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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File No. 0-28740
MIM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 05-0489664
(State of incorporation) (IRS Employer Identification No.)
100 Clearbrook Road, Elmsford, New York 10523
(914) 460-1600
(Address and telephone number of Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended ("Exchange Act") during the preceding twelve months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Annual Report on Form 10-K
("Annual Report") or any amendment to this Annual Report on Form 10-K. ___
The aggregate market value of the registrant's Common Stock, par value
$.0001 per share ("Common Stock") (its only voting stock), held by
non-affiliates of the registrant as of March 12, 1999 was approximately $29.0
million based on the closing sales price of the Common Stock on such day of
$2.50 per share. (Reference is made to the fourth paragraph of Part II, Item 5
herein for a statement of the assumptions upon which this calculation is based.)
On March 12, 1999, there were outstanding 18,742,689 shares of the
registrant's Common Stock.
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PART I
Item 1. Business
Overview
MIM Corporation (the "Company") is an independent pharmacy benefit
management ("PBM") and prescription mail order organization that offers a broad
range of pharmaceutical services to the health care industry. The Company
promotes the cost effective delivery of pharmacy benefits to plan members and
the public. The Company targets two types of plan sponsors: (1) sponsors of
public and private health plans, such as health maintenance organizations
("HMO's") and other managed care organizations ("MCO's"), and long-term care
facilities, such as nursing homes and assisted living facilities; and (2)
self-funded plans sponsored by employers. The Company provides flexible program
designs, pricing arrangements, formulary management, clinical expertise,
innovative technology and quality service designed to control pharmacy costs.
The Company promotes the clinically appropriate substitution of generic drugs
from equivalent but more expensive brand name drugs that are often prescribed.
The Company was incorporated in Delaware in March 1996 and completed its
initial public Offering ("Offering") in August 1996. Prior to the Offering, the
Company combined the businesses and operations of Pro-Mark Holdings, Inc.
("Pro-Mark") and MIM Strategic Marketing, LLC, which became 100% and 90% owned
subsidiaries, respectively, of the Company in May 1996. On August 24, 1998, the
Company acquired all of the outstanding capital stock of Continental Managed
Pharmacy Services, Inc. ("Continental"), complementing its core PBM business
with mail order pharmacy services.
At December 31, 1998, the Company provided PBM services to 127 plan
sponsors with approximately 1.9 million plan members, including six plan
sponsors with approximately 1.2 million members receiving mandated health care
benefits under Tennessee's TennCare(R) Medicaid waiver program ("TennCare"). As
of January 1, 1999, the Company's relationship with these TennCare plan sponsors
was restructured. See "The TennCare Program" below. Throughout this Annual
Report, all references to the number of members or lives managed by the Company
under the TennCare program excludes members or lives duplicatively covered under
an agreement between the Company and TennCare behavioral health plan sponsors.
In prior periodic reports under the Exchange Act and in previous press releases,
the Company has counted such members and lives twice when covered under more
than one agreement.
Since the Offering through mid-December 1997, the Company focused its
marketing efforts on large public health programs, particularly in states with
high Medicaid eligible populations, and on private health plans throughout the
United States. Beginning in 1998 and continuing with more emphasis into 1999,
the Company has focused its marketing efforts on small to mid- sized employer
groups, both directly through its sales and marketing force and indirectly
through commissioned brokers and agents, such as third party administrators. At
March 15, 1999, approximately 32% of the plan members for whom the Company
provides PBM services were covered through employer groups.
PBM Services
The Company's PBM services include formulary design and management with an
emphasis on providing clinically appropriate, cost effective pharmacy services,
point of sale ("POS") claims processing, clinical services, an established
pharmacy network, mail order pharmacy services, drug utilization review and
reporting ("DUR"), quality assurance polices and pharmacy data services and
reporting. The Company's benefit management programs include a number of design
features and structures that are tailored to a plan sponsor's particular benefit
program and cost requirements. The Company's fee structures include traditional
fee-for-service arrangements (e.g., billing for ingredient cost and pharmacist's
dispensing fee plus certain administrative fees), capitated arrangements (e.g.,
fixed price per plan participant), cost sharing arrangements (e.g., pricing
based on sharing with customers the financial benefits resulting from not
exceeding established per capita amounts), and profit sharing arrangements
(e.g., pricing which incentivizes the plan sponsors to support fully the
Company's cost control efforts).
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Formulary Design and Management. The Company offers flexible benefit and
formulary designs to meet the specific requirements of each plan sponsor.
