(3) In 1998, the Company recorded charges of $1,500 in connection with the negotiated termination of a vendor contract and $2,200 paid in settlement of a Federal and State of Tennessee investigation of the conduct of two former officers of the Company.
(4) Net income (loss) includes legal expenses advanced for the defense of two former officers for the years 2000, 1999, and 1998 in the amounts of $2,700, $1,400, and $ 1,300, respectively.
(6) The historical loss per common share for the years 2000 and 1999 excludes the effect of common stock equivalents, as their inclusion would be antidilutive.
(7) This amount represents long-term debt assumed by the Company in connection with its acquisition of Continental Managed Pharmacy Services, Inc. and its subsidiaries.
The following discussion should be read in conjuction with the Consolidated Financial Statements of MIM Corporation and subsidiaries (collectively, the "Company") including the Notes thereto, included elsewhere in this Report. This Report contains statements not purely historical and which may be considered forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including statements regarding the Company's expectations, hopes, beliefs, intentions or strategies regarding the future. These forward looking statements may include statements relating to the Company's business development activities, sales and marketing efforts, the status of material contractual arrangements, including the negotiation or re-negotiation of such arrangements, future capital expenditures, the effects of regulation and competition on the Company's business, future operating performance of the Company and the results, benefits and risks associated with integration of acquired companies. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, that actual results may differ materially from those possible results discussed in the forward-looking statements as a result of various factors. These factors include, among other things, risks associated with risk-based or "capitated" contracts, increased government regulation related to the health care and insurance industries in general and more specifically, pharmacy benefit management and specialty pharmaceutical distribution organizations, the existence of complex laws and regulations relating to the Company's business, increased competition from the Company's competitors, including competitors with greater financial, technical, marketing and other resources. This Report contains information regarding important factors that could cause such differences. The Company does not undertake any obligation to supplement these forward-looking statements to reflect any future events and circumstances.
The Company offers Plan Sponsors a broad range of PBM Services designed to promote the cost-effective delivery of clinically appropriate pharmacy benefits through its network of retail pharmacies and its own mail service distribution facility.
Co-payments. When prescriptions are filled and the Company is the participating pharmacy, the Company is entitled to receive co-payments from Members and record these co-payments as revenue when the amounts are deemed collectible and reasonably estimable. When prescriptions are filled through its retail pharmacy networks, the Company is not entitled to these amounts and does not account for co-payments in its financial statements as these amounts are never billed or collected by the Company and it has no legal right or obligation to co-payments collected by the retail pharmacies.
Manufacturers' rebates are recorded as estimates until such time as the rebate monies are received. These estimates are based on historical results and trends as well as the Company's forecasts. In January 2001, the Company adopted Emerging Issues Task Force Issue No. 00-22, "Accounting for 'Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future" ("EITF 00-22"). EITF 00-22, states, among other things, that rebates received from pharmaceutical manufacturers should be recognized as a reduction of cost of revenue and rebates shared with Plan Sponsors as a reduction of revenue.
The Company accounts for employee stock-based compensation plans and non-employee director stock incentive plans in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Stock options granted to non-employees are accounted for in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" (See Note 14 of Notes to Consolidated Financial Statements). Stock options granted to
As part of the process of preparing the Company's consolidated financial statements, management is required to estimate income taxes. The process involves estimating actual current tax expense along with assessing temporary differences resulting from differing treatment of items for book and tax purposes. These timing differences result in deferred tax assets, which are included in the Company's consolidated balance sheet.
The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long lived assets, including intangible assets, may warrant revision or that the remaining balance of an asset may not be recoverable. The measurement of possible impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. Impairment losses, if any, would be determined based on the present value of the cash flows using discount rates that reflect the inherent risk of the underlying business. It is the Company's belief that no such impairment existed as of December 31, 2002 and 2001.
The following table provides details for the segment for the years ended December 31, 2002, 2001 and 2000.
