Our corporate headquarters are located in leased office space in Elmsford, New York. We also lease commercial office space for our above-described operations in South Kingstown and Wakefield, Rhode Island; Columbus, Ohio; Livingston, New Jersey; Roslyn Heights; Bronx, New York and Westchester, Pennsylvania.
Beginning in 2001, as required by EITF No. 02-16, we 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 we recorded the difference between rebates billed and the rebates shared with customers as a reduction of cost of revenue. For comparative purposes, the year 2000 has been reclassified to give effect to this change.
Net income (loss) includes legal expenses for the defense of two former officers for the year 2000, in the amount of $2,700.
In the fourth quarter of 2000, we recorded a provision for loss of $2,300 on its investment in Wang Healthcare Information Systems.
(9) The net loss per common share for the year 2000 excludes the effect of common stock equivalents, as their inclusion would be antidilutive.
The following discussion should be read in conjunction with our Consolidated Financial Statements 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 our expectations, hopes, beliefs, intentions or strategies regarding the future. These forward looking statements may include statements relating to our 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 our business, future operating performance 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 our business, increased competition from our 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, we do not undertake any obligation to supplement these forward-looking statements to reflect any future events and circumstances.
Our Specialty Management and Delivery Services programs are primarily provided to Members who are chronically ill, genetically impaired, or afflicted with potentially life threatening or debilitating diseases. These services include the distribution principally of biotech and other injectable and infusion prescription medications and also include traditional medications in tablet and capsule form. We also provide pharmacy-related clinical management services, product administration and disease state programs. Specialty services are also offered to physicians (in group practice and hospital settings) on behalf of their patients. These physicians typically have network affiliations with Plan Sponsors, which in turn have a relationship with us.
As part of our PBM Services and Specialty Management and Delivery Services, we offer our customers a wide selection of clinical services including pharmacy case management, therapy assessment, compliance monitoring, health risk assessment, patient education and interaction evaluation, pharmacy claims processing, mail service and related prescription distribution, benefit design consultation, drug utilization review, formulary management and consultation, drug data analysis, drug interaction management, program management and pharmaceutical rebate administration.
Fee-For-Service Agreements. Fee-for-service agreements include: (i) specialty and mail service agreements, where we dispense prescription medications through our pharmacy facilities and (ii) PBM agreements, where prescription medications are dispensed through pharmacies participating in our retail pharmacy network as well as through our traditional mail service facility. Under fee-for-service agreements, revenue is recognized either: (a) when the pharmacy services are reported to us through the point of sale (“POS”) claims processing system and the drug is dispensed to the Member, in the case of a prescription filled through a pharmacy participating in our retail pharmacy network, or (b) at the time the drug is dispensed, in the case of a prescription filled through a pharmacy owned by us. Fee-for-service agreements accounted for 99.6%, or $627.8 million, 97.0%, or $571.3 million, and 90.9%, or $524.0 million, of our revenue for the years ended December 31, 2004, 2003 and 2002, respectively.
As part of the process of preparing our consolidated financial statements, we estimate income taxes in each of the jurisdictions in which we operate. We account for income taxes under Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes. 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 be able to realize the benefit from the deferred tax assets. Deferred tax assets that will be utilized within twelve months are classified as current assets. In 2002 and 2003 management reduced the valuation allowance for the Federal net operating loss carryforwards (“NOLs”) as it was determined that the tax asset will more likely than not be realized. All of the reversal of the valuation allowance in 2003 and a portion of such reduction in 2002 did not affect net income or the effective tax rate, as it related to NOLs resulting from stock option exercises, and accordingly, was recorded in stockholders equity.
Effective on January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. This statement addresses the accounting and reporting of goodwill and other intangible assets subsequent to their acquisition. Since adoption of SFAS No. 142 in July 2001, amortization of goodwill was discontinued, and goodwill is reviewed at least annually for impairment.
We account 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”) as permitted by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”) and as such, generally recognizes no compensation expense for employee stock options.
