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.
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.
(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.
(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.
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.
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:
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.
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 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.
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.
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.
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.
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%
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.
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.
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.
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.
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 was $0.06 million for 2001 compared to net interest income of $0.8 million for 2000.
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.
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.
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.
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).
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.
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 following table sets forth the Company's contractual obligations affecting cash in the future.
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.
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)
The Company paid $853, $465 and $657 for interest of each of the years ended December 31, 2002, 2001, and 2000, respectively.
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.
The consolidated financial statements include the accounts of MIM Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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').
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.
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.
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")
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.
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:
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 =======
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 =========
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
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.
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:
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.
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.
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.
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.
2003 ............... $ 1,725 2004 ............... 1,597 2005 ............... 1,466 2006 ............... 1,325 2007 ............... 1,018 Thereafter ......... 1,351
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.
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 ========
The Company's reconciliation of the expected provision (benefit) rate to the effective income tax rate 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 ============================
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.