2002 Inc/(Dec) 2001 Inc/(Dec) 2000 - -------------------------------------------------------------------------------- Revenues $169,503 308% $41,547 133% $17,854 Cost of revenues 130,990 28,398 11,211 ------- ------ ------ Gross profit $ 38,513 $13,149 $ 6,643 ======== ======= ======= Gross profit percentage 22.7% 31.7% 37.2%
Cost of revenue increased $102.6 million to $131 million in 2002 compared to $28.4 million in 2001. This increase is commensurate with the business generated from the Vitality business purchased on January 31, 2002 and the growth in the Company's BioScrip(R) programs from 2001.
The gross profit percentage declined in 2002 compared to 2001 as a result of increases in the lower margin BioScrip(R) injectable therapy programs. The current gross profit percentages now reflect a higher proportion of injectable therapy programs compared to 2001. Infusion therapy historically has yielded a higher gross profit percentage.
Cost of revenue increased $17.2 million to $28.4 million in 2001 compared to $11.2 million in 2000. This increase is commensurate with the increase in revenues discussed above.
The following table provides details for the segment for the years ended December 31, 2002, 2001 and 2000:
Gross profit for the PBM Services segment decreased $8.2 million to $32.1 million in 2002 compared to $40.3 million in 2001. This is a result of the Company's termination of certain less profitable PBM accounts and the liqudation of a former TennCare MCO customer. These decreases were partially offset by increases from continued growth in the Company's retail network and mail services.
The gross profit percentage decreased to 7.9% in 2002 from 9.7% in 2001 as result of the liquidation of a former TennCare MCO customer, the change in the mix of PBM clients from 2001 as well as new growth in the Company's retail network and mail services for 2002 which generated lower gross profit percentages.
Net interest expense was $0.8 million and $0.06 million for 2002 and 2001, respectively. Interest expense for 2002 is primarily a result of increased borrowings under the Company's revolving credit facility to fund the $35 million cash portion of purchase price for the Vitality acquisition.
As of January 1, 2003, certain of the NOLs described above were subject to limitation and may be utilized in a future year upon release of the limitation and recorded directly in Stockholders' Equity as discussed above. If the NOLs are not utilized in the year they are available they may be utilized in a future year to the extent they have not expired.
For 2001, the Company recorded net income of $14.2 million, or $0.64 per diluted share, including gains associated with the TennCare(R) reserve adjustment of $0.10 per diluted share, compared with a net loss of $1.8 million, or $0.09 per share, for 2000, which included charges of $5.4 million relating to the legal defense costs of two former officers and the write off of a non-operating investment.
Net cash used in investing activities in 2002 was $33.3 million compared to $3.7 million used in 2001. This increase reflects approximately $35 million of the Facility used for the cash portion of the purchase price for the Vitality acquisition (see Note 4 of Notes to Consolidated Financial Statements), partially offset by the repayment in full, in March 2002, of a $2.1 million officer loan (see Note 7 of Notes to Consolidated Financial Statements).
Net cash provided by financing activities in 2002 was $5.7 million compared to $3.9 million in 2001. The increase reflects $4.6 million currently outstanding under the Facility after repaying most of the borrowings used to pay the cash portion of the purchase price for the Vitality acquisition, offset by a $5.6 million decrease in proceeds from the exercise of stock options and $2.6 million less of treasury stock purchases in 2001.
At December 31, 2002, the Company had working capital of $5.1 million compared to $9.3 million at December 31, 2001. This change is primarily the result of the acquisition of Vitality for $45 million, of which $35 million was paid in cash. Goodwill and intangible assets, classified as non-current, increased $39.4 million and the $4.6 million current unpaid balance under the Facility was classified as a current liability. Amortizable intangibles are amortized over 2 to 10 years.