Formulary design options include open, select, closed, tiered copayment or
custom. Open formularies generally cover all FDA approved drugs, except certain
classes of excluded pharmaceuticals (such as certain vitamins and cosmetic,
experimental, investigative and over-the-counter drugs). A select formulary
designates preferred products within each therapeutic drug class and may include
financial and other incentives (such as lower copayments) for a member to use
one or more preferred products. Closed formularies restrict the availability of
certain drugs within a given therapeutic class (except where it is determined to
be medically necessary) (see "Clinical Services" below) and are coupled with
comprehensive physician and member education initiatives. Closed formularies
require the Company's active involvement in Pharmacy and Therapeutics ("P&T")
Committees (consisting of local plan sponsors, physicians, pharmacists and other
health care professionals) to design and implement clinically appropriate
formularies designed to control costs through the use of therapeutically
equivalent lower cost pharmaceutical products. As a result of rising pharmacy
program costs, the Company believes that both public and private health plans
have become increasingly receptive to closed and tiered copayment formularies.
Tiered copayment formularies require members utilizing non-formulary medications
to pay higher copayments, thereby discouraging the use of non-formulary
medications, or in preferred generic programs, brand drugs. Custom formularies
are designed to accommodate the needs of a particular group (e.g., hospice, long
term care, the elderly, workers' compensation and behavioral health). All
formularies are subject to the final approval of the plan sponsor, directly or
through their respective P&T Committees.
Cost control and savings initiatives are realized through formulary designs
focusing on generic substitution and formulary selection of the most cost
effective agents within each therapeutic class, in each case, to the extent
consistent with accepted medical and pharmacy practice and applicable law.
Generic substitution programs promote the selection of bio-equivalent generic
drugs as a cost effective alternative to brand name drugs in accordance with a
plan sponsor's generic utilization goals. Formulary selection involves utilizing
lower cost brand name drugs within a therapeutic class and therapeutic
algorithms that promote appropriate selection of therapeutic agents. Selective
utilization within therapeutic classes enables the Company to negotiate and
obtain purchasing concessions and other financial incentives from both brand and
generic drug manufacturers which are often shared with plan sponsors. The
Company currently contracts with over forty pharmaceutical manufacturers to
provide such concessions and incentives for formulary products.
POS Claims Processing. Benefit designs and formulary parameters are managed
through the Company's point of service ("POS") claims processing system through
which real-time electronic messages are transmitted to pharmacists to ensure
compliance with specified benefit design and formulary parameters before
services are rendered. The POS claims processing system adjudicates claims at
the point-of-sale, verifying eligibility and reporting to the pharmacist the
appropriate pricing and copayment structure. In addition, the system performs a
series of on-line drug utilization review ("DUR") edits, as discussed below,
(see "Drug Utilization Review") to identify, before a medication is dispensed,
potential adverse drug interactions and other possible problems which may exist.
Clinical Services. The Company's formularies typically provide a selection
of covered drugs within each therapeutic class. Formulary agents are selected by
the plan sponsor working together with the Company's P&T Committee based upon
clinical and pharmacoeconomic information. However, when determined to be
clinically appropriate, non-formulary drugs (other than products within excluded
therapeutic classes) are also covered. Since non-formulary drugs are
automatically rejected by the POS claims processing system, the Company may
implement sponsor requested overrides, or prior authorization ("PA") and medical
necessity ("MN") override procedures for a specific patient and length of
therapy. A PA is required upon the failure of a therapeutic trial of formulary
alternatives or allergy/intolerance to formulary alternatives not requiring a
PA. A drug subject to MN review is not on a plan sponsor's formulary, but
coverage is granted upon a failed therapeutic trial of formulary and PA
alternatives and/or an allergy/intolerance to formulary alternatives and PA
alternatives. In addition, in a medical emergency as determined by a dispensing
pharmacist, the Company authorizes, without prior approval, short-term supplies
of non-formulary medications. Non-formulary PA and MN overrides are processed on
the basis of documented, clinically supported guidelines and typically are
granted or denied within 24 to 48 hours after request if accompanied by all
necessary supporting documentation. Requests for, and appeals of denials of PA
or
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MN overrides are handled by the Company's staff of trained pharmacists,
nationally certified pharmacy technicians and board certified pharmacotherapy
specialists, subject to the plan sponsor's ultimate decision making authority
over all such appeals.
Pharmacy Network Management. The Company's pharmacy network consists of
pharmacy chains and independent pharmacies, as well as pharmacy service
administrative organizations. Participating pharmacies may be included in the
Company's open, preferred, select or custom networks, which are designed to
ensure that members have the plan sponsor's desired level of access to quality
pharmacy services. The open network, consisting of both independent and chain
pharmacies, provides maximum access to pharmacy services. The preferred network
offers clients, on a negotiated basis, access to a limited subset of independent
and chain pharmacies within the Company's national network, allowing enhanced
discount opportunities for plan sponsors and their members. The select pharmacy
network offers clients maximum savings potential through an even more limited
subset of the Company's national network of chain and independent pharmacies
with respect to one or more of a sponsor's plans through the negotiation of
aggressive reimbursement discounts within such limited network, while
maintaining the plan sponsor's desired level of access for members. Custom
networks are developed when necessary to support specialty formularies and
disease state management protocols. The Company has an open network policy and
continually works to increase pharmacy participation in its existing network.
Aggressive solicitation of pharmacies occurs in areas that require network
penetration such as when the Company begins servicing a client in a geographic
area not previously serviced by the Company. Specific pharmacies may be added at
a client's or member's request.
The Company utilizes uniform industry as well as plan specific standards to
credential new participating pharmacy providers and individual pharmacists and
to recredential existing pharmacy providers every two years. In addition, the
Company encourages pharmacies and/or pharmacists to participate in various
educational, peer review and professional programs and to take other actions
designed to maintain and enhance the quality of services rendered by
participating pharmacies.
In the case of an emergency, members may use a non-participating pharmacy
to obtain their medication by paying the non-participating pharmacy for a
prescription and being subsequently reimbursed by the Company. Plan sponsors are
provided with direct member reimbursement ("DMR") forms to distribute to plan
members on which members may submit emergency out-of-network claims for
reimbursement. DMR claims submitted are processed by the Company through its
claim processing system, allowing for complete, integrated DUR and reporting.
Mail Order Services. The Company operates a national mail order pharmacy
providing savings to plan sponsors through the direct distribution of
pharmaceutical products to members. Dispensing pharmaceuticals through mail
service generates substantial savings and provides the convenience of home
delivery, automatic refills and the dispensing of larger authorized quantities
(up to 90 day supplies) than typically available through retail network
pharmacies, thereby reducing repetitive dispensing fees incurred in standard
30-day supply prescriptions dispensed in such retail pharmacies. Prescriptions
are dispensed from a centralized facility located in Cleveland, Ohio.
Prescriptions are received at the facility by mail, facsimile or telephone.
Prior to filling a prescription, the Company's pharmacist verifies the patient's
eligibility status, his or her physician's name, the prescription's strength,
quantity, pricing and directions for use. Prescriptions are dispensed and sent
to patients generally within 72 hours of receipt by United States Postal service
or a national delivery service.
The cost efficiency of the Company's mail service delivery system is
generated through the bulk purchase of pharmaceuticals on terms more favorable
than those of smaller orders, price concessions or financial incentives from
drug manufacturers on high volume purchases and the comparatively lower cost of
prescription fulfillment at the centralized facility. Most of the Company's
wholesale pharmaceutical purchases are made from a leading drug distributor
through an electronic ordering system, enabling the Company's mail order
facility to receive just-in-time delivery of pharmaceutical supplies.
Drug Utilization Review. The Company provides a comprehensive DUR program,
evaluating drug usage on a concurrent, prospective and retrospective basis. The
concurrent DUR program evaluates, before a medication is dispensed to a patient,
potential problems that may exist. The program is designed to assist the
dispensing pharmacist in performing their professional obligation to provide
patients with appropriate medication and
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counseling. Concurrent DUR identifies preventable prescribing problems before
the medications are dispensed and may be targeted for specific therapeutic
classes or individual drug products. Standard DUR edits implemented through the
POS claims processing system include early refill alerts, therapeutic
duplication, drug-drug interaction, drug-age conflict, drug-gender conflict,
pregnancy conflict, underutilization, maximum and minimum dose screening and
other customized alerts (at a client's request). An early refill alert is the
only DUR edit that results in an automatic on-line claim rejection. All other
DUR edits are implemented through a warning message communicated on-line to the
dispensing pharmacist, which enables the pharmacist to use his or her
professional judgment to intervene when appropriate.
The Company's retrospective DUR program is an ongoing process in which
select medication therapies are reviewed for appropriateness and cost
effectiveness from data collected when prescriptions are filled. The
retrospective DUR program is designed to identify and address adverse
prescribing habits and trends by educating physicians and sharing information
with pharmacists to impact prescribing, dispensing and overall drug utilization
practices. In addition, the program identifies changes in pharmacotherapy that
will improve member outcomes, cost effectiveness and quality of care and monitor
potential fraud and abuse by a prescriber, member or pharmacy. Educational
interventions are directed toward the dispensing pharmacy and the prescribing
physician to warn of potential adverse events.
