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 our Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Report.
Beginning in 2001, as required by EITF No. 02-16, 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 and 1999 have been reclassified to give effect to this change.
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 11 of Notes to Consolidated Financial Statements. During 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. There have been no changes in 2003 and the reserve remains $357.
This amount represents long-term debt assumed by the Company in connection with its acquisition of Continental Managed Pharmacy Services, Inc. and its subsidiaries.
Net income in 2003 includes a $0.6 million charge related to a tentative settlement with the founder, E. David Corvese and a restructuring charge of $0.9 million.
The following discussion should be read in conjunction 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. Except as required by law, the Company does not undertake any obligation to supplement these forward-looking statements to reflect any future events and circumstances.
MIM Corporation is a pharmaceutical healthcare organization which delivers innovative pharmacy benefit management, specialty pharmaceutical management and distribution 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, 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, and other self-funded plan sponsors (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 Delivery Services").
Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles ("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.
We generate revenue principally through the sale of prescription drugs, which are dispensed either through a pharmacy participating in our pharmacy network or a pharmacy owned by us. Revenue is derived under two types of agreements: (i) fee-for-service agreements, which accounted for 97.0%, or $571.3 million, 90.9%, or $524.0 million, and 78.8 % or $360.0 million of our revenue for the years ended December 31, 2003, 2002 and 2001, respectively, and (ii) capitated agreements, which accounted for 3.0%, or $17.5 million, 9.1%, or $52.6 million, and 21.2% or $96.6 million of our revenue for the years ended December 31, 2003, 2002, and 2001, respectively.
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 continues to be 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.
We are responsible for all covered prescriptions provided to plan members during the contract period. Claims are continuously adjudicated through our on-line adjudication system. These claims are paid to the individual pharmacies on a weekly basis.
We are reimbursed for the drugs and services we sell by many different payors including insurance companies, Medicare and state Medicaid programs. The 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. Should actual results differ, adjustments will be recorded in future earnings. In some instances rebate payments are shared with the Company's managed care organizations. Shared rebates are recorded as a reduction of revenue. Total rebates are recorded as a reduction of cost of goods sold.
We evaluate 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 management's belief that no such impairment existed as of December 31, 2003.
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 both of the fair values of the reporting units exceeded their carrying amounts resulting in no impairment charges in fiscal year 2003.
We cannot predict the occurrence of certain future events that might adversely affect the reported value of the intangible that is carried at $4.7 million at December 31, 2003. 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.
Total revenues for the year ended December 31, 2002 were $576.6 million compared to $456.6 for the same period of 2001, an increase of 26%. All of this growth occurred in the Specialty Management and Delivery Services segment and includes the revenue from the Long Island, NY distribution center which was purchased in February of 2002.
Year ended December 31, 2003 vs. year ended December 31, 2002
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 Long Island, NY distribution center 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, such as Immune Deficiency, Hepatitis C, Rheumatoid Arthritis, Multiple Sclerosis and Growth Hormone therapies.
Revenues increased $128.0 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 Long Island, NY distribution center, purchased on January 31, 2002, and continued growth in our BioScrip® 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 Long Island, NY distribution center business as well as increased BioScrip® sales, 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® injectable therapy programs as a percentage of total gross profit. The 2002 gross profit percentages reflect a higher proportion of injectable therapy programs as compared to 2001, thereby decreasing gross profit percentage over time. Infusion therapy historically yields a higher gross profit percentage.
PBM Services revenue decreased $11.6 million to $395.5 million in 2003 compared to revenue of $407.1 million in 2002, due to the loss of TennCare® PBM business in the third quarter of 2003. The decrease was partially offset by growth in mail revenue and other existing PBM contracts. TennCare® PBM revenue in 2003 was $67.8 million compared to $140.2 million in 2002. Excluding the revenue from TennCare®, revenues from PBM Services grew 23% in 2003.
PBM Services cost of revenue increased slightly to $375.0 million in 2002 from $374.8 million in 2001. This change is a result of the same reasons discussed above.
The PBM Services 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 liquidation of a former TennCare® MCO customer and the termination of certain less profitable PBM accounts. These decreases were partially offset by increases from continued growth in our retail network and mail services.
There were no TennCare® reserve adjustments during 2003. The TennCare® reserve adjustment of $0.9 million in the first quarter of 2002 was the result of the collection of previously reserved receivables from Xantus Healthplans of Tennessee, Inc.
For 2003, we recorded amortization of intangibles of $1.9 million, versus $1.4 million in 2002. The increase was primarily the result of a change in the estimated amortizable period of certain identifiable intangibles related to the Long Island, NY distribution center. In the fourth quarter of 2002 the Company changed the life of the intangible assets acquired with the Long Island distribution center. The expected amortizable life of these assets range from three to ten years.
Net income for 2003 was $9.1 million, or $0.40 per diluted share, compared to net income of $18.7 million, or $0.79 per diluted share for 2002. For the year ended 2003, net income includes a charge of $0.9 million related to severance payments as well as a charge of $0.6 million for settlement with the founder and former officer of the Company. The effective tax rate for 2003 was 40% compared to 20% for 2002. Average diluted shares outstanding for 2003 decreased by 1.0 million to 22.6 million shares, due to the repurchase of some of our common stock during the year.
We utilize both funds generated from operations and available credit under its Facility (as defined below) for acquisitions, capital expenditures and its general working capital needs.
At December 31, 2003, we had working capital of $17.0 million compared to $5.1 million at December 31, 2002. This increase is primarily the result of continued strong operating cash generated by our business and operations which allowed the full repayment of all outstanding borrowings under the Facility at December 31, 2003, totaling $4.6 million at December 31, 2002.
On March 1, 2004 we reached a tentative settlement with E. David Corvese, the founder and a former officer and director of the Company under which we would pay Mr. Corvese $950,000 and either extend the term of our existing lease or purchase the real property at which one of our facilities is located, the value of which would be determined by a certified real estate appraiser. Mr. Corvese had sued us in Delaware Chancery Court seeking indemnification of $2.4 million 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 the Company for legal fees, costs and expenses previously advanced by us to him to defend those claims and charges. We answered the complaint denying that Mr. Corvese is entitled to indemnification and seeking repayment of the advanced fees, costs and expenses. However, after considering the substantial costs of proceeding with this litigation and the significant management time and attention that would be required, we believe that a settlement at this time would be in the Company's and its stockholders' best interest. The settlement was reached after the balance sheet date but prior to the issuance of the financial statements. Accordingly, we recorded a pre-tax charge of $950,000 at December 31, 2003.
We believe that we have rights of recovery for amounts paid in this settlement against third parties. We are exploring our rights against these parties and will pursue recovery if it is ultimately deemed to be in the stockholders' best interests. The settlement is subject to documentation and approval by the Company's Board and, if finalized, would include both parties' full release of the other.
In 1998, we 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 our 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 February 2, 2004, we announced our acquisition of Natural Living, Inc., a specialty pharmaceutical provider, based in New York City for $15 million. We believe that Natural Living's foundation of long-term local physician relationships and loyal customer base in the New York metropolitan region will further enhance our HIV, Oncology and Hepatitis C disease categories, while complementing our overall disease state profile.
In November 2002, the Emerging Issues Task Force ("EITF") of the FASB reached a consensus on EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" related to the timing of revenue recognition for arrangements in which goods or services or both are delivered separately in a bundled sales arrangement. The consensus requires that when the deliverables included in this type of arrangement meet certain criteria they should be accounted for separately. This may result in a difference in the timing of revenue recognition but will not result in a change in the total amount of revenue recognized over the life of the arrangement. The allocation of revenue to the separate deliverables is based on the relative fair value of each item in a bundled sales arrangement. If the fair value is not available for the delivered items, the residual method must be used. This method requires that the amount allocated for the undelivered items in the arrangement be recorded at their full fair value. This results in the discount, if any, being allocated to the delivered items. This consensus is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material impact on our financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement established standards for how an issuer classifies and measures in its Statement of Financial Position certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 13, 2003 and must be applied prospectively by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. The adoption of SFAS No. 150 did not have a material effect on our financial position or results of operations since we do not currently have any financial instruments with characteristics of both liabilities and equity.
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 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 in Note 5 are appropriate. However, we were not engaged to audit, review or apply any procedures to the 2001 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 financial statements taken as a whole.
As discussed in Note 5 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142.
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.
Cash paid for income taxes was $1,678, $3,071 and $1,147 for the years ended December 31, 2003, 2002, and 2001, respectively.
In connection with the acquisition of Vitality Home Infusion Services, Inc. ("Vitality") (the Long Island, N.Y. Distribution Center), 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.
MIM Corporation (the "Company" or "MIM") is a pharmaceutical healthcare organization which delivers 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. The Company provides a broad array of pharmacy benefits, 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, and other self-funded plan sponsors (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 Delivery Services").
Through its BioScrip® 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® 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.
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 and amounts due from certain third party payors.
Capitated Agreements. The Company's capitated PBM Services 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 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. The Company's largest capitated contract expired March 31, 2003 and the customer continues to be 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. The Company has no capitated Specialty Management and Delivery Services agreements. At December 31, 2003, the Company had six capitated arrangements.
The Company accounts for employee stock and stock-based compensation plans through the intrinsic value method in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Stock-based compensation granted to non-employees is accounted for using the fair value method 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").
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 in fiscal year 2003 did not have a material effect on our financial position or results of operations.
In November 2002, the Emerging Issues Task Force ("EITF") of the FASB reached a consensus on EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" related to the timing of revenue recognition for arrangements in which goods or services or both are delivered separately in a bundled sales arrangement. The consensus requires that when the deliverables included in this type of arrangement meet certain criteria they should be accounted for separately. This may result in a difference in the timing of revenue recognition but will not result in a change in the total amount of revenue recognized over the life of the arrangement. The allocation of revenue to the separate deliverables is based on the relative fair value of each item in a bundled sales arrangement. If the fair value is not available for the delivered items, the residual method must be used. This method requires that the amount allocated for the undelivered items in the arrangement be recorded at their full fair value. This results in the discount, if any, being allocated to the delivered items. This consensus is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 did not impact our financial position or results of operations.
The aggregate purchase price for the Long Island, NY Distribution Center 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 the Long Island Distribution Center 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.
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 January 1, 2002.
The Company's intangible assets are composed of customer relationships, non compete agreements and trademarks associated with the Ohio and Long Island, New York acquisitions. The expected amortizable life of these assets range from three to ten years.
The Company had 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® program. Consulting fees under this contract were $762, $549 and $508 for the years ended December 31, 2003, 2002 and 2001. The contract was terminated June 30, 2003.
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 and $121 for the years ended December 31, 2002 and 2001, respectively.
The Company had a $502 note receivable outstanding with Mr. E. David Corvese 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.
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 superseded by the 2003 repurchase plan.
On August 13, 2003, a current PBM Services customer demanded arbitration before the American Arbitration Association of a claim for an alleged breach of contract involving the adjudication of certain PBM claims. The Company has denied liability and counterclaimed for unpaid amounts. The demand seeks $2,600 for part of the alleged period at issue and may be amended as to other periods and the counterclaim seeks $319. The Company believes its claims adjudication satisfied the contract and complied in all respects with the parties' agreed procedures and intends to defend the matter vigorously.
While management, including internal counsel, believes that the ultimate resolution of these proceedings will not have a material adverse effect on its financial position, litigation is subject to inherent uncertainties. Were an unfavorable ruling to occur in either of these proceedings, there exists a possibility of a material adverse impact on the net income of the period in which the ruling occurs.
Rent expense for non-related party leased facilities and equipment was approximately $1,647, $1,820, and $1,384 for the years ended December 31, 2003, 2002 and 2001, respectively.
At December 31, 2003, the Company has Federal NOLs ("NOLs") remaining of approximately $19,400 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 full benefit of these NOLs are recorded directly in Stockholders' Equity rather than as a reduction of tax expense as the NOL's were generated primarily from the exercise of stock options in prior years.
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. At the annual stockholders meeting in 2003 an amendment and restatement of the 2001 Plan was approved to increase the plan by an additional 2,000,000 shares, from 1,750,000 to 3,750,000. As of December 31, 2003, 1,252,018 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).
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 and Chief Operating Officer. This option was not granted under the Plan. During 2001, all of the options granted to the former officer were exercised.
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, 2003, the Company has 151,000 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 $552 related to these Performance Shares through December 31, 2003 based on the fair market value at the date of grant.
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:
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 $161, $102, and $86 for the years ended December 31, 2003, 2002, and 2001, respectively.
The Company believes that it has rights of recovery for amounts paid in this settlement against third parties. The Company is exploring its rights against these parties and will pursue recovery if it is ultimately deemed to be in the stockholders' best interests. The settlement is subject to documentation and approval by MIM's Board and, if finalized, would include both parties' full release of the other.