On November 1, 2000, the Company entered into a $45 million secured revolving credit facility (the "Facility") with HFG Healthco-4 LLC, an affiliate of Healthcare Finance Group, Inc. ("HFG"). The Facility has a three-year term and is secured by the Company's receivables. Interest is payable monthly and provides for borrowing of up to $45 million at the London InterBank Offered Rate (LIBOR) plus 2.1%. The Facility contains various covenants that, among other things, require the Company to maintain certain financial ratios, as defined in the agreement governing the Facility. As of December 31, 2002, there was outstanding $4.6 million under the Facility as a result of the Company's acquisition of Vitality. The Facility terminates October 31, 2003. The Company believes that it will be able to extend or renew the Facility or, alternatively, obtain a new credit facility with another lender; however, there can be no assurances that the Company will be able to renew or extend the Facility or obtain a new one on terms favorable to the Company. Failure to renew or extend the Facility or enter into a new credit facility could have a material adverse effect on the Company.
Under the terms of the Facility, all remittances from customers are sent/deposited into the Company's lock box accounts with authorized access by HFG. Regardless of whether any portion of the Facility is outstanding on any given day, all available cash in the lock box accounts is swept daily by HFG to its account. If there are no amounts owed under the Facility, the swept cash is transferred back the same day to the Company's main bank account. If any amounts are currently outstanding under the Facility, the swept cash is immediately applied by HFG against all or a portion of the loan balance. Any cash available after repayment of the entire outstanding loan balance on any given day is transferred back to the Company as discussed above.
On February 28, 2003, the Company announced a stock repurchase program pursuant to which the Company is authorized to purchase up to $10 million of the Company's Common Stock from time to time in the open market or in private transactions. As of March 25, 2003, the Company has used, in the aggregate, approximately $5.1 million of this authorization. The Board's current authorization supersedes the repurchase program adopted by the Company in 2001.
In the first quarter of 2001, the Company commenced a stock repurchase program under which it was authorized to repurchase up to $5 million of the Company's Common Stock from time to time in the open market or in private
transactions. In February 2001, the Company repurchased 1,298,183 shares of Common Stock at a price of $2.00 per share in private transactions. (See Note 11 of Notes to Consolidated Financial Statements). This program has been superseded by the 2003 repurchase plan.
The Company also may pursue joint venture arrangements, business acquisitions and other transactions designed to expand its Specialty Management and Distribution Services and PBM Services businesses, which the Company would expect to fund from cash on hand or debt, borrowings under the Facility, other future indebtedness or, if appropriate, the private and/or public sale or exchange of equity securities of the Company (see discussion of the Facility above).
In 1998, the Company recorded a $2.2 million charge against earnings as a result of an agreement in principle with respect to a civil settlement of a Federal and State of Tennessee investigation in connection with conduct occurring prior to the Company's August 1996 initial public offering involving, among others, two former officers of the Company. The definitive agreement covering that settlement was executed on June 15, 2000, and required payment of $0.8 million in 2000, $0.9 million in 2001, and $0.5 million in 2002. On July 1, 2002, this settlement was paid in full.
The TennCare(R) program operates under a demonstration waiver from The United States Center for Medicare and Medicaid Services ("CMS"). That waiver is the basis of the Company's ongoing service to those MCOs in the TennCare(R) program. The waiver expires on December 31, 2004. While the Company believes that pharmacy benefits will continue to be provided to Medicaid and other eligible TennCare(R) enrollees through MCOs in one form or another through at least December 31, 2004, should the funding sources and/or conditions for the TennCare(R) program change significantly, the TennCare(R) program's ability to pay the MCOs, and in turn the MCO's ability to pay the Company, could materially and adversely affect the Company's financial position and results of operations. Revenues from the TennCare(R) program for the years 2002, 2001 and 2000 were 30.1%, 36.6% and 47.5%, respectively of total revenue.
Historically, as a result of providing capitated PBM services to certain TennCare(R) MCOs, the Company's pharmaceutical claims costs had been subject to significant increases from October through February, which the Company believes is due to the need for increased medical attention to, and intervention with, MCOs' Members during the colder months. The resulting increase in pharmaceutical costs impacted the profitability of capitated contracts. Currently, the Company has no capitated PBM arrangements with MCOs participating in the TennCare(R) program. Fee-for-service arrangements mitigate the adverse effect on profitability of higher pharmaceutical costs incurred under capitated contracts, as higher utilization positively impacts profitability. The Company presently anticipates that approximately 12% of its total revenues for 2003 will be derived from capitated arrangements.
