In 1999, we 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”). During 2001, we 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, we 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. There have been no changes in 2004 and the reserve remains $357.
Net income in 2003 includes a $0.6 million charge related to a settlement with our founder, E. David Corvese, and a restructuring charge of $0.9 million.
Net income in 2004 includes a $0.5 million charge related to a global settlement with Value Options of Texas, Inc.
We are a pharmaceutical healthcare organization, which delivers innovative pharmacy benefit management, specialty pharmaceutical management and delivery services and other pharmacy-related healthcare solutions. We combine clinical management expertise, sophisticated data management and therapeutic fulfillment capabilities to serve the particular needs of our customers. We provide a broad array of pharmacy benefits, and pharmacy and pharmacy-related products and services to individual patients (or enrollees) (“Members”) receiving health benefits, principally through health insurers, including HMO’s, indemnity plans and PPO’s, managed care organizations, other insurance companies and, to a lesser extent, labor unions, self-funded employer groups, government agencies (including Medicaid and Medicare), and other self-funded plan sponsors (collectively, “Plan Sponsors”), as well as third-party administratrors. These services are organized under two operating segments: pharmacy benefit management and mail services (collectively, “PBM Services”) and specialty pharmacy distribution and clinical management services (“Specialty Management and Delivery Services”).
Our PBM Services are offered to Plan Sponsors and are designed to promote a broad range of cost-effective, clinically appropriate PBM Services through our network of retail pharmacies and our own dedicated mail service distribution facility.
The Merger is intended to constitute a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended. The consummation of the Merger is subject to the approval and adoption of the Merger and Merger Agreement by the
shareholders of Chronimed, the approval by our stockholders of the issuance of the shares of common stock to be issued in the Merger and other customary closing conditions.
On February 2, 2004, we acquired all of the issued and outstanding stock of Natural Living, Inc., d/b/a Fair Pharmacy (“Fair Pharmacy”), a specialty pharmaceutical provider located in Bronx, New York, for $15.0 million in cash, plus a performance-based earn-out of $4.0 million paid after the first anniversary of the closing. This contingent payment was recorded in December 2004. The acquisition enhanced our HIV, Oncology and Hepatitis C disease categories and has been incorporated into our Specialty Management and Delivery Services segment. Direct expenses associated with the acquisition were approximately $0.5 million. The acquisition has been accounted for in accordance with SFAS No. 141, Business Combinations. The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values at the date of acquisition. Fair values of intangible assets were estimated by independent third party appraisal. The assets purchased and liabilities assumed have been reflected in our consolidated balance sheet as of February 2, 2004.
On March 26, 2004, we announced that the Centers for Medicare and Medicaid Services selected us as an approved national sponsor of two Medicare Discount Drug Card programs. Our Medicare-approved Drug Discount Card programs are called “Freedom” and “Choice.” We began enrollment for these discount cards on June 1, 2004 and currently have approximately 77,000 members enrolled.
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). In preparing our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the 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. We evaluate our estimates and judgments on an ongoing basis. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates, and different assumptions or conditions may yield different estimates. The following discussion highlights what we believe to be the critical accounting policies and judgments made in the preparation of these consolidated financial statements.
Capitated Agreements. Our capitated PBM Services agreements with Plan Sponsors require us to provide covered pharmacy services to Plan Sponsors’ 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 three years. At such time as management estimates that a contract will sustain losses over its remaining contractual life as a result of increased utilization or changes in product mix, a reserve is established for these estimated losses at that time. There are currently no expected loss contracts, however, if historical patterns change, we may be required to estimate a loss contract accrual. Our largest capitated contract expired March 31, 2003 and the customer has been serviced on a fee-for-service basis since that time. We are not actively pursuing new capitated contracts and expect that the amount of revenue derived from such contracts will continue to decline. We have no capitated Specialty Management and Delivery Services agreements. Capitated agreements accounted for 0.4%, or $2.7 million, 3.0%, or $17.5 million, and 9.1%, or $52.6 million, of our revenue for the years ended December 31, 2004, 2003 and 2002, respectively.
Co-payments. When prescriptions are filled in a pharmacy owned by us, we collect and retain co-payments from Plan Sponsors’ Members and record these receipts as revenue when the amounts are collected or deemed collectible and reasonably estimable. When prescriptions are filled through pharmacies participating in our retail pharmacy networks, we are not entitled to
retain co-payments and accordingly does not account for retail pharmacy co-payments in its financial statements. Pharmacy network co-payments are never billed or collected by us and we have no legal right or obligation to receive them as they are collected by our network pharmacies.
Allowances for doubtful accounts are based on estimates of losses related to customer receivable balances. The procedure for estimating the allowance for doubtful accounts requires significant judgment and assumptions. The risk of collection varies based upon the product, the payor and the patient’s ability to pay the amounts not reimbursed by the payor. We estimate the allowance for doubtful accounts based upon a variety of factors including the age of the outstanding receivables and our historical experience of collections, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. We continually review the estimation process and make changes to the estimates as necessary.
We are reimbursed for the drugs and services we sell by Plan Sponsors and other payors including insurance companies, Medicare and state Medicaid programs. Revenues and related accounts receivable are recorded net of payor contractual discounts to reflect the estimated net billable amounts for the products and services delivered. We estimate the allowance for contractual discounts, based on historical experience and in certain cases on a customer-specific basis, given our interpretation of the contract terms or applicable regulations. However, the reimbursement rates are often subject to interpretation that could result in payments that differ from our estimates. Additionally, updated regulations and contract negotiations occur frequently, necessitating our continual review and assessment of the estimation process.
Manufacturers’ rebates are recorded as estimates until such time as the rebate monies are received. These estimates are based on historical results and trends and are revised on a regular basis depending on our latest forecasts, as well as information received from rebate sources. Should actual results differ, adjustments will be recorded in future earnings. In some instances, rebate payments are shared with our managed care organizations. Shared rebates are recorded as a reduction of revenue. Total rebates are recorded as a reduction of cost of goods sold.
In addition, we have established, and periodically review and reevaluate, an estimated income tax reserve which is included in accrued expenses and other current liabilities on our consolidated balance sheet. This income tax reserve is for exposures related to matters such as nexus, and allocation of overhead costs across various Federal and state tax jurisdictions. An accrual is established at the time an exposure is identified when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. While we believe that we have identified all reasonably identifiable exposures and that the reserve we have established for identifiable exposures is appropriate under the circumstance, it is possible that additional exposures exist and that the exposures will be settled at amounts different than the amounts reserved. It is possible that changes in estimates in the future could cause us to either materially increase or reduce the carrying amount of our income tax reserve.
We evaluate goodwill for impairment based on a two-step process. The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is unnecessary. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is necessary to measure the amount of impairment loss, if any. The second step compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to that excess. We have two reporting units and the fair values of both of the reporting units exceeded their carrying amounts resulting in no impairment charges in fiscal year 2004.
The determination of fair value of this intangible asset requires management to use estimates and assumptions of the future cash flows and discount rates. Changes to these assumptions could affect the estimated fair value. We have tested fair value of this intangible asset during 2004, and determined it exceeded the carrying value.
We cannot predict the occurrence of certain future events that might adversely affect the reported value of the intangible asset that is carried at $4.7 million at December 31, 2004. Such events include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base, or a material negative change in our relationships with significant customers.
We will adopt the fair-value-based method of accounting for share-based payments effective July 1, 2005. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. Had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 2 to our consolidated financial statements. We are still evaluating the alternative methods available in calculating and adopting this standard, and has not yet reached a decision on which method to use. At this time it is not possible to estimate the impact the adoption of SFAS No. 123(R) will have on our future financial results.
Total cost of revenue increased 8% to $562.4 million from $520.2 million for the year ended December 31, 2003. This is commensurate with the increase in revenues experienced in 2004.
Total cost of revenue increased 3% to $520.2 million from $506.0 million for the year ended December 31, 2002.
Gross profit for the year ended December 31, 2003 was $68.5 million representing a gross profit percentage of 11.6% compared to $70.6 million, or 12.2%, for the prior year. The decrease in gross profit percentage from 2002 to 2003 is a result of increases in the sales of the lower margin injectable therapy programs in our Specialty Management and Delivery Services segment. In 2002 the percentage of infusion therapy was higher. Infusion therapy historically yields a higher gross profit percentage.
Excluding the results of TennCare® PBM and Synagis®, revenue grew $123.3 million, or 24%, to $630.5 million at December 31, 2004 compared to $507.2 million at December 31, 2003. Cost of revenue for 2004 was $562.6 million compared to $445.2 million for 2003. This resulted in gross profit, after adjustments, of $67.9 million for 2004, compared to $62.0 million for 2003, a 10% increase year over year.
Specialty Management and Delivery Services revenue increased $23.7 million in 2003 to $193.2 million, compared to revenue of $169.5 million in 2002. This increase includes a $13.4 million decrease in revenue at the Roslyn Heights, NY dispensing facility over the prior year, as a result of a reduction in the wholesale oncology business and from the loss of distribution rights for Synagis®. The overall increase was due to continued growth in our injectable and infusion therapy programs, in particular Immune Deficiency, Hepatitis C, Rheumatoid Arthritis, Multiple Sclerosis and Growth Hormone therapies.
PBM Services revenue decreased $16.5 million to $379.0 million in 2004 compared to revenue of $395.5 million in 2003, due to the loss of TennCare® PBM revenue which represented $67.8 million in 2003. The lost TennCare® PBM revenue was offset by growth from our existing PBM Services business, including our traditional mail services business. The mail order portion of our PBM Services business in Columbus, Ohio filled approximately 3.2 million prescriptions in 2004 compared to approximately 2.7 million in 2003.
PBM Services cost of revenue decreased $12.3 million to $353.0 million in 2004. The cost of revenue for the TennCare® PBM business was $62.2 million in 2003. Gross profit decreased $4.2 million to $26.0 million in 2004 compared to $30.2 million in 2003. The gross profit percentage decreased to 6.9% from 7.6% in 2003. The decrease in gross profit percentage reflects changes in our product mix as well as the termination of the TennCare® PBM contracts.
For the year ended December 31, 2004, selling, general and administrative (“SG&A”) expenses increased to $52.8 million from $50.6 million for the year ended December 31, 2003, but decreased as a percentage of revenue to 8.4% for 2004 from 8.6% for 2003. SG&A expenses for the year ended December 31, 2004 included $0.9 million for the settlement of Value Options of Texas, Inc. and $0.1 million for noncapitalizable acquisition costs.
For 2003, we recorded amortization of intangibles of $1.9 million, compared to $1.4 million in 2002. The increase was primarily the result of a change in the estimated life of certain identifiable intangibles related to the Vitality acquisition. In the fourth quarter of 2002 we changed the life of the intangible assets acquired with the Vitality acquisition. The adjusted expected amortizable life of these assets range from three to ten years.
Net cash provided by financing activities in 2004 was $7.3 million compared to net cash used in financing activities in 2003 of $9.7 million. At December 31, 2004 there were $7.3 million of outstanding bank borrowings under our $45 million revolving credit facility (the “Facility”) with an affiliate of Healthcare Finance Group, Inc. (“HFG”), a $7.3 million increase from the same period in 2003. Outstanding borrowings increased in 2004 as a result of borrowing for the acquisition of Fair Pharmacy. Net cash used in financing activities in 2003 was for the purchase of treasury stock and payment on the Facility.
Our daily borrowings during 2004 were $696.0 million, of which $688.7 million was repaid during 2004. At the end of any given month during 2004 the line of credit balance did not exceed $16.3 million. The borrowing and repayment processes under the Facility are outlined below.
On February 2, 2004, we acquired Fair Pharmacy for $15.0 million in cash. Direct expenses associated with the acquisition were approximately $0.5 million. The acquisition was paid for with proceeds from the Facility, as well as available cash on hand. As we continue to grow, we anticipate that our working capital needs will also continue to increase. We believe that our cash on hand, together with funds available under the Facility and cash expected to be generated from operating activities will be sufficient to fund our anticipated working capital and other cash needs for a least the next twelve months.
We also may pursue joint venture arrangements, business acquisitions and other transactions designed to expand our Specialty Management and Delivery Services and PBM Services businesses, which we would expect to fund from cash on hand, borrowings under the Facility, other future indebtedness or, if appropriate, the private and/or public sale or exchange of our debt or equity securities.
At December 31, 2004, we had Federal NOLs of approximately $16.7 million, which will begin expiring in 2011. Our remaining Federal NOLs will not affect our effective tax rate when utilized, but we will receive the cash flow benefit from the reduction in our
We expect our 2005 annual effective tax rate to be approximately 39%. This rate differs from the Federal statutory rate of 35% primarily due to state taxes.
Our exposure to market risk for changes in interest rates relates primarily to our outstanding debt. At December 31, 2004 we did not have any long-term debt. We do not invest in, or otherwise use, derivative financial instruments.
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, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. 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.
We have also audited, in accordance with the Standards of the Public Company Accounting Oversight Board (United States), the effectiveness of MIM Corporation’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3, 2005, expressed an unqualified opinion on management’s assessment and an adverse opinion on the effectiveness of internal control over financial reporting.
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.
Historically, a significant portion of the Company’s revenues were derived from providing PBM services in the State of Tennessee to managed care organizations participating in the State of Tennessee’s TennCare® program. On May 27, 2003 the Company was notified that commencing July 1, 2003, it would no longer be providing PBM Services to Plan Sponsors participating in the TennCare® program. For the years ended December 31, 2003 and 2002, TennCare® PBM revenue was $67.8 million and $140.2 million, respectively. Gross Profit for the same periods was $5.6 million and $11.6 million, respectively. The Company is still providing Specialty Management and Delivery Services to customers in Tennessee and continues to work for increased penetration in this market.
The consolidated financial statements include the accounts of MIM and its wholly-owned subsidiaries. On February 2, 2004, the Company acquired all of the issued and outstanding stock of Natural Living, Inc. d/b/a Fair Pharmacy. On January 31, 2002, the Company acquired all the issued and outstanding capital stock of Vitality. Both acquisitions have been consolidated since the date of purchase. All significant intercompany accounts and transactions have been eliminated in consolidation.
Receivables include amounts due from plan sponsors under the Company’s pharmacy benefit management (“PBM”) agreements, amounts due from pharmaceutical manufacturers for rebates, service fees resulting from the distribution of certain drugs through retail pharmacies, amounts due from certain third party payors and patient co-payments for pharmacies owned by the Company.
Allowances for doubtful accounts are based on estimates of losses related to customer receivable balances. Our primary collection risks are for patient co-payments. We estimate the allowance for doubtful accounts based upon a variety of factors including the age of the outstanding receivables and our historical experience of collections. We continually review the estimation process and makes changes to estimates as necessary.
Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Inventory consists principally of purchased prescription drugs for our traditional mail and specialty distribution operations. Included in inventory is a reserve for obsolete inventory.
Deferred acquisition costs represent our direct costs associated with the pending merger with Chronimed Inc. (“Chronimed”), (see Note 4).
Payables to plan sponsors represents the sharing of manufacturer’s rebates with the plan sponsors and, on a limited basis, profit sharing plans with certain contracts, primarily in the PBM services segment.
The Company estimates the portion of those rebates that are shared with plan sponsors and adjusts rebates payable to plan sponsors when the amounts are paid, typically on a quarterly basis in arrears, or as significant events occur. These estimates are accrued based on actual and estimated claims data and agreed upon contractual rebate sharing rates. The Company adjusts these estimates on a periodic basis according to changing circumstances such as changes to contracts, product mix subject to rebates, and changes in the applicable formulary.
Capitated Agreements. Capitated agreements with plan sponsors require the Company to provide covered pharmacy services to plan sponsors’ members in return for a fixed fee per member per month paid by a plan sponsor. Capitated contracts have terms varying from six months to three years. 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. Currently, the Company does not believe that there are any expected loss contracts and there are no loss contract reserves recorded.
Cost of revenue includes pharmacy claims, fees paid to pharmacies, shipping and other direct and indirect 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 separate cost of revenue information with respect to product sales.
As part of the process of preparing the Company’s consolidated financial statements, management is required to estimate income taxes in each of the jurisdictions in which it operates. The Company accounts for income taxes under SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”). SFAS No. 109 requires the use of the asset and liability method of accounting for income taxes. Under this method, deferred taxes are determined by calculating the future tax consequences attributable to differences between the financial accounting and tax bases of existing assets and liabilities. The resulting deferred tax assets and liabilities are included in our consolidated balance sheet. A valuation allowance is recorded against deferred tax assets when, in the opinion of management, it is more likely than not that we will not be able to realize the benefit from its deferred tax assets.
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.
On August 9, 2004 through our wholly-owned subsidiary, Chronimed Acquisition Corp., a Minnesota corporation (“Merger Sub”), we entered into the Merger Agreement with Chronimed, pursuant to which MIM will acquire Chronimed in a stock-for-stock transaction. On January 3, 2005 we entered into Amendment No. 1 to the Merger Agreement. Subject to the terms and conditions of the Merger Agreement, as amended, at the effective time of the Merger , Merger Sub will be merged with and into Chronimed, the separate corporate existence of Merger Sub will cease, and Chronimed will continue as a wholly-owned subsidiary of MIM. Pursuant to the Merger Agreement, as amended, we will issue 1.12 shares of our common stock in exchange for each outstanding share of common stock of Chronimed (the “Exchange Ratio”). In addition, each outstanding option to purchase Chronimed common stock will be assumed by us and the exercise price and number of shares for which each such option is (or will become) exercisable will be adjusted based on the Exchange Ratio.
On February 2, 2004, the Company acquired all of the issued and outstanding stock of Natural Living, Inc., d/b/a Fair Pharmacy, a specialty pharmaceutical provider located in Bronx, New York for $15,000 in cash, plus a performance-based earn-out of $4.0 million paid after the first anniversary of the closing.
The acquisition enhanced the Company’s HIV, Oncology and Hepatitis C disease therapies and has been incorporated into the Company’s Specialty Management and Delivery Services segment. Direct expenses associated with the acquisition were $535. The acquisition has been accounted for in accordance with SFAS No. 141, Business Combinations. The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values at the date of acquisition. Fair values of intangible assets were estimated by independent third party appraisal. The assets purchased and liabilities assumed have been reflected in the Company’s consolidated balance sheet as of February 2, 2004.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141 and Statement of Financial Standard 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 following table details the acquired intangible assets and their accumulated amortization as of December 31, 2004.
The Company’s intangible assets are composed of customer relationships, non compete agreements and tradenames associated with the acquired businesses. The adjusted expected amortizable life of these assets range from three to ten years.
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 $59, $56 and $56 for the years ended December 31, 2004, 2003, and 2002.
The Company had a consulting arrangement with one of its board members which, in addition to customary board fees, the board member’s company received a monthly fee to perform consulting work predominantly related to the TennCare® program. Consulting fees under this contract were $762 and $549 for the years ended December 31, 2003 and 2002. The contract was terminated June 30, 2003.
One of the Company’s board members is an employee of the Company’s primary outside legal services firm. Fees were paid to that legal firm of $1,155, $620, and $1,096 for the years ended December 31, 2004, 2003 and 2002, respectively. Accrued legal fees in the amount of $268 and $203 were included in the accrued expenses of the Company’s balance sheet as of December 31, 2004 and 2003, respectively.
On November 1, 2000 we entered into a $45 million revolving credit facility (the “Facility”) with an affiliate of Healthcare Finance Group, Inc. (“HFG”). The Facility had a three-year term and was secured by our receivables with interest paid monthly. It provided for borrowing up to $45,000 at the London Inter-Bank Offered Rate (LIBOR) plus 2.1%. The facility contained various covenants that, among other things, required us to maintain certain financial ratios, as defined in the agreements governing the Facility.
The Facility was scheduled to terminate on October 31, 2003. We extended the Facility with HFG through November 1, 2006 at LIBOR plus 2.4%. The contract governing the Facility provides for automatic one year extensions unless either party gives notice not less than 90 days prior to the expiration of the initial term or any renewal term of its intention not to renew the Facility. The extension was effective as of June 30, 2003. The Facility, as extended, permits us to request an increase in the amount available for borrowing to up to $100,000, as well as converting a portion of any outstanding borrowings from a Revolving Loan into a Term Loan. The borrowing base utilizes receivables balances, among other things, as collateral. In connection with the 2003 extension, we paid HFG a renewal fee of $315. Our daily borrowings during 2004 were $696,040, of which $688,737 was repaid during 2004, resulting in an outstanding line of credit balance of $7,303 as of December 31, 2004. The line of credit balance did not exceed $16,300 at the end of any given month. At December 31, 2004 we are in compliance with all financial covenants contained in the agreement.
On February 27, 2003, the Executive Committee of the Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to an aggregate of $10,000 of its Common Stock in open market or private transactions. As of December 31, 2004, the Company has repurchased 799,893 shares of its Common Stock in the open market at an aggregate purchase price of $5,068, pursuant to this plan.
During the third quarter of 2004, we reached a definitive settlement with E. David Corvese, the founder and a former officer and director of the Company under which we would pay Mr. Corvese $950 and extend the term of our existing lease at which one of our facilities is located, at a fair market rent. Mr. Corvese had previously sued us in Delaware Chancery Court seeking indemnification of $2,400 he paid to settle certain claims and charges of the Federal government and State of Tennessee and a declaration that he is not obligated to repay us for legal fees, costs and expenses previously advanced by us to him to defend those claims and charges. The Company did not believe that Mr. Corvese was entitled to indemnification or that legal fees should not have been repaid. However, given the substantial costs of proceeding with the litigation and the management time and attention that would have been required in continuing to defend against the lawsuit, the Company believed that this settlement was in the best interests of the Company and its stockholders.
As previously reported on February 1, 2004 , the Company reached a global settlement with Value Options of Texas, Inc., (“Value Options”) a former PBM customer. MIM paid $1.0 million to Value Options to resolve all disputes between us. Net of reserves, a charge of $0.9 million was recorded in selling, general and administrative expenses in the fourth quarter of 2004.
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 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, results of operations and cash flows. Violation of the Federal anti-kickback statute, for example, may result in substantial criminal penalties, as well as suspension or exclusion from the Medicare and Medicaid 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, results of operations and cash flows.
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 suspension or exclusion from participation in the Medicare or Medicaid programs.
The Company leases its facilities and certain equipment under various operating leases, with third parties and related parties. The future minimum lease payments under these operating leases at December 31 are as follows:
The Company leases certain equipment under various capital leases. At December 31, 2004 there remains $35 in short term capital lease payments due. These payments will be made in the first quarter of 2005.
The Company’s Federal and state income tax provision is summarized in the following table.
As of December 31, 2004 and December 31, 2003 the Company has recorded a net deferred tax asset of $5,181 and $7,789. This primarily consists of Federal net operating loss carryforwards (“NOLs”) generated from stock option exercises. During 2003 and 2002 management concluded that certain valuation allowances were no longer needed as the tax asset will more likely than not be realized. In 2003 the remaining valuation allowance related to our Federal NOLs generated from stock option exercises was reversed. This reversal did not affect income or the effective tax rate. In 2002 allowances on certain Federal NOLs were reversed, a portion of which affected the effective tax rate and the remainder of which related to stock option exercises and were adjusted through stockholders equity.
The Company’s reconciliation of the statutory rate to the effective income tax rate is as follows:
At December 31, 2004, the Company has Federal NOLs remaining of approximately $16,700 that will begin expiring in 2011. The Company also has state net operating losses of $5,309, with varying expiration dates. The state operating losses have a full valuation allowance recorded against them, as there is uncertainty concerning the Company’s ability to utilize the state NOLs,
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 3,750,000 shares are authorized for issuance. As of December 31, 2004, 1,083,690 shares remained available for grant under the Plans.
As of December 31, 2004 and 2003, the exercisable portion of outstanding options was 2,193,826 shares and 1,628,002 shares, respectively. Stock option activity under the Plans through December 31, 2004 is as follows:
The maximum term of stock options under these plans is ten years. Options outstanding as of December 31, 2004 expire on various dates ranging from May 2006 through March 2014. The following table outlines our outstanding and exercisable stock options as of December 31, 2004.
Plan Sponsor (B) revenue and accounts receivable is primarily in the PBM Services
During 2003, in association with a cost structure review related to the loss of the TennCare® PBM business the Company notified 55 employees employed in the PBM Services segment that their employment with the Company would be involuntarily terminated. As a result the Company recorded $1,506 of selling, general and administrative expenses for employee separation costs, primarily severance and contract related termination payments in 2003. All the employees left active payroll by October 31, 2003. There are no further TennCare® related severance charges planned or expected.
TennCare® PBM and Synagis® revenues were recorded in the first two quarters of 2003 in the amount of $81,548. These revenue streams ended in June of 2003.
In the fourth quarter of 2003, the Company recorded a settlement of $570 with the founder of the Company and $354 in acquisition costs. In addition, restructuring charges of $370, $583 and ($50) were recorded in the second, third and fourth quarters, respectively of 2003 as a result of the loss of the TennCare® PBM business.
(1) Amounts credited to the TennCare® reserve account and reductions in related liability accounts