The following table provides consolidated details of our results for the years ended December 31, 2004, 2003 and 2002:
Total revenue for the year ended December 31, 2004 increased 7% to $630.5 million from $588.8 million for the same period in 2003. This increase reflects increased revenues due to increased volume in both the Specialty Management and Delivery Services and PBM Services segments aggregating $123.3 million, offset by the loss of TennCare® PBM and Synagis® revenues.
As discussed in more detail above, in 2003 we lost the TennCare® PBM and Synagis® distribution portion of the business. There was no TennCare® PBM and Synagis® revenues in 2004, a partial year of TennCare® PBM and Synagis® in 2003 and a full year of both revenue streams in 2002. To better understand the trends in our business and for comparative purposes we believe the information contained in the table below provides a more accurate comparison of our year over year revenue, cost of revenue and gross profit.
Revenue for the year ended December 31, 2003 increased 20% to $507.2 million from $421.8 million for the year ended December 31, 2002. This increase was a result of a larger customer base in both segments of the business, with corresponding higher volume. Cost of revenue increased commensurate with the increased volume in the business. Gross profit increased 7% to $62.0 million in 2003 from $57.9 million in 2002, after adjustments. The gross profit percentage decreased year over year due to the decrease in the percentage of higher margin IVIG infusion therapy sales included in the specialty segment.
The following table provides details for the Specialty Management and Delivery Services segment for the years ended December 31, 2004, 2003 and 2002.
Year ended December 31, 2004 vs. year ended December 31, 2003
Specialty Management and Delivery Services revenue increased $71.9 million in 2004 to $251.5 million, compared to revenue of $193.2 million in 2003. This increase was the result of the extension of the geographic span of one of our Specialty contracts, and the first quarter acquisition of Fair Pharmacy, offset by the loss of $13.7 million in Synagis® sales revenue.
Cost of revenue increased $54.3 million to $209.3 million in 2004, compared to $155.0 in 2003. Gross profit increased $3.9 million to $42.2 million for the year ended December 31, 2004. Gross profit percentage declined to 16.8% in 2004 compared to 19.8% in 2003, as a result of reimbursement and pricing pressures in the IVIG market, as well as renegotiated rates in a particular specialty contract. We expect that these new rates will result in increased revenue as a result of higher volume but decreased gross profit on that contract.
Cost of revenue increased $24.0 million to $155.0 million in 2003, compared to $131.0 in 2002. Gross profit declined $0.2 million to $38.3 million for the year ended December 31, 2003. Gross profit percentage declined to 19.8% in 2003 compared to 22.7% in 2002, as a result of increased revenue in lower margin injectable therapy programs as well as decreased revenues and margin erosion at the Rosyln Heights, NY distribution center.
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 the TennCare® PBM business on July 1, 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 decreased $9.7 million to $365.3 million in 2003. Gross profit decreased $1.9 million to $30.2 million compared to $32.1 million in 2002. The gross profit percentage decreased slightly from 7.9% to 7.6% compared to 2002. The decrease is primarily due to renewing a previously capitated contract on a fee for service basis, which generally has a lower margin, and lower rebates due to a change in the mix of certain drugs dispensed.
In 2003, SG&A expenses increased $4.7 million, or 10.4%, to $50.6 million compared to $45.9 million in 2001. This increase was principally the result of increased investment in sales resources and expanded management to support the growth in the Specialty Management and Delivery Services business, a severance related charge of $1.5 million associated with the termination of 55 employees in the PBM Services segment, acquisition related expenses of $0.7 million and a $0.9 million charge for a tentative settlement with our founder and a former officer (see Other Matters). We did not pay bonus compensation for 2003, as certain internal financial goals were not achieved. Bonus compensation for 2002 was $0.9 million.
In 2002, the TennCare® reserve adjustment of $0.9 million was the result of the collection of previously reserved receivables from Xantus Healthplans of Tennessee, Inc.
For 2004, we recorded amortization of intangibles of $3.0 million compared to $1.9 million in 2003. The increase in 2004 was a result of the amortization of the intangibles acquired with the purchase of Fair Pharmacy on February 2, 2004.
