Item 1. Business
Overview
MIM Corporation (the "Company" or "MIM") is a pharmaceutical healthcare organization delivering innovative pharmacy benefit management, specialty pharmaceutical management and distribution and other pharmacy-related healthcare solutions. The Company combines its clinical management expertise, sophisticated data management and therapeutic fulfillment capabilities to serve the particular needs of each of its customers and respective pharmacy benefit recipients. The Company provides a broad array of pharmacy benefits and pharmacy products and services to individual enrollees ("Members") receiving health benefits, principally through health insurers, including managed care organizations ("MCOs") and other insurance companies, and, to a lesser extent, labor unions, self-funded employer groups, government agencies, and other self-funded plan sponsors, directly or indirectly through third party administrators (collectively, "Plan Sponsors"). These services are organized under two reportable operating segments: pharmacy benefit management and mail services (collectively, "PBM Services") and specialty pharmacy distribution and clinical management services ("Specialty Management and Distribution Services").
The Company's Specialty Management and Distribution Services programs are offered to the chronically ill and genetically impaired, directly through Plan Sponsors of all sizes, and include the distribution of biotech and other prescription medications and the provision of pharmacy-related clinical management services and disease state programs. Specialty services are also offered to physicians (in group practice and hospital settings) on behalf of their patients, in conjunction with Plan Sponsors. These physicians are typically affiliated with Plan Sponsors which in turn have a provider relationship with the Company.
The Company offers Plan Sponsors a broad range of PBM Services designed to promote the cost-effective delivery of clinically appropriate PBM Services through its network of retail pharmacies and its own dedicated mail service distribution facility.
Depending on the goals and objectives of the Plan Sponsors with which the Company does business, the Company provides some or all of the following clinical services as part of its PBM and/or Specialty Management and Distribution Services, all of which are described below in greater detail: pharmacy case management, therapy assessment, compliance monitoring, health risk assessment, patient education, drug usage and interaction evaluation, pharmacy claims processing, mail service and related prescription distribution, benefit design consultation, drug utilization review, formulary management and consultation, drug data analysis, drug interaction management, patient compliance, program management and pharmaceutical rebate administration.
Specialty Management and Distribution Services
Through its BioScrip(R) specialty injectable and infusion therapy programs, the Company distributes high-cost pharmaceuticals and provides clinically focused case and disease management programs to Members afflicted with chronic illnesses or genetic impairments. The disease states or conditions for which the Company has such programs include HIV/AIDS, oncology, hemophilia, multiple sclerosis, growth hormone deficiency, Gaucher's disease, rheumatoid arthritis, infertility, respiratory syncytial virus (RSV), hepatitis C, Crohn's disease and transplants. The specialty drugs distributed through the BioScrip(R) programs are dispensed and serviced from the Company's various dispensing locations in Columbus, Ohio; Livingston, New Jersey; and Roslyn Heights, New York. The Roslyn Heights facility has been utilized since January 2002, the acquisition date of Vitality Home Infusion Services, Inc. ("Vitality"), a New York-based provider of specialty pharmaceutical injectable therapy services. The Livingston location has been utilized since August 2000, the acquisition date of American Disease Management Associates, LLC ("ADIMA"), a New Jersey-based provider of specialty injectable and infusion therapy services.
The Company's specialty injectable and infusion therapy programs are marketed principally to Plan Sponsors and physicians in order to control the high cost trends associated with medications for the chronically ill and genetically impaired. As part of a bundled offering, the Company distributes prescription products to Plan Sponsors' Members and clinically manages each Member's condition from a pharmacoeconomic perspective.
Unlike many of the Company's competitors, which focus on particular pharmaceutical products within a limited number of chronic disease states, the
Company offers numerous products within a larger number of disease states since it is attempting to control a Plan Sponsor's overall pharmacy and medical expenditures in the most clinically appropriate manner. In contrast, many of the Company's competitors focus on increasing the market share of a particular product and increasing profitability through its relationship with the manufacturer of that particular product. Viewed another way, the Company considers its ultimate customer(s) Plan Sponsors and their respective Members.
The following services are available through the Company's specialty programs:
Pharmacy Case Management. The Company provides Plan Sponsors' Members with access to its BioScrip(R) pharmacy case management team ("PCM Team"), which is a specialized unit of skilled professionals including Pharmacists, Registered Nurses, Certified Pharmacy Technicians, Insurance Verification and Reimbursement Specialists, and Customer Service Representatives. The PCM Team is available via phone to both providers and patients, 24 hours per day, seven days per week. Each PCM Team member is cross trained in case management as well as individual disease states, in order to provide Plan Sponsors and its Members with a variety of basic services, including:
Prior Authorizations. The Company assists its Plan Sponsors in developing formal criteria and protocols for the effective management of specialty pharmaceutical care. Criteria are reviewed prior to the onset of therapy to minimize incorrect prescribing, thereby reducing unnecessary costs.
Infusion Therapy. The Company also distributes and administers high cost specialty infusion therapies to patients requiring principally immunosuppression blood products, parenteral nutrition products, and infused antibiotic therapies. Hence, the Company attempts to maximize Member patient outcomes through strict adherence to the clinical guidelines or protocols for a particular prescription therapy while at the same time managing the costs of such therapies on behalf of the Plan Sponsor. In adhering to the guidelines, the Company also attempts to minimize or control the costs associated with a Member's condition. Unlike the Company's other specialty programs, infusion patients have their therapies administered intravenously by IV certified nurses.
Therapy Assessment. The PCM Team monitors on an on-going basis each patients therapy to assure adherence to that therapy, desired response to therapy and any necessary interventions to improve patient care.
Patient Enrollment. The PCM Team is the main point of contact for both physicians and patients during the enrollment process. PCM Team members are responsible for identifying immediate patient needs, triggering important patient and physician mailings and following through on the enrollment process and delivery of the initial prescription.
Risk Assessment. The PCM Team initially assesses all new patients to determine the patient's knowledge level, self-care ability and non-compliance risk. Depending on the results of this assessment, patients are classified and an appropriate monitoring program is selected and administered. Patients are reassessed at appropriate times during their treatment as determined by the PCM Team.
Education. Each PCM Team member is trained in disease state management and treatment issues and serves as a valuable resource for both patients and physicians in answering treatment questions pertaining to such topics as side effects, self-administration and compliance issues.
Compliance Monitoring. The PCM Team collectively tracks the patient's progress and initiates reminders, reinforcements and non-compliance alerts to both physicians and the patient. The PCM Team is responsible for understanding compliance risks and coordinating the support necessary to maximize the patient's treatment.
Coordinated Medication Delivery. The Company's pharmacies provide express delivery of medications to the patient's point of service, whether that is his or her home or a physician's office. Special handling techniques and/or refrigeration (including shipping with dry-ice packing) are utilized in compliance with a manufacturer's specified requirements. In addition to the injectable medication, the Company also provides Sharps containers, syringes and ancillary materials needed for administration of the product. Express delivery via overnight courier is provided without additional charge to the patient or physician.
Pharmacy Data Services. The Company utilizes claims, medical and laboratory data to analyze and evaluate pharmaceutical utilization and cost trends to support Plan Sponsors' understanding of such information through the generation of reports for management and Plan Sponsor use, and presentation of information vital to the Plan Sponsors' understanding of their particular pharmaceutical utilization and cost trends. These services include drug utilization review, quality assurance and claims and laboratory analysis. The Company has developed proprietary systems to provide Plan Sponsors with real-time access to pharmacy, financial, claims, prescriber and dispensing data.
Disease Management. The Company designs and administers programs to maximize the benefits of pharmaceutical utilization as a tool in achieving therapy goals for certain targeted diseases. Programs focus on preventing high-risk events, such as asthma exacerbation or stroke, through appropriate use of pharmaceuticals while eliminating unnecessary or duplicate therapies. Key components of these programs include health care provider training, integration of care between pharmacy and medical health disciplines, monitoring of patient compliance, measurement of care process and quality, and providing feedback for continuous improvement in achieving therapy goals.
The Company offers its specialty programs to Plan Sponsors as a comprehensive pharmaceutical service that manages all aspects of a Plan Sponsor's pharmaceutical needs, including the specialty pharmacy services described above. Alternatively, the Company may limit the number of products and/or therapeutic categories which it manages. The Company believes that its ability to offer a full line of services, including its specialty pharmacy products and services, provides it an advantage over its competition, many of which focus on a limited number of disease states and/or products. Likewise, the Company believes that the implementation of a broad-based specialty pharmacy program affords Plan Sponsors greatest overall Member outcomes as well as the greatest degree of cost control or savings. The Company has also been successful in contracting to provide specialty pharmacy services, typically on a non-exclusive or preferred basis to Plan Sponsors, clinics, hospitals and physician groups not previously contracted with the Company for PBM Services.
The Company markets its specialty pharmaceutical programs to MCOs without regard to the size of a plan's enrollment, third party administrators, physician practice groups and hospitals. Unlike many of its competitors, the Company also markets these programs to other pharmacy benefit managers, which may not have the same resources as the Company or which otherwise have determined not to develop independent specialty pharmacy operations.
PBM Services
The Company's PBM Services offer Plan Sponsors a broad range of services designed to ensure the cost-effective delivery of clinically appropriate pharmacy benefits. PBM Services available to the Company's customers include the following:
Formulary and Benefit Design. The Company advises its Plan Sponsors with respect to the development of customized, flexible formulary and benefit plan designs to meet its specific program requirements. Formulary design may assist in controlling program costs by focusing, to the extent consistent with accepted medical and pharmacy practices and applicable law, primarily on two areas: (i) generic substitution, which involves the selection of generic drugs as a cost-effective alternative to their bio-equivalent brand name drugs within a therapeutic category, and/or (ii) therapeutic interchange, which involves the selection of a lower cost brand name drug as an alternative to a higher priced brand name drug within a therapeutic category. After a formulary has been established by a Plan Sponsor, rebates on brand name drugs are typically negotiated with drug manufacturers and are often shared with Plan Sponsors.
Many Plan Sponsors do not restrict coverage to a specific list of pharmaceuticals and are said to have "no" formulary or an "open" formulary that generally covers all FDA-approved drugs except certain classes of excluded pharmaceuticals (such as certain vitamins and cosmetics, experimental, investigative or over-the-counter drugs). As a result of rising pharmacy program costs, however, the Company believes that both public and private health plans have become increasingly receptive to controlling pharmacy costs by restricting the availability of certain drugs within a given therapeutic class, other than in cases of medical necessity or other pre-established prior authorization guidelines, to the extent clinically appropriate. Once a Plan Sponsor decides to utilize a "restricted" or "closed" formulary, the Company actively involves its clinical staff with a Plan Sponsor's Pharmacy and Therapeutics Committees ("P&T Committee")(which typically consists of local Plan Sponsors, prescribers, pharmacists and other health care professionals) to assist that P&T committee in its design of clinically appropriate formularies in order to control pharmacy costs. The composition of the formulary is the responsibility and, ultimately approved by of the Plan Sponsor.
The primary method for assuring formulary compliance on behalf of a Plan Sponsor is by controlling pharmacy reimbursement to ensure that non-formulary drugs are not dispensed to a Member, subject to certain limited exceptions. Benefit design and formulary parameters are managed through a point-of-sale ("POS") claims processing system through which real-time electronic messages are transmitted to pharmacists to ensure compliance with specified benefit design and formulary parameters before services are rendered and prescriptions are dispensed. Over utilization of medication is monitored and managed through quantity limitations based upon nationally recognized standards and guidelines regarding maintenance versus non-maintenance therapy. Step protocols, which are procedures requiring that preferred therapies be tried and shown ineffective
before more expensive therapies are covered are also established by the Company in conjunction with the Plan Sponsor P&T Committee to control improper utilization of certain high-risk or high-cost medications.
Clinical Services. Plan Sponsors' formularies typically identify a limited number of drugs for preferred status within each therapeutic class to be the covered drugs in order to treat most medical conditions appropriately. Provision is also made, however, for coverage of non-formulary or non-preferred drugs (other than certain excluded products) when documented to be clinically appropriate for a particular patient. Since non-formulary drugs ordinarily are automatically rejected for coverage by the real-time POS system, the Company employs procedures to override restrictions on non-formulary medications for a particular patient and period of treatment. Similarly, restrictions on the use of certain high-risk or high-cost formulary drugs may be overridden through prior authorization procedures. Non-formulary overrides and prior authorizations are processed on the basis of documented, clinically supported medical information and typically are granted or denied within 48 hours after request. Requests for, and appeals of denials, of coverage in those cases are handled by the Company through its staff of trained pharmacists and board certified pharmacotherapy specialists, subject to a Plan Sponsor's ultimate authority over all such requests and appeals. Further, in the case of a medical emergency, as determined by the dispensing network pharmacist, the Company authorizes, without prior approval, short-term supplies of all medication unless specifically excluded by a Plan Sponsor.
Drug Usage Evaluation. Drug usage is evaluated on a concurrent, prospective and retrospective basis utilizing the real-time POS system and proprietary information systems for multiple drug interactions, drug-health condition interactions, duplication of therapy, step therapy protocol enforcement, minimum/maximum dose range edits, compliance with prescribed utilization levels and early refill notification. The Company also maintains a drug utilization review program in which select medication therapies are reviewed and data is collected, analyzed and reported for management applications.
Pharmacy Data Services. The Company utilizes claims data to analyze and evaluate pharmaceutical utilization and cost trends to support Plan Sponsors' understanding of such information through the generation of reports for management and Plan Sponsor use, and presentation of information vital to the Plan Sponsors' understanding of its particular pharmaceutical utilization and cost trends. These services include drug utilization review, quality assurance review, claims analysis and rebate contract administration. The Company has developed proprietary systems to provide Plan Sponsors with real-time access to pharmacy, financial, claims, prescriber and dispensing data.