Prospective DUR programs are designed to improve drug utilization prior to
prescribing. The programs include member education and disease state management
programs. Members receive standard communication packages as well as customized
educational materials designed to maximize drug therapy compliance and cost
savings. Disease state management ("DSM") programs are designed to assist plan
sponsors and network pharmacies in achieving therapy goals for certain targeted
diseases. DSM programs communicate the most cost effective disease treatments to
physicians utilizing current literature and national standards. The Company has
implemented DSM programs for asthma, diabetes and geriatric care. Patient and
physician surveys are distributed to determine acceptance of the DSM program and
the corresponding benefits.
Behavioral Health Pharmacy Services. Managed care organizations have
recently recognized the particular and specialized behavioral health needs of
certain patients within their memberships, which has resulted in MCO's
increasingly segregating the behavioral health population into a separate
management area. The Company provides services to the segregated behavioral
health entities created by MCO's and other behavioral health organizations
("BHO's") which encourage the clinically appropriate and cost effective
utilization of behavioral health medications. Through the development of
provider education programs, utilization protocols and prescription dispensing
evaluation tools, the Company is able to integrate pharmaceutical care with
other medical therapies to enhance patient compliance in the behavioral health
area, thereby minimizing unnecessary or suboptimal prescribing practices. These
services are integrated into a package of behavioral health care products for
marketing to private insurers, public managed care programs and other health
providers.
Quality Assurance. Quality is monitored through audit procedures and the
enforcement of disciplinary policies. The Company continually performs audit
procedures on claims data to detect improper claims or inappropriate costs
submitted, incorrect quantities dispensed, excessive claims volume and excessive
price per dispensed prescription. Claims audits which uncover unusual or
inappropriate items may prompt an on-site pharmacy audit. A full on-site audit
verifies randomly selected claims for authenticity and accuracy. The Company
attempts to recoup all identified overpayments and may take other disciplinary
action as appropriate. The Company's disciplinary action policy applies to all
pharmacies found in violation of the Company's pharmacy participation agreement
or its standard operating policies and procedures. The severity of disciplinary
action is dependent on the number and type of discrepancies found.
Pharmacy Data Services and Reporting. The Company utilizes claims data to
generate analysis reports for Company management and plan sponsor use. These
reports, available on tape, diskette, on-line or hard copy, provide summarized
and sorted historical data utilized by management and the plan sponsors to
evaluate trends. Standard management report packages provided to clients are
reviewed by the clinical pharmacy staff to track trends and recommend systems to
ensure cost effective, clinically appropriate pharmacy services.
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The Company has developed systems to provide plan sponsors with real-time,
on-line access to pharmacy claims data. This reporting is available through the
Company's Clinical Management System ("CMS"), a pharmacy intranet system that
provides timely, concise utilization data to help manage drug benefit programs.
CMS provides detail claims transactions, month-to-date data and a rolling
24-month history of the benefit plan. CMS allows the user the ability to
download data to other user applications (e.g., spreadsheet, word processing) so
that specific data can be stored and/or manipulated by the user.
Other Services
Individual Customers. For privately insured and uninsured individuals, the
Company's recently acquired subsidiary, Continental, historically has
administered a mail service program in conjunction with a retail pharmacy
prescription drug card program. Continental historically has solicited
individual patients covered by indemnity contracts with insurance companies
through several marketing programs, including an exclusive agency relationship
with an organization dedicated to individual insureds afflicted with diabetes
and a joint venture with an organization serving HIV positive patients covered
by these insurance arrangements. These organizations have provided Continental's
mail order business with a base of customers who require more frequent and more
costly prescription medications than the average patient.
Through these programs tailored to individual customers who use long-term
or "maintenance" prescription drugs, Continental historically has assisted
insured individuals with the financing and management of their prescription
medications. These members were not required to pay any up-front costs or
membership fees; however, these individuals were billed for copayment amounts or
deductibles required under their insurance plans, unless they were eligible for
financial hardship waivers. Upon dispensing a prescription, Continental would,
on behalf of that patient, submit a claim to his or her insurance company,
finance the purchase of the drug at no cost to the patient and await
reimbursement from the patient's insurance company.
The Company also offers similar services to those individuals without
insurance coverage. Unlike the Continental individual indemnity program,
however, members are required to pay an annual membership fee. The program
offers discounts of up to 40% off the national average prices on prescriptions
filled by the Company's mail order facility. In addition, members receive a
prescription drug card which may be used to obtain prescription medication at
discount prices at retail pharmacies participating in the Company's network.
The TennCare Program
RxCare of Tennessee, Inc. ("RxCare"), a pharmacy services administrative
organization owned by the Tennessee Pharmacists Association and representing
approximately 1,600 retail pharmacies, initially retained the Company in 1993 to
assist in obtaining contracts with MCO's applying to participate in the TennCare
program to provide PBM services to those MCO's and their TennCare eligible and
commercial recipients. In January 1