricted cash
    
    
    2,767
    
    
    
    381Accounts receivable, net
    
    
    (129
    )
    
    
    (4,771
    )Rebates receivable
    
    
    12,252
    
    
    
    1,863Inventory
    
    
    26
    
    
    
    (613
    )Prepaid expenses and other current assets
    
    
    649
    
    
    
    (2,972
    )Other non-current assets
    
    
    (20
    )
    
    
    (175
    )Claims payable to pharmacies
    
    
    1,400
    
    
    
    (5,539
    )Rebates payable to customers
    
    
    (9,735
    )
    
    
    4,792Trade and other payables and accrued expenses
    
    
    (4,924
    )
    
    
    (4,005
    )Customer deposits payable
    
    
    896
    
    
    
    2,205Other current liabilities
    
    
    (693
    )
    
    
    5,371Other non-current liabilities
    
    
    (285
    )
    
    
    (70
    )Net cash provided by operating activities
    
    
    7,370
    
    
    
    8,007Cash flows from investing activities:Capital expenditures
    
    
    (1,419
    )
    
    
    (2,439
    )Acquisition of PPP
    
    
    
    
    
    
    (901
    )Acquisition of MPP
    
    
    
    
    
    
    (100
    )Proceeds from sale of capital assets
    
    
    
    
    
    
    5Net cash used in investing activities
    
    
    (1,419
    )
    
    
    (3,435
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    266
    
    
    
    1,852Payment of redeemable convertible preferred stock cash dividends
    
    
    
    
    
    
    (1,412
    )Excess tax benefit from exercise of stock options
    
    
    7
    
    
    
    Repayments of capital lease obligations
    
    
    (529
    )
    
    
    (1,662
    )Net cash used in financing activities
    
    
    (256
    )
    
    
    (1,222
    )Net increase in cash and cash equivalents
    
    
    5,695
    
    
    
    3,350Cash and cash equivalents at beginning of period
    
    
    1,925
    
    
    
    8,410Cash and cash equivalents at end of period
    
    $
    7,620
    
    
    $
    11,760
 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. RESTRICTED CASH
  6. 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)
    7. 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.
  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)
 8. GOODWILL AND INTANGIBLE ASSETS, NET
   December 31, 2007
    
    
    June 30, 2007Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Net Book
    
    
    Carrying
    
    
    Accumulated
    
    
    Net BookAmount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValueIntangible assets:PBM (1)
    
    $
    7,034
    
    
    $
    4,831
    
    
    $
    2,203
    
    
    $
    7,034
    
    
    $
    4,619
    
    
    $
    2,415Specialty (2)
    
    
    595
    
    
    
    486
    
    
    
    109
    
    
    
    595
    
    
    
    459
    
    
    
    136Total
    
    $
    7,629
    
    
    $
    5,317
    
    
    $
    2,312
    
    
    $
    7,629
    
    
    $
    5,078
    
    
    $
    2,551
   9. LINE OF CREDIT
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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)
  10. SEGMENT REPORTING
    Specialty
    
    
    IntersegmentSix Months Ended December 31, 2007
    
    PBM
    
    
    Service
    
    
    Elimination
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    319,735
    
    
    $
    34,414
    
    
    $
    (20,299
    )
    
    $
    
    
    
    $
    333,850Cost of claims
    
    
    281,530
    
    
    
    29,702
    
    
    
    (17,596
    )
    
    
    
    
    
    
    293,636Gross profit
    
    
    38,205
    
    
    
    4,712
    
    
    
    (2,703
    )
    
    
    
    
    
    
    40,214Selling, general and
administrative expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,790
    
    
    
    41,790Interest and other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,153
    
    
    
    1,153Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (176
    )
    
    
    (176
    )Loss before benefit from
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (599
    )Benefit from income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (89
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (510
    )Total identifiable assets
    
    $
    231,402
    
    
    $
    137,708
    
    
    $
    (127,323
    )
    
    
    
    
    
    $
    241,787
 Specialty
    
    
    IntersegmentSix Months Ended December 31, 2006
    
    PBM
    
    
    Service
    
    
    Elimination
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    377,142
    
    
    $
    24,023
    
    
    $
    (13,148
    )
    
    $
    
    
    
    $
    388,017Cost of claims
    
    
    333,615
    
    
    
    20,957
    
    
    
    (11,454
    )
    
    
    
    
    
    
    343,118Gross profit
    
    
    43,527
    
    
    
    3,066
    
    
    
