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, 2002, 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. The leases provide for annual rental payments of a total of $126,000 for the first year, increasing by 5% each year.
The audited Consolidated Financial Statements include the accounts of Health Card and its wholly owned subsidiaries, PAI, PMP, Centrus, National Medical Health Card IPA, Inc. ("IPA") (which was formerly known as PSCNY IPA, Inc.), Specialty, NMHCRX Contracts, Inc. ("Contracts") and PBM Technology, Inc. ("PBM Tech"). Also included are the accounts of Funding. Unless the context otherwise requires, references herein to the "Company" or "Health Card" refer to the Company and its subsidiaries on a consolidated basis. The results of operations and balance sheet of PAI have been included in the consolidation as of July 20, 2000, the effective date that the Company acquired PAI. The results of operations and balance sheet of PMP have been included in the consolidation as of March 5, 2001, the effective date that the Company acquired PMP. The results of operations and balance sheet of Centrus and Funding have been included in the consolidation as of January 29, 2002, the effective date that the Company acquired Centrus. All material intercompany balances and transactions have been eliminated in the consolidation.
The following table sets forth the breakdown of Health Card's revenues relating to pharmaceuticals dispensed and administrative fees ($ in thousands):
Health Card does not take possession or legal ownership of the pharmaceuticals dispensed by the pharmacy network, although Health Card assumes the legal responsibility and financial risk of paying for dispensed pharmaceuticals whether or not Health Card is paid by its sponsors.
Health Card utilizes its comprehensive pharmacy benefit database to perform outcome studies and to develop disease information programs which are used to reduce overall healthcare costs. These programs currently produce a small amount of revenue. Health Card believes that these value added information based services are becoming a more important component of managed care, and therefore these services may provide an increasing source of revenue for Health Card in the future.
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 amount per claim. Therefore once the total number of claims is known, then the total amount of rebates to be received will be known. These amounts are contractually required to be paid within 150 days after the end of a quarter.
Health Card plans to continue its organic growth through increased marketing of its services and by expanding the range of services offered, particularly to include value added consulting and information-based services which Health Card believes to be in growing demand within the healthcare industry. In addition, Health Card intends to continue to pursue an acquisition program to supplement its organic growth by making acquisitions of other pharmacy benefit management service providers, as well as related services providers.
Gross profit increased from $22.5 million for the fiscal year ended June 30, 2001 to $35.1 million for the fiscal year ended June 30, 2002; a $12.6 million, or 56%, increase. In addition, to the revenue volume increase, Centrus accounted for $4.2 million, or 33%, of the increase. PMP accounted for another $1.9 million, or 15%, of the increase. The increase in rebates (and admin- istrative fees related to the collection of rebates) after accounting for the amount of rebates that are shared with sponsors, accounted for another $4.6 million, or 37%. Gross profit, as a percentage of revenue, declined from 8.3% to 7.6% for the fiscal years ended June 30, 2001 and June 30, 2002, respectively. The decrease year-over-year is again principally related to the lower margins achieved by Centrus. The Company has also seen a decline in profit margins due to competitive pressures.
General and administrative expenses charged by affiliates decreased approximately $2.2 million, or 54%, year-over-year from $4.1 million to $1.9 million for the fiscal years ended June 30, 2001 and June 30, 2002, respectively. The Company has eliminated most of the related party transactions effective January 1, 2002. The majority of the decrease related to reduced information technology services and management and consulting services procured from affiliated companies. The hiring of full time employees and the use of outside consultants replaced the use of affiliated companies to update the information technology infrastructure.
Selling, general, and administrative expenses as a percent of revenue improved from 7.9% for the fiscal year ended June 30, 2001 to 5.9% for the fiscal year ended June 30, 2002. This improvement stems from the continued growth of the Company due to improving efficiencies with scale.
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.
Fiscal Year Ended June 30, 2001 Compared to Fiscal Year Ended June 30, 2000
Revenues increased $104.4 million, or approximately 62%, from $167.7 million for the fiscal year ended June 30, 2000, to $272.1 million for the fiscal year ended June 30, 2001. Of the increase, $75.7 million, or 72% was due to the inclusion of revenues from PAI, subsequent to July 20, 2000, and PMP, subsequent to March 5, 2001. $15.6 million of the increase was due to revenues related to new sponsors or new services offered. The majority of the balance of the year-over-year increase, or approximately $13.1 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. Both periods were negatively impacted by a net reduction in revenues that arose when the Company settled certain fees due from a major sponsor related to a capitation arrangement for calendar years 1997 - 1999. The net reduction in revenues was $821,000 for the fiscal year ended June 30, 2000, and $733,000 for the fiscal year ended June 30, 2001. The calendar year 2000 and 2001 contract with this sponsor is no longer a capitation arrangement.