Disease Management. The Company designs and administers programs to maximize the benefits of pharmaceutical utilization as a tool in achieving therapy goals for certain targeted diseases, such as diabetes and asthma. Programs focus on preventing high-risk events, such as asthma exacerbation or stroke, through appropriate use of pharmaceuticals, while eliminating unnecessary or duplicate therapies. Key components of these programs include health care provider training, integration of care between medical and pharmacy disciplines, monitoring of patient compliance, and providing feedback for continuous improvement in achieving therapy goals. As described more fully above under "Specialty Management and Distribution Services," many of these same tools are used by the Company in delivering specialty pharmaceutical services and products to patients afflicted with the disease states managed by the Company.
Behavioral Health Pharmacy Services. In recent years, Plan Sponsors, particularly MCOs, have recognized the specialized behavioral health needs of certain of their Members. As a result, many MCOs have "carved out" those afflicted with behavioral health issues into separately managed programs. The Company provides pharmaceutical-related services that encourage the proper and cost-effective utilization of behavioral health medication to enrollees within the segregated population within separate behavioral health organizations ("BHOs"), which are traditionally (but not always) affiliated with that MCO. Through the development of provider education programs, utilization protocols and prescription dispensing evaluation tools, the Company is able to integrate pharmaceutical behavioral or mental health therapies with other medical therapies to enhance patient compliance and minimize unnecessary or sub optimal prescribing practices. These services are integrated into the Plan Sponsor's package of behavioral health care products for marketing to private insurers, public managed care programs and other health providers.
Pharmacy Dispensing Facility. The Company believes that pharmacy benefit program costs may also be reduced through the distribution of pharmaceutical products directly to Plan Sponsors' Members by the use of mail service programs through its own proprietary pharmacy dispensing facility. The Company provides these mail service dispensing services from a fully automated fulfillment facility in Columbus, Ohio. Mail service is typically provided to Members who receive maintenance medications. The use of mail service affords the Company and its Plan Sponsors with the ability to reduce cost as compared to the more costly retail distribution of prescription products.
Capitated Billing Arrangements. In addition to traditional fee-for-service billing arrangements, the Company has historically offered capitated fee billing arrangements to its MCO customers. A capitated fee arrangement permits a Plan Sponsor to incur a fixed fee per Member (a "capitated" program), which allows for cost shifting to the Company where aggregate PBM costs exceed pre-established per Member amounts and a premium, or greater financial benefit to the Company where costs are less than pre-established per Member amounts. For 2003, the Company has two remaining material capitated arrangements with an MCO. For the year ended December 31, 2002, 12.9% of the Company's PBM Services revenues were generated from capitated contracts compared to 23.3% in 2001, while non-capitated business (including mail services) represented 87.1% and 76.7% for 2002 and 2001, respectively.
Sales and Marketing
In late 2002 and early 2003, the Company consolidated its sales force and structured its resources on a regional basis in order to more effectively focus on specific opportunities. The Company believes that this consolidation will enhance its ability to market PBM Services and Specialty Management and Distribution Services. In addition, the Company believes that a consolidated sales force will increase the cross selling opportunities that exist within the Company's customer base, specifically, and within the healthcare market, generally.
The TennCare(R) Program
Historically, a majority of the Company's revenues were derived from providing services in the State of Tennessee to MCOs participating in the State of Tennessee's TennCare(R) program and BHOs participating in the State of Tennessee's TennCare(R) Partners program. Revenues generated from MCOs and BHOs participating in TennCare(R), as a percentage of the Company's revenue, is decreasing and is expected to continue to decrease given the Company's growth in the specialty area.
The TennCare(R) program operates under a demonstration waiver from The United States Center for Medicare and Medicaid Services ("CMS"). That waiver is the basis of the Company's ongoing service to those MCOs in the TennCare(R) program. The waiver expires on December 31, 2004. While the Company believes that pharmacy benefits will continue to be provided to Medicaid and other eligible TennCare(R) enrollees through MCOs in one form or another through at least December 31, 2004, should the funding sources and/or conditions for the TennCare(R) program change significantly, the TennCare(R) program's ability to pay the MCOs, and in turn the MCO's ability to pay the Company, could materially and adversely affect the Company's financial position and results of operations.
Competition
The Company faces substantial competition within the pharmaceutical healthcare services industry. This industry includes a number of large, well-capitalized companies with nationwide operations, such as AdvancePCS Inc., Caremark Rx, Inc., Express Scripts, Inc., Medco Health Solutions, Inc., MedImpact Healthcare Systems, Inc. and WellPoint Pharmacy Management, as well as many smaller organizations typically operating on a local or regional basis. The Company also competes with several national and regional specialty pharmaceutical distribution companies that have substantial financial resources and which also provide products and services to the chronically ill and genetically impaired. These competitors include Accredo Health Inc., Chronimed, Inc. and Priority Healthcare Corporation, as well as a number of the pharmacy benefit managers mentioned above. Some of the Company's competitors are under common control with, or ownership, by, brand name drug manufacturers or retail pharmacy chains and may be better positioned with respect to the cost-effective distribution of pharmaceuticals and/or the pricing of PBM Services. Some of the Company's primary competitors have a substantially larger market share than the Company's existing market share. Moreover, some of the Company's competitors may have secured long-term supply or distribution arrangements for prescription pharmaceuticals necessary to treat certain chronic disease states on price terms substantially more favorable than the terms currently available to the Company. As a result of such advantageous pricing, the Company may be less price competitive than some of these competitors with respect to certain pharmaceutical products. However, as it relates to its specialty programs, the Company does not believe that it competes strictly on the selling price of particular products; rather, it offers customers the opportunity to lower overall pharmaceutical and medical costs while providing high quality care.
Financial Information about Segments
The following table presents revenue and income from operations by segments. In 2002, the Company began operating in two segments. For comparative purposes, 2001 and 2000 have been reclassified to those segments, since the Company had only one operating segment prior to 2002. Operating segment financial information is provided in Note 3 of Notes to Consolidated Financial Statements.
Segment Financial Information (in thousands)
Government Regulation
General. As a participant in the healthcare industry, the Company's operations and relationships are subject to federal and state laws and regulations and enforcement by federal and state governmental agencies. Various federal and state laws and regulations govern the purchase, dispensing or distribution and management of prescription drugs and related services and may affect the Company. The Company believes that it is in compliance with all legal requirements material to its operations.
In the second quarter of 2000, the Company entered into a global settlement agreement with the Office of Inspector General (the "OIG"), within the U.S. Department of Health and Human Services ("HHS"), and the State of Tennessee relating to certain civil and criminal charges brought against former officers of the Company's predecessor. The Company did not admit any wrongdoing in the global settlement agreement but agreed to enter into a corporate integrity agreement in order to ensure ongoing compliance with the requirements of Medicare, Medicaid and all other Federal health care programs. Under the terms of that agreement, the Company is required to, among other things, implement a corporate compliance program, conduct ongoing educational programs to inform employees regarding compliance with relevant laws and regulations and institute a formal reporting procedure to disclose possible violations of law to the OIG. In addition to these requirements, the Company must submit annual reports with respect to the status of its compliance activities. Although compliance with the corporate integrity agreement is designed to reduce the risk of violations of laws and regulations relevant to our business, the Company is required to report any such potential violations to the OIG and the U.S. Department of Justice. The Company is therefore subject to increased regulatory scrutiny and, if the Company commits legal or regulatory violations, it may be subject to an increased risk of sanction or penalty, including exclusion from participation in the Medicare or Medicaid programs.
On October 1, 2002, the OIG released its Draft Compliance Program Guidance for Pharmaceutical Manufacturers (the "Draft Guidance") designed to provide voluntary, nonbinding guidance to assist pharmaceutical manufacturers in devising effective legal compliance programs. The Draft Guidance identifies in general terms certain areas of potential legal risk that the OIG encourages pharmaceutical manufacturers to consider in structuring compliance programs. The OIG has solicited public comment on the Draft Guidance and will at some time in the future publish final guidance along with a discussion of relevant comments. The Company currently maintains a compliance program that includes many of the key compliance program elements described in the Draft Guidance. We do not believe that the Draft Guidance, if adopted in its current form, would have a material effect on our business operations or financial results. However, it is possible that the Draft Guidance could be changed prior to publication of the final version, and any such changes could impact our business operations, possibly materially. However, the Company does not believe that any such changes could have a material adverse effect on the Company's financial performance, results of operation, or liquidity.
Among the various Federal and state laws and regulations which may govern or impact the Company's current and planned operations are the following:
Mail Service Pharmacy Regulation. Many of the states into which the Company delivers pharmaceuticals have laws and regulations that require out-of-state mail service pharmacies to register with, or be licensed by, the boards of pharmacy or similar regulatory bodies in those states. These states generally permit the dispensing pharmacy to follow the laws of the state within which the dispensing pharmacy is located.
However, various states have enacted laws and adopted regulations directed at restricting or prohibiting the operation of out-of-state pharmacies by, among other things, requiring compliance with all laws of the states into which the out-of-state pharmacy dispenses medications, whether or not those laws conflict with the laws of the state in which the pharmacy is located. To the extent that such laws or regulations are found to be applicable to the Company's operations, the Company would be required to comply with them. In addition, to the extent that any of the foregoing laws or regulations prohibit or restrict the operation of mail service pharmacies and are found to be applicable to the Company, they could have an adverse effect on the Company's prescription mail service operations.
Other statutes and regulations may also affect the Company's mail service operations. The Federal Trade Commission requires mail order sellers of goods generally to engage in truthful advertising, to stock a reasonable supply of the products to be sold, to fill mail orders within 30 days, and to provide clients with refunds when appropriate.
Licensure Laws. Many states have licensure or registration laws governing certain types of ancillary healthcare organizations, including preferred provider organizations, third party administrators, and companies that provide utilization review services. The scope of these laws differs significantly from state to state, and the application of such laws to the activities of pharmacy benefit managers often is unclear. The Company has registered under such laws in those states in which the Company has concluded that such registration or licensure is required.
The Company dispenses prescription drugs pursuant to orders received through its ScripPharmacy.com Web site, as well as other affiliated private label Web sites. Accordingly, the Company may be subject to laws affecting on-line pharmacies. Several states have proposed laws to regulate on-line pharmacies and require on-line pharmacies to obtain state pharmacy licenses. Additionally, federal regulation by the United States Food and Drug Administration (the "FDA"), or another federal agency, of on-line pharmacies that dispense prescription drugs has been proposed. To the extent that such state or federal regulation could apply to the Company's operations, certain of the Company's operations could be adversely affected by such licensure legislation. Management does not believe that the adoption of any of these internet related laws would have a material adverse effect on the Company's business or operations.
Other Laws Affecting Pharmacy Operations. The Company is subject to state and federal statutes and regulations governing the operation of pharmacies, repackaging of drug products, wholesale distribution, dispensing of controlled substances, medical waste disposal, and clinical trials. Federal statutes and regulations govern the labeling, packaging, advertising and adulteration of prescription drugs and the dispensing of controlled substances. Federal controlled substance laws require the Company to register its pharmacies and repackaging facilities with the United States Drug Enforcement Administration and to comply with security, recordkeeping, inventory control and labeling standards in order to dispense controlled substances.
State controlled substance laws require registration and compliance with state pharmacy licensure, registration or permit standards promulgated by state's pharmacy licensing authority. Such standards often address the qualification of an applicant's personnel, the adequacy of its prescription fulfillment and inventory control practices and the adequacy of its facilities. In general, pharmacy licenses are renewed annually. Pharmacists and pharmacy technicians employed at each of the Company's dispensing locations must also satisfy applicable state licensing requirements.
FDA Regulation. The FDA generally has authority to regulate drug promotional information and materials that are disseminated by a drug manufacturer or by other persons on behalf of a drug manufacturer. In January 1998, the FDA issued Draft Guidance regarding its intent to regulate certain drug promotion and switching activities of pharmaceutical manufacturers that control, directly or indirectly, a PBM. The FDA effectively withdrew the Draft Guidance and has indicated that it would not issue a new draft guidance. However, there can be no assurance that the FDA will not assert jurisdiction over certain aspects of the Company's PBM business, including the internet sale of prescription drugs.
Network Access Legislation. A majority of states now have some form of legislation affecting the ability of the Company to limit access to a pharmacy provider network or remove network providers. Such legislation may require the Company or its client to admit any retail pharmacy willing to meet the plan's
price and other terms for network participation ("any willing provider" legislation), or may prohibit the removal of a provider from a network except in compliance with certain procedures ("due process" legislation) or may prohibit days' supply limitations or co-payment differentials between mail and retail pharmacy providers. Many states with any willing provider statutes also permit a Member suspected of substance abuse or who otherwise need oversight by a pharmacist to be "locked into" one particular pharmacy for the purchase of his or her prescription medication. Many states have exceptions to the applicability of these statutes for managed care arrangements or other government benefit programs, including Tennessee.
Legislation Imposing Plan Design Mandates. Some states have enacted legislation that prohibits Plan Sponsors from implementing certain restriction design features, and many states have introduced legislation to regulate various aspects of managed care plans. Including legislation that prohibits or restricts therapeutic substitution, requires coverage of all drugs approved by the FDA, or prohibits denial of coverage for non-FDA approved uses. For example, some states provide that Members may not be required to use network providers, but that they must instead be provided with benefits even if they choose to use non-network providers ("freedom of choice" legislation), or provide that a Member may sue his or her health plan if care is denied. Some states have enacted, and other states have introduced, legislation regarding plan design mandates. Some states mandate coverage of certain benefits or conditions. Such legislation does not generally apply to the Company, but it may apply to certain of the Company's customers (generally, HMOs and health insurers). If any such legislation was to become widespread and broad in scope, it could have the effect of limiting the economic benefits achievable through pharmacy benefit management. To the extent that such legislation is applicable and is not preempted by the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (as to plans governed by ERISA), certain operations of the Company could be adversely affected.
