** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

**FORM 10-K/A**

**AMENDMENT NO. 1**

 

**ý****          ****ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934.**

 

**For thefiscal year ended June 30, 2005**

 

**o****          ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.**

 

**For the transition period from         to          **

 

**Commissionfile number 000-26749**

 

**NATIONALMEDICAL HEALTH CARD SYSTEMS, INC.**

(Exact name of Registrant as specified in itscharter)

 
| **Delaware**                                                                |   | **11-2581812**                        |
|-----------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of                                            |   | (I.R.S. Employee  Identification No.) |
| incorporation or  organization)                                             |   |                                  |
|                                                                        |   |                                  |
| **26 Harbor  Park Drive,**                                                  |
| **Port  Washington, NY**                                                    |
| (Address of principal  executive offices)                                   |
| **11050**                                                                   |
| (Zip Code)                                                                  |
|                                                                        |
| Registrant’s  telephone number, including area code:**(516) 626-0007** |
|                                                                        |
| Securities  registered under Section 12(b) of the Exchange Act:   |
| **None**                                                                    |
|                                                                        |   |                                  |
| Securities  registered under Section 12(g) of the Exchange Act:   |
| **Common  Stock, $.001 par value per share**                                |
| (Title of class)                                                            |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes ý  No  ̈

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes ý No o

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No  ý

 

The aggregate market value of the registrant’s votingand non-voting common stock held by non-affiliates of the registrant, computedby reference to the price at which the common stock was last sold, as quoted onthe NASDAQ National Market on December 31, 2004 (the last business day ofthe registrant’s most recently completed second fiscal quarter) wasapproximately $101,133,786.

 

Indicate the number of shares outstanding of theregistrant’s common stock, as of the latest practicable date: 4,847,660 sharesof common stock outstanding as of September 8, 2005.

 

**DOCUMENTS INCORPORATED BY REFERENCE:**

 

Portions of the registrant’s definitive proxy statement for its 2005Annual Meeting of Stockholders is incorporated by reference into Part IIIof this Annual Report on Form 10-K, which will be filed no later than October 28,2005.

 

 

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**ExplanatoryNote**

 

NationalMedical Health Card Systems, Inc. (“NMHC”) received a review letter fromthe Staff of the Securities and Exchange Commission (“SEC”) as part of itsperiodic examination of public company disclosure.  In connection with the review by the SEC,this Amendment No. 1 to the annual report on Form 10-K/A of NMHChereby amends the information in its Form 10-K for the fiscal year ended June 30,2005, as filed with the SEC on September 22, 2005 by amending theinformation contained in Item 7 of Part II and revising the disclosure toclarify certain information contained therein.

 

***We are notamending any of our previously reported financial statements in this amendment,nor does this amendment change any of our disclosures except as noted above.***

 

This amendment continues to speak as of the filingdate of our original Form 10-K for the year ended June 30, 2005. Wehave not amended, modified, supplemented or updated the disclosures containedin this amendment to reflect events that have occurred since the filing of theoriginal Form 10-K, nor have we amended, modified, supplemented or updatedthese disclosures in any way other than as described above. Accordingly, thisamendment should be read in conjunction with our filings made with the SECafter September 22, 2005, the filing date of the original Form 10-K.

 

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**INTRODUCTORYSTATEMENTS**

 

**ForwardLooking Statements**

 

Whenused herein, the words “may,” “could,” “estimate,” “believe,” “anticipate,” “think,”“intend,” “expect” and similar expressions identify forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of 1995.Such statements are not guarantees of future performance and involve known andunknown risks and uncertainties, and other factors, which could cause actualresults to differ materially from those in the forward-looking statements.Readers are cautioned not to place undue reliance on such statements, whichspeak only as of the date hereof.  For adiscussion of such risks and uncertainties, including risks relating topricing, competition in the bidding and proposal process, our ability to consummatecontract negotiations with prospective clients, dependence on key members ofmanagement, government regulation, acquisitions and affiliations, the marketfor pharmacy benefit management (“PBM”) services, and other factors, readersare urged to carefully review and consider various disclosures made by NationalMedical Health Card Systems, Inc. (“NMHC”) which attempt to adviseinterested parties of the factors which affect NMHC’s business, including,without limitation, the disclosures made under the caption “Description ofBusiness” in Item 1 of this Form 10-K/A and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Risk Factors” in Item7 of this Form 10-K/A.  NMHC makesno commitment to revise or update any forward-looking statements in order toreflect events or circumstances after the date any such statement is made.

 

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**Item 7.****                    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

**Overview**

 

Theaudited Consolidated Financial Statements include the accounts of NMHC and itswholly owned subsidiaries, Pharmacy Associates, Inc.(“PAI”), Interchange PMP,Inc. (“PMP”), Centrus Corporation (“Centrus”), National Medical Health CardIPA, Inc. (“IPA”), Specialty Pharmacy Care, Inc. (“Specialty”), NMHCRXContracts, Inc. (“Contracts”), PBM Technology, Inc. (“PBM Tech”), NMHCRX MailOrder, Inc. (“ NMHCmail”), Integrail, Inc. (“NMHC Integrail”), PortlandProfessional Pharmacy and Portland Professional Pharmacy Associates(collectively “NMHC Ascend”), Inteq Corp. and Inteq TX Corp. (collectively“Inteq”) and Pharmaceutical Care Network (“PCN”).  Also included are the accounts of NMHCFunding, Inc. (“Funding”). Unless the context otherwise requires, referencesherein to NMHC refer to National Medical Health Card Systems, Inc. and itssubsidiaries on a consolidated basis. The results of operations and balance sheet of NMHC’s acquisitions andsubsidiaries have been included in the consolidation as of the effective datethat NMHC acquired or established the entity as follows: PAI – July 20, 2000,PMP – March 5, 2001, Centrus and Funding – January 29, 2002, NMHCmail –September 1, 2002, NMHC Integrail – November 1, 2002, NMHC Ascend – July 31,2003, Inteq – April 1, 2004 and PCN – March 7, 2005. All material intercompanybalances and transactions have been eliminated in the consolidation.

** **

NMHC derives its revenue from the provision of comprehensive pharmacybenefit management services to sponsors of prescription benefit plans.  Substantially all of the services NMHCprovides to its sponsors are related to pharmacy benefit programs andservices.  NMHC also recognizesadministrative fees and earns rebates at the time of claims adjudication.

 

Revenue for the PBM division is earned and recognized as follows:administrative fees are agreed upon with the sponsor on either a per claimcharge or a per plan participant per month charge.  Per claim fees are billed to sponsors for theclaims adjudicated during the period. Per plan participant per month fees are generally billed to sponsors atthe end of the month.  The amount ofrevenue related to the drugs dispensed by pharmacies participating in ourpharmacy network is recognized at the time of dispensing the drug as the costis incurred.  The amount of revenuerecognized is reduced by the amount of rebates that we share with our sponsors.  The specific terms of the contracts that weenter into with our sponsors will determine whether we recognize the grossrevenue related to the cost of the prescriptions filled.  In certain cases, we do not recognize thegross revenue or cost related to prescriptions filled for a specific sponsor.  This has no impact on our gross profit sinceneither the prescription revenue nor the related cost of the prescriptions isrecorded.  Whether revenues are recordedon either a gross or net basis, we record the gross amount billed in accountsreceivable and the related claims payable to the pharmacies on the balancesheet.

 

The following table sets forth the breakdown of NMHC’s revenuesrelating to pharmaceuticals dispensed and administrative fees ($ in thousands):

 

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| ** **                     | ** ** | **Years Ended June 30,** | ** ** |
|--------------------------------|------------|--------------------------|------------|
| ** **                     | ** ** | **2005**                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues  relating to:         |       |                     |       |   |   |   |   |
| Pharmaceuticals                |       | $                        | 775,351    |   | $ | 630,356 |   | $ | 555,168 |   |
| Administrative  fees and other |       | 25,241                   |       | 20,742 |   | 18,098 |   |
|                           |       |                     |       |   |   |   |   |
| Total Revenues                 |       | $                        | 800,592    |   | $ | 651,098 |   | $ | 573,266 |   |

 

NMHC does not take possession or legal ownership of the pharmaceuticalsdispensed by the retail pharmacy network or its out-sourced mail servicefacilities, although NMHC assumes the legal responsibility and financial riskof paying for dispensed pharmaceuticals whether or not NMHC is paid by itssponsors.  NMHC does take possession anddispenses pharmaceuticals from our mail service facility and specialtypharmacy.

 

NMHC utilizes its comprehensive pharmacy benefit database to performoutcome studies and to develop disease information programs which are used toreduce overall healthcare costs. Our NMHC Integrail division uses its softwaretools to analyze and predict outcomes for both medical and pharmacy data.  These programs currently produce a smallamount of revenue, but are starting to attract interest in themarketplace.  We believe that these valueadded information based services are becoming a more important component ofmanaged care as well as management of the overall healthcare dollar, andtherefore these services may provide an increasing source of revenue for us inthe future.