Income before income taxes declined approximately $862,000, or 30%, from approximately $2,863,000, for the fiscal year ended June 30, 2000, to approximately $2,001,000 for the fiscal year ended June 30, 2001. The primary reasons for the decline were the one time adjustments noted above: (i) the $733,000 revenue reduction in the fiscal year ended June 30, 2001; (ii) the $1,353,000 payments/accrued reserve for settlements in the fiscal year ended June 30, 2001; and (iii) the $736,000 reduction in rebates payable in the fiscal year ended June 30, 2000. While income before income taxes declined year-over-year, EBITDA (earnings before interest, taxes, depreciation and amortization) for these same periods actually increased by approximately $478,000, or 15%, from $3,241,000 for the fiscal year ended June 30, 2000 to $3,719,000 for the fiscal year ended June 30, 2001. This was due to the inclusion of approximately $568,000 of goodwill amortization related to the PAI and PMP acquisitions in the period ended June 30, 2001, approximately $93,000 of depreciation of PAI's and PMP's assets during this same year, as well as approximately $635,000 of incremental depreciation and amortization of new assets procured and capitalized during the year ended June 30, 2001. These increases offset the approximate $818,000 decline in operating income year-over-year.
Net cash provided by operating activities was $12.1 million and $20.4 million for the fiscal years ended June 30, 2001 and 2002, respectively. Of the $8.3 million increase, $3.3 million is related to increased net income generated during the fiscal year ended June 30, 2002. For the fiscal year ended June 30, 2002, accounts payable increased by $49.7 million primarily related to Centrus' claims and rebates payables being added. At the same time, accounts and rebates receivables increased by $37.7 million, again primarily due to Centrus. The net effect of these two items was $12 million of net cash provided by operations. For the fiscal year ended June 30, 2001 accounts and rebates receivables increased by $11.5 million and accounts payable increased by $19.5 million, a net provision of cash of $8 million, a difference of $4 million during the two periods.
Net cash used in investing activities was $15.1 million for the fiscal year ended June 30, 2001 as compared to $42.9 million for the fiscal year ended June 30, 2002. The primary differences in the two periods were the acquisitions completed. The fiscal year ended June 30, 2001 included the acquisitions of PAI and PMP which used net cash of $11.3 million. The fiscal year ended June 30, 2002 included the acquisition of Centrus which used $40.3 million of net cash and $1.0 million of additional consideration paid to the PAI shareholders (see Note 2 to Consolidated Financial Statements comprising Item 8 hereof). The difference in the amount of net cash required for these three acquisitions was $30.0 million. The net cash outlay for PAI as of June 30, 2002 was $5.5 million, representing the initial payment of $6.0 million plus $0.2 million of related expenses, plus the $1.0 in additional consideration, less PAI's cash balance at July 20, 2000 of $1.7 million. The net cash outlay for PMP was $6.7 million, representing the initial payment of $6.8 million plus $0.2 million of related expenses, less PMP's cash balance at March 5, 2001 of $0.3 million. The net cash outlay for Centrus was $40.3 million, representing the initial payment of $40.0 million plus $0.3 of related expenses. None of Centrus' existing cash was acquired. Partially offsetting the increase in cash used over the two periods was the $1.3 million gross proceeds from the sale-leaseback transaction in October 2001. (See Note 9 to Consolidated Financial Statements comprising Item 8 hereof.)
The Company has entered into various real estate operating leases with both related and unrelated parties. The Company has entered into various operating leases with unrelated third parties for office equipment. These leases have different payment terms and expirations dates. The Company also entered into a sale-leaseback operating lease of certain fixed assets (principally computer hardware and externally developed software) with an affiliate of the Company's Vice Chairman. See Note 9 to the Consolidated Financial Statements comprising Item 8 hereof for a further description of these various leases.
In February 1998, the Company entered into an agreement with an unaffiliated party for computer software products and professional services. The agreement required the Company to pay an initial license fee. In addition, if certain milestones are met based on the number of processed claims, as defined in the agreement, the initial license fee increases in specified increments. To date, four such milestones have been met, resulting in a 100% increase in the license fee. The agreement also provides for the annual payment of a fee for maintenance and updating services equal to 18% of the initial license fee, as defined. It is anticipated that, based on internal growth and the Centrus acquisition, that the last milestone will be met. If the remaining milestone is reached, the cash outlay by the Company would be $100,000.
Management does not believe that inflation has had a material adverse impact on Health Card's net income.
Revenue under the fee for service arrangement is recognized when the claims are adjudicated. Included as revenue are the Company's administrative fees, and charges relating to pharmaceuticals dispensed by the Company's network of pharmacies. Revenue is reduced by the amount of rebates paid to the Company's sponsors.
Rebates are recognized when the Company is entitled to them in accordance with the terms of its arrangements with drug manufacturers, third party rebate administrators, and sponsors, and when the amount of the rebates is determinable. The Company records the gross rebate receivable and the appropriate payable to the sponsors based on estimates, which are subject to final settlement. The estimates are based upon the claims submitted and the Company's rebate experience, and are adjusted as additional information becomes available.