Other states have enacted legislation purporting to prohibit health plans from requiring or offering Members financial incentives for use of mail order pharmacies.
Anti-Kickback Laws. Subject to certain statutory and regulatory exceptions (including exceptions relating to certain managed care, discount, group purchasing and personal services arrangements), Federal law prohibits the payment or receipt of remuneration to induce, arrange for or recommend the purchase of health care items or services paid for in whole or in part by Medicare or state health care programs (including Medicaid programs and Medicaid waiver programs). Certain state laws may extend the prohibition to items or services that are paid for by private insurance and self-pay patients. Management carefully considers the importance of such "anti-kickback" laws when structuring its operations, and believes the Company is in compliance therewith. Violation of the Federal anti-kickback statute could subject the Company to criminal and/or civil penalties, including suspension or exclusion from Medicare and Medicaid (including TennCare(R)) programs or state-funded programs in the case of state enforcement.
The federal anti-kickback law has been interpreted broadly by courts, the OIG and administrative bodies. Because of the broad scope of those statutes, federal regulations establish certain safe harbors from liability. Safe harbors exist for certain properly reported discounts received from vendors, certain investment interests held by a person or entity, and certain properly disclosed payments made by vendors to group purchasing organizations, as well as for other transactions or relationships. Nonetheless, a practice that does not fall within a safe harbor is not necessarily unlawful, but may be subject to scrutiny and challenge. In the absence of an applicable exception or safe harbor, a violation of the statute may occur even if only one purpose of a payment arrangement is to induce patient referrals or purchases. Among the practices that have been identified by the OIG as potentially improper under the statute are certain "product conversion programs" in which benefits are given by drug manufacturers to pharmacists or physicians for changing a prescription (or recommending or requesting such a change) from one drug to another. Anti-kickback laws have been cited as a partial basis, along with state consumer protection laws discussed below, for investigations and multi-state settlements relating to financial incentives provided by drug manufacturers to retail pharmacies in connection with such programs.
Certain governmental entities have commenced investigations of PBM companies and other companies having dealings with the PBM industry and have identified issues concerning selection of drug formularies, therapeutic substitution programs and discounts or rebates from prescription drug manufacturers and whether best pricing requirements are being complied with. Additionally, at least one state has filed a lawsuit concerning similar issues against a health plan. To date, the Company has not been the subject of any such investigation or suit and has not received subpoenas or been requested to produce documents for any such investigation or suit. However, there can be no assurance that the Company will not receive subpoenas or be requested to produce documents in pending investigations or litigation in the future.
The Company believes that it is in compliance with the legal requirements imposed by the anti-remuneration laws and regulations, and the Company believes that there are material and substantial differences between drug switching programs that have been challenged under these laws and the therapeutic interchange practices and formulary management programs offered by the Company to Plan Sponsors. However, there can be no assurance that the Company will not be subject to scrutiny or challenge under such laws or regulations, or that any such challenge would not have a material adverse effect upon the Company.
The Stark Laws. The federal law known as "Stark II" became effective in 1995 and was a significant expansion of an earlier federal physician self-referral law commonly known as "Stark I". Stark II prohibits physicians from referring Medicare or Medicaid patients for "designated health services" to an entity with which the physician, or an immediate family member of the physician, has a financial relationship. Possible penalties for violation of the Stark laws include denial of payment, refund of amounts collected in violation of the statute, civil monetary penalties and program exclusion. The Stark laws standards contain certain exceptions for physician financial arrangements.
Management carefully considers the importance of Stark II in structuring its sales and marketing arrangements and its operations and believes the Company is in compliance therewith. Violation of the Stark II laws could subject the Company to civil and/or criminal penalties, including suspension or exclusion from Medicare and Medicaid (including TennCare) programs or state-funded programs in the case of state enforcement.
State Self-Referral Laws. The Company is subject to state statutes and regulations that prohibit payments for referral of patients and referrals by physicians to healthcare providers with whom the physicians have a financial relationship. Some state statutes and regulations apply to services reimbursed by governmental as well as private payors. Violation of these laws may result in prohibition of payment for services rendered, loss of pharmacy or health provider licenses, fines and criminal penalties. The laws and exceptions or safe harbors may vary from the federal Stark laws and vary significantly from state to state. The laws are often vague, and in many cases, have not been widely interpreted by courts or regulatory agencies; however, the Company believes it is in compliance with such laws.
Statutes Prohibiting False Claims and Fraudulent Billing Activities. A range of federal civil and criminal laws target false claims and fraudulent billing activities. One of the most significant is the Federal False Claims Act, which prohibits the submission of a false claim or the making of a false record or statement in order to secure a reimbursement from a government-sponsored program. In recent years, the federal government has launched several initiatives aimed at uncovering practices which violate false claims or fraudulent billing laws. Claims under these laws may be brought either by the government or by private individuals on behalf of the government, through a "whistleblower" or "qui tam" action.
Reimbursement. Approximately 40% of the Company's revenues are derived directly from Medicare or Medicaid or other government-sponsored healthcare programs subject to the federal anti-kickback laws and/or the Stark laws. Also, the Company indirectly provides benefits to managed care entities that provide services to beneficiaries of Medicare, Medicaid and other government-sponsored healthcare programs. Should there be material changes to federal or state reimbursement methodologies, regulations or policies, the Company's reimbursements from government-sponsored healthcare programs could be adversely affected. In addition, certain state Medicaid programs only allow for reimbursement to pharmacies residing in the state or in a border state. While the Company believes that it can service its current Medicaid patients through existing pharmacies, there can be no assurance that additional states will not enact in-state dispensing requirements for their Medicaid programs. To the extent such requirements are enacted, certain therapeutic pharmaceutical reimbursements could be adversely affected.
Legislation and Other Matters Affecting Drug Prices. Some states have adopted legislation providing that a pharmacy participating in the state Medicaid program must give the state the best price that the pharmacy makes available to any third party plan ("most favored nation" legislation). Such legislation may adversely affect the Company's ability to negotiate discounts in the future from network pharmacies. At least one state has enacted "unitary pricing" legislation, which mandates that all wholesale purchasers of drugs within the state be given access to the same discounts and incentives. Such legislation has not yet been enacted in the states where the Company's mail service pharmacies are located. Such legislation, if enacted in other states, could adversely affect the Company's ability to negotiate discounts on its purchase of prescription drugs to be dispensed by its Mail Service pharmacies.
Confidentiality. Most of the Company's activities involve the receipt, use and disclosure by the Company of confidential medical, pharmacy or other health-related information concerning individual Members, including the disclosure of the confidential information to the Member's health benefit plan. In addition, the Company uses aggregated and blinded (anonymous) data for research and analysis purposes.
In December 2000, HHS issued final regulations regarding the privacy of individually identifiable health information pursuant to the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). On August 14, 2002, HHS published final changes to the HIPAA privacy regulations (the "Privacy Regulations"). The Company will be required to comply with the Privacy Regulations by April 14, 2003.
The Privacy Regulations are designed to protect the medical information of a health care patient or health plan enrollee that could be used to identify the individual. The Company refers to this information as "protected health information". The Privacy Regulations apply directly to certain entities known as "covered entities," which include Plan Sponsors and most health care providers. In addition, the Privacy Regulations require covered entities to enter into contracts requiring their "business associates" to agree to certain restrictions regarding the use and disclosure of protected health information. The Privacy Regulations apply to protected health information maintained in any format, including both electronic and paper records, and impose extensive restrictions on the way in which covered entities (and indirectly their business associates) may use and disclose protected health information. In addition, the Privacy Regulations also give patients significant rights to understand and control how their protected health information is used and disclosed. Often, use and disclosure of protected health information must be limited to the minimum amount necessary to achieve the purpose of the use or disclosure. Certain of the Company's businesses will be covered entities directly subject to the Privacy Regulations, and other of the Company's businesses will be "business associates" of covered entities, such as Plan Sponsors.
Also in 2000, HHS published a final rule on transaction standards and code sets pursuant to HIPAA (the "Transactions Standards"). The Transactions Standards establish uniform standards to be utilized by covered entities in the electronic transmission of health information in connection with certain common health care financing transactions, such as health care claims. The compliance deadline for the Transactions Standards was October 16, 2002; however, HHS granted the Company and all other entities that applied on a timely basis a one-year extension of the compliance deadline to October 16, 2003.
In addition, in February 2003, HHS issued final regulations governing the security of PHI pursuant to HIPAA (the "Security Standards"). The Security Standards impose substantial requirements on covered entities and their business associates regarding the storage, utilization of, and access to and transmission of PHI. The Security Standards must be complied with beginning on April 21, 2005.
Sanctions for failing to comply with standards issued pursuant to HIPAA can include possible jail time, criminal penalties of up to $250,000 and civil fines of up to $25,000.
The requirements imposed by the Privacy Regulations, the Transactions Standards, and the Security Standards are extensive and have required substantial cost and effort by MIM to assess and implement. MIM will take the steps it believes are reasonable to ensure that its policies and procedures are in compliance with the Privacy Rule, the Transactions Standards and the Security Standards. The requirements imposed by HIPAA will likely increase our burden and costs of regulatory compliance (including with respect to our health improvement programs and other information-based products), alter our reporting to Plan Sponsors and may reduce the amount of information we can use or disclose if patients and health plan enrollees do not authorize such uses or disclosures.
Consumer Protection Laws. Most states have consumer protection laws that have been the basis for investigations and multi-state settlements relating to financial incentives provided by drug manufacturers to pharmacies in connection with drug switching programs. No assurance can be given that the Company will not be subject to scrutiny or challenge under one or more of these laws.
Disease Management Services Regulation. All states regulate the practice of medicine. To the Company's knowledge, no PBM has been found to be engaging in the practice of medicine by reason of its disease management services. However, there can be no assurance that a federal or state regulatory authority will not assert that such services constitute the practice of medicine, thereby subjecting such services to federal and state laws and regulations applicable to the practice of medicine.
Comprehensive PBM Regulation. Although no state has passed legislation regulating PBM activities in a comprehensive manner, such legislation has been introduced in the past in several states. Such legislation, if enacted in a state in which the Company conducts a significant amount of business, could have a material adverse impact on the Company's operations.
Antitrust Laws. Numerous lawsuits have been filed throughout the United States by retail pharmacies against drug manufacturers challenging certain brand drug pricing practices under various state and Federal antitrust laws. A settlement in one such suit would require defendant drug manufacturers to provide the same types of discounts on pharmaceuticals to retail pharmacies and buying groups as are provided to managed care entities to the extent that their respective abilities to affect market share are comparable, a practice which, if generally followed in the industry, could increase competition from pharmacy
chains and buying groups and reduce or eliminate the availability to the Company of certain discounts, rebates and fees currently received in connection with its drug purchasing and formulary administration programs. In addition, to the extent that the Company or an associated business appears to have actual or potential market power in a relevant market, business arrangements and practices may be subject to heightened scrutiny from an anti-competitive perspective and possible challenge by state or Federal regulators or private parties.
While management believes that the Company is in substantial compliance with all existing laws and regulations stated above, such laws and regulations are subject to rapid change and often are uncertain in their application. As controversies continue to arise in the health care industry (for example, regarding the efforts of Plan Sponsors and pharmacy benefit managers to limit formularies, alter drug choice and establish limited networks of participating pharmacies), Federal and state regulation and enforcement priorities in this area may increase, the impact of which on the Company cannot be predicted. There can be no assurance that the Company will not be subject to scrutiny or challenge under one or more of these laws or that any such challenge would not be successful. Any such challenge, whether or not successful, could have a material adverse effect upon the Company's business and results of operations.
Employees
At February 28, 2003, the Company employed a total of 390 people, including 51 licensed pharmacists. The Company's employees are not represented by any union and, in the opinion of management, the Company's relations with its employees are satisfactory.
Available Information
The Company files annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any reports, statements and other information filed by the Company at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call (800) SEC-0330 for further information on the Public Reference Room. The SEC maintains an Internet web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The Company's filings are also available to the public at the web site maintained by the SEC, http://www.sec.gov.
The Company makes available, free of charge, through its web site its reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, as soon as reasonably practicable after they are filed with the SEC. The URL for the Company's web site is www.mimcorporation.com
Item 2.
Item 2. Properties
The Company's corporate headquarters are located in leased office space in Elmsford, New York. The Company also leases commercial office space for its above-described operations in South Kingstown, Rhode Island; Columbus, Ohio; Livingston, New Jersey; Roslyn Heights, New York; and Nashville, Tennessee.
Item 3.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of Security Holders for the fourth quarter of the fiscal year reported on in this Form 10-K.
PART II
Item 5.
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
The Company's common stock, par value $0.0001 per share ("Common Stock"), is traded on the National Market System of The Nasdaq Stock Market, Inc. under the symbol "MIMS." The following table represents the range of high and low sales prices for the Company's Common Stock for the last eight quarters. Such prices reflect interdealer prices, without retail markup, markdown or commissions and may not necessarily represent actual transactions.
High Low -------------------------- 2001: First Quarter................ $ 2.56 $ 0.81 Second Quarter............... $ 6.65 $ 2.16 Third Quarter................ $ 12.58 $ 5.93 Fourth Quarter............... $ 18.33 $ 9.46
2002: First Quarter................. $ 21.59 $ 13.25 Second Quarter............... $ 22.95 $ 9.21 Third Quarter................ $ 12.71 $ 7.30 Fourth Quarter............... $ 9.75 $ 5.08
As of March 15, 2003, there were 92 stockholders of record in addition to approximately 10,489 stockholders whose shares were held in nominee name.