 

NMHCmail recognizes revenueat the point of shipment for both the co-pay collected from the individualmember, as well as for the “sale” of the prescription to the PBM at specifiedprices. Revenue from this intercompany sale is eliminated inconsolidation.  To date, NMHCmail onlyfills prescriptions for NMHC plan sponsors.

 

Revenue is recognized by NMHC Ascend at the point of shipment to themember.  NMHC Ascend invoices individualmembers, insurance companies, Medicare and Medicaid, and the PBM.  Revenue from intercompany sales areeliminated in consolidation.

 

Cost of claims includes the amounts paid to network pharmacies,including mail service pharmacies, for pharmaceutical claims, and reductionsresulting from the gross rebates received from drug manufacturers.  Cost of claims is recognized as follows:  the contractual obligation of NMHC to pay forthese drugs is recorded as cost of claims at the time of dispensing of the drugby the pharmacy network.  Cost of claimsis reduced by the rebates that NMHC receives. Rebates are earned from drug manufacturers based on drugs utilized byplan participants at the time of dispensing. These rebates, which vary by sponsor, are recorded monthly based uponthe claims adjudicated in that month.

 

Theamount of rebates recognized as reductions to revenue or cost of claims isbased on estimates tied to actual claims data. NMHC processes its rebate claims either directly with the drugmanufacturers, through its wholly-owned subsidiary, Specialty, for which itreceives administrative fees, or through a third party rebateadministrator.  Effective July 1, 2001,we have entered into an agreement with a third party rebate administrator (the“Administrator”) to handle all of our consolidated rebate claims which we donot otherwise submit directly to the drug manufacturers.

 

TheAdministrator provides estimates to us based on its analysis of the amount ofrebates that our claims should generate. These estimates are prepared based on estimates of how our claims mightinfluence the market share of a particular drug covered under an agreement witha drug manufacturer.  Market share isgenerally defined as the percentage of utilization of a certain

 

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drug or drugs within itstherapeutic class.  Under our contractwith the Administrator, we receive a specified minimum amount per claim 150days after the end of a quarter.  Amountsabove the minimum are shared between the Administrator and NMHC with finalsettlement twelve months after a quarter-end. We accrue rebates based upon an estimate provided by the Administrator.

 

NMHCcomputes the amount of rebates due direct from the drug manufacturers based onthe actual claims data, the criteria established in each individual contract,and the specified payment schedules.  Thedrug manufacturers are obligated to reimburse us for earned rebates within aspecified period of time.  We reconcileour estimates to amounts received from the manufacturers on a quarterly basis.

 

Certainof our sponsors are entitled to all or a portion of rebates received by NMHC,which portion varies contractually by sponsor. The manufacturer rebates retained by NMHC, after the sponsors receivetheir contractual amounts, have historically had a significant impact on ourfinancial performance.  For the fiscalyears ended June 30, 2005, 2004 and 2003 the rebates retained by NMHC haveequaled 15%, 16% and 11%, respectively, of our total gross profit.  Due to the expected continued growth anddiversification of our business, we expect rebates to continue to account for asignificant, but declining, percentage of our total gross profit.

 

If such rebate programs were to be discontinued or adversely altered bydrug manufacturers, or government action, or if the terms of NMHC’s rebatesharing arrangements with its sponsors were adversely altered when thesearrangements expire, there could be a material adverse effect on our business,operating results and financial condition.

 

Credit risk relating to the rebates receivable is evaluated based onthe financial strength of the rebate administrator and the drug manufacturersplus our collection history.  The drugmanufacturers contracted with are primarily Fortune 500 companies and NMHC hasnot had a history of write-offs related to rebate receivables.  We do not believe a credit risk reserve isnecessary.

 

The pharmacy benefit management industry is intensely competitive,generally resulting in continuous pressure on our gross profit as a percentageof total revenue.  In recent years,industry consolidation and dramatic growth in managed healthcare have led toincreasingly aggressive pricing of pharmacy benefit management services.  Given the pressure on all parties to reducehealthcare costs, NMHC expects this competitive environment to continue for theforeseeable future.

 

We plan to continue our organic growth through increased marketing ofour services and by expanding the range of services offered, including valueadded consulting and information-based services through our NMHC Integraildivision, home delivery services through NMHCmail, and specialty pharmacyservices through our NMHC Ascend division. NMHC believes these services to be in growing demand within thehealthcare industry.  In addition, NMHCintends to continue to pursue an acquisition program to supplement our organicgrowth by making acquisitions of other pharmacy benefit management serviceproviders, as well as related services providers.

 

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**OPERATING INCOME**

($ in thousands)

 
| ** **                                    | ** ** | **Year ended June 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | **2005**                | ** ** | **Increase/  (Decrease)** | ** ** | **2004** | ** ** | **Increase/  (Decrease)** | ** ** | **2003** | ** ** |
| Revenue                                       |       | $                       | 800,592    |   | 23.0 | % | $ | 651,098 |   | 13.6 | % | $ | 573,266 |   |
| Cost of  Claims                               |       | 713,883                 |       | 21.6 | % | 587,055 |   | 11.7 | % | 525,472 |   |
| Gross profit                                  |       | 86,709                  |       | 35.4 | % | 64,043 |   | 34.0 | % | 47,794 |   |
| Selling, general, and administrative  expense |       | 67,786                  |       | 33.9 | % | 50,606 |   | 40.7 | % | 35,974 |   |
| Operating  Income                             |       | $                       | 18,923     |   | 40.8 | % | $ | 13,437 |   | 13.7 | % | $ | 11,820 |   |

 

**Results of Operations**

 

***Fiscal Year Ended June 30, 2005Compared to Fiscal Year Ended June 30, 2004***

 

Revenueincreased $149.5 million, or approximately 23%, from $651.1 million for thefiscal year ended June 30, 2004, to $800.6 million for the fiscal year endedJune 30, 2005. Revenue recognized for contracts recorded on a gross revenuebasis was $794.8 million for the fiscal year ended June 30, 2005 and $648.5million for the fiscal year ended June 30, 2004.  Revenue recognized for contracts recorded ona net revenue basis was $5.8 million for the fiscal year ended June 30, 2005and $2.6 million for the fiscal year ended June 30, 2004. The specific terms ofthe contracts that NMHC enters into with its sponsors will determine whether NMHCrecognizes the gross revenue related to the cost of the prescriptionsfilled.  For those contracts that NMHCrecognizes net revenue, there is no impact on gross profit since neither theprescription revenue nor the related costs of the prescriptions isrecorded.  Whether revenues are recordedon either a gross or net basis, we record the gross amount billed in accountsreceivable and the related claims payable to the pharmacies on the balancesheet.  We include in revenue only thoseco-payments collected from NMHCmail.  Forthe twelve months ended June 30, 2005, there were approximately $15.1 millionof co-payments included in revenue versus approximately $2.3 million for thetwelve months ended June 30, 2004. Co-payments retained by pharmacies on prescriptionsfilled for our members and not included in our revenue were $280.9 million and$203.4 million, for the twelve months ended June 30, 2005 and 2004,respectively.

 

Ofthe $149.5 million increase in revenue in fiscal 2005, $25.0 million was due tothe inclusion of revenues from PCN, which was included in the revenue fromMarch 7, 2005, but not in the year ended June 30, 2004.  In addition, $39.0 million was due to theinclusion of revenue from Inteq, which was included in the revenue for the yearended June 30, 2005, but was only included for three months in the year endedJune 30, 2004.  Co-payments received fromthe Mail Service operations accounted for $12.9 million of this increase.  Another approximately $96.9 million of theoverall gross revenue increase was due to revenue related to new sponsors ornew services offered during fiscal 2005 excluding contracts recorded on a netrevenue basis. An additional increase of approximately $49.4 million wasattributable to other existing sponsors as

 

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a result of several factorsincluding higher charges relating to increased cost of pharmaceuticals, newdrugs, plan participant growth and an increase in the average number of claimsper plan participant.  These increaseswere partially offset by revenue decreases related to the termination ofexisting customer contracts throughout the fiscal year, leading to a reductionin revenue of approximately $73.7 million.

 

Costof claims increased $126.8 million, or approximately 22%, from $587.1 millionfor the fiscal year ended June 30, 2004, to $713.9 million for the fiscal yearended June 30, 2005.  PCN accounted for$21.7 million, of the net increase, while Inteq accounted for another $35.2million.  New sponsors and the growth inexisting sponsors accounted for $140.9 million of the increase. This increasewas partially offset by the loss of sponsors which reduced cost of claims by$71.0 million (including a $1.1 million adjustment for previous pharmacyclaims). As a percentage of revenue, cost of claims decreased from 90.2% to89.2% for the fiscal years ended June 30, 2004 and June 30, 2005,respectively.  The contracts that NMHCrecognized on a net revenue basis decreased NMHC’s overall costs as apercentage of revenue due to the cost not being recognized on the contractsrecorded on the net revenue basis.  Inaddition, the receipt of an additional $12.9 million in co-payments forNMHCmail operations resulted in a lower cost of claims as a percent of revenue,since no additional cost of claims are incurred related to these fees.

 

Grossprofit increased from $64.0 million for the fiscal year ended June 30, 2004 to$86.7 million for the fiscal year ended June 30, 2005; a $22.7 million, or 35%,increase.  In addition to the revenuevolume increase described above, PCN accounted for $3.3 million, or 15%, of theincrease.  Inteq accounted for another$3.8 million, or 17% of the increase. The increase in rebates (andadministrative fees related to the collection of rebates) after accounting forthe amount of rebates that are shared with sponsors, accounted for another $2.5million, or 11%. The balance of the increase relates to the margins on the newbusiness that replaced the lost business and growth in the existing business fromadditional services provided.  Grossprofit, as a percentage of revenue, increased from 9.8% to 10.8% for the twelvemonths ended June 30, 2004 and June 30, 2005, respectively.  The contracts NMHC recognizes on a netrevenue basis have the effect of improving the gross margin as a percentage ofrevenue due to the fact that recorded revenue and costs are lower since onlythe administrative fees related to these contracts are recorded. The increasedactivities at NMHCmail and NMHC Ascend also led to an increase in gross profitpercentage, year-over-year.  Partiallyoffsetting the impact of the net revenue and new activities, NMHC has seen somedecline in profit margins due to competitive pressures.

 

Selling,general, and administrative expenses increased $17.2 million, or approximately34%, from $50.6 million for the fiscal year ended June 30, 2004 to $67.8million for the fiscal year ended June 30, 2005.  Included in selling, general andadministrative expenses for the fiscal year ended June 30, 2004 wereapproximately $2.6 million of non-recurring expenses related to the NewMountain Transaction (see “- Liquidity and Capital Resources”) and for thefiscal year ended June 30, 2005 was an approximately $1.7 million non-recurringcharge for the settlement of the Midwest Health Plan lawsuit (“LegalSettlement”).  Excluding thesenon-recurring items, the increase in selling, general and administrativeexpenses was $18.1 million.  Approximately$7.6 million, or 42%, of this increase in selling, general, and administrativeexpenses is related to new entities which were part of NMHC in the twelvemonths ended June 30, 2005 which were not part of NMHC during all of the twelvemonths ended June 30, 2004. The major components of the $7.6 million increasein expenses related to the acquisitions were: 1) salaries and benefits – approximately $3.6 million, 2) commissionsand fess to outside brokers and sales consultants – 

 

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approximately $1.5 million, 3)depreciation and amortization – approximately $0.9 million, 4) rent and relatedexpenses – approximately $0.7 million, 5) IT expenses – approximately $0.4million, 6) professional fees – approximately $0.2 million, and 7) other –approximately $0.3 million. Non-acquisition related increases included:  1) salaries and benefits (from increasedheadcount) - $3.8 million, 2) commissions and fees to outside brokers and salesconsultants - $2.2 million, 3) professional fees (much as a result ofcompliance with the Sarbanes-Oxley Act) - $2.1 million, 4) IT expenses - $2.0million and 5) other - $0.4 million.

 

Selling,general, and administrative expenses as a percent of revenue increased from7.8% for the fiscal year ended June 30, 2004 to 8.5% for the fiscal year endedJune 30, 2005.  The main reasons for theincrease were the impact of recognizing more contracts on a net revenue basis.

** **

For the fiscal year endedJune 30, 2005, NMHC earned other income, net, of approximately $1.5million.  For the fiscal year ended June30, 2004, we earned other income, net, of approximately $40,000. The primarycomponent of the increase in other income was the realization of a $1.7 milliongain from an insurance claim which represented the excess of the insuranceproceeds over the carrying value of the assets covered by the claim.

 

Incomebefore the provision for income taxes increased approximately $6.9 million, or51%, from approximately $13.5 million, for the fiscal year ended June 30, 2004,to approximately $20.4 million for the fiscal year ended June 30, 2005.  The primary factors leading to this increasewere the rises in gross profit and other income, offset by the increase inselling, general and administrative expenses related to the new activities.

 

The effective tax ratedecreased from 41.0% for the twelve months ended June 30, 2004 to 39.3% for thetwelve months ended June 30, 2005.  Themain reason for the decrease was a reduction in NMHC’s state income taxes.

 

Netincome for the fiscal year ended June 30, 2005 was approximately $12.4 millionas compared to approximately $8.0 million for the fiscal year ended June 30,2004; a 56% increase.  The increase innet income is attributable to the same factors causing the increase in incomebefore income taxes, in addition to the lower effective tax rate.

 

In addition, there werethree other charges recorded to determine income (loss) available to commonstockholders related to the New Mountain Transaction.  The first of these charges relates topreferred stock cash dividends, which amounted to approximately $5.6 millionfor the fiscal year ended June 30, 2005 and $1.6 million for the fiscal yearended June 30, 2004.  The preferred stockprovides for an initial cash dividend equal to 7% of the investment amount(currently $80 million), which decreases to 3.5% after the fifth anniversary ofissuance.  All dividends accrued in eachfiscal year were paid by the end of the given fiscal year.  The second charge during the fiscal yearended June 30, 2004 was the $80 million beneficial conversion feature.  This non-recurring, non-cash chargerepresents the difference between the fair market value of our common stock onthe date of the closing of the New Mountain Transaction and the effectiveconversion price of $11.29, and which is limited to the $80 million purchaseprice for the series A preferred stock. The third charge is for the accretion of transaction expenses.  Certain transaction costs of approximately$4.7 million related to the New Mountain Transaction preferred stock investmentare deducted from net proceeds and the carrying value of the series A preferredstock.  These transaction costs areaccreted to the series A preferred stock carrying

 

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value over the ten-year life ofthe preferred stock investment.  Suchaccretion amounted to approximately $475,000 for the fiscal year ended June 30,2005 and $135,000 for the fiscal year ended June 30, 2004.  After deducting these three charges from netincome there remained net income available to common stockholders ofapproximately $6.3 million for the fiscal year ended June 30, 2005, as comparedto a net loss available to common stockholders of approximately $73.8 millionfor the fiscal year ended June 30, 2004.

 

Whilenet income and net income available to common stockholders excluding the NewMountain Transaction items are not measures of financial performance under U.S.generally accepted accounting principles, they are provided as information forinvestors for analysis purposes in evaluating the effect of the New MountainTransaction items on net income and net income available to commonstockholders.  Net income and net incomeavailable to common stockholders excluding the New Mountain Transaction itemsare not meant to be considered a substitute or replacement for net income ornet income (loss) available to common stockholders as prepared in accordancewith U.S. generally accepted accounting principles.  The reconciliation from net income to netincome available to common stockholders excluding the New Mountain Transactionitems, is as follows (all amounts are in thousands, except per share amounts):

 

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| ** **                                                                                                   | ** ** | **Twelve Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                   | ** ** | **June 30, 2005**       | ** ** | **June 30, 2004** | ** ** |
|                                                                                                         |       |                    |       |   |   |
| Net income,  as reported                                                                                     |       | $                       | 12,381     |   | $ | 7,953 |   |
|                                                                                                         |       |                    |       |   |   |
| Add back:                                                                                                    |       |                    |       |   |   |
| Transaction bonuses and severance payment,  net of income tax benefit                                        |       | —                  |       | 910 |   |
| Compensation charge related to stock  options issued in lieu of transaction bonus, net of income tax benefit |       | —                  |       | 406 |   |
| Compensation charge related to the  acceleration of directors options, net of income tax benefit             |       | —                  |       | 200 |   |
|                                                                                                         |       |                    |       |   |   |
| Net income  excluding New Mountain Transaction items (C)                                                     |       | 12,381                  |       | 9,469 |   |
|                                                                                                         |       |                    |       |   |   |
| Less:                                                                                                        |       |                    |       |   |   |
| Preferred  dividends                                                                                         |       | 5,600                   |       | 1,596 |   |
| Accretion of  transaction expenses                                                                           |       | 475                     |       | 135 |   |
|                                                                                                         |       |                    |       |   |   |
| Net income  available to common shareholders excluding New Mountain Transaction items (A)                    |       | $                       | 6,306      |   | $ | 7,738 |   |
|                                                                                                         |       |                    |       |   |   |
| Earnings per  share excluding New Mountain Transaction items:                                           |       | $                       | 1.39       |   | $ | 1.17 |   |
| Basic ((A) / (B))                                                                                            |       | $                       | 1.03       |   | $ | 0.98 |   |
| Diluted ((C) / (D))                                                                                          |       |                    |       |   |   |
|                                                                                                         |       |                    |       |   |   |
| Weighted  average number of shares outstanding:                                                              |       |                    |       |   |   |
| Basic (B)                                                                                                    |       | 4,542                   |       | 6,622 |   |
| Diluted (D)                                                                                                  |       | 11,983                  | *          | 9,633 | * |

 

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*Diluted weighted average number of shares assumes the conversion ofthe 6,957 shares of redeemable convertible preferred stock and dilutive commonstock options and warrants.

 

NMHChas no off balance sheet transactions.

 

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***Fiscal Year Ended June 30, 2004Compared to Fiscal Year Ended June 30, 2003***

 

Revenueincreased $77.8 million, or approximately 14%, from $573.3 million for thefiscal year ended June 30, 2003, to $651.1 million for the fiscal year endedJune 30, 2004. Revenue recognized for contracts recorded on a gross revenuebasis was $648.5 million for the fiscal year ended June 30, 2004 and $572.0million for the fiscal year ended June 30, 2003.  Revenue recognized for contracts recorded ona net revenue basis was $2.6 million for the fiscal year ended June 30, 2004and $1.3 million for the fiscal year ended June 30, 2003. The specific terms ofthe contracts that NMHC enters into with its sponsors will determine whetherNMHC recognizes the gross revenue related to the cost of the prescriptionsfilled.  For those contracts that NMHCrecognizes net revenue, there is no impact on gross profit since neither theprescription revenue nor the related costs of the prescriptions isrecorded.  Whether revenues are recordedon either a gross or net basis, we record the gross amount billed in accountsreceivable and the related claims payable to the pharmacies on the balancesheet.  NMHC includes in revenue onlythose co-payments collected from NMHCmail. For the twelve months ended June 30, 2004, there were approximately $2.3million of co-payments included in revenue versus zero for the twelve monthsended June 30, 2003. Co-payments retained by pharmacies on prescriptions filledfor NMHC’s members and not included in NMHC’s revenue were $203.4 million and$168.5 million, for the twelve months ended June 30, 2004 and 2003,respectively.

 

Ofthe $77.8 million increase in revenue in fiscal 2004, $33.3 million was due tothe inclusion of revenues from Ascend and Inteq, which were included in therevenue for the twelve months ended June 30, 2004, but not in the twelve monthsended June 30, 2003. Another approximate $77.3 million of the overall grossrevenue increase was due to revenue related to new sponsors or new servicesoffered during fiscal 2004 excluding contracts recorded on a net revenue basis.An additional increase of approximately $77.5 million was attributable to otherexisting sponsors as a result of several factors including higher chargesrelating to increased cost of pharmaceuticals, new drugs, plan participantgrowth and an increase in the average number of claims per planparticipant.  These increases werepartially offset by revenue decreases related to three factors: 1) thetermination of existing customer contracts throughout the fiscal year includingone major sponsor which terminated their contract effective December 31, 2002,leading to a reduction in revenue of approximately $93.3 million, and 2) therewas one contract during the twelve months ended June 30, 2004 that NMHCrecognized on a net revenue basis that was recognized on a gross revenue basisfor four months during the twelve months ended June 30, 2003.  Due to a change in the contract termseffective November 1, 2002, this customer’s revenue was recognized on a netbasis from that point.  The revenueimpact of this change was a year over year reduction of gross revenue ofapproximately $9.0 million.  The thirddecrease occurred as a result of rebates payable to NMHC’s sponsors increasingby $8.0 million for the twelve months ended June 30, 2004 as compared to thetwelve months ended June 30, 2003. Since these rebates are treated as areduction in revenue, this led to a reduction in the overall year-over-yearrevenue increase.

 

Costof claims increased $61.6 million, or approximately 12%, from $525.5 millionfor the fiscal year ended June 30, 2003, to $587.1 million for the fiscal yearended June 30, 2004.  Ascend and Inteqaccounted for $28.4 million, of the net increase.  New sponsors and the growth in existingsponsors accounted for $144.8 million of the increase. This increase waspartially offset by the three factors described in the previous paragraph,namely, the loss of sponsors which reduced cost of claims by $89.1 million, therecognizing of a certain contract on a net revenue basis which reduced cost ofclaims by $9.0 million, and an increase of $13.5 million in gross rebatesreceived, which is treated as a reduction in cost of claims. As a percentage ofrevenue, cost of claims decreased from 91.7% to 90.2% for the fiscal yearsended June 30, 2003

 

12

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and June 30, 2004,respectively.  The same factorscontributed to the declining costs as a percentage of revenue.  The major sponsor, which terminated itscontract, is a managed care organization. Industry-wide, managed care clients have a greater cost of claims, andconsequently a lower gross margin, than other types of business in the PBMindustry.  The new business NMHC broughton during the fiscal year ended June 30, 2004, for the most part was notmanaged care, so consequently the cost of claims on the new business was lowerthan on the business it replaced.  Inaddition, the contracts recognized on a net revenue basis decrease the overallCompany costs as a percentage of revenue due to the cost not being recognizedon the contracts recorded on the net revenue basis.

 

Grossprofit increased from $47.8 million for the fiscal year ended June 30, 2003 to$64.0 million for the fiscal year ended June 30, 2004; a $16.2 million, or 34%,increase.  In addition to the revenue volumeincrease described above, Ascend and Inteq accounted for $4.9 million, or 30%,of the increase. The increase in rebates (and administrative fees related tothe collection of rebates) after accounting for the amount of rebates that areshared with sponsors, accounted for another $5.5 million, or 34%. The balanceof the increase relates to the margins on the new business that replaced thelost business and growth in the existing business from additional servicesprovided.  Gross profit, as a percentageof revenue, increased from 8.3% to 9.8% for the twelve months ended June 30,2003 and June 30, 2004, respectively. The contracts NMHC recognizes on a net revenue basis have the effect ofimproving the gross margin as a percent of revenue due to the lower revenuebase. The new activities at NMHC mail and Ascend also led to an increase ingross profit percentage, year-over-year. Partially offsetting the impact of the net revenue and new activities,NMHC has seen some decline in profit margins due to competitive pressures.

 

Selling,general, and administrative expenses, which include amounts charged byaffiliates, increased $14.6 million, or approximately 41%, from $36.0 millionfor the fiscal year ended June 30, 2003 to $50.6 million for the fiscal yearended June 30, 2004. Approximately $8.5 million, or 73%, of this increase inselling, general, and administrative expenses is related to new entities whichwere part of NMHC in the twelve months ended June 30, 2004 which were not partof NMHC during all of the twelve months ended June 30, 2003. The servicesprovided by these entities include specialty pharmacy distribution throughNMHC’s acquisition of PPP, predictive modeling and consulting services throughNMHC’s acquisition of Integrail, and mail order distribution through NMHC’sowned facility in Miramar, Florida. In addition, PBM services were complementedand enhanced by the acquisition of Inteq. The major components of the $8.5 million increase in expenses related tonew services was: 1) salaries and benefits – approximately $4,046,000, 2)postage and supplies – approximately $461,000, 3) equipment rental –approximately $505,000, 4) insurance – approximately $339,000, 5) marketing –approximately $229,000, 6) depreciation and amortization – approximately $556,000,7) commissions to outside brokers – approximately $599,000, and 8) postage andshipping – approximately $589,000.

 

Includedin selling, general and administrative expenses for the twelve months endedJune 30, 2004 were approximately $2,569,500 of non-recurring expenses relatedto the New Mountain Transaction including: 1) transaction bonuses and aseverance payment totaling $1,542,500, 2) a non-cash compensation charge ofapproximately $339,000 related to the acceleration of stock options for two directorswho resigned upon the closing of the New Mountain Transaction and 3) a non-cashcompensation charge and related expenses of approximately $688,000 related tostock options issued in lieu of a transaction bonus.

 

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Ofthe remaining approximate $3.5 million increase in selling, general andadministrative expenses during the twelve months ended June 30, 2004, themajority of the increase is related to the increased revenue and volume in thePBM.  Salary and benefits related to newhires, temporary help, travel and entertainment, and commissions to internalsales people as well as external brokers have all increased year over year dueto the increased volume of activity.

 

Selling,general, and administrative expenses as a percent of revenue increased from6.3% for the fiscal year ended June 30, 2003 to 7.8% for the fiscal year endedJune 30, 2004.  The main reasons for theincrease are the impact of recognizing more contracts on a net revenue basis,as that has the effect of dividing these same expenses over a smaller grossrevenue base, the $2.6 million of non-recurring expenses related to NewMountain which added 40 basis points, and the start-up of NMHCmail.

 

For the fiscal year endedJune 30, 2004, NMHC earned other income, net, of approximately $40,000.  For the fiscal year ended June 30, 2003, NMHCincurred other expense, net, of approximately $804,000. The components of theapproximate $844,000 increase in other income, net were an approximate $506,000decrease in interest expense, an approximate $342,000 increase in interestincome, slightly offset by an approximate $4,000 reduced gain on assetssold.  The primary reasons for the netincrease in income were 1) interest expense declined due to the reducedborrowings under NMHC’s revolving credit facility due to increasingprofitability and additional cash flow from operations (see Item 1,“Description of Business-Recent Acquisitions and Developments,” and Note 3 tothe Consolidated Financial Statements comprising Item 8 hereof), and 2)interest income increased due to the interest portion of a settlement, with anoutside party, related to past due rebates owed to NMHC, and excess cashbalances related to some of NMHC’s acquisitions.  NMHC entered into a new sale leaseback withan unrelated third party in November 2003. This led to an approximate $35,000gain on the sale of assets during the twelve months ended June 30, 2004. Thetotal gain from this transaction was approximately $147,000 which was recordedas deferred revenue and is being recognized over the life of the lease, whichis thirty-six (36) months. (See Note 11 to the Consolidated FinancialStatements comprising Item 8 hereof.) This gain was offset by approximately $41,000 related to assets written-offwhen Ascend moved to a new facility in Portland.

 

Incomebefore the provision for income taxes increased approximately $2.5 million, or22%, from approximately $11.0 million, for the fiscal year ended June 30, 2003,to approximately $13.5 million for the fiscal year ended June 30, 2004. Theprimary reason for the increase was the improving efficiencies that come withscale arising from the integration of the acquisitions NMHC has completed.  The start-up of the mail order facility hadthe impact of reducing overall profitability in the year ended June 30, 2004.

 

The effective tax ratedecreased from 41.8% for the twelve months ended June 30, 2003 to 41.0% for thetwelve months ended June 30, 2004.  Themain reason for the decrease was a decline in NMHC’s federal statutory rate.

 

Netincome for the fiscal year ended June 30, 2004 was approximately $8.0 millionas compared to approximately $6.4 million for the fiscal year ended June 30,2003; a 24% increase.  Net income for thetwelve months ended June 30, 2004 includes the $1.5 million after tax impact ofthe New Mountain Transaction items.

 

14

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# **Liquidity and Capital Resources**

 

NMHC’sprimary cash requirements are for capital expenditures and operating expenses,including cost of pharmaceuticals, software and hardware upgrades and thefunding of accounts receivable. Effective July 2003, NMHC requires cash to carry inventory in our mailservice facility and specialty pharmacy. Also, we require cash for potentialacquisitions of other pharmacy benefit management companies or of companiesproviding related services.  As of June30, 2005, we had a working capital deficit of $24.4 million as compared to aworking capital deficit of $27.7 million as of June 30, 2004.  The primary reason for the improvement inworking capital was the profitability generated by NMHC during the fiscal yearended June 30, 2005 offset by the acquisition of PCN.  NMHC has now acquired seven companies sinceJuly 2000 utilizing primarily cash.  Thishas had the effect of increasing our working capital deficits until sufficientprofitability is earned to offset these deficits.

 

Net cash provided by operating activities was $10.3 million for thefiscal year ended June 30, 2005, compared to $24.1 million for the fiscal yearended June 30, 2004.  The primary factorcontributing to this $13.8 million decrease in cash provided by operations wasthe timing of the PCN acquisition.  OnMarch 7, 2005, the date of the acquisition, PCN had cash on hand exceeding$16.7 million, the vast majority of which was earmarked for payment within thenext few days to the various dispensing pharmacies.  Generally accepted accounting principlesrequire that all acquisitions be reported net of cash acquired.  Because the $16.7 million of cash on handexceeded the acquisition price of $13.0 million and related acquisition costsof $0.6 million, the PCN acquisition was reported as a $3.2 million cash sourceof funds.  The timing of this eventcaused NMHC’s cash provided by operations for the fiscal year ended June 30,2005 to be $10.3 million.  If the PCNAcquisition had not occurred, however, we would have reported net cash providedby operating activities of $22.5 million, net cash used in investing activitiesof $7.3 million, and net cash used in financing activities of $2.3 million forthe fiscal year ended June 30, 2005.

 

Whilecash flow from operating and investing activities excluding the impact of thePCN acquisition are not measures of financial performance under U.S. generallyaccepted accounting principles, they are provided as information for investorsfor analysis purposes in evaluating the effect of the PCN acquisition on cashflow from operating and investing activities. Cash flow from operating and investing activities excluding the impactof the PCN acquisition is not meant to be considered a substitute orreplacement for cash flow from operating and investing activities as preparedin accordance with U.S. generally accepted accounting principles.  The reconciliation from cash flow fromoperating and investing activities to cash flow from operating and investingactivities excluding the impact of the PCN acquisition, is as follows:

 

15

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| ** **                                                                                                         | ** ** | **For the fiscal year ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                         | ** ** | **June 30, 2005**             | ** ** | **June 30, 2004** | ** ** |
| ** **                                                                                                         | ** ** | **(unaudited)**               | ** ** | **(unaudited)** | ** ** |
| Net cash  provided by operating activities, as reported                                                            |       | $                             | 10,322     |   | $ | 24,060 |   |
| Impact of  PCN on cash flow from operations for the period March 7 – June 30, 2005                            |       | 12,218                        |       | — |   |
| Net cash  provided by operating activities, excluding the impact of the PCN Acquisition                            |       | $                             | 22,540     |   | $ | 24,060 |   |
|                                                                                                               |       |                          |       |   |   |
| Net cash  used in investing activities, as reported                                                                |       | $                             | (4,142     | ) | $ | (39,361 | ) |
| Impact of  PCN acquisition at March 7, 2005 on cash flow from investing activities                                 |       | (3,129                        | )          | — |   |
| Net cash  used in investing activities, excluding the impact of the PCN Acquisition                                |       | $                             | (7,271     | ) | $ | (39,361 | ) |
|                                                                                                               |       |                          |       |   |   |
| Net cash  (used in) provided by financing activities, as reported                                                  |       | $                             | (2,296     | ) | $ | 13,467 |   |
| Impact of PCN on cash flow (used in)  provided by financing activities for the period March 7 – June 30, 2005 |       | 32                            |       | — |   |
| Net cash (used in) provided by financing  activities, excluding the impact of the PCN Acquisition                  |       | $                             | (2,264     | ) | $ | 13,467 |   |
|                                                                                                               |       |                          |       |   |   |
| Cash and  cash equivalents at end of period, as reported                                                           |       | $                             | 7,272      |   | $ | 3,388 |   |
| Impact of PCN acquisition at March 7, 2005  and PCN’s operations for the period March 7 – June 30, 2005  |       | 9,121                         |       | — |   |
| Cash and  cash equivalents at end of period, excluding the impact of the PCN  Acquisition                          |       | $                             | 16,393     |   | $ | 3,388 |   |

 

Historically, the timing of NMHC’s accounts receivable and accountspayable has generally been a net source of cash from operating activities. Thisis the result of the terms of trade in place with plan sponsors on the onehand, and our pharmacy network on the other hand. These terms generally lead toour payments to participating pharmacies being slower than our correspondingcollections from plan sponsors. NMHC believes that this situation is notunusual in the pharmacy benefit management industry and expects to operate onsimilar terms for the foreseeable future. However, there can be no assurance that such terms of trade willcontinue in the future and, if they were to change materially, we could requireadditional working capital financing. We have put in place a $65 millionrevolving credit facility for acquisitions and working capital financing.  However, if such terms of trade were tochange materially, and/or if NMHC were unable to obtain additional workingcapital financing, there could be a material adverse effect on our business,financial condition, or results of operations.

 

Ouraccounts receivable have increased at a rate faster than revenue because thereare certain contracts, such as our Preferred Partnership Program, in which, ingeneral, we bill these pass-through sponsors on a gross revenue basis but onlyrecognize their revenue on a net basis. The primary factor that leads to recognizing net revenue on thesePreferred Partnership Program contracts is that the amount that we earn isfixed.  Under the Preferred PartnershipProgram contracts, which, in general, are full pass-through contracts, wereceive a fixed charge per claim and a small fixed percentage of the rebatessubject to minimums; and all other pharmacy costs are charged to the plansponsor.  The entire amount paid to thepharmacy is billed to the plan sponsor, and there is no margin retained byus.  For the fiscal year ended June 30,2005, billings from pass-through contracts increased 86% ($197 million) whichwas the primary reason for the 41% increase in accounts receivable.

 

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Netcash used in investing activities was $4.1 million for the twelve months endedJune 30, 2005, as compared to $39.4 million for the twelve months ended June30, 2004.  This decrease of $35.2 millionin net cash used in investing activities was primarily the result of a decreasein cash paid for acquisitions.  Totalcash expenditures in the fiscal year ended June 30, 2004 for acquisitions,primarily PPP and Inteq, amounted to $34.7 million, as compared to cashgenerated from acquisitions of $1.7 million for the fiscal year ended June 30,2005.  Also during the fiscal year endedJune 30, 2004, $2.8 million of cash was generated from the repayment ofaffiliate and officer loans.  Finally,capital expenditures were $7.4 million (including $2.3 million of capitalizedinternal use software) for the fiscal year ended June 30, 2004 as compared to$5.8 million (including $3.2 million of capitalized internal use software) forthe fiscal year ended June 30, 2005, a reduction of $1.6 million when comparingthe two fiscal years.

 

Duringthe fiscal year ended June 30, 2005, NMHC used $2.1 million from financingactivities as compared to receiving $13.6 million in the fiscal year ended June30, 2004.  This decrease of $15.7 millionis the result of $75.3 million from the issuance of NMHC’s series A preferredstock net of $51.1 million for the purchase of NMHC’s shares in the tenderoffer in the fiscal year ended June 30, 2004. Further, in the fiscal year ended June 30, 2004, cash was reduced by a$15.6 net repayment under the revolving credit facility compared to no netactivity in the fiscal year ended June 30, 2005.  Finally, an additional $4.0 million was paidfor dividends on the convertible preferred stock during the fiscal year endedJune 30, 2005 as compared to the fiscal year ended June 30, 2004 offset by $2.8million less in proceeds from the exercise of stock options as compared to theprior year.

 

OnJanuary 28, 2005, NMHC entered into a five-year $65.0 million cash flow based,line of credit with a syndicate of commercial banks led by JPMorgan Chase Bank,N.A. (“JPMorgan”).  Subject to certainconditions, the new line of credit may be increased by an aggregate of $35.0million.  The line of credit facilitycontains various covenants that, among other things, require NMHC to maintaincertain financial ratios, which are consolidated net worth, consolidated fixedcharge ratio and consolidated debt to EBITDA (earnings before interest, taxes,depreciation and amortization) ratio.  Asof June 30, 2005, there was no principal balance outstanding under the line ofcredit facility, and NMHC was in compliance with its financial covenants.

 

Twoof these financial covenants are based upon the EBITDA generated by us overspecified periods of time.  Thesecovenants, consolidated fixed charge ratio and consolidated debt to EBITDAratio, are evaluated by JPMorgan as a measure of our liquidity and our ability tomeet all of our obligations under the credit facility. EBITDA is presented ascash flow from operations plus or minus the net changes in assets andliabilities and the changes in certain non-cash reconciling items from net cashfrom operations to net income over the reported periods.  While EBITDA is not a measure of financialperformance or liquidity under generally accepted accounting principles, it isprovided as information for investors for analytical purposes in light of thefinancial covenants referred to above. EBITDA is not meant to be considered asubstitute or replacement for net income as prepared in accordance with UnitedStates generally accepted accounting principles.  EBITDA, which increased by approximately $7.7million or 40%, from $19.3 million for the fiscal year ended June 30, 2004 to$27.0 million for the fiscal year ended June 30, 2005, is calculated as follows

 

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(seeConsolidated Statement of Cash Flows comprising Item 1 hereof for moredetails):

 
| ** **                                                          | ** ** | **Year Ended June 30,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                          | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash flow  from operations                                          |       | $                       | 10,322     |   | $ | 24,060 |   | $ | 15,868 |   |
| Provision  for income taxes                                         |       | 8,031                   |       | 5,524 |   | 4,602 |   |
| Interest  (income) expense, Net                                     |       | 299                     |       | 109 |   | 957 |   |
| Net change  in assets and liabilities                               |       | 11,988                  |       | (7,823 | ) | (4,613 | ) |
| Non-cash  items to reconcile net cash from operations to net income |       | (3,630                  | )          | (2,578 | ) | (404 | ) |
| EBITDA                                                              |       | $                       | 27,010     |   | $ | 19,292 |   | $ | 16,410 |   |

 

NMHChas entered into various capital lease transactions for hardware and software.  NMHC has also assumed various capital leasesthrough its acquisitions. The principal balance of all capital leases as ofJune 30, 2005 was approximately $45,000.

 

NMHChas entered into various real estate operating leases with both related andunrelated parties.  NMHC has entered intovarious operating leases with unrelated third parties for officeequipment.  These leases have differentpayment terms and expirations dates. NMHC also entered into a sale-leaseback operating lease of certain fixedassets (principally mail service equipment. See Note 11 to the Consolidated Financial Statements comprising Item 8hereof for a further description of these various real estate and operatingleases.

 

Thetotal future payments under these contractual obligations as of June 30, 2005are as follows:

 

**Payments Due by Period**

**($ in thousands)**

 

**Contractual Obligations**

 
| ** **                          | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3  years** | ** ** | **4-5 years** | ** ** | **After 5  Years** | ** ** |
|-------------------------------------|------------|-----------|------------|-----------------------|------------|----------------|------------|---------------|------------|--------------------|------------|
|                                |       |      |       |                  |       |           |       |          |       |               |       |
| Long Term  Debt                     |       | $         | —     |                  | $          | —         |       | $             | —     |               | $          | — |   | $ | — |   |
|                                |       |      |       |                  |       |           |       |          |       |               |       |
| Capital  Lease Obligations          |       | 45        |       | 29                    |       | 16             |       | —        |       | —             |       |
|                                |       |      |       |                  |       |           |       |          |       |               |       |
| Operating  Leases                   |       | 24,183    |       | 7,153                 |       | 9,446          |       | 4,558         |       | 3,026              |       |
|                                |       |      |       |                  |       |           |       |          |       |               |       |
| Sale-leaseback                      |       | 210       |       | 140                   |       | 70             |       | —        |       | —             |       |
|                                |       |      |       |                  |       |           |       |          |       |               |       |
| Total  Contractual Cash Obligations |       | $         | 24,438     |                  | $          | 7,322          |       | $             | 9,532      |               | $          | 4,558 |   | $ | 3,026 |   |

 

18

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Theshareholders of PCN are eligible to receive additional consideration of up to$30,000,000, if certain financial and performance targets are met over thethree year period beginning March 1, 2005. As of June 30, 2005, $225,000 has been accrued based upon the tentativeachievement of the financial and performance targets.

 

Theshareholders of the Inteq Group are eligible to receive additionalconsideration of up to $4,200,000, if certain financial targets are met duringthe year ending April 1, 2005.  Of thispotential amount, $3,000,000 was deposited into escrow at the time ofclosing.  As of June 30, 2005, $1,024,000has been earned, of which $957,000 was released from escrow on October 5, 2004,with an additional $67,000 released in January 2005.

 

Theshareholders of PPP are eligible to receive additional consideration of up to$7,000,000, if certain financial targets are met over the three year periodbeginning August 1, 2003.  Such amountsearned are payable within 45 days after the first, second, and thirdanniversary of the date of acquisition. In the sole discretion of NMHC, up to 50% of any amounts earned can bepaid in the form of our stock in lieu of cash. For the first year ended July31, 2004, $716,000 was earned and was paid on September 15, 2004.  Of this amount, $358,000 was paid in cash and$358,000 was paid in the form of our common stock.  For the second year through June 30, 2005,$795,000 has been earned and will be paid on September 15, 2005.  Up to 50% of this amount may be paid in theform of our stock in lieu of cash.

 

Theshareholders of Centrus were eligible to receive additional consideration of upto $4,000,000, payable over three years, if certain financial targets were metover the first two years. The financial performance targets were achieved and$4 million has been earned.  Of thisamount, $1 million was paid in May 2003, $2 million was paid in May 2004, andanother $1 million was paid in May 2005.

 

Weentered into an amended and restated preferred stock purchase agreement, datedas of November 26, 2003, with New Mountain Partners, L.P. (the “purchaseagreement”).  Pursuant to the purchaseagreement, we agreed, subject to various conditions, to issue to New MountainPartners a total of 6,956,522 shares of the series A 7% convertiblepreferred stock (the “series A preferred stock”) at a purchase price of $11.50per share, for aggregate proceeds of approximately $80 million.  On March 19, 2004, we completed the sale ofthe series A preferred stock to New Mountain Partners and usedapproximately $49 million of the proceeds of the sale of the series Apreferred stock to purchase, pursuant to a tender offer, 4,448,900 shares ofour outstanding common stock at $11.00 per share (collectively, the “NewMountain Transaction”).  Prior to theclosing of the New Mountain Transaction, Bert E. Brodsky, the former chairmanof the board of directors, and certain stockholders related to him, held(assuming the exercise of 

 

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330,000 options and warrantsheld by Mr. Brodsky, which occurred in April 2004), in the aggregate,approximately 59% of our outstanding common stock and had agreed to tender4,448,900 shares, or approximately 54% of our outstanding common stock, held bythem, into the tender offer.  No othershareholders tendered shares in the offer.

 

Followingthe completion of the tender offer, and assuming the exercise of 330,000options and warrants held by Mr. Brodsky, which occurred in April 2004, NewMountain Partners owned securities at March 19, 2004 that were initiallyconvertible into approximately 64% of NMHC’s issued and outstanding commonstock and prior to conversion of the series A preferred stock wereentitled to cast that number of votes that is equal to approximately 60% ofNMHC’s aggregate voting power.  Followingthe closing of the New Mountain Transaction, New Mountain Partners wereentitled to and did nominate and elect 60% of the members of NMHC’s board ofdirectors.

 

Weused the remaining proceeds from the issuance and sale of the series Apreferred stock of approximately $24 million, excluding expenses relatedto the closing of the New Mountain Transaction, for the Inteq Acquisition andworking capital purposes.

 

The preferred stock provides for an initial annual cash dividend equalto 7% of the investment amount, which decreases to 3.5% after the fifthanniversary of issuance.  The preferredstock is convertible into common stock at a price of $11.50 per share of commonstock, or an aggregate of approximately 7 million shares of our common stock.

 

Theseries A preferred stock may be redeemed at NMHC’s option subsequent tothe fourth anniversary of its issuance, subject to certain conditions.  After the tenth anniversary of the issuanceof the series A preferred stock, each holder of shares of series Apreferred stock may require us to redeem all or a part of that holder’s sharesof series A preferred stock.

 

NMHCanticipates that current cash positions, together with anticipated cash flowfrom operations, will be sufficient to satisfy our contemplated cashrequirements for at least 24 months. This is based upon current levels of capital expenditures andanticipated operating results for the next 24 months.  However, it is one of our stated goals toacquire other pharmacy benefit management companies and companies providingrelated services.  Depending on our evaluationof future acquisitions, additional cash may be required to complete theseacquisitions.  In addition, we willrequire cash to acquire inventory for our mail service and specialtydistribution operations.  In the eventthat NMHC’s plans change or its assumptions prove to be inaccurate, or theproceeds from the JPMorgan credit facility and the New Mountain Transactionprove to be insufficient to fund operations and acquisitions, we could berequired to seek additional financing sooner than anticipated.  There can be no assurance that such financingcould be obtained at rates or on terms acceptable to us, if at all.

 

**Supplemental Quarterly Financial Data**

 

Unaudited quarterly financial data ($ in thousands, except per shareamounts) for the fiscal years 2005 and 2004 are summarized as follows:

 

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| ** **                                             | ** ** | **Fiscal Year 2005** | ** ** |
|--------------------------------------------------------|------------|----------------------|------------|
| **Quarters ended**                                     | ** ** | **June 30**          | ** ** | **March 31** | ** ** | **December 31** | ** ** | **September 30** | ** ** |
|                                                   |       |                 |       |   |   |   |   |   |   |
| Revenue                                                |       | $                    | 215,858    |   | $ | 199,342 |   | $ | 200,550 |   | $ | 184,842 |   |
|                                                   |       |                 |       |   |   |   |   |   |   |
| Income  before provision for income taxes              |       | 3,913                |       | 5,538 |   | 6,442 |   | 4,519 |   |
|                                                   |       |                 |       |   |   |   |   |   |   |
| Net Income                                             |       | 2,647                |       | 3,267 |   | 3,801 |   | 2,666 |   |
|                                                   |       |                 |       |   |   |   |   |   |   |
| Net income  (loss) available to common Stockholders    |       | 1,132                |       | 1,769 |   | 2,270 |   | 1,135 |   |
|                                                   |       |                 |       |   |   |   |   |   |   |
| Earnings  (loss) per common share:                     |       |                 |       |   |   |   |   |   |   |
| Basic                                                  |       | 0.24                 |       | 0.39 |   | 0.51 |   | 0.26 |   |
| Diluted                                                |       | 0.22                 |       | 0.27 |   | 0.32 |   | 0.22 |   |
|                                                   |       |                 |       |   |   |   |   |   |   |
| Weighted-average number of common shares  outstanding: |       |                 |       |   |   |   |   |   |   |
| Basic                                                  |       | 4,764                |       | 4,584 |   | 4,424 |   | 4,400 |   |
| Diluted                                                |       | 12,085               |       | 11,997 |   | 11,865 |   | 11,904 |   |
|                                                        |            |                      |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                             | ** ** | **Fiscal Year 2004** | ** ** |
|--------------------------------------------------------|------------|----------------------|------------|
| **Quarters ended**                                     | ** ** | **June 30**          | ** ** | **March 31** | ** ** | **December 31** | ** ** | **September 30** | ** ** |
|                                                   |       |                 |       |   |   |   |   |   |   |
| Revenue                                                |       | $                    | 176,647    |   | $ | 159,725 |   | $ | 163,896 |   | $ | 150,830 |   |
|                                                   |       |                 |       |   |   |   |   |   |   |
| Income  before provision for income taxes              |       | 4,277                |       | 2,641 |   | 3,769 |   | 2,790 |   |
|                                                   |       |                 |       |   |   |   |   |   |   |
| Net Income                                             |       | 2,525                |       | 1,564 |   | 2,218 |   | 1,646 |   |
|                                                   |       |                 |       |   |   |   |   |   |   |
| Net income  (loss) available to common Stockholders    |       | 1,010                |       | (78,652 | )* | 2,218 |   | 1,646 |   |
|                                                   |       |                 |       |   |   |   |   |   |   |
| Earnings  (loss) per common share:                     |       |                 |       |   |   |   |   |   |   |
| Basic                                                  |       | 0.25                 |       | (11.17 | ) | 0.29 |   | 0.22 |   |
| Diluted                                                |       | 0.21                 |       | (11.17 | ) | 0.25 |   | 0.19 |   |
|                                                   |       |                 |       |   |   |   |   |   |   |
| Weighted-average number of common shares  outstanding: |       |                 |       |   |   |   |   |   |   |
| Basic                                                  |       | 4,013                |       | 7,044 |   | 7,764 |   | 7,641 |   |
| Diluted                                                |       | 11,831               |       | 7,044 |   | 8,888 |   | 8,473 |   |
|                                                        |            |                      |            |  |  |  |  |  |  |  |  |  |  |

 

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*Includes an $80,000 non-recurring, non-cash charge for a beneficialconversion feature related to the New Mountain transaction.

 

**Other Matters**

 

***Inflation***

 

Management does not believe that inflation has had a material adverseimpact on NMHC’s net income for the three most recent fiscal years.

 

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**Critical Accounting Policies and Estimates**

 

***General***

 

NMHC’s discussion andanalysis of its financial condition and results of operations are based uponNMHC’s Consolidated Financial Statements, which have been prepared inaccordance with U.S. generally accepted accounting principles.  The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenue and expenses; these estimates and judgments alsoaffect related disclosures of contingent assets and liabilities.  On an on-going basis, NMHC evaluates itsestimates and judgments, including those related to revenue recognition, baddebt, intangible assets, income taxes, and financing operations.  NMHC bases its estimates on experience and onvarious other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources.  Actual results maydiffer from these estimates under different assumptions or conditions.

 

NMHC believes that of its significant accounting policies, which aredescribed in Note 1 to the Consolidated Financial Statements comprising Item 8hereof, the following may involve a higher degree of judgment and complexitythan others:

 

***Revenue Recognition***

 

(a)          Since January 1, 2000, services provided byNMHC have been on a fee for service basis. Under the fee for service arrangement, we are paid by our sponsors forour contractually agreed upon rates based upon actual claims adjudicated, plusa fixed transaction fee.

 

Revenueunder the fee for service arrangement is recognized when the claims areadjudicated.  Included as revenue are ouradministrative fees and charges relating to pharmaceuticals dispensed by ournetwork of pharmacies.  Revenue isreduced by the amount of rebates paid to our sponsors.

 

(b)           The specific terms of the contracts that NMHCenters into with its sponsors will determine whether we recognize the grossrevenue related to the cost of the prescriptions filled.  There are several factors from EITF 99-19that led us to recognize the majority of our revenue on a gross basis.  These include: NMHC acts as a principal andnot an agent and is the primary obligor in the relationship among thepharmacies, the sponsors and NMHC, NMHC has credit risk, NMHC has certainlatitude in establishing price, and NMHC has discretion in supplierselection.  In certain cases, primarilybecause the amount we earn is fixed, we have not recognized the gross revenueor cost related to prescriptions filled for a specific sponsor.  This has no impact on our gross profit sinceneither the prescription revenue nor the related cost of the prescriptions isrecorded. Whether revenues are recorded on either a gross or net basis, werecord the gross amount billed in accounts receivable and the related claimspayable to the pharmacies on the balance sheet.

 

(c)           NMHC includes in revenue only thoseco-payments collected from individual members by NMHCmail. Co-payments retainedby pharmacies on the remainder of the prescriptions filled for our members arenot included in our reported revenue.  Wedisclose these amounts parenthetically on the face of our ConsolidatedStatement of Income.

 

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(d)           Rebates are recognized when we are entitledto them in accordance with the terms of our arrangements with drugmanufacturers, third party rebate administrators, and sponsors, and when theamount of the rebates is determinable. NMHC records the gross rebate receivable as a reduction of cost, and theappropriate payable as a reduction of revenue, to the sponsors based onestimates, which are subject to final settlement.  The estimates are based upon the claims submittedand our rebate experience, and are adjusted as additional information becomesavailable.

 

***Bad Debt***

 

Wemaintain allowances for doubtful accounts for estimated losses resulting fromthe liability of our sponsors to make required payments.  If the financial condition of our sponsorswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances may be required.

 

***Goodwill and Intangible Asset Impairment***

 

Inassessing the recoverability of our goodwill and other intangibles, we mustmake assumptions regarding estimated future cash flows and other factors todetermine the fair value of the respective assets.  If these estimates or their relatedassumptions change in the future, we may be required to record impairmentcharges for these assets not previously recorded.  On July 1, 2001 we adopted Statement ofFinancial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,”and will be required to analyze our goodwill for impairment issues on aperiodic basis thereafter.  To date, wehave not recorded any impairment losses related to goodwill and otherintangible assets.

 

***Deferred Taxes***

 

NMHCperiodically considers whether or not we should record a valuation allowance toreduce our deferred tax assets to the amount that is more likely than not to berealized.  While we have consideredfuture taxable income and ongoing tax planning strategies in assessing the needfor the valuation allowance, in the event NMHC were to determine that we wouldbe able to realize our deferred tax assets in the future in excess of our netrecorded amount, an adjustment to the deferred tax asset would increase incomein the period such determination was made. Likewise, should we determine that we would not be able to realize all orpart of our net deferred tax asset in the future, an adjustment to the deferredtax asset would be charged to income in the period such determination was made.

 

***Capitalized Software***

 

Thecosts of software developed for internal use incurred during the preliminaryproject stage are expensed as incurred. Direct costs incurred during the application development stage whichprovide additional functionality are capitalized.  Costs incurred during thepost-implementation/operation stage are expensed as incurred.  Capitalized software development costs areamortized on a straight-line basis over their estimated useful lives,commencing on the date the software is placed into use, primarily three years.

 

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**ITEM 15.   EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES**

 

3.             **Exhibits**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                     |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Exhibit**                                                                                                                                                                     |
|        |       |                                                                                                                                                                                           |
| 2.1         |       | Stock  Purchase Agreement dated July 31, 2003, among NMHC and Portland Professional  Pharmacy, Portland Professional Pharmacy Associates and the individuals listed  on Schedule I thereto (3) |
| 2.2         |       | Amended  and Restated Stock Purchase Agreement dated November 26, 2003 by and between  NMHC and New Mountain Partners, L.P. (8)                                                                |
| 2.3         |       | Asset  Purchase Agreement among NMHC, Inteq PBM, LP, Inteq-RX Group, LLP, and the  individuals named therein dated April 1, 2004 (6)                                                           |

 

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| 2.4   |   | Stock  Purchase Agreement dated March 7, 2005 among NMHC, PCN Acquisition Corp.,  Pharmaceutical Care Network and California Pharmacists Association (13) |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1   |   | Certificate  of Incorporation of NMHC (2)                                                                                                                 |
| 3.2   |   | Certificate  of Amendment to the Certificate of Incorporation of NMHC (7)                                                                                 |
| 3.3   |   | Amended  and Restated By-Laws of NMHC (9)                                                                                                                 |
| 3.4   |   | Amended  and Restated Audit Committee Charter (7)                                                                                                         |
| 4.1   |   | Form  of Warrant Agreement, including form of Representatives’ Warrants (1)                                                                          |
| 4.2   |   | Certificate  of Designation, Preferences and Rights of Series A 7% Convertible Preferred  Stock of NMHC (7)                                               |
| 10.1  |   | Credit  Agreement dated January 28, 2005 among NMHC, the Lenders party thereto and  JPMorgan Chase, as Administrative Agent (12)                          |
| 10.2  |   | Stock  Option Agreement between NMHC and James Bigl dated July 22, 2003 (3)                                                                               |
| 10.3  |   | Stock  Option Agreement between NMHC and Agnes Hall dated August 1, 2003 (3)                                                                              |
| 10.4  |   | Stock  Option Agreement between NMHC and David Gershen dated August 1, 2003 (3)                                                                           |
| 10.5  |   | Stock  Option Agreement between NMHC and Tery Baskin dated August 1, 2003 (3)                                                                             |
| 10.6  |   | Stock  Option Agreement between NMHC and Patrick McLaughlin dated August 1, 2003 (3)                                                                      |
| 10.7  |   | Sixth  Amendment to Employment Agreement, dated October 30, 2003, by and between  NMHC and James J. Bigl (5)                                              |
| 10.8  |   | Lease  Expansion and Modification Agreement dated July 31, 2003 between Sunbeam  Development Corporation and NMHCRx Mail Order, Inc. (3)                  |
| 10.9  |   | AmerisourceBergen  Prime Vendor Agreement, dated July 21, 2003 between NMHCRx Mail Order, Inc.  d/b/a NMHCmail and AmerisourceBergen Drug Corporation (3) |
| 10.10 |   | Release,  dated October 30, 2003, by Sandata Technologies, Inc. and Sandsport, Inc. (5)                                                                   |
| 10.11 |   | Amendment  to Lease Agreement, dated as of October 23, 2003, by and among BFS Realty,  LLC and NMHC (5)                                                   |
| 10.12 |   | Amendment  to Lease Agreement (30 Sea Cliff), dated as of October 30, 2003, between  Living in Style, LLC and NMHC (5)                               |
| 10.13 |   | Amendment  to Lease Agreement (32 Sea Cliff), dated as of October 30, 2003, between  Living in Style, LLC NMHC (5)                                        |
| 10.14 |   | Second  Amendment to Employment Agreement, dated October 30, 2003, by and between  NMHC and Bert E. Brodsky (5)                                           |
| 10.15 |   | Amended  and Restated Employment Agreement dated June 14, 2004 between NMHC and James  J. Bigl (9)                                                        |
| 10.16 |   | Form  of Stock Option Agreement between NMHC and Non-Employee Directors dated May  4, 2004 for a grant of 15,000 shares of common stock (9)               |
| 10.17 |   | Form  of Stock Option Agreement between NMHC and Non-Employee Directors dated May  4, 2004 for a grant of 20,000 shares of common stock (9)               |
| 10.18 |   | Employment  Agreement dated August 30, 2004 between NMHC and James F. Smith (11)                                                                          |
| 10.19 |   | Employment  Agreement dated October 4, 2004 between NMHC and Bill Masters (11)                                                                            |
| 10.20 |   | Stock  Option Agreement dated August 31, 2004 between NMHC and James F. Smith (11)                                                                        |
| 10.21 |   | Stock  Option Agreement dated October 4, 2004 between NMHC and Bill Masters (11)                                                                          |
| 10.22 |   | Form  of Stock Option Agreement between NMHC and Senior Management dated December  20, 2004 (14)                                                          |
| 10.23 |   | Form  of Stock Option Agreement between NMHC and Non-Employee Directors dated  December 21, 2004 (14)                                                     |
| 14.1  |   | Amended  and Restated Code of Ethics (10)                                                                                                                 |
| 21.1  |   | List  of Subsidiaries (15)                                                                                                                                |
| 23.1  |   | Consent  of Ernst & Young LLP, Independent Registered Public Accounting Firm (15)                                                                     |

 

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| 31.1 |   | Rule  13a-14(a)/15d-14(a) Certification of CEO pursuant to Section 302 of the  Sarbanes-Oxley Act |
|------|--------|---------------------------------------------------------------------------------------------------|
| 31.2 |   | Rule  13a-14(a)/15d-14(a) Certification of CFO pursuant to Section 302 of the  Sarbanes-Oxley Act |
| 32.1 |   | Section  1350 Certification of CEO as adopted by Section 906 of the Sarbanes-Oxley Act(15)        |
| 32.2 |   | Section  1350 Certification of CFO as adopted by Section 906 of the Sarbanes-Oxley Act(15)        |

 

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(1)               Denotes document filed as an Exhibit toNMHC’s Registration Statement on Form S-1 (Registration Number:  333-72209) and incorporated herein byreference.

 

(2)               Denotes document filed as an Exhibit toNMHC’s Definitive Proxy Statement on Schedule 14-A filed on December 21, 2001and incorporated herein by reference.

 

(3)               Denotes document filed as an Exhibit toNMHC’s Report on Form 10-K for the year ended June 30, 2003 and incorporatedherein by reference.

 

(4)               Denotes document filed as an Exhibit toNMHC’s Form 8-K filed on November 13, 2003 and incorporated herein byreference.

 

(5)               Denotes document filed as an Exhibit toNMHC’s Report on Form 10-K/A Amendment Number 2 for the year ended June 30,2003 and incorporated herein by reference.

 

(6)               Denotes document filed as an Exhibit toNMHC’s Form 8-K filed on April 14, 2004 and incorporated herein by reference.

 

(7)               Denotes document filed as an Exhibit toNMHC’s Form 10-Q for the quarter ended March 31, 2004 and incorporated hereinby reference.

 

(8)               Denotes document filed as an exhibit toNMHC’s Definitive Proxy Statement on Schedule 14-A filed on February 19, 2004and incorporated herein by reference.

 

(9)               Denotes document filed as an exhibit toNMHC’s Form 10-K for the fiscal year ended June 30, 2004 and incorporatedherein by reference.

 

(10)             Denotes document filed on October 28, 2004 asan exhibit to NMHC’s Definitive Proxy Statement on Schedule 14-A andincorporated herein by reference.

 

(11)             Denotes document filed as an exhibit toNMHC’s Form 10-Q for the period ended September 30, 2004 and incorporated hereinby reference.

 

(12)             Denotes document filed as an exhibit toNMHC’s Form 8-K filed on February 3, 2005 and incorporated herein by reference.

 

(13)             Denotes document filed as an exhibit toNMHC’s Form 8-K filed on March 11, 2005 and incorporated herein by reference.

 

(14)             Denotes document filed as an exhibit toNMHC’s Form 10-Q for the period ended March 31, 2005 and incorporated herein byreference.

 

(15)             Denotes document filed as an Exhibit toNMHC’s Report on Form 10-K for the year ended June 30, 2005 and incorporatedherein by reference.

 

26

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|                           | NATIONAL MEDICAL HEALTH  CARD SYSTEMS, INC.                                        |
|--------------------------------|------------------------------------------------------------------------------------|
|                           | (Registrant)                                                                       |
|                           |                                                                               |
| By                             | /s/ James F.  Smith                                                                |   |
| ** **                     | ** **                                                                         |
|                           | James F. Smith, Chief Executive Officer, Principal  Executive Officer and Director |
| Date:  September 15, 2006 |

 

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