    (1,694
    )
    
    
    
    
    
    
    44,899Selling, general and
administrative expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,044
    
    
    
    40,044Interest and other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    832
    
    
    
    832Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (250
    )
    
    
    (250
    )Income before provision for
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,437Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,511Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,926Total identifiable assets
    
    $
    273,175
    
    
    $
    64,805
    
    
    $
    (54,289
    )
    
    
    
    
    
    $
    283,691
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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
    
    
    IntersegmentThree Months Ended December 31, 2007
    
    PBM
    
    
    Service
    
    
    Elimination
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    160,833
    
    
    $
    19,874
    
    
    $
    (11,764
    )
    
    $
    
    
    
    $
    168,943Cost of claims
    
    
    141,445
    
    
    
    17,225
    
    
    
    (10,277
    )
    
    
    
    
    
    
    148,393Gross profit
    
    
    19,388
    
    
    
    2,649
    
    
    
    (1,487
    )
    
    
    
    
    
    
    20,550Selling, general and
administrative expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,227
    
    
    
    20,227Interest and other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    579
    
    
    
    579Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (75
    )
    
    
    (75
    )Income before provision for
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    827Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    759Total identifiable assets
    
    $
    231,402
    
    
    $
    137,708
    
    
    $
    (127,323
    )
    
    
    
    
    
    $
    241,787
 Specialty
    
    
    IntersegmentThree Months Ended December 31, 2006
    
    PBM
    
    
    Service
    
    
    Elimination
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    192,919
    
    
    $
    13,860
    
    
    $
    (7,475
    )
    
    $
    
    
    
    $
    199,304Cost of claims
    
    
    171,026
    
    
    
    12,073
    
    
    
    (6,492
    )
    
    
    
    
    
    
    176,607Gross profit
    
    
    21,893
    
    
    
    1,787
    
    
    
    (983
    )
    
    
    
    
    
    
    22,697Selling, general and
administrative expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,208
    
    
    
    20,208Interest and other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    388
    
    
    
    388Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (101
    )
    
    
    (101
    )Income before provision for
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,776Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,262Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,514Total identifiable assets
    
    $
    273,175
    
    
    $
    64,805
    
    
    $
    (54,289
    )
    
    
    
    
    
    $
    283,691
 11. EARNINGS PER SHARE
   12. STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFIT PLAN
 Employee Stock Option Plan
  15




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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)
   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
    
    
    (35,047
    )
    
    
    7.60
    
    
    
    
    
    
    
    Cancelled/forfeited
    
    
    (222,119
    )
    
    
    22.38
    
    
    
    
    
    
    
    Outstanding at December 31, 2007
    
    
    886,970
    
    
    $
    22.81
    
    
    
    5.32
    
    
    $
    19Exercisable at December 31, 2007
    
    
    395,564
    
    
    $
    24.35
    
    
    
    4.08
    
    
    $
    19
   Weighted-AverageNumber of
    
    
    Grant Date FairOptions
    
    
    ValueNonvested at June 30, 2007
    
    
    659,659
    
    
    $
    13.04Granted
    
    
    
    
    
    
    Vested
    
    
    (88,445
    )
    
    
    13.34Cancelled/forfeited
    
    
    (79,808
    )
    
    
    11.96Nonvested at December 31, 2007
    
    
    491,406
    
    
    $
    13.16
 16




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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)
   Restricted Stock Grant Plan
    Weighted Average
    
    
    AggregateGrant Date
    
    
    IntrinsicShares
    
    
    Fair Value
    
    
    ValueOutstanding at June 30, 2007
    
    
    42,540
    
    
    $
    19.75
    
    
    $
    840Granted
    
    
    269,000
    
    
    
    8.88
    
    
    
    Converted to common stock
    
    
    (1,036
    )
    
    
    14.98
    
    
    
    Cancelled/forfeited
    
    
    (4,538
    )
    
    
    14.07
    
    
    
    Outstanding at December 31, 2007
    
    
    305,966
    
    
    $
    14.24
    
    
    
    $4,357
 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)
  13. SUPPLEMENTAL CASH FLOW INFORMATION
 Six months ended December 31,
    
    2007
    
    
    2006Cash paid:Interest
    
    $
    229
    
    
    $
    148Income taxes
    
    $
    11
    
    
    $
    367
  14. MAJOR CUSTOMERS AND PHARMACIES
   15. COMMITMENTS AND CONTINGENCIES
   16. MANAGEMENT CHANGES
  18




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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 INCOME
 Increase/2007
    