The Company has never paid cash dividends on its Common Stock and does not anticipate doing so in the foreseeable future.
During the three months ended December 31, 2002, the Company did not sell any securities without registration under the Securities Act of 1933, as amended (the "Securities Act").
Item 6.
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data presented below should be read in conjunction with, and is qualified in its entirety by reference to, Management's Discussion and Analysis and the Company's Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Report.
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(1) Beginning in 2001, as required by EITF No. 00-22, the Company adopted a new method of recording rebates received from manufacturers as a reduction of cost of revenue and rebates shared with Plan Sponsors as a reduction of revenue. Prior to 2001 the Company recorded the difference between rebates billed and the rebates shared with customers as a reduction of cost of revenue. For comparative purposes, the years 2000, 1999 and 1998 have all been reclassified to give effect to this new methodology. In 2002, the Company changed the terms with certain of its PBM clients, whereby the Company no longer assumes credit risk. Revenue for these clients is recorded net.
(2) In 1999, the Company recorded $6,029 of TennCare reserve adjustments for estimated losses on contract receivables relating to Tennessee Health Partnership ("THP"), Preferred Health Plans and Xantus Health Plans of Tennessee, Inc. ("Xantus"), as further described in Note 12 of Notes to Consolidated Financial Statements. During the first quarter of 2001, the Company recorded a reserve adjustment credit of $980 to reflect a favorable settlement with THP relative to the amount initially reserved in 1999. In the third quarter of 2001 and the first quarter of 2002, the Company recorded TennCare reserve adjustments of $1,496 and $851, respectively, as a result of the collection of receivables from Xantus, which were previously reserved in 1999. The remaining reserve is $357.
(3) In 1998, the Company recorded charges of $1,500 in connection with the negotiated termination of a vendor contract and $2,200 paid in settlement of a Federal and State of Tennessee investigation of the conduct of two former officers of the Company.
(4) Net income (loss) includes legal expenses advanced for the defense of two former officers for the years 2000, 1999, and 1998 in the amounts of $2,700, $1,400, and $ 1,300, respectively.
(5) In the fourth quarter of 2000, the Company recorded a provision for loss of $2,300 on its investment in Wang Healthcare Information Systems.
(6) The historical loss per common share for the years 2000 and 1999 excludes the effect of common stock equivalents, as their inclusion would be antidilutive.
(7) This amount represents long-term debt assumed by the Company in connection with its acquisition of Continental Managed Pharmacy Services, Inc. and its subsidiaries.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjuction with the Consolidated Financial Statements of MIM Corporation and subsidiaries (collectively, the "Company") including the Notes thereto, included elsewhere in this Report. This Report contains statements not purely historical and which may be considered forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including statements regarding the Company's expectations, hopes, beliefs, intentions or strategies regarding the future. These forward looking statements may include statements relating to the Company's business development activities, sales and marketing efforts, the status of material contractual arrangements, including the negotiation or re-negotiation of such arrangements, future capital expenditures, the effects of regulation and competition on the Company's business, future operating performance of the Company and the results, benefits and risks associated with integration of acquired companies. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, that actual results may differ materially from those possible results discussed in the forward-looking statements as a result of various factors. These factors include, among other things, risks associated with risk-based or "capitated" contracts, increased government regulation related to the health care and insurance industries in general and more specifically, pharmacy benefit management and specialty pharmaceutical distribution organizations, the existence of complex laws and regulations relating to the Company's business, increased competition from the Company's competitors, including competitors with greater financial, technical, marketing and other resources. This Report contains information regarding important factors that could cause such differences. The Company does not undertake any obligation to supplement these forward-looking statements to reflect any future events and circumstances.
Business Overview
The Company is a pharmaceutical healthcare organization delivering innovative pharmacy benefit management, specialty pharmaceutical management and distribution, and other pharmacy-related healthcare solutions. The Company combines its clinical management expertise, sophisticated data management and therapeutic fulfillment capabilities to serve the particular needs of each of its customers and respective pharmacy benefit recipients covered by a customer's pharmacy-related health benefits. These services are organized under two reportable operating segments: PBM Services and Specialty Management and Distribution Services.
The Company offers Plan Sponsors a broad range of PBM Services designed to promote the cost-effective delivery of clinically appropriate pharmacy benefits through its network of retail pharmacies and its own mail service distribution facility.
Through its BioScrip(R) specialty injectable and infusion therapy programs, the Company distributes high-cost pharmaceuticals and provides clinically focused case and disease management programs to Members afflicted with chronic illnesses or genetic impairments. The disease states or conditions for which the Company has such programs include HIV/AIDS, oncology, hemophilia, multiple sclerosis, growth hormone deficiency, Gaucher's disease, rheumatoid arthritis, infertility, respiratory syncytial virus (RSV), hepatitis C, Crohn's disease and transplants. The specialty drugs distributed through the BioScrip(R) programs are dispensed and serviced from the Company's various dispensing locations in Columbus, Ohio; Livingston, New Jersey; and Roslyn Heights, New York. The Roslyn Heights facility has been utilized since January 2002, the acquisition date of Vitality Home Infusion Services, Inc. ("Vitality"), a New York-based provider of specialty pharmaceutical injectable therapy services. The Livingston location has been utilized since August 2000, the acquisition date of American Disease Management Associates, LLC ("ADIMA"), a New Jersey-based provider of specialty injectable and infusion therapy services.
Recent Developments
On February 27, 2003, the Executive Committee of the Board of Directors approved a stock repurchase program pursuant to which the Company is authorized to repurchase up to an aggregate of $10 million of its Common Stock in open market or private transactions. As of March 25, 2003, the Company has repurchased 799,893 shares of its Common Stock in the open market at an aggregate purchase price of $5.1 million.
Critical Accounting Policies
Revenue Recognition
Revenues consist principally of sales of prescription drugs to Members, either through the Company's own pharmacies or through the Company's network of contractually affiliated retail pharmacies, and are recognized when those prescriptions are dispensed. Revenue is primarily derived from the following types of arrangements:
Fee-For-Service. Approximately 91% of revenues are generated from fee-for-service contracts. Under these contracts, revenues from orders dispensed by the retail pharmacy networks are recognized when the pharmacy services are reported to the Company by the dispensing pharmacist through the POS claims processing systems and the drug is dispensed.
The Company evaluates each contract using the indicators of Emerging Issues Task Force No. 99-19 "Reporting Gross Revenue as a Principal vs. Net as an Agent" ("EITF 99-19") to determine whether the Company acts as a principal or as an agent in the fulfillment of prescriptions through the retail pharmacy network. When the Company independently has a contractual obligation to pay a network pharmacy provider for benefits provided to its Plan Sponsors Members, and has other indicators of risk and reward, the Company includes payments from these Plan Sponsors as revenue and payments to the network pharmacy providers as cost of revenue ('gross') in accordance with EITF 99-19, as these transactions require the Company to assume credit risk and act as a principal. If the Company was merely administering Plan Sponsors' network pharmacy contracts in which the Company does not assume credit risk, but acts as an agent, the Company records only the administrative or dispensing fees as revenue ('net').
Capitated Agreements. Approximately 9% of revenues are generated from capitated contracts. The Company's capitated contracts with Plan Sponsors require the Company to provide covered pharmacy services to Plan Sponsor Members in return for a fixed fee per Member per month paid by the Plan Sponsor. Capitated contracts have terms varying from six months to one year. These contracts are subject to rate adjustment or termination upon the occurrence of certain events. At such time as management estimates that a contract will sustain losses over its remaining contractual life, a reserve is established for these estimated losses. There are currently no expected loss contracts.
Co-payments. When prescriptions are filled and the Company is the participating pharmacy, the Company is entitled to receive co-payments from Members and record these co-payments as revenue when the amounts are deemed collectible and reasonably estimable. When prescriptions are filled through its retail pharmacy networks, the Company is not entitled to these amounts and does not account for co-payments in its financial statements as these amounts are never billed or collected by the Company and it has no legal right or obligation to co-payments collected by the retail pharmacies.
Allowance for Doubtful Accounts
Allowances for doubtful accounts are based on estimates of losses related to customer receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances.
Rebates
Manufacturers' rebates are recorded as estimates until such time as the rebate monies are received. These estimates are based on historical results and trends as well as the Company's forecasts. In January 2001, the Company adopted Emerging Issues Task Force Issue No. 00-22, "Accounting for 'Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future" ("EITF 00-22"). EITF 00-22, states, among other things, that rebates received from pharmaceutical manufacturers should be recognized as a reduction of cost of revenue and rebates shared with Plan Sponsors as a reduction of revenue.
Accounting for Stock-Based Compensation
The Company accounts for employee stock-based compensation plans and non-employee director stock incentive plans in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Stock options granted to non-employees are accounted for in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" (See Note 14 of Notes to Consolidated Financial Statements). Stock options granted to
non-employees are also accounted for in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", as well as Emerging Issues Task Force No. 96-18 "Accounting for Equity Instruments That Are Issued To Other Than Employees for Acquiring, or In Conjunction with Selling, Goods or Services("EITF 96-18")."
Purchase Price Allocation
The Company accounts for its acquisitions under the purchase method of accounting and, accordingly, the acquired assets and liabilities assumed are recorded at their respective fair values. The recorded values of assets and liabilities are based on estimates and independent valuations when available. The remaining values are based on management's judgments and estimates and, accordingly, the Company's financial position or results of operations may be affected by changes in estimates and judgments.
Income Taxes
As part of the process of preparing the Company's consolidated financial statements, management is required to estimate income taxes. The process involves estimating actual current tax expense along with assessing temporary differences resulting from differing treatment of items for book and tax purposes. These timing differences result in deferred tax assets, which are included in the Company's consolidated balance sheet.
Deferred Tax Assets
Deferred tax assets are recognized based on temporary differences between book and tax basis of assets and liabilities. A valuation allowance is recorded against these assets when, in the opinion of the Company, it is uncertain that the Company will realize the benefit from its deferred tax assets.
Impairment of Long Lived Assets
The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long lived assets, including intangible assets, may warrant revision or that the remaining balance of an asset may not be recoverable. The measurement of possible impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. Impairment losses, if any, would be determined based on the present value of the cash flows using discount rates that reflect the inherent risk of the underlying business. It is the Company's belief that no such impairment existed as of December 31, 2002 and 2001.
Results of Operations
Specialty Management and Distribution Services
The following table provides details for the segment for the years ended December 31, 2002, 2001 and 2000.
Specialty Management and Distribution Services ($ in thousands)
2002 Inc/(Dec) 2001 Inc/(Dec) 2000 - -------------------------------------------------------------------------------- Revenues $169,503 308% $41,547 133% $17,854 Cost of revenues 130,990 28,398 11,211 ------- ------ ------ Gross profit $ 38,513 $13,149 $ 6,643 ======== ======= ======= Gross profit percentage 22.7% 31.7% 37.2%
Year ended December 31, 2002 vs. year ended December 31, 2001
Revenues increased $128 million to $169.5 million in 2002 compared to $41.5 million in 2001. This increase was primarily the result of the revenue generated from the Vitality business purchased on January 31, 2002 (see Note 4 of Notes to Consolidated Financial Statements) and continued growth in the Company's BioScrip(R) injectable and infusion therapy programs.
Cost of revenue increased $102.6 million to $131 million in 2002 compared to $28.4 million in 2001. This increase is commensurate with the business generated from the Vitality business purchased on January 31, 2002 and the growth in the Company's BioScrip(R) programs from 2001.
Gross profit increased $25.4 million to $38.5 million in 2002 compared to $13.1 million in 2001. This is a result of the business generated from the Vitality business purchased on January 31, 2002 as well as increases from the BioScrip(R) programs, reflecting their revenue growth from 2001.
The gross profit percentage declined in 2002 compared to 2001 as a result of increases in the lower margin BioScrip(R) injectable therapy programs. The current gross profit percentages now reflect a higher proportion of injectable therapy programs compared to 2001. Infusion therapy historically has yielded a higher gross profit percentage.
Year ended December 31, 2001 vs. year ended December 31, 2000
Revenues increased $23.6 million to $41.5 million in 2001, compared to $17.9 million in 2000. The year 2001 included a full year of revenue generated from the ADIMA business purchased in August 2000.
Cost of revenue increased $17.2 million to $28.4 million in 2001 compared to $11.2 million in 2000. This increase is commensurate with the increase in revenues discussed above.
Gross profit increased $6.5 million to $13.1 million in 2001 compared to $6.6 million in 2000. This is a result of the same changes in revenue discussed above. The gross profit percentage declined from 2001 to 2000 as a result of an increase in the BioScrip(R) injectable therapy revenue which has a lower gross profit percentage than infusion therapy.
PBM Services
The following table provides details for the segment for the years ended December 31, 2002, 2001 and 2000:
PBM Services ($ in thousands)
2002 Inc/(Dec) 2001 Inc/(Dec) 2000 ------------------------------------------------------- Revenues $407,093 (2%) $415,099 30% $320,317 Cost of revenues 375,008 374,845 291,780 -------- -------- -------- Gross profit $ 32,085 $ 40,254 $ 28,537 ======== ======== ======== Gross profit percentage 7.9% 9.7% 8.9%
Year ended December 31, 2002 vs. year ended December 31, 2001
Revenues decreased $8 million to $407.1 million in 2002 compared to $415.1 million in 2001. In the second quarter of 2002 the Company changed the terms of some of its PBM customers so that the Company no longer accepted financial or credit risk for these customers. Those changes resulted in the Company recording revenue from these customers on a net basis where previously it was recorded on a gross basis. This change reduced gross revenue and cost of revenue by $53.5 million for the twelve months ended December 31, 2002, with no resulting effect on reported gross profit. Revenue was also reduced in 2002 as a result of the Company's termination of certain unprofitable PBM clients and the liquidation of Access MedPLUS in the fourth quarter of 2001. These decreases were partially offset by increases in the Company's retail network and mail service contracts. For 2002, approximately 13% of the Company's PBM Services revenues were derived from capitated contracts compared to approximately 23% in 2001.