Generally, loss contracts arise only on capitated or other risk-based contracts and primarily result from higher than expected pharmacy utilization rates, higher than expected inflation in drug costs and the inability of the
We have audited the accompanying consolidated balance sheet of MIM Corporation and subsidiaries as of December 31, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audit. The financial statements and schedule of MIM Corporation as of December 31, 2001 and for the years ended December 31, 2001 and 2000, were audited by other auditors who have ceased operations and whose report dated February 16, 2002, expressed an unqualified opinion on those statements, prior to restatement.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MIM Corporation at December 31, 2002, and the consolidated results of their operations and their cash flows for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
In addition, as described in Note 5, these financial statements have been further revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 5 with respect to 2001 and 2000 included (a) agreeing the previously reported net income (loss) representing amortization expense, (including any related tax effects) recognized in those periods related to goodwill, to the Company's underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net income (loss) to reported net income (loss) and the related earnings-per-share amounts. In our opinion, the disclosures for 2001 and 2000 in Note 5 are appropriate. However, we were not engaged to audit, review or apply any procedures to the 2001 or 2000 financial statements of the Company other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2001 or 2000 financial statements taken as a whole.
/s/ Ernst & Young, LLP - ---------------------- Ernst & Young, LLP MetroPark, New Jersey February 14, 2003
MIM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, (In thousands, except for share amounts)
MIM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, (In thousands, except per share amounts)
Capital lease obligations of $1,495 were incurred to acquire equipment for the year ended December 31, 2000. None were incurred for the years ended December 31, 2002, and 2001.
In 2001, there was a contribution of a minority interest to additional paid-in capital of $1,112 upon dissolution of a subsidiary.
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.
Through its BioScrip(R) specialty injectable and infusion therapy programs, the Company distributes high-cost pharmaceuticals and provides clinically focused case and disease management programs to Members afflicted with chronic illnesses or genetic impairments. The disease states or conditions for which the Company has such programs include HIV/AIDS, oncology, hemophilia, multiple sclerosis, growth hormone deficiency, Gaucher's disease, rheumatoid arthritis, infertility, respiratory syncytial virus (RSV), hepatitis C, Crohn's disease and transplants. The specialty drugs distributed through the BioScrip(R) programs are dispensed and serviced from the Company's various dispensing locations in Columbus, Ohio; Livingston, New Jersey; and Roslyn Heights, New York. The Roslyn Heights facility has been utilized since January 2002, the acquisition date of Vitality Home Infusion Services, Inc. ("Vitality"), a New York-based provider of specialty pharmaceutical injectable therapy services. The Livingston location has been utilized since August 2000, the acquisition date of American Disease Management Associates, LLC ("ADIMA"), a New Jersey-based provider of specialty injectable and infusion therapy services.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
Receivables include amounts due from Plan Sponsors under the Company's PBM contracts, amounts due from pharmaceutical manufacturers for rebates, service fees resulting from the distribution of certain drugs through retail pharmacies and amounts due from certain third party payors.
Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventory consists principally of purchased prescription drugs.
Asset Useful Life - ----- ----------- Computer and office equipment................. 3-5 years Furniture and fixtures........................ 5-7 years
Leasehold improvements and leased assets are amortized using a straight-line basis over the related lease term or estimated useful life of the assets, whichever is less. The cost and related accumulated depreciation of assets sold or retired are removed from the accounts with the gain or loss, if applicable, recorded in the statement of operations. Maintenance and repairs are expensed as incurred.
The Company is responsible for all covered prescriptions provided to plan members during the contract period. Claims payable also includes estimates of certain prescriptions that were dispensed to members for whom the related claims had not yet been submitted.
The Company estimates the portion of those pharmacy rebates that are shared with its clients and adjusts pharmacy rebates payable to plan sponsors when the amounts are paid typically on a quarterly basis, or as significant events occur. These estimates are accrued periodically based on actual and estimated claims data and agreed upon contractual rebate sharing rates. The Company records any cumulative effect of these adjustments against costs as identified, and adjusts its estimates prospectively to consider recurring matters. Adjustments generally result from contract changes with clients, differences between the estimated and actual product mix subject to rebates or whether the product was included in the applicable formulary.
Capitated Agreements. Approximately 9%, or $52,628 of the total company revenues were generated from capitated contracts in the year ended December 31, 2002. The Company's capitated contracts with Plan Sponsors require the Company to provide covered pharmacy services to Plan Sponsor Members in return for a fixed fee per Member per month paid by the Plan Sponsor. Capitated contracts have terms varying from six months to one year. These contracts are subject to rate adjustment or termination upon the occurrence of certain events. At such time as management estimates that a contract will sustain losses over its remaining contractual life, a reserve is established for these estimated losses. There are currently no expected loss contracts.
Cost of revenue includes pharmacy claims, fees paid to pharmacies and other direct costs associated with pharmacy management, claims processing operations and mail order services, offset by volume rebates received from pharmaceutical manufacturers. The Company does not maintain cost of revenue information with regards to product sales.
The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 utilizes the liability method, and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities at currently enacted tax laws and rates.
Basic earnings (loss) per common share are based on the weighted average number of shares outstanding and diluted earnings per share are based on the weighted average number of shares outstanding, including common stock equivalents. For the year ended December 31, 2000, diluted loss per share is the same as basic loss per share because the inclusion of common stock equivalents would be anti-dilutive.
The Company operates in two operating segments: (1) PBM Services, which is comprised of fully integrated pharmacy benefit management and mail services; and (2) Specialty Management and Distribution Services, which is comprised of its BioScrip(R) specialty injectable and infusion therapy programs for patients who are chronically ill and genetically impaired.
Although the Company did offer its BioScrip(R) programs in 2001, it did not manage this portion of its business separately from the PBM and mail services business. Hence, the BioScrip(R) services were not an operating segment at that time. In the first quarter of 2002, the Company substantially altered its business model with the acquisition and integration of Vitality. Due to various factors and industry projections (i.e., growth forecasts, penetration rates, etc.) related to the specialty pharmaceutical area, management decided to allocate a significant amount of resources to the growth of its specialty pharmaceutical business. After this reorganization in the first quarter of 2002, the Company determined that its specialty BioScrip(R) business met the definition of a reportable operating segment.
The accounting policies applied to the business segments are the same as those described in the Summary of Significant Accounting Policies.
With respect to the segment information below, the Company is required under SFAS 131, "Disclosures about Segments of an Enterprise and Related Information to show comparable segment information for the same periods in 2001 and 2000, regardless of the fact that the Company had only one operating segment prior to 2002. For purposes of 2001 and 2000 segment information disclosed below, we made segment allocations based on methodologies used for 2002 information.
Purchase price: Funded from the Company's line of credit $35,000 Common stock value 10,355 Transaction costs 1,061 ------- Total purchase price 46,416
The following table sets forth the assets and liabilities acquired with the purchase of Vitality.
The following unaudited consolidated pro forma financial information for the whole Company for the twelve months ended December 31, 2002 and 2001, respectively, has been prepared assuming Vitality was acquired as of January 1, 2001, utilizing the purchase method of accounting, with pro forma adjustments for non-amortizing goodwill, amortizing intangibles, interest expense, rent expense and income tax benefit. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results that would have been realized had the acquisition occurred on January 1, 2001. This pro forma financial information is not intended to be a projection of future operating results.
Pursuant to SFAS No. 142, substantially all of the Company's intangible assets will no longer be amortized and the Company is required to perform an annual impairment test for goodwill and intangible assets. Goodwill and intangible assets are allocated to the reporting units, which are either the operating segment or one reporting level below the operating segment. SFAS 142 requires the Company to compare the fair value of the reporting unit to its carrying amount on an annual basis to determine if there is potential impairment. If the fair value of the reporting unit is less than its carrying value an impairment loss would be recorded to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value. The impairment test for indefinite lived intangible assets consists of comparing the fair value of the intangible asset to its carrying value. If the carrying value of the intangible asset exceeds its fair value an impairment loss is recognized. Fair value for goodwill and intangible assets are determined based on discounted cash flows and appraised values. During the first quarter of 2002, the Company completed its initial impairment review, which indicated that there was no impairment of goodwill or intangible assets. The Company also performed its annual impairment test which indicated there was no impairment at December 31, 2002,
All goodwill assigned to our Specialty Management and Distribution Services segment is expected to be deductible for income tax purposes. Goodwill associated with the PBM Services segment is not tax deductible.
The following table details the acquired intangible assets and their accumulated amortization as of December 31, 2002.
The amortization expense for the year ended December 31, 2002 was $1,424. The estimated amortization expense for the next five years is as follows:
On June 23, 1997, the Company acquired an 8% interest in Wang Healthcare Information Systems, Inc. ("WHIS"), which markets PC-based clinical information systems to physicians utilizing patented image-based technology. The Company purchased 1,150,000 shares of the Series B Convertible Preferred Stock of WHIS, for an aggregate purchase price equal to $2,300. Due to changes in the financial situation at WHIS and its ability to access capital, the Company recorded a provision for loss in the amount of $2,300 on this investment in 2000.
Under certain circumstances, the Company may be obligated to indemnify and has advanced defense costs to two former officers of a subsidiary of the Company in connection with their involvement in the Federal and State of Tennessee investigation of which they were the subject. During 2000, the Company advanced and expensed approximately $2,700 for the former officers' legal costs in this matter.
On June 28, 2001, the Company dissolved MIM Strategic Marketing, LLC ("Strategic"), a joint venture of which the Company was the majority investor. The Company does not have any repayment obligation to the minority interest investor under Strategic's operating agreement or under the laws of the state of its formation. As a result of this dissolution, the minority interest balance of $1,112 has been reclassified to additional paid in capital.
In February 2001, the Company repurchased 1,298,183 shares of the Company's common stock for $2,596, at a price of $2.00 per share. This program has been superceded by the 2003 repurchase plan.
Until settled on April 2, 2001, the Company had been engaged in commercial arbitration with Tennessee Health Partnership ("THP") over a number of commercial disputes surrounding the parties' relationship. In 1999, the Company recorded a TennCare reserve adjustment of $3,300 for estimated future losses related to this dispute and another TennCare provider. In connection with the above settlement, which was favorable to the Company, $1,300 was paid to THP in satisfaction of all claims between the parties and a $980 TennCare reserve adjustment credit was recorded in the first quarter of 2001.
Various Federal and state laws and regulations affecting the healthcare industry do or may impact the Company's current and planned operations, including, without limitation, Federal and state laws prohibiting kickbacks in government health programs (including TennCare(R)), Federal and state antitrust and drug distribution laws, and a wide variety of consumer protection, insurance and other state laws and regulations. While management believes that the Company is in substantial compliance with all existing laws and regulations material to the operation of its business, such laws and regulations are subject to rapid change and often are uncertain in their application. As controversies continue to arise in the healthcare industry (for example, regarding the efforts of Plan Sponsors and pharmacy benefit managers to limit formularies, alter drug choice and establish limited networks of participating pharmacies), Federal and state regulation and enforcement priorities in this area can be expected to increase, the impact of which on the Company cannot be predicted. There can be no assurance that the Company will not be subject to scrutiny or challenge under one or more of these laws or that any such challenge would not be successful. Any such challenge, whether or not successful, could have a material adverse effect upon the Company's financial position and results of operations. Violation of the Federal anti-kickback statute, for example, may result in substantial criminal penalties, as well as exclusion from the Medicare and Medicaid (including TennCare) programs. Further, there can be no assurance that the Company will be able to obtain or maintain any of the regulatory approvals that may be required to operate its business, and the failure to do so could have a material adverse effect on the Company's financial position and results of operations.
At December 31, 2002, the Company has Federal NOLs ("NOLs") remaining of approximately $21,500 million which will begin expiring in 2009. As opposed to the Company's NOLs that reduced the effective tax rate in fiscal years' 2002 and 2001, the remaining NOLs will be recorded directly in Stockholders' Equity when utilized rather than as a reduction of tax expense as the NOL's were generated primarily from the exercise of stock options in prior years. However, the Company will receive the cash flow benefit from the reduction in its income tax liability when the remaining NOLs are utilized.
As of December 31, 2002, certain of the NOLs described above are subject to limitation and may be utilized in a future year upon release of the limitation and recorded directly in Stockholders' Equity as discussed above. If the NOLs are not utilized in the year they are available they may be utilized in a future year to the extent they have not expired.
The 1996 Incentive Stock Plan (the "1996 Plan") provided for the granting of incentive stock options ("ISOs") and non-qualified stock options ("NQSOs") to employees, directors and consultants of the Company. Under the 1996 Plan there were 5,200,450 shares authorized for issuance. In 2001, the stockholders approved the Company's 2001 Incentive Stock Plan (the "2001 Plan," collectively with the 1996 Plan, the "Plans"). Under the 2001 Plan an additional 950,000 shares were authorized for issuance. At the annual stockholders meeting in 2002 an amendment and restatement of the 2001 Plan was approved to increase the plan by 800,000 shares, from 950,000 to 1,750,000. As of December 31, 2002, 450,688 shares remained available for grant under the Plans.
The 1996 Directors Stock Incentive Plan, (the "Directors Plan") was adopted to attract and retain qualified individuals to serve as non-employee directors of the Company ("Outside Directors"), to provide incentives and rewards to such directors and to associate more closely the interests of such directors with those of the Company's stockholders. The Directors Plan provides for the automatic granting of non-qualified stock options to Outside Directors joining the Company. Each such Outside Director receives an option to purchase 20,000 shares of Common Stock upon his or her initial appointment or election to the Board of Directors. The exercise price of such options is equal to the fair market value of the Common Stock on the date of grant. Options granted under the Directors Plan vest over three years. In 2002, an amendment and restatement of the Directors Plan was approved at the annual stockholders meeting to add 200,000 shares to the 300,000 shares previously authorized and provide the automatic annual grant of 5,000 options to each non-employee director of the Company. Following the approval, 5,000 options at an exercise price of $9.94 were granted to each of the six Directors. In addition, 20,000 shares at an exercise price of $8.77 were granted to the newly appointed director of the Company. As of December 31, 2002, options to purchase 170,000 shares are outstanding at an average exercise price of $6.88. At December 31, 2002, 100,000 shares under the Directors Plan were exercisable.
2002 2001 2000 Volatility 104.6% 104.4% 106.6% Risk-free interest rate 2.79% 1.25% 6.25% Expected life of options 6 years 4 years 4 years
Under the Plans, the Company's Board of Directors may grant stock to key employees. The Board of Directors may make the issuance of common stock subject to the satisfaction of one or more employment, performance, purchase or other conditions. As of December 31, 2002, the Company has 220,000 restricted stock grants (the "Performance Shares") that vest and become exercisable 8 years from the date of grant or earlier, if the Company exceeds certain earnings per share levels in 2001 and 2002. During 2002, the Company did not meet the earnings per share levels to accelerate vesting of the Performance Shares. The Company has recorded cumulative compensation expense of $362,484 related to these Performance Shares through December 31, 2002 based on the fair market value at the date of grant.
A summary of quarterly financial information for fiscal 2002 and 2001 is as follows: