Additionally, the Company leases office and/or warehouse space through its subsidiaries in Little Rock, Arkansas; Tulsa, Oklahoma; Portland, Maine; Miramar, Florida and Latham, New York. The aggregate annual rental payments for leased space in Little Rock are approximately $194,000; for leased space in Tulsa are approximately $24,000; for Miramar, Florida, approximately $142,000, for Portland, Maine approximately $40,000; and for Latham, approximately $383,000. The Company intends to move its current office space in Portland, Maine to a larger office and warehouse space in South Portland, Maine.
In addition, Health Card rents a two family house in Port Washington, New York (near the Company's offices) from P.W. Capital, LLC, (a company affiliated with Health Card's Chairman of the Board) which is used for out-of-town employees. Health Card evaluated the cost of hotels for these individuals and determined it was more cost efficient to rent the house at a monthly rate of $5,500. During the fiscal year ended June 30, 2003, Health Card paid P.W. Capital, LLC, $66,000 in rent for this facility. For the same reasons, Health Card rents two houses from Living In Style, LLC, an entity owned by three of Health Card's executive officers. Pursuant to leases dated May 1, 2002 and expiring April 30, 2007, Health Card paid an aggregate of $127,050 in rent for these two facilities during the fiscal year ended June 30, 2003. The annual rent for each of the facilities increases by 5% per year.
The following tables summarize certain selected financial information for each of the years in the five year period ended June 30, 2003 and provide certain supplemental data. The selected consolidated income statement data for the years ended June 30, 2001, 2002, and 2003 and the selected consolidated balance sheet data as of June 30, 2002 and 2003 have been derived from the audited consolidated financial statements of Health Card included in Item 8 hereof. The selected consolidated income statement data for the years ended June 30, 1999 and 2000 and the selected consolidated balance sheet data as of June 30, 1999, 2000 and 2001 have been derived from audited consolidated financial statements of Health Card that are not included in this Form 10-K. The information contained in this table should be read in conjunction with Health Card's consolidated financial statements and notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in
Years Ended June 30, 2001 2002 2003 Revenues relating to: Pharmaceuticals $266,959 $447,862 $562,283 Administrative fees and other 5,160 11,970 10,983 --------- -------- --------
Health Card utilizes its comprehensive pharmacy benefit database to perform outcome studies and to develop disease information programs which are used to reduce overall healthcare costs. The Company's Integrail division uses its software tools to analyze and predict outcomes for both medical and pharmacy data. These programs currently produce a small amount of revenue, but is starting to attract interest in the marketplace. Health Card believes that these value added information based services are becoming a more important component of managed care as well as management of the overall healthcare dollar, and therefore these services may provide an increasing source of revenue for Health Card in the future.
Health Card processes its rebate claims either direct with the drug manufacturers, through its wholly-owned subsidiary, Specialty, for which it receives administrative fees, or through a third party rebate administrator. Effective July 1, 2001, Health Card has entered into an agreement with a third party administrator to handle all of its consolidated rebate claims which it does not otherwise submit direct to the drug manufacturers.
The amount of rebates recognized as reductions to revenue or cost of claims is based on estimates tied to actual claims data. The third party administrator provides estimates to Health Card based on its analysis of the amount of rebates that Health Card's claims should generate. These estimates are prepared based on estimates of how Health Card's claims might influence the market share of a particular drug covered under an agreement with a drug manufacturer. Market share is generally defined as the percentage of utilization of a certain drug or drugs within its therapeutic class. Under Health Card's contract with the Administrator, Health Card receives a specified minimum amount per claim 150 days after the end of a quarter. Amounts above the minimum are shared between the Administrator and Health Card with final settlement twelve months after a quarter end. Health Card accrues rebates based upon an estimate provided by the Administrator.
Fiscal Year Ended June 30, 2003 Compared to Fiscal Year Ended June 30, 2002
Revenues increased $113.4 million, or approximately 25%, from $459.8 million for the fiscal year ended June 30, 2002, to $573.2 million for the fiscal year ended June 30, 2003. Of the increase, $156.0 million was due to the inclusion of revenues from Centrus, since it was acquired on January 29, 2002 and included a full fiscal year in 2003 compared to a little over five months in the fiscal year ended June 30, 2002. Another $84.2 million of the increase was due to revenues related to new sponsors or new services offered during fiscal 2003. These increases were partially offset by a revenue decrease related to two factors: 1) two major sponsors terminated their contracts with Health Card, one effective June 30, 2002 and one effective December 31, 2002 leading to a reduction in revenue of approximately $88 million, and 2) there were certain contracts during the twelve months ended June 30, 2003 that the Company recognized on a net revenue basis versus fewer contracts during the twelve months ended June 30, 2002 that the Company recognized on a net revenue basis. The specific terms of the contracts that Health Card enters into with its sponsors will determine whether Health Card recognizes the gross revenue related to the cost of the prescriptions filled. For those contracts that Health Card recognizes net revenue, there is no impact on gross profit since neither the revenue nor the related costs of the prescriptions is recorded. Another factor affecting the year-over-year increase was rebates payable to the Company's sponsors increased by $23.2 for the twelve months ended June 30, 2003 as compared to the twelve months ended June 30, 2002. Since these rebates are treated as a reduction in revenues, this led to a reduction in the overall year-over-year revenue increase. The majority of the balance of the increase, or approximately $46 million, was due primarily to increased revenues from other existing sponsors as a result of several factors including higher charges relating to increased cost of pharmaceuticals, new drugs, plan participant growth and an increase in the average number of claims per plan participant.
Gross profit increased from $35.1 million for the fiscal year ended June 30, 2002 to $47.8 million for the fiscal year ended June 30, 2003; a $12.7 million, or 36%, increase. In addition, to the revenue volume increase, Centrus accounted for $4.3 million, or 33%, of the increase. The increase in rebates (and administrative fees related to the collection of rebates) after accounting for the amount of rebates that are shared with sponsors, accounted for another $1.6 million, or 13%. Gross profit, as a percentage of revenue, increased from 7.6% to 8.3% for the twelve months ended June 30, 2002 and June 30, 2003, respectively. The contracts the Company recognizes on a net revenue basis have the effect of improving the gross margin as a percent of revenue due to the lower revenue base. Partially offsetting this impact, the Company has seen some decline in profit margins due to competitive pressures.
Selling, general, and administrative expenses, which include amounts charged by affiliates, increased $8.7 million, or approximately 32%, from $27.2 million for the fiscal year ended June 30, 2002 to $35.9 million for the fiscal year ended June 30, 2003. This increase is primarily related to the acquisition of Centrus. While the expenses specifically related to Centrus were $7.3 million greater in the twelve months ended June 30, 2003 as compared to the five months since the acquisition in the twelve months ended June 30, 2002, this was partially offset by reductions in other areas of the Company related to the full integration of Centrus. The Company analyzed every department in the Company and made decisions concerning the most efficient way to operate regardless of location. This evaluation has led to synergies across the Company and has allowed the Company to maximize the utilization of its resources. It is anticipated that this kind of analysis and deployment of resources will continue as the Company grows.
Selling, general, and administrative expenses also increased in the twelve months ended June 30, 2003 due to the start-up of two new activities in the quarter ended December 31, 2002. The Company acquired Integrail as of November 1, 2002 (See Note 2 to the Consolidated Financial Statements comprising Item 8 hereof). In the months since the Company acquired Integrail, approximately $1.3 million of expenses were incurred primarily related to salary and benefits and depreciation and amortization. The other activity was the start-up of the build out of a mail order facility in Miramar, Florida. Prior to July 1, 2003, the Company out-sourced the total actual fulfillment of prescriptions that are ordered by mail. By bringing these services in-house the Company will be better able to control service and cost for its customers. For the twelve months ended June 30, 2003, approximately $450,000 of expenses were incurred on this endeavor. The division started dispensing pharmaceuticals as of July 1, 2003.
For the fiscal year ended June 30, 2002, the Company incurred other expense, net, of approximately $502,000. For the fiscal year ended June 30, 2003, the Company incurred other expense, net, of approximately $804,000. The components of the approximate $302,000 increase in net expense were an approximate $84,000 increase in interest expense, an approximate $270,000 decrease in interest income, offset by an approximate $52,000 additional gain on sold assets during the fiscal year ended June 30, 2002. The primary reasons for the net increase in expense were 1) the interest expense incurred on the Company's revolving credit facility and on the Note Offering to finance the acquisition of Centrus and Integrail (see Item 1, "Description of Business-Recent Acquisitions", and Note 2 to the Consolidated Financial Statements comprising Item 8 hereof), and 2) the reduction in interest income since all cash balances go towards paying off the revolving credit facility. Partially offsetting the increase in other expense was an approximate $52,000 increase in deferred gain on the sale of assets related to a sale/leaseback transaction, which gain of approximately $459,000 was recorded as deferred revenue and is being recognized over the life of the lease, which is thirty-six (36) months. (See Note 9 to the Consolidated Financial Statements comprising Item 8 hereof.)
EBITDA (earnings before interest, taxes, depreciation and amortization) increased by approximately $5.1 million or 46%, from $11.1 million for the fiscal year ended June 30, 2002 to $16.3 million for the fiscal year ended June 30, 2003. The primary factor for the increase was the approximate $4.0 million increase in operating income described above. In addition, there was an approximate $736,000 increase in depreciation and amortization and an approximate $438,000 increase in other intangible amortization related to the Company's acquisitions. (See "-- Fiscal Year Ended June 30, 2002 Compared to Fiscal Year Ended June 30, 2001.")
The effective tax rate increased from 39.4% for the fiscal year ended June 30, 2002 to 41.8% for the fiscal year ended June 30, 2003. The increase stemmed primarily from an increase in the state tax rate as more of the Company's income has been allocated to higher taxed states.
Net income for the fiscal year ended June 30, 2003 was approximately $6.4 million as compared to approximately $4.5 million for the fiscal year ended June 30, 2002; a 44% increase. Earnings per diluted share increased by $0.24, to $0.80 for the fiscal year ended June 30, 2003.
EBITDA (earnings before interest, taxes, depreciation and amortization) increased by approximately $7.4 million or 199%, from $3.7 million for the fiscal year ended June 30, 2001 to $11.1 million for the fiscal year ended June 30, 2002. The primary factor for the increase was the approximate $6.7 million increase in operating income described above. In addition, there was an approximate $870,000 increase in depreciation and amortization, including Centrus. This increase was partially offset by an approximate $202,000 decrease in goodwill and other intangibles amortization. (See chart below).
The effective tax rate decreased from 42.1% for the fiscal year ended June 30, 2001 to 39.4% for the fiscal year ended June 30, 2002. The decrease stemmed primarily from a reduction in non-deductible goodwill amortization.
Net cash provided by operating activities was $12.4 million and $15.7 million for the fiscal years ended June 30, 2002 and 2003, respectively. One factor leading to the $3.3 million increase in cash provided by operations was the $1.9 million of incremental net income generated during the fiscal year ended June 30, 2003 as compared to the fiscal year ended June 30, 2002. Another factor in the increase in cash was the changes in accounts receivables and payables during the two years. For the year ended June 30, 2002 accounts payable and accrued expenses increased by $41.7 million while receivables increased by $37.7 million, providing $4.0 million of cash. For the year ended June 30, 2003, accounts payable increased by $6.8 million while receivables decreased by $1.3 million generating $8.1 million of cash. Thus, $4.1 million more cash was provided by operations from changes in receivables and payables during the fiscal year ended June 30, 2003 as compared to June 30, 2002.
During the year ended June 30, 2003 the Company borrowed a net of approximately $1.8 million under its revolving credit facility. These funds were primarily utilized to repay the principal balance of the Convertible Notes, which had been put in place to acquire Centrus, which has had the effect of significantly reducing the interest expense that the Company incurs. The Company also paid $0.8 million towards its outstanding capital lease and other debt obligations during the fiscal year ended June 30, 2003.
The Company has entered into various capital lease transactions for hardware and software. The Company has also assumed various capital leases through its acquisitions. The principal balance of all capital leases as of June 30, 2003 was approximately $808,000.
The total future payments under these contractual obligations as of June 30, 2003 is as follows:
The members of PMP are eligible to receive additional consideration of up to $1,000,000 if certain PMP clients are retained over the first three years after acquisition. These targets were not met in the first two years so no additional consideration was due and payable. It is the Company's expectations that these amounts will not be earned in the third year either as the identified clients were not generally retained directly, although they were replaced.
The Company believes that of its significant accounting policies (see Note 1 to the Consolidated Financial Statements comprising Item 8 hereof), the following may involve a higher degree of judgment and complexity than others:
The audited financial statements of Health Card as of June 30, 2003, 2002 and 2001, and the related Schedules, are included in this Form 10-K following Item 14 hereof.