Net interest expense has remained constant at $0.8 million for the years 2004, 2003 and 2002. Interest expense is primarily comprised of interest on the line of credit borrowings, interest paid for capital leases, offset by minimal interest income on excess cash invested overnight.
The provision for income taxes was $4.5 million for 2004 and $6.1 million for 2003. The effective tax rate was 38.8% in 2004 compared to 40.0% in 2003. The 2004 tax rate was positively impacted by state tax planning effectuated in 2004. At December 31, 2004, we had remaining Federal net operating losses (“NOLs”) of $16.7 million which begin expiring in 2011 and state net operating losses of $5.3 million with varying expiration dates. The state operating losses have a full valuation allowance recorded against them as there is uncertainty concerning our ability to utilize the state NOLs prior to expiration.
The provision for income taxes was $6.1 million for 2003 and $4.7 million for 2002. The effective tax rate for 2003 was 40.0% compared to a 20.0% rate for 2002. 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. At December 31, 2003, we had remaining Federal NOLs of $19.4 million, and state NOLs of $6.6 million. In 2003, Management evaluated the remaining valuation allowance for the Federal NOLs and concluded that the allowance was no longer needed as the tax asset will more likely than not be realized. Therefore, the total valuation allowance related to our Federal NOLs, all of which were generated from stock option exercises, was reversed. The reversal did not affect income or our effective tax rate.
Net income for 2004 was $7.0 million, or $0.31 per diluted share, compared to net income of $9.1 million, or $0.40 per diluted share for 2003. The decrease is principally the result of the factors enumerated above, including the TennCare® and Synagis® losses, Value Options settlement and noncapitalizable acquisition costs.
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 included a charge of $0.9 million related to severance payments as well as a charge of $0.6 million for settlement with our founder and a former officer, as well as six months of TennCare® and Synagis®. 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.
For 2004, net cash provided from operating activities totaled $3.3 million compared to $14.3 million for 2003. The decrease in operating cash flows from 2004 to 2003 was the result of the delay in rebate payments shared with terminated TennCare® clients of $8.6 million in 2004 as well as opportunistic inventory purchases in the fourth quarter and the timing of payments to vendors and network pharmacies. Accounts receivable balances increased from 2003 to 2004 as a result of the increase in revenue. Days sales outstanding decreased year over year.
Net cash used in investing activities in 2004 was $17.1 million compared to $1.0 million used in 2003. The increase resulted primarily from acquiring Fair Pharmacy in February 2004.
At December 31, 2004, we had working capital of $14.4 million compared to $20.3 million at December 31, 2003, primarily attributable to the use of cash and borrowing amounts available under our line of credit to purchase Fair Pharmacy.
The Facility has a three-year term secured by our receivables with interest paid monthly. It provides for borrowings of up to $45 million at the London Inter-Bank Offered Rate (LIBOR) plus 2.4%. The Facility contains various covenants that, among other things, require us to maintain certain financial ratios, as defined in the agreements governing the Facility. After the initial three year term, the Facility automatically renews for additional one-year terms 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 Facility permits us to request an increase in the amount available for borrowing up to $100 million, as well as converting a portion of any outstanding borrowings from a Revolving Loan into a Term Loan. The borrowing base is based on receivables balances, among other things.
Under the terms of the Facility, all remittances from customers are sent/deposited into our lock box accounts with authorized access by HFG. Regardless of whether any portion of the Facility is outstanding on any given day, all available cash in the lock box accounts is swept daily by HFG to its account. If there are no amounts owed under the Facility, the swept cash is transferred back the same day to our main bank account. If any amounts are currently outstanding under the Facility, the swept cash is immediately applied by HFG against all or a portion of the loan balance. Any cash available after repayment of the entire outstanding loan balance on any given day is transferred back to us as discussed above.
All of our checks are drawn on one of two disbursement accounts, one for pharmacy claims payments and one for all other accounts payable. Checks are presented for payment daily to the disbursement accounts and are automatically funded by a transfer from our 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 we must borrow from the Facility that day. One of our authorized officers 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.
Due to the pending transaction with Chronimed, our NOLs may be subject to an annual limitation regarding their future utilization against taxable income due to a “change of ownership” in accordance with the provisions under Section 382 of the Internal Revenue Code. These annual limitations may effect the utilization of both Federal and state NOLs and also the tax deductions for assets that have book basis in excess of tax basis.
On February 28, 2003 we announced a stock repurchase program pursuant to which we are authorized to purchase up to $10 million of our common stock from time to time by various means. As of December 31, 2004, we used, in the aggregate, approximately $5.1 million of that authorization. The Board’s current authorization superseded the repurchase program authorized in 2001. No stock was repurchased during 2004.
As previously reported on February 1, 2004, we reached a global settlement with Value Options of Texas, Inc., a former PBM customer. We paid $1.0 million to Value Options to resolve all of our disputes. Net of reserves, a charge of $0.9 million was recorded in SG&A expenses in the fourth quarter of 2004.
At December 31, 2004, the carrying values of cash and cash equivalents, accounts receivable, accounts payable, claims payable, payables to plan sponsors and others, debt and line of credit approximate fair value due to their short-term nature.
MIM Corporation (the “Company” or “MIM”) is 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, and other self-funded plan sponsors (collectively, “Plan Sponsors”), as well as third party adminstrators. 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”).
In 2004, 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 Delivery Services to patients who are chronically ill, genetically impaired, or afflicted with potentially life threatening diseases that require injection and infusion therapies, as well as infusion therapies and home healthcare services to patients recently discharged from hospitals.
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, Immune Deficiency, Oncology, Hemophilia, Multiple Sclerosis, Growth Hormone Deficiency, Gaucher’s Disease, Rheumatoid Arthritis, Infertility, Hepatitis C, Psoriasis, 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; Roslyn Heights, New York; Bronx, New York and Westchester, Pennsylvania. The Bronx location has been utilized since February 2004, the acquisition date of Natural Living, Inc (“Fair Pharmacy”), a New York-based provider of specialty pharmaceutical therapy services. 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. ADIMA recently completed the construction of a new dispensing facility in Westchester, Pennslyvania which has been utilized since November of 2004. The Columbus, Ohio facility began dispensing specialty drugs in January of 2000.
The Company generates revenue principally through the sale of prescription drugs, which are dispensed either through a pharmacy participating in the Company’s retail pharmacy network or a pharmacy owned by the Company. Revenue is generally derived under fee-for-service agreements; however a non-material number of capitated agreements exist. Prescription drug revenue is offset by the rebates shared with plan sponsors.
Fee-For-Service Agreements. Fee-for-service agreements include: (i) specialty and mail service agreements, where the Company dispenses prescription medications through its own pharmacy facilities and (ii) PBM agreements, where prescription medications are dispensed through pharmacies participating in the Company’s retail pharmacy network as well as the Company’s mail service facility. Under fee-for-service agreements, revenue is recognized either: (a) when the pharmacy services are reported to the Company through the point of sale (“POS”) claims processing system and the drug is dispensed to the Member, in the case of a prescription filled through a pharmacy participating in the Company’s retail pharmacy network, or (b) at the time the drug is dispensed, in the case of a prescription filled through a pharmacy owned by the Company.
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.
The Company’s financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable and its line of credit. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and line of credit approximate fair value due to their fully liquid or short-term nature. The outstanding balance on its line of credit at December 31, 2004 was $7,303.
We account for employee stock and stock-based compensation plans using the intrinsic value method in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) as permitted by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), and as such, generally recognize no compensation cost for employee stock options.
Our compensation cost for stock option plans for employees and directors, had it been determined in accordance with the fair value method prescribed by SFAS No. 123, would have been as follows for the years ended December 31:
As pro forma compensation expense for options granted is recorded over the vesting period of options, future pro forma compensation expense may be greater as additional options are granted.
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payments, which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB 25, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach to estimating the fair value of options in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) must be adopted no later than July 1, 2005. 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 above. The Company is still evaluating the alternative methods available for 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 the financial results of the Company in future years.
The Company operates in two reportable segments: (1) Specialty Management and Delivery Services, which is comprised of specialty pharmacy distribution and clinical management services; and (2) PBM Services, which is comprised of fully integrated pharmacy benefit management and traditional mail services.