Cost of revenue increased slightly to $375 million in 2002 from $374.8 million in 2001. This change is a result of the same reasons discussed above.
Gross profit for the PBM Services segment decreased $8.2 million to $32.1 million in 2002 compared to $40.3 million in 2001. This is a result of the Company's termination of certain less profitable PBM accounts and the liqudation of a former TennCare MCO customer. These decreases were partially offset by increases from continued growth in the Company's retail network and mail services.
The gross profit percentage decreased to 7.9% in 2002 from 9.7% in 2001 as result of the liquidation of a former TennCare MCO customer, the change in the mix of PBM clients from 2001 as well as new growth in the Company's retail network and mail services for 2002 which generated lower gross profit percentages.
Year ended December 31, 2001 vs. year ended December 31, 2000
Revenues increased $94.8 million in 2001 to $415.1 million compared to $320.3 million in 2000. This increase is primarily due to growth in new PBM and mail services clients as well as increased member utilization and eligibility for existing PBM clients. For 2001, approximately 23% of PBM Services revenues were derived from capitated contracts compared to approximately 32% in 2000.
In the first quarter of 2001 the Company adopted a new method of recording pharmaceutical manufacturers' rebates that are shared with some of the Company's PBM customers. As a result, the Company has recorded rebates shared with its customers as a reduction of revenue and rebates billed to manufacturers as a reduction to cost of revenue. Prior to this, the Company recorded the net difference between rebates billed and rebates shared with customers as a reduction of cost of revenue.
Cost of revenue increased $83.0 million to $374.8 million in 2001 compared to $291.8 million in 2000. This increase is the result of increased business in the retail network and mail services, as discussed above.
Gross profit increased $11.8 million to $40.3 million in 2001 compared to $28.5 million in 2000. This is a result of the same reasons discussed above.
CONSOLIDATED RESULTS
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $7.4 million, or 19%, to $45.9 million in 2002 compared to $38.5 million in 2001. This increase is principally the result of the inclusion of Vitality's business since February 2002, additional expenses incurred to support the growth of the Company's businesses and higher insurance premiums. Selling, general and administrative expenses as a percentage of revenue decreased to 8% in 2002 from 8.4% in 2001.
Selling, general and administrative expenses increased $4.6 million, or 13.6%, to $38.5 million in 2001 compared to $33.9 million in 2000. This increase was primarily the result of the inclusion of ADIMA's business and increases related to the Company's general growth, including the hiring of additional key management in support of the Company's Specialty Management and Distribution Services and PBM Services businesses. These increases were partially offset by the termination of the legal defense costs associated with two former officers of the Company. As a percentage of revenue, selling, general and administrative expenses decreased to 8.4% in 2001 from 10% in 2000.
TennCare(R) Reserve Adjustments
In 1999, the Company recorded $6.0 million of TennCare(R) reserve adjustments for estimated losses on contract receivables relating to Tennessee Health Partnership ("THP"), Preferred Health Plans and Xantus Health Plans of Tennessee, Inc. ("Xantus"), as further described in Note 12 of Notes to Consolidated Financial Statements. There were no reserve adjustments in 2000. During the first quarter of 2001, the Company recorded a reserve adjustment credit of $1.0 million to reflect a favorable settlement with THP relative to the amount initially reserved in 1999. In the third quarter of 2001 and the first quarter of 2002, the Company recorded reserve adjustment credits of $1.5 million and $0.9 million, respectively, as a result of the collection of receivables from Xantus, which were previously reserved in 1999.
Amortization of Intangibles
In 2002 and 2001 the Company recorded amortization of intangibles of $1.4 million and $2.2 million, respectively. The decrease of $0.8 million in 2002 is a result of the adoption of SFAS No. 142 (see Note 5 of Notes to Consolidated Financial Statements), partially offset by increased amortization of intangibles acquired from Vitality on January 31, 2002.
In 2001, the Company recorded amortization of goodwill and other intangibles of $2.2 million compared to $1.5 million in 2000. This increase is due to the inclusion of a full year of goodwill amortization for ADIMA in 2001.
Net Interest Expense
Net interest expense was $0.8 million and $0.06 million for 2002 and 2001, respectively. Interest expense for 2002 is primarily a result of increased borrowings under the Company's revolving credit facility to fund the $35 million cash portion of purchase price for the Vitality acquisition.
Net interest expense was $0.06 million for 2001 compared to net interest income of $0.8 million for 2000.
Provision for Income Taxes
Tax expense for 2002 and 2001 was $4.7 million and $0.9 million, respectively. The effective tax rate for 2002 was 20% compared to 6.2% for 2001. The Company was able to fully offset 2001 taxable income with its Federal net operating loss carry forwards ("NOLs"), but was only able to partially offset 2002 taxable income with NOLs. At December 31, 2002, the Company has remaining NOLs of approximately $21.5 million which will begin expiring in 2009. As opposed to the Company's NOLs that reduced the effective tax rate in 2002 and 2001, the remaining NOLs will be recorded directly in Stockholders' Equity when utilized rather than as a reduction of tax expense as they were generated primarily as a result of the exercise of stock options in prior years. However, the Company will receive the cash flow benefit from the reduction in its income tax liability when the remaining NOLs are utilized. For 2003, the Company believes that its effective tax rate will be approximately 40%. The Company did not have tax expense in 2000 because it did not have any taxable income.
As of January 1, 2003, certain of the NOLs described above were subject to limitation and may be utilized in a future year upon release of the limitation and recorded directly in Stockholders' Equity as discussed above. If the NOLs are not utilized in the year they are available they may be utilized in a future year to the extent they have not expired.
Net Income and Earnings Per Share
Net income for 2002 increased 32% to $18.7 million, or $0.79 per diluted share, compared to net income of $14.2 million, or $0.64 per diluted share, for 2001. Excluding 2002 and 2001 gains associated with TennCare(R) reserve adjustments of $0.03 and $0.10 per diluted share, respectively, and the $0.08 impact of amortization of goodwill in 2001, net income for 2002 was $18.0 million, or $0.76 per diluted share, compared to net income of $13.6 million, or $0.61 per diluted share, for 2001.
For 2001, the Company recorded net income of $14.2 million, or $0.64 per diluted share, including gains associated with the TennCare(R) reserve adjustment of $0.10 per diluted share, compared with a net loss of $1.8 million, or $0.09 per share, for 2000, which included charges of $5.4 million relating to the legal defense costs of two former officers and the write off of a non-operating investment.
Liquidity and Capital Resources
The Company utilizes both funds generated from operations and available credit under its Facility (as defined below) for acquisitions, capital expenditures and its general working capital needs.
For 2002, net cash provided to the Company from operating activities totaled $20.8 million compared to $10.9 million for 2001. This improvement is the result of continued growth in the Company's businesses resulting in increased cash earnings.
As a percentage of accounts receivable, the allowance for doubtful accounts was 4.4% and 7.3% at December 31, 2002 and 2001, respectively. The decrease in 2002 is due primarily to the reduction in reserves associated with the TennCare(R) reserve adjustment in the first quarter of 2002 (see "TennCare(R) Reserve Adjustments" discussion above).
Net cash used in investing activities in 2002 was $33.3 million compared to $3.7 million used in 2001. This increase reflects approximately $35 million of the Facility used for the cash portion of the purchase price for the Vitality acquisition (see Note 4 of Notes to Consolidated Financial Statements), partially offset by the repayment in full, in March 2002, of a $2.1 million officer loan (see Note 7 of Notes to Consolidated Financial Statements).
Net cash provided by financing activities in 2002 was $5.7 million compared to $3.9 million in 2001. The increase reflects $4.6 million currently outstanding under the Facility after repaying most of the borrowings used to pay the cash portion of the purchase price for the Vitality acquisition, offset by a $5.6 million decrease in proceeds from the exercise of stock options and $2.6 million less of treasury stock purchases in 2001.
At December 31, 2002, the Company had working capital of $5.1 million compared to $9.3 million at December 31, 2001. This change is primarily the result of the acquisition of Vitality for $45 million, of which $35 million was paid in cash. Goodwill and intangible assets, classified as non-current, increased $39.4 million and the $4.6 million current unpaid balance under the Facility was classified as a current liability. Amortizable intangibles are amortized over 2 to 10 years.
On November 1, 2000, the Company entered into a $45 million secured revolving credit facility (the "Facility") with HFG Healthco-4 LLC, an affiliate of Healthcare Finance Group, Inc. ("HFG"). The Facility has a three-year term and is secured by the Company's receivables. Interest is payable monthly and provides for borrowing of up to $45 million at the London InterBank Offered Rate (LIBOR) plus 2.1%. The Facility contains various covenants that, among other things, require the Company to maintain certain financial ratios, as defined in the agreement governing the Facility. As of December 31, 2002, there was outstanding $4.6 million under the Facility as a result of the Company's acquisition of Vitality. The Facility terminates October 31, 2003. The Company believes that it will be able to extend or renew the Facility or, alternatively, obtain a new credit facility with another lender; however, there can be no assurances that the Company will be able to renew or extend the Facility or obtain a new one on terms favorable to the Company. Failure to renew or extend the Facility or enter into a new credit facility could have a material adverse effect on the Company.
The Facility is an asset-based loan, secured by the Company's receivables, with any borrowings repaid by the cash flow from customer payments. The borrowing and repayment processes under the Facility are outlined below:
Cash Received by the Company
Under the terms of the Facility, all remittances from customers are sent/deposited into the Company's lock box accounts with authorized access by HFG. Regardless of whether any portion of the Facility is outstanding on any given day, all available cash in the lock box accounts is swept daily by HFG to its account. If there are no amounts owed under the Facility, the swept cash is transferred back the same day to the Company's main bank account. If any amounts are currently outstanding under the Facility, the swept cash is immediately applied by HFG against all or a portion of the loan balance. Any cash available after repayment of the entire outstanding loan balance on any given day is transferred back to the Company as discussed above.
Check Disbursements by the Company
All Company-issued checks are drawn on two disbursement accounts, one for pharmacy claims payments and one for remaining accounts payable. Checks are presented for payment daily to the disbursement accounts and are automatically funded by a transfer from the Company's main concentration account. If there are sufficient available balances in the concentration account, funds are automatically transferred to the disbursement accounts to cover the presentments. If there are not sufficient available balances in the concentration account the Company must borrow from the Facility that day. An authorized officer of the Company transmits a notice to HFG with the requested amount by noon. Within an hour HFG wires the requested amount as available funds to the concentration account, which amount is then automatically transferred the same day to the disbursement accounts to cover the presentments.
On February 28, 2003, the Company announced a stock repurchase program pursuant to which the Company is authorized to purchase up to $10 million of the Company's Common Stock from time to time in the open market or in private transactions. As of March 25, 2003, the Company has used, in the aggregate, approximately $5.1 million of this authorization. The Board's current authorization supersedes the repurchase program adopted by the Company in 2001.
In the first quarter of 2001, the Company commenced a stock repurchase program under which it was authorized to repurchase up to $5 million of the Company's Common Stock from time to time in the open market or in private
transactions. In February 2001, the Company repurchased 1,298,183 shares of Common Stock at a price of $2.00 per share in private transactions. (See Note 11 of Notes to Consolidated Financial Statements). This program has been superseded by the 2003 repurchase plan.
As the Company continues to grow, it anticipates that its working capital needs will also continue to increase. The Company believes that it has sufficient cash on hand, together with funds available under the Facility and cash expected to be generated from operating activities, to fund the Company's anticipated working capital needs, the current stock repurchase program and other cash needs.
The Company also may pursue joint venture arrangements, business acquisitions and other transactions designed to expand its Specialty Management and Distribution Services and PBM Services businesses, which the Company would expect to fund from cash on hand or debt, borrowings under the Facility, other future indebtedness or, if appropriate, the private and/or public sale or exchange of equity securities of the Company (see discussion of the Facility above).
The following table sets forth the Company's contractual obligations affecting cash in the future.
Other Matters
In 1998, the Company recorded a $2.2 million charge against earnings as a result of an agreement in principle with respect to a civil settlement of a Federal and State of Tennessee investigation in connection with conduct occurring prior to the Company's August 1996 initial public offering involving, among others, two former officers of the Company. The definitive agreement covering that settlement was executed on June 15, 2000, and required payment of $0.8 million in 2000, $0.9 million in 2001, and $0.5 million in 2002. On July 1, 2002, this settlement was paid in full.
The TennCare(R) program operates under a demonstration waiver from The United States Center for Medicare and Medicaid Services ("CMS"). That waiver is the basis of the Company's ongoing service to those MCOs in the TennCare(R) program. The waiver expires on December 31, 2004. While the Company believes that pharmacy benefits will continue to be provided to Medicaid and other eligible TennCare(R) enrollees through MCOs in one form or another through at least December 31, 2004, should the funding sources and/or conditions for the TennCare(R) program change significantly, the TennCare(R) program's ability to pay the MCOs, and in turn the MCO's ability to pay the Company, could materially and adversely affect the Company's financial position and results of operations. Revenues from the TennCare(R) program for the years 2002, 2001 and 2000 were 30.1%, 36.6% and 47.5%, respectively of total revenue.
Historically, as a result of providing capitated PBM services to certain TennCare(R) MCOs, the Company's pharmaceutical claims costs had been subject to significant increases from October through February, which the Company believes is due to the need for increased medical attention to, and intervention with, MCOs' Members during the colder months. The resulting increase in pharmaceutical costs impacted the profitability of capitated contracts. Currently, the Company has no capitated PBM arrangements with MCOs participating in the TennCare(R) program. Fee-for-service arrangements mitigate the adverse effect on profitability of higher pharmaceutical costs incurred under capitated contracts, as higher utilization positively impacts profitability. The Company presently anticipates that approximately 12% of its total revenues for 2003 will be derived from capitated arrangements.