    
    (Decrease)
    
    
    2006Revenue
    
    $
    168,943
    
    
    
    (15.2
    %)
    
    $
    199,304Cost of claims
    
    
    148,393
    
    
    
    (16.0
    %)
    
    
    176,607Gross profit
    
    
    20,550
    
    
    
    (9.5
    %)
    
    
    22,697Selling, general and
administrative expenses
    
    
    20,227
    
    
    
    0.1
    %
    
    
    20,208Operating income
    
    $
    323
    
    
    
    (87.0
    %)
    
    $
    2,489
 OPERATING (LOSS) INCOME
 Increase/2007
    
    
    (Decrease)
    
    
    2006Revenue
    
    $
    333,850
    
    
    
    (14.0
    %)
    
    $
    388,017Cost of claims
    
    
    293,636
    
    
    
    (14.4
    %)
    
    
    343,118Gross profit
    
    
    40,214
    
    
    
    (10.4
    %)
    
    
    44,899Selling, general and
administrative expenses
    
    
    41,790
    
    
    
    4.4
    %
    
    
    40,044Operating (loss) income
    
    $
    (1,576
    )
    
    
    (132.5
    %)
    
    $
    4,855
 Results of Operations
 Fiscal Quarter Ended December 31, 2007 Compared to Fiscal Quarter Ended December 31, 2006
    20




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




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
 
 Six Months ended December 31, 2007 Compared to Six Months ended December 31, 2006
          22




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
 
    Liquidity and Capital Resources
    23




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
 
     Line of Credit
  24




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
 
  EBITDA
    Six Months Ended December 31,2007
    
    
    2006Net cash provided by operating
activities
    
    $
    7,370
    
    
    $
    8,007(Benefit) provision for income taxes
    
    
    (89
    )
    
    
    2,511Interest (income) expense, net
    
    
    (975
    )
    
    
    (561
    )Net change in assets and liabilities
    
    
    (2,204
    )
    
    
    3,533Non-cash items to reconcile net cash from
operations to net (loss) income
    
    
    (1,699
    )
    
    
    (4,036
    )EBITDA
    
    $
    2,403
    
    
    $
    9,454Adjusted prescriptions (1)
    
    
    11,173
    
    
    
    13,895EBITDA per adjusted prescription
    
    $
    0.22
    
    
    $
    0.68
 (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.
 25




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
 
 Contractual Obligations
   Payments Due by Period
 Total
    
    
    2008
    
    
    2009-2010
    
    
    2011-2012
    
    
    ThereafterCapital lease obligations
    
    $
    2,184
    
    
    $
    939
    
    
    $
    1,091
    
    
    $
    154
    
    
    $
    Operating leases
    
    
    11,391
    
    
    
    3,954
    
    
    
    5,092
    
    
    
    1,385
    
    
    
    960Total contractual cash
obligations
    
    $
    13,575
    
    
    $
    4,893
    
    
    $
    6,183
    
    
    $
    1,539
    
    
    $
    960
 Off-Balance Sheet Arrangements
  Commitments and Contingencies
    26




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
 
       27




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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
  Recent Accounting Pronouncements
   28




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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
(All in thousands, except share amounts)
 
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
     29




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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
  
 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)
 30




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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
    
    
    Lease Extension to Lease dated January 28, 2008 between Sunbeam Development
Corporation and NMHCRx Mail Order, Inc.10.2
    
    
    Employment Agreement between NMHC and Stuart Diamond dated as of November 13, 200710.3
    
    
    (9)Employment Agreement between NMHC and George P. McGinn, Jr. dated as of November
13, 2007 (9)10.4
    
    
    Employment Agreement between NMHC and Mark Adkison dated as of November 13, 2007 (9)10.5
    
    
    Employment Agreement between NMHC and Marty Magill dated as of November 13, 2007 (9)
Form of Restricted Stock Agreement (9)10.6
    
    
    First Amendment to Chairman Agreement dated as of January 28, 2008 (10)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
 
 +
    
    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.
 31




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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.(10)
    
    Denotes document filed as an exhibit to NMHCs Form 8-K filed on February 1, 2008.
 32




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SIGNATURES
  NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
 Date: February 8, 2008
    By:
    /s/ Thomas W. EricksonThomas W. EricksonPresident and Chief Executive Officer
(Principal Executive Officer) By:
    /s/ Stuart DiamondStuart DiamondChief Financial Officer
(Principal Financial Officer) 33