The following table sets forth the allocation of the purchase price as of December 31, 2004.
The following table sets forth the fair value of the identifiable assets acquired and liabilities assumed in the acquisition of Fair Pharmacy.
Intangible assets consist of trademarks and non-compete agreements and will be amortized over their estimated useful life of three and five years, respectively. The excess of the purchase price over the fair value of the identifiable net assets and the fair value of the identifiable intangible assets acquired was allocated to goodwill that was assigned to the Specialty Management and Delivery Services segment. Amortization of the goodwill acquired with Fair Pharmacy will be tax deductible. Certain financial performance objectives as outlined in the original sales agreement were achieved by December 31, 2004 and additional consideration will be paid based on a percentage of Fair Pharmacy’s actual 2004 earnings before income taxes, depreciation and amortization. The preliminary calculation of this additional consideration is $4.0 million. This amount has been accrued as of December 2004, and the consideration is expected to be paid out in the first quarter of 2005.
On January 31, 2002, the Company acquired all of the issued and outstanding capital stock of Vitality, a New York-based provider of specialty pharmaceutical services (the Rosyln Heights, NY dispensing facility). Vitality provides such services to the chronically ill and genetically impaired, focusing particularly on oncology, infectious disease, immunology and rheumatory disease.
The aggregate purchase price for the Roslyn Heights, NY dispensing facility 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 Rosyln Heights, NY dispensing facility 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.
All goodwill assigned to our Specialty Management and Delivery Services segment is expected to be deductible for income tax purposes. Goodwill associated with the PBM Services segment is not tax deductible.
The amortization expense for the years ended December 31, 2004, 2003 and 2002was $3,019, $1,863 and $1,424 respectively. The estimated amortization expense for the next five years is as follows:
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 accompanying financial statements do not reflect any recoveries from third parties.
Rent expense for non-related party leased facilities and equipment was approximately $1,495, $1,647 and $1,820 for the years ended December 31, 2004, 2003 and 2002, respectively.
The effect of temporary differences that give rise to a significant portion of deferred taxes is as follows as of December 31:
As of December 31, 2004, certain of the NOLs described above are subject to limitation and may be utilized in a future year upon release of the limitation. If the NOLs are not utilized in the year they are available they may be utilized in a future year to the extent they have not expired.
The 1996 Directors Stock Incentive Plan, (the “Directors Plan”) was adopted to attract and retain qualified individuals to serve as non-employee directors of the Company (“Outside Directors”), to provide incentives and rewards to such directors and to align more closely the interests of such directors with those of the Company’s stockholders. As amended, the Directors Plan has 300,000 shares authorized, and allows for 5,000 shares per year to be automatically granted to each Oustide Director, and 20,000 non-qualified stock options to be automatically granted to Outside Directors upon his or her initial appointment or election to the Board. The exercise price of such options is equal to the fair market value of the Common Stock on the date of grant. Options granted under the Directors Plan vest over three years. In 2003, 20,000 shares at an exercise price of $8.77 were granted to a newly appointed director of the Company. As of December 31, 2004, options to purchase 250,000 shares are outstanding at an average exercise price of $6.95 and 171,667 shares under the Directors Plan were exercisable.
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, 2004, the Company has 136,000 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 by 2002. We did not meet the earnings per share levels by 2002 to accelerate vesting of the Performance Shares. The Company has recorded cumulative compensation expense of $630 related to these Performance Shares through December 31, 2004 based on the fair market value at the date of grant. Based on outstanding number of shares, the deferred compensation expense at December 31, 2004 is $123. The total expense recorded for 2004, 2003 and 2002 was $62, $206 and $145, respectively.
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:
segment with a lesser amount in the Specialty Management and Delivery Services segment
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 in selling, general and administrative expenses of $192, $161 and $102 for the years ended December 31, 2004, 2003, and 2002, respectively.
A summary of quarterly financial information for fiscal 2004 and 2003 is as follows:
In the fourth quarter of 2004, the Company recorded $534, net of tax, for a settlement with Value Options, a client in the PBM Services segment.