Generally, loss contracts arise only on capitated or other risk-based contracts and primarily result from higher than expected pharmacy utilization rates, higher than expected inflation in drug costs and the inability of the
Company to restrict its MCO clients' formularies to the extent anticipated by the Company at the time contracted PBM services are implemented, thereby resulting in higher than expected drug costs. At such time as management estimates that a contract will sustain losses over its remaining contractual life, a reserve is established for these estimated losses. There are currently no loss contracts and management does not believe that there is an overall trend towards losses on its existing capitated contracts.
On March 23, 2002, Mr. Richard Friedman, the Company's Chairman and Chief Executive Officer, repaid in full a $1.7 million loan from the Company. This loan, together with accrued and unpaid interest, totaled approximately $2.1 million.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk for changes in interest rates relates primarily to the Company's debt. At December 31, 2002 the Company did not have any long term debt. The Company does not invest in, or otherwise use, derivative financial instruments.
At December 31, 2002, the carrying values of cash and cash equivalents, accounts receivable, accounts payable, claims payable, payables to Plan Sponsors and others, and debt approximate fair value due to their short-term nature.
Because management does not believe that its exposure to interest rate market risk is material at this time, the Company has not developed or implemented a strategy to manage this market risk through the use of derivative financial instruments or otherwise. The Company will assess the significance of interest rate market risk from time to time and will develop and implement strategies to manage that risk as appropriate.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders MIM Corporation
We have audited the accompanying consolidated balance sheet of MIM Corporation and subsidiaries as of December 31, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audit. The financial statements and schedule of MIM Corporation as of December 31, 2001 and for the years ended December 31, 2001 and 2000, were audited by other auditors who have ceased operations and whose report dated February 16, 2002, expressed an unqualified opinion on those statements, prior to restatement.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MIM Corporation at December 31, 2002, and the consolidated results of their operations and their cash flows for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
In addition, as described in Note 5, these financial statements have been further revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 5 with respect to 2001 and 2000 included (a) agreeing the previously reported net income (loss) representing amortization expense, (including any related tax effects) recognized in those periods related to goodwill, to the Company's underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net income (loss) to reported net income (loss) and the related earnings-per-share amounts. In our opinion, the disclosures for 2001 and 2000 in Note 5 are appropriate. However, we were not engaged to audit, review or apply any procedures to the 2001 or 2000 financial statements of the Company other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2001 or 2000 financial statements taken as a whole.
/s/ Ernst & Young, LLP - ---------------------- Ernst & Young, LLP MetroPark, New Jersey February 14, 2003
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of MIM Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of MIM Corporation (a Delaware corporation) and Subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MIM Corporation and Subsidiaries as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to the financial statements is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements, and in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey February 16, 2002
This is a copy of an Accountant's Report previously issued by Arthur Andersen LLP, and has not been reissued by Andersen. See Exhibit 23.2 for further information.
MIM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, (In thousands, except for share amounts)
MIM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, (In thousands, except per share amounts)
MIM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
MIM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
MIM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, (In thousands, except per share amounts)
Supplemental Disclosures:
The Company paid $853, $465 and $657 for interest of each of the years ended December 31, 2002, 2001, and 2000, respectively.
Capital lease obligations of $1,495 were incurred to acquire equipment for the year ended December 31, 2000. None were incurred for the years ended December 31, 2002, and 2001.
In connection with the acquisition of American Disease Management Associates L.L.C. ("ADIMA"), the Company issued 2,700 shares of its common stock, par value $0.0001 per share, valued at $5,034 during the year ended December 31, 2000.
In 2001, there was a contribution of a minority interest to additional paid-in capital of $1,112 upon dissolution of a subsidiary.
In 2001, the Company reclassified stockholder notes receivable of $771 to other assets. During 2001, the stockholder repaid $504 of the notes outstanding, with the balance of $267 being repaid in 2002.
In connection with the acquisition of Vitality Home Infusion Services, Inc. ("Vitality"), the Company issued 612,419 shares of its common stock, par value $0.0001 per share, valued at $10,355 during the year ended December 31, 2002.
The accompanying notes are an integral part of these consolidated financial statements.
MIM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share and per share amounts)
NOTE 1--NATURE OF BUSINESS
Corporate Organization
MIM Corporation (the "Company" or "MIM") is a pharmaceutical healthcare organization delivering innovative pharmacy benefit management, specialty pharmaceutical management and distribution and other pharmacy-related healthcare solutions. The Company combines its clinical management expertise, sophisticated data management and therapeutic fulfillment capabilities to serve the particular needs of each of its customers and respective pharmacy benefit recipients covered by a customer's pharmacy-related health benefits. The Company provides a broad array of pharmacy benefits and pharmacy products and services to individual enrollees ("Members") receiving health benefits, principally through health insurers, including managed care organizations ("MCOs") and other insurance companies, and, to a lesser extent, labor unions, self-funded employer groups, government agencies, and other self-funded plan sponsors, directly or indirectly through third party administrators (collectively, "Plan Sponsors"). These services are organized under two reportable operating segments: pharmacy benefit management and mail services (collectively, "PBM Services"), and specialty pharmacy distribution and clinical management services ("Specialty Management and Distribution Services").
Business
In 2002, the Company derived revenues from agreements to provide PBM services, which includes prescription Mail Service to the Members of Plan Sponsors in the United States. The Company also provided Specialty Management and Distribution Services to chronically ill or genetically impaired patients that require injection and infusion therapies, as well as infusion therapies and home healthcare services to patients recently discharged from hospitals.
Historically, a significant portion of the Company's revenues have been derived from providing PBM services in the State of Tennessee to managed care organizations ("MCOs") participating in the State of Tennessee's TennCare(R) program. Revenue for the TennCare(R) program for the year 2002 was 30.1% of the Company's revenue, compared to 36.6% and 47.5% for the years ended December 31, 2001 and 2000, respectively.
Through its BioScrip(R) specialty injectable and infusion therapy programs, the Company distributes high-cost pharmaceuticals and provides clinically focused case and disease management programs to Members afflicted with chronic illnesses or genetic impairments. The disease states or conditions for which the Company has such programs include HIV/AIDS, oncology, hemophilia, multiple sclerosis, growth hormone deficiency, Gaucher's disease, rheumatoid arthritis, infertility, respiratory syncytial virus (RSV), hepatitis C, Crohn's disease and transplants. The specialty drugs distributed through the BioScrip(R) programs are dispensed and serviced from the Company's various dispensing locations in Columbus, Ohio; Livingston, New Jersey; and Roslyn Heights, New York. The Roslyn Heights facility has been utilized since January 2002, the acquisition date of Vitality Home Infusion Services, Inc. ("Vitality"), a New York-based provider of specialty pharmaceutical injectable therapy services. The Livingston location has been utilized since August 2000, the acquisition date of American Disease Management Associates, LLC ("ADIMA"), a New Jersey-based provider of specialty injectable and infusion therapy services.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of MIM Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits, overnight investments and money market accounts, with maturities of ninety days or less.
Receivables
Receivables include amounts due from Plan Sponsors under the Company's PBM contracts, amounts due from pharmaceutical manufacturers for rebates, service fees resulting from the distribution of certain drugs through retail pharmacies and amounts due from certain third party payors.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventory consists principally of purchased prescription drugs.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of assets. The estimated useful lives of the Company's assets are as follows:
Asset Useful Life - ----- ----------- Computer and office equipment................. 3-5 years Furniture and fixtures........................ 5-7 years
Leasehold improvements and leased assets are amortized using a straight-line basis over the related lease term or estimated useful life of the assets, whichever is less. The cost and related accumulated depreciation of assets sold or retired are removed from the accounts with the gain or loss, if applicable, recorded in the statement of operations. Maintenance and repairs are expensed as incurred.
Claims Payable
The Company is responsible for all covered prescriptions provided to plan members during the contract period. Claims payable also includes estimates of certain prescriptions that were dispensed to members for whom the related claims had not yet been submitted.
Payables to Plan Sponsors
Payables to Plan Sponsors represent the sharing of pharmaceutical rebates with the Plan Sponsors, and on a limited bases, profit sharing plans with certain capitated contracts.
The Company estimates the portion of those pharmacy rebates that are shared with its clients and adjusts pharmacy rebates payable to plan sponsors when the amounts are paid typically on a quarterly basis, or as significant events occur. These estimates are accrued periodically based on actual and estimated claims data and agreed upon contractual rebate sharing rates. The Company records any cumulative effect of these adjustments against costs as identified, and adjusts its estimates prospectively to consider recurring matters. Adjustments generally result from contract changes with clients, differences between the estimated and actual product mix subject to rebates or whether the product was included in the applicable formulary.
Revenue Recognition
Revenues consist principally of sales of prescription drugs to Members, either through the Company's own pharmacies or through the Company's network of contractually affiliated retail pharmacies, and are recognized when those prescriptions are dispensed. Revenue is primarily derived from the following types of arrangements:
Fee-For-Service. Approximately 91% of revenues are generated from fee-for-service contracts. Under these contracts, revenues from orders dispensed by the retail pharmacy networks are recognized when the pharmacy services are reported to the Company by the dispensing pharmacist through the POS claims processing systems and the drug is dispensed.
The Company evaluates each contract using the indicators of Emerging Issues Task Force No. 99-19 "Reporting Gross Revenue as a Principal vs. Net as an Agent" ("EITF 99-19") to determine whether the Company acts as a principal or as an agent in the fulfillment of prescriptions through the retail pharmacy network. When the Company independently has a contractual obligation to pay a network pharmacy provider for benefits provided to its Plan Sponsors Members, and has other indicators of risk and reward, the Company includes payments from these Plan Sponsors as revenue and payments to the network pharmacy providers as cost of revenue ('gross') in accordance with EITF 99-19, as these transactions require the Company to assume credit risk and act as a principal. If the Company was merely administering Plan Sponsors' network pharmacy contracts in which the Company does not assume credit risk, but acts as an agent, the Company records only the administrative or dispensing fees as revenue ('net').
Capitated Agreements. Approximately 9%, or $52,628 of the total company revenues were generated from capitated contracts in the year ended December 31, 2002. The Company's capitated contracts with Plan Sponsors require the Company to provide covered pharmacy services to Plan Sponsor Members in return for a fixed fee per Member per month paid by the Plan Sponsor. Capitated contracts have terms varying from six months to one year. These contracts are subject to rate adjustment or termination upon the occurrence of certain events. At such time as management estimates that a contract will sustain losses over its remaining contractual life, a reserve is established for these estimated losses. There are currently no expected loss contracts.
Co-payments. When prescriptions are filled and the Company is the participating pharmacy, the Company is entitled to receive co-payments from its members and record these co-payments as revenue when the amounts are deemed collectible and reasonably estimable. When prescriptions are filled through its retail pharmacy networks, the Company is not entitled to these amounts and does not account for co-payments in its financial statements as these amounts are never billed or collected by the Company and it has no legal right or obligation to co-payments collected by the pharmacies in its retail network.
Cost of Revenue
Cost of revenue includes pharmacy claims, fees paid to pharmacies and other direct costs associated with pharmacy management, claims processing operations and mail order services, offset by volume rebates received from pharmaceutical manufacturers. The Company does not maintain cost of revenue information with regards to product sales.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 utilizes the liability method, and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities at currently enacted tax laws and rates.
Earnings per Share
Basic earnings (loss) per common share are based on the weighted average number of shares outstanding and diluted earnings per share are based on the weighted average number of shares outstanding, including common stock equivalents. For the year ended December 31, 2000, diluted loss per share is the same as basic loss per share because the inclusion of common stock equivalents would be anti-dilutive.
Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable and short-term debt. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximate fair value due to their short-term nature.
Accounting for Stock-Based Compensation
The Company accounts for employee stock based compensation plans and non-employee director stock incentive plans in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Stock options granted to non-employees are accounted for ("SFAS 123") in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" (See Note 14). Stock options granted to non-employees are also accounted for in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", as well as Emerging Issues Task Force No. 96-18 "Accounting for Equity Instruments That Are Issued To Other Than Employees for Acquiring, or In Conjunction with Selling, Goods or Services." ("EITF 96-18")
The fair value of the Company's compensation cost for stock option plans for employees and directors, had it been determined, in accordance with SFAS 123, would have been as follows for the years ended December 31:
Because the fair value method prescribed by SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation expense may not be representative of the amount of compensation expense to be recorded in future years. As pro forma compensation expense for options granted is recorded over the vesting period, future pro forma compensation expense may be greater as additional options are granted.
Recent Accounting Pronouncements
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, and amendment of FASB Statement No. 123 (SFAS No. 148)." This
statement amends SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 31, 2002. The Company will continue to account for stock-based employee compensation using the intrinsic value method under APB No. 25, "Accounting for Stock Issued to Employees" with pro forma disclosure of net income and earnings per share as if the fair value method prescribed by SFAS No. 123 had been applied in accordance with SFAS No. 148.
NOTE 3 - OPERATING SEGMENTS
The Company operates in two operating segments: (1) PBM Services, which is comprised of fully integrated pharmacy benefit management and mail services; and (2) Specialty Management and Distribution Services, which is comprised of its BioScrip(R) specialty injectable and infusion therapy programs for patients who are chronically ill and genetically impaired.
Although the Company did offer its BioScrip(R) programs in 2001, it did not manage this portion of its business separately from the PBM and mail services business. Hence, the BioScrip(R) services were not an operating segment at that time. In the first quarter of 2002, the Company substantially altered its business model with the acquisition and integration of Vitality. Due to various factors and industry projections (i.e., growth forecasts, penetration rates, etc.) related to the specialty pharmaceutical area, management decided to allocate a significant amount of resources to the growth of its specialty pharmaceutical business. After this reorganization in the first quarter of 2002, the Company determined that its specialty BioScrip(R) business met the definition of a reportable operating segment.
The accounting policies applied to the business segments are the same as those described in the Summary of Significant Accounting Policies.
With respect to the segment information below, the Company is required under SFAS 131, "Disclosures about Segments of an Enterprise and Related Information to show comparable segment information for the same periods in 2001 and 2000, regardless of the fact that the Company had only one operating segment prior to 2002. For purposes of 2001 and 2000 segment information disclosed below, we made segment allocations based on methodologies used for 2002 information.
NOTE 4 - ACQUISITIONS
On January 31, 2002, the Company acquired all of the issued and outstanding capital stock of Vitality Home Infusion Services, Inc. ("Vitality"). Vitality is a New York-based provider of specialty pharmaceutical services. Vitality provided such services to chronically ill and genetically impaired patients, particularly focusing on oncology, infectious disease, immunology and rheumatory disease.
The aggregate purchase price for Vitality was $46,416 (including $1,061 in transaction costs), payable $35,000 in cash and 612,419 shares of MIM common stock valued at $10,355. The common stock of MIM was valued using the average market price of the Company's common stock over the period including the two days before and after the terms of the acquisition were agreed to and announced. The purchase price for Vitality has been allocated to assets and liabilities based on management's best estimates of fair value and based on a final valuation performed by an independent outside valuation firm. The following table sets forth the allocation of the purchase price as of December 31, 2002:
Purchase price: Funded from the Company's line of credit $35,000 Common stock value 10,355 Transaction costs 1,061 ------- Total purchase price 46,416
Less: net tangible assets as of January 31, 2002 5,641 Excess of purchase price over net tangible assets acquired $40,775 =======
Allocation of excess purchase price: Customer relationships $11,000 Trademarks 4,700 Non-compete agreements 730 Goodwill 24,345 ------- Total $40,775 =======
The following table sets forth the assets and liabilities acquired with the purchase of Vitality.
Vitality Balance Sheet At January 31, 2002 ASSETS Cash $ 1,136 Accounts receivable 7,217 Inventory 4,098 --------- 12,451 Fixed and other assets 180 --------- Total assets $ 12,631 =========
LIABILITIES Accounts payable and accrued expenses $ 6,990 Stockholders equity 5,641 --------- Total liabilities and equity $ 12,631 =========
Vitality Pro Forma Financial Information
The following unaudited consolidated pro forma financial information for the whole Company for the twelve months ended December 31, 2002 and 2001, respectively, has been prepared assuming Vitality was acquired as of January 1, 2001, utilizing the purchase method of accounting, with pro forma adjustments for non-amortizing goodwill, amortizing intangibles, interest expense, rent expense and income tax benefit. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results that would have been realized had the acquisition occurred on January 1, 2001. This pro forma financial information is not intended to be a projection of future operating results.
Pro Forma Income Statement
For the year ended December 31 ---------------------------------------- 2002 2001 ------------------- ------------------- (unaudited) (unaudited)
Revenues $ 583,640 $ 531,417 Net income $ 18,497 $ 16,287 Basic income per common share $ 0.82 $ 0.74 Diluted income per common share $ 0.78 $ 0.71
NOTE 5 - GOODWILL
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations," ("SFAS 141")and No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142") which establish accounting and reporting standards governing business combinations, goodwill and intangible assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. SFAS 142 states that goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value based test. Under the new rules, an acquired intangible asset should be separately recognized and amortized over its useful life (unless an indefinite life) if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged regardless of the acquirer's intent to do so. The Company adopted these standards on July 1, 2002 and January 1, 2002.
Pursuant to SFAS No. 142, substantially all of the Company's intangible assets will no longer be amortized and the Company is required to perform an annual impairment test for goodwill and intangible assets. Goodwill and intangible assets are allocated to the reporting units, which are either the operating segment or one reporting level below the operating segment. SFAS 142 requires the Company to compare the fair value of the reporting unit to its carrying amount on an annual basis to determine if there is potential impairment. If the fair value of the reporting unit is less than its carrying value an impairment loss would be recorded to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value. The impairment test for indefinite lived intangible assets consists of comparing the fair value of the intangible asset to its carrying value. If the carrying value of the intangible asset exceeds its fair value an impairment loss is recognized. Fair value for goodwill and intangible assets are determined based on discounted cash flows and appraised values. During the first quarter of 2002, the Company completed its initial impairment review, which indicated that there was no impairment of goodwill or intangible assets. The Company also performed its annual impairment test which indicated there was no impairment at December 31, 2002,
The following table provides a reconciliation of reported net income for the years ended December 31, 2001 and 2000, to adjusted net income as if SFAS No. 142 had been applied as of January 1, 2000.
The changes in the net carrying amount of goodwill for the year ended December 31, 2002, are as follows:
All goodwill assigned to our Specialty Management and Distribution Services segment is expected to be deductible for income tax purposes. Goodwill associated with the PBM Services segment is not tax deductible.
The following table details the acquired intangible assets and their accumulated amortization as of December 31, 2002.
The amortization expense for the year ended December 31, 2002 was $1,424. The estimated amortization expense for the next five years is as follows:
For the year ending December 31,
2003 $1,841 2004 $1,755 2005 $1,402 2006 $1,377 2007 $1,377
NOTE 6 - INVESTMENT
On June 23, 1997, the Company acquired an 8% interest in Wang Healthcare Information Systems, Inc. ("WHIS"), which markets PC-based clinical information systems to physicians utilizing patented image-based technology. The Company purchased 1,150,000 shares of the Series B Convertible Preferred Stock of WHIS, for an aggregate purchase price equal to $2,300. Due to changes in the financial situation at WHIS and its ability to access capital, the Company recorded a provision for loss in the amount of $2,300 on this investment in 2000.
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company leases one of its facilities from Alchemie Properties, LLC ("Alchemie") pursuant to a ten-year agreement. Alchemie is controlled by Mr. E. David Corvese, a stockholder and former officer and director of the Company (the "Founder"). Rent expense was approximately $56 for each of the years ended December 31, 2002, 2001, and 2000.
The Company has a consulting arrangement with one of its board members which, in addition to customary board fees, the board member's company receives a monthly fee to perform consulting work predominantly related to the TennCare(R) program. Consulting fees under this contract were $549, $508 and $494 for the years ended December 31, 2002, 2001 and 2000.
Stockholder Notes Receivable
On March 23, 2002, the Company's Chairman and Chief Executive Officer, repaid in full a $1,700 loan, together with all accrued and unpaid interest thereon, totaling approximately $2,100. Interest income on the note was $19, $121 and $161 for the years ended December 31, 2002, 2001 and 2000, respectively.
The Company had a $502 note receivable outstanding with the Founder as of December 31, 2000. The note was repaid in 2001. Interest income on the note was $41 for the year ended December 31, 2001, and $46 for the year ended December 31, 2000.
The Company had a $267 and $269 note receivable from Alchemie outstanding as of December 31, 2001 and 2000, respectively. The note bears interest at a rate of 10% per annum with principal due and payable on December 1, 2004. Interest income was $2, $29 and $27 for the years ended December 31, 2002, 2001 and 2000. This note was paid in full on January 31, 2002.
The Company had a $780 note receivable from the Founder outstanding as of December 31, 1999. The note was fully repaid in 2000. Interest income on the notes was $27 for the year ended December 31, 2000.
In 2001, the Company reclassified the then outstanding stockholder notes receivable from the Founder of approximately $771 from a reduction of stockholders' equity to other assets. Although the loans did not originate from the issuance of, or were otherwise collateralized by, the Company's equity securities, the Company initially classified the promissory notes in equity due to the nature of the borrowers' relationship to the Company at the time of the notes' origination. At that time, the Founder was the President and majority stockholder of the Company. As such, the borrowers and the Company were entities under common control at that time and the promissory notes were therefore treated as equity. The Founder is no longer an officer, director or majority stockholder of the Company and accordingly, the borrowers and the Company are no longer considered to be entities under common control.
Indemnification
Under certain circumstances, the Company may be obligated to indemnify and has advanced defense costs to two former officers of a subsidiary of the Company in connection with their involvement in the Federal and State of Tennessee investigation of which they were the subject. During 2000, the Company advanced and expensed approximately $2,700 for the former officers' legal costs in this matter.
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following at December 31:
NOTE 9 - LINE OF CREDIT
On November 1, 2000 the Company entered into a $45,000 revolving credit facility (the "Facility") with HFG Healthco-4 LLC, an affiliate of Healthcare Finance Group, Inc. ("HFG"), to be used for working capital purposes and future acquisitions. The Facility has a three-year term and is secured by the Company's receivables. Interest is payable monthly and provides for borrowing up to $45,000 at the London Inter-Bank Offered Rate (LIBOR) plus 2.1% (3.5% as of 2002). A 0.5% annual fee is incurred monthly when the line is not utilized. In connection with the issuance of the Facility, the Company incurred financing costs of $1,642, which are included in other assets and are being amortized over the term of the agreement. The facility contains various covenants that, among other things, require the Company to maintain certain financial ratios, as defined in the agreements governing the Facility. As of December 31, 2002 and 2001, the Company had amounts outstanding of $4.6 million and $0, respectively.
NOTE 10 - MINORITY INTEREST
On June 28, 2001, the Company dissolved MIM Strategic Marketing, LLC ("Strategic"), a joint venture of which the Company was the majority investor. The Company does not have any repayment obligation to the minority interest investor under Strategic's operating agreement or under the laws of the state of its formation. As a result of this dissolution, the minority interest balance of $1,112 has been reclassified to additional paid in capital.
NOTE 11 -TREASURY STOCK
In February 2001, the Company repurchased 1,298,183 shares of the Company's common stock for $2,596, at a price of $2.00 per share. This program has been superceded by the 2003 repurchase plan.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Legal Proceedings
Until settled on April 2, 2001, the Company had been engaged in commercial arbitration with Tennessee Health Partnership ("THP") over a number of commercial disputes surrounding the parties' relationship. In 1999, the Company recorded a TennCare reserve adjustment of $3,300 for estimated future losses related to this dispute and another TennCare provider. In connection with the above settlement, which was favorable to the Company, $1,300 was paid to THP in satisfaction of all claims between the parties and a $980 TennCare reserve adjustment credit was recorded in the first quarter of 2001.
On March 31, 1999, the State of Tennessee (the "State") placed Xantus Health Plans of Tennessee, Inc. ("Xantus") in receivership. The State proposed a plan of rehabilitation (the "Plan"), as opposed to a liquidation of Xantus, that would allow Xantus to remain operating as a TennCare MCO. Under the Plan, the State loaned Xantus $30,000 to repay pre-petition claims of providers, which claims aggregate approximately $80,000. Under the Plan, during December 1999, the Company received $4,200, including $600 of unpaid rebates to Xantus, which the Company was allowed to offset in full against its pre-petition claims. Because a plan for the payment of the remaining amounts had not been finalized in time for completion of the annual audit, and the recovery of any additional amounts was uncertain, the Company recorded a special charge in 1999 of $2,700 as a TennCare reserve adjustment for the estimated loss on the remaining amounts owed. In the third quarter of 2001 the Company recorded $1,496 as credits to the TennCare reserve, resulting from the collection of receivables from Xantus for amounts previously reserved in 1999. In the first quarter of 2002, the Company recorded $851 as a credit against that reserve based on management's determination that amount was free from claims to third parties.
In 1998, the Company recorded a $2,200 charge against earnings in connection with an agreement in principle with respect to a civil settlement of the Federal and State of Tennessee investigation in connection with the conduct of two former officers of the Company, prior to the Company's initial public offering. This settlement was paid in full on July 1, 2002.
Government Regulation
Various Federal and state laws and regulations affecting the healthcare industry do or may impact the Company's current and planned operations, including, without limitation, Federal and state laws prohibiting kickbacks in government health programs (including TennCare(R)), Federal and state antitrust and drug distribution laws, and a wide variety of consumer protection, insurance and other state laws and regulations. While management believes that the Company is in substantial compliance with all existing laws and regulations material to the operation of its business, such laws and regulations are subject to rapid change and often are uncertain in their application. As controversies continue to arise in the healthcare industry (for example, regarding the efforts of Plan Sponsors and pharmacy benefit managers to limit formularies, alter drug choice and establish limited networks of participating pharmacies), Federal and state regulation and enforcement priorities in this area can be expected to increase, the impact of which on the Company cannot be predicted. There can be no assurance that the Company will not be subject to scrutiny or challenge under one or more of these laws or that any such challenge would not be successful. Any such challenge, whether or not successful, could have a material adverse effect upon the Company's financial position and results of operations. Violation of the Federal anti-kickback statute, for example, may result in substantial criminal penalties, as well as exclusion from the Medicare and Medicaid (including TennCare) programs. Further, there can be no assurance that the Company will be able to obtain or maintain any of the regulatory approvals that may be required to operate its business, and the failure to do so could have a material adverse effect on the Company's financial position and results of operations.
The Company entered into a corporate integrity agreement with the Office of Inspector General (the "OIG") within the Department of Health and Human Services ("HHS") in connection with the Global Settlement Agreement entered into with the OIG and the State of Tennessee in June 2000. In order to assist the Company in maintaining compliance with laws and regulations and the corporate integrity agreement the Company implemented its corporate compliance program in August of 2000. This program includes educational training for all employees on compliance with laws and regulations relevant to the Company's business and operations and a formal program of reporting and resolution of possible violations of laws or regulations, as well as increased oversight by the OIG. Should the oversight procedures reveal credible evidence of any violation of federal law, the Company is required to report such potential violations to the OIG and the Department of Justice ("DOJ"). The Company is therefore subject to increased regulatory scrutiny and, if the Company commits legal or regulatory violations, they may be subject to an increased risk of sanctions or penalties, including exclusion from participation in the Medicare or Medicaid programs.
Employment Agreements
The Company has entered into employment agreements with certain key employees that expire at various dates through February 2004. Total minimum commitments under these agreements are approximately as follows:
2003 .................. $ 1,666 2004 .................. 234
-------------- Total $ 1,900 ==============
Operating Leases
The Company leases its facilities and certain equipment under various operating leases. The future minimum lease payments under these operating leases at December 31 are as follows:
2003 ............... $ 1,725 2004 ............... 1,597 2005 ............... 1,466 2006 ............... 1,325 2007 ............... 1,018 Thereafter ......... 1,351
-------------- Total $ 8,482 ==============
Rent expense for non-related party leased facilities and equipment was approximately $1,820, $1,384 and $1,292 for the years ended December 31, 2002, 2001 and 2000, respectively.
Capital Leases
The Company leases certain equipment under various capital leases. Future minimum lease payments under the capital lease agreements at December 31 are as follows:
2003 .......................................... $ 706 2004 .......................................... 420 2005 .......................................... 35 -------- Total minimum lease payments .................. 1,161 Less: Amount representing interest ........... 97 -------- Obligations under leases ...................... 1,064 Less: Current portion of lease obligations ... 634 -------- Long term portion of lease obligations ........ $ 430 ========
NOTE 13 - INCOME TAXES
The effect of temporary differences that give rise to a significant portion of federal deferred taxes is as follows as of December 31:
The Company has recorded a net deferred tax asset of approximately $3 million at December 31, 2002. Realization of this asset is dependent on generating sufficient taxable income in future periods. Management believes it is more likely than not that the deferred tax asset will be realized. As reflected in the preceding table, the majority of the valuation allowance relates to net operating loss carry forwards generated from stock exercises, where there is uncertainty regarding full realizability due to use limitations.
The Company's reconciliation of the expected provision (benefit) rate to the effective income tax rate is as follows:
At December 31, 2002, the Company has Federal NOLs ("NOLs") remaining of approximately $21,500 million which will begin expiring in 2009. As opposed to the Company's NOLs that reduced the effective tax rate in fiscal years' 2002 and 2001, the remaining NOLs will be recorded directly in Stockholders' Equity when utilized rather than as a reduction of tax expense as the NOL's were generated primarily from the exercise of stock options in prior years. However, the Company will receive the cash flow benefit from the reduction in its income tax liability when the remaining NOLs are utilized.
As of December 31, 2002, certain of the NOLs described above are subject to limitation and may be utilized in a future year upon release of the limitation and recorded directly in Stockholders' Equity as discussed above. If the NOLs are not utilized in the year they are available they may be utilized in a future year to the extent they have not expired.
NOTE 14 - STOCKHOLDERS' EQUITY
Stock Options
The 1996 Incentive Stock Plan (the "1996 Plan") provided for the granting of incentive stock options ("ISOs") and non-qualified stock options ("NQSOs") to employees, directors and consultants of the Company. Under the 1996 Plan there were 5,200,450 shares authorized for issuance. In 2001, the stockholders approved the Company's 2001 Incentive Stock Plan (the "2001 Plan," collectively with the 1996 Plan, the "Plans"). Under the 2001 Plan an additional 950,000 shares were authorized for issuance. At the annual stockholders meeting in 2002 an amendment and restatement of the 2001 Plan was approved to increase the plan by 800,000 shares, from 950,000 to 1,750,000. As of December 31, 2002, 450,688 shares remained available for grant under the Plans.
Options granted under the Plans vest over a three-year period and, in certain limited instances, fully vest upon a change in control of the Company. In addition, such options are generally exercisable for 10 years after the date of grant, subject in some cases, to earlier termination in certain circumstances. The exercise price of ISOs granted under the Plans will not be less than 100% of the fair market value on the date of grant (110% for ISOs granted to more than a 10% stockholder).
As of December 31, 2002 and 2001, the exercisable portion of outstanding options was 1,096,071 shares and 874,699 shares, respectively. Stock option activity under the Plans through December 31, 2002 is as follows:
Average Share Options Price ---------------------------- Balance, December 31, 1999 ..................... 2,038,666 $4.2280 Granted ................................... 615,000 $2.1960 Canceled .................................. (360,027) $1.3852 Exercised ................................. (105,167) $3.1657 ---------------------------- Balance, December 31, 2000 ..................... 2,188,472 $4.1756 Granted ................................... 1,087,000 $8.3392 Canceled .................................. (215,999) $3.4262 Exercised ................................. (510,831) $4.2416 ---------------------------- Balance, December 31, 2001 ..................... 2,548,642 $5.7929 Granted ................................... 633,000 $13.6739 Canceled .................................. (184,663) $5.6851 Exercised ................................. (349,095) $4.4445 ---------------------------- Balance, December 31, 2002 ..................... 2,647,884 $7.8702 ============================
On April 17, 1998, the Company granted a former officer an option to purchase 1,000,000 shares of Common Stock at $4.50 (then-current market price) in connection with his employment agreement to become the Company's President, Chief Operating Officer and Chief Financial Officer. This option was not granted under the Plan. During 2001, all of the options granted to the former officer were exercised.
The 1996 Directors Stock Incentive Plan, (the "Directors Plan") was adopted to attract and retain qualified individuals to serve as non-employee directors of the Company ("Outside Directors"), to provide incentives and rewards to such directors and to associate more closely the interests of such directors with those of the Company's stockholders. The Directors Plan provides for the automatic granting of non-qualified stock options to Outside Directors joining the Company. Each such Outside Director receives an option to purchase 20,000 shares of Common Stock upon his or her initial appointment or election to the Board of Directors. The exercise price of such options is equal to the fair market value of the Common Stock on the date of grant. Options granted under the Directors Plan vest over three years. In 2002, an amendment and restatement of the Directors Plan was approved at the annual stockholders meeting to add 200,000 shares to the 300,000 shares previously authorized and provide the automatic annual grant of 5,000 options to each non-employee director of the Company. Following the approval, 5,000 options at an exercise price of $9.94 were granted to each of the six Directors. In addition, 20,000 shares at an exercise price of $8.77 were granted to the newly appointed director of the Company. As of December 31, 2002, options to purchase 170,000 shares are outstanding at an average exercise price of $6.88. At December 31, 2002, 100,000 shares under the Directors Plan were exercisable.
Accounting for Stock-Based Compensation
The fair value of the Company's compensation cost for stock option plans for employees and directors, had it been determined, in accordance with SFAS 123, would have been as follows for the years ended December 31:
Because the fair value method prescribed by SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation expense may not be representative of the amount of compensation expense to be recorded in future years. As pro forma compensation expense for options granted is recorded over the vesting period, future pro forma compensation expense may be greater as additional options are granted.
The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:
2002 2001 2000 Volatility 104.6% 104.4% 106.6% Risk-free interest rate 2.79% 1.25% 6.25% Expected life of options 6 years 4 years 4 years
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Performance Shares
Under the Plans, the Company's Board of Directors may grant stock to key employees. The Board of Directors may make the issuance of common stock subject to the satisfaction of one or more employment, performance, purchase or other conditions. As of December 31, 2002, the Company has 220,000 restricted stock grants (the "Performance Shares") that vest and become exercisable 8 years from the date of grant or earlier, if the Company exceeds certain earnings per share levels in 2001 and 2002. During 2002, the Company did not meet the earnings per share levels to accelerate vesting of the Performance Shares. The Company has recorded cumulative compensation expense of $362,484 related to these Performance Shares through December 31, 2002 based on the fair market value at the date of grant.
Performance Units
Under the Plans, performance units may be granted by the Company's Board of Directors to key employees. The terms and conditions of the performance units including the performance goals, the performance period and the value for each performance unit are established by the Company's Board of Directors. If the performance goals are satisfied, the Company shall pay the key employee an amount in cash equal to the value of each performance unit at the time of payment. In no event shall a key employee receive an amount in excess of $1,000,000 in respect of performance units for any given year. During 2002, 2001 and 2000, performance goals were not satisfied, thus there were no amounts paid to employees related to performance. As of December 31, 2002, there were no performance units outstanding as no amendments to the Plan were made and no targets for any year were met.
NOTE 15 - CONCENTRATION OF CREDIT RISK
The following table outlines contracts with Plan Sponsors having revenues and/or accounts receivable that individually exceeded 10% of the Company's total revenues and/or accounts receivable during the applicable time period:
NOTE 16 - PROFIT SHARING PLAN
The Company maintains a deferred compensation plan under Section 401(k) of the Internal Revenue Code. Under the plan, employees may elect to defer up to 50% of their salary, subject to Internal Revenue Service limits. The Company may make a discretionary matching contribution. The Company recorded matching contributions of $102, $86 and $65 for the years ended December 31, 2002, 2001, and 2000, respectively.
NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of quarterly financial information for fiscal 2002 and 2001 is as follows:
NOTE 18- SUBSEQUENT EVENT
On February 27, 2003, the Executive Committee of the Board of Directors approved a stock repurchase program pursuant to which the Company is authorized to repurchase up to an aggregate of $10 million of its Common Stock in open market or private transactions. As of March 25, 2003, the Company has repurchased 799,893 shares of its Common Stock in the open market at an aggregate purchase price of $5.1 million.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
The information required by this item has been previously reported by the Company in a Current Report on form 8-K filed with the Commission on May 29,
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference from the information contained in our definitive proxy statement to be filed with the SEC on or before April 30, 2003 in connection with the Company's 2003 Annual Meeting of Stockholders.
Item 11.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from the information contained in our definitive proxy statement to be filed with the SEC on or before April 30, 2003 in connection with the Company's 2003 Annual Meeting of Stockholders.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from the information contained in our definitive proxy statement to be filed with the SEC on or before April 30, 2003 in connection with the Company's 2003 Annual Meeting of Stockholders.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from the information contained in our definitive proxy statement to be filed with the SEC on or before April 20, 2003 in connection with our 2003 Annual Meeting of Stockholders.
Item 14.
Item 14. Controls and Procedures
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of disclosure controls and procedures has been evaluated within 90 days of the filing date of this annual report, and, based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective. There were no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of that evaluation.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934 ("Exchange Act") is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in such reports is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decision regarding required disclosure.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(A) Documents Filed as a Part of this Report
All other schedules not listed above have been omitted since they are not applicable or are not required, or because the required information is included in the Consolidated Financial Statements or Notes thereto.
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(1) Incorporated by reference to the indicated exhibit to the Company's Registration Statement on Form S-1 (File No. 333-05327), as amended, which became effective on August 14, 1996.
(2) Incorporated by reference to the indicated exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
(3) Incorporated by reference to the indicated exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
(4) Incorporated by reference to the indicated exhibit to the Company's Registration Statement on Form S-4 (File No. 333-60647), as amended, which became effective on August 21, 1998.
(5) Incorporated by reference to the indicated exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998, as amended.
(6) Incorporated by reference to the indicated exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
(7) Incorporated by reference to the indicated exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1999.
(8) Incorporated by reference to the indicated exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1999.
(9) Incorporated by reference to the indicated exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000.
(10) Incorporated by reference to the indicated exhibit to the Company's Current Report on Form 8-K filed on August 10, 2000.
(11) Incorporated by reference to the indicated exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2000.
(12) Incorporated by reference to the indicated exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
(13) Incorporated by reference to the indicated exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001.
(14) Incorporated by reference to the indicated exhibit to the Company's Form S-3 filed on July 12, 2001.
(15) Incorporated by reference to the indicated exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2001.
(16) Incorporated by reference to the indicated exhibit to the Company's Form 8-K filed on February 5, 2002.
(17) Incorporated by reference to the indicated exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
(18) Incorporated by reference from the Company's definitive proxy statement for its 2002 annual meeting of stockholders filed with the Commission on April 30, 2003.
(19) This document is being furnished in accordance with SEC Release Nos. 33-8212 and 34-47551.
(B) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 31, 2003.
MIM CORPORATION
/s/ James S. Lusk ----------------- James S. Lusk Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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EXHIBIT INDEX - --------------------------------------------------------------------------------
(Exhibits being filed with this Annual Report on Form 10-K)
3.2 Amended and Restated By-Laws of the Company
10.50 Amendment to Employment Agreement entered into as of September 18, 2002 by and between the Company and Barry A. Posner
10.51 Amendment to Employment Agreement effective as of December 31, 2001 by and between the Company and Richard H. Friedman
10.52 Employment Letter dated October 1, 2002, between the Company and James S. Lusk
10.53 Third Amendment of Agreement of Lease, dated June 24, 2002, between Five Regent Park Associates and American Disease Management Associates
10.54 Second Amendment and Consent, dated as of January 31, 2002, to the Receivables Purchase and Transfer Agreement, dated as of November 1, 2000, among each of the parties named on Schedule I thereto, MIM Funding, LLC and HFG Healthco-4 LLC
10.55 Amendment No. 3, dated as of November 25, 2002, to the Receivables Purchase and Transfer Agreement, dated as of November 1, 2000, among each of the parties named on Schedule I thereto, MIM Funding, LLC and HFG Healthco-4 LLC
21 List of Subsidiaries
23.1 Consent of Ernst and Young, LLP
23.2 Notice Regarding Consent of Arthur Andersen LLP
99.1 Section 302 Certification of Richard H. Friedman
99.2 Section 302 Certification of James S. Lusk
99.3 Section 906 Certification of Richard H. Friedman (1)
99.4 Section 906 Certification of James S. Lusk (1)
(1) This document is being furnished in accordance with SEC Release Nos. 33-8812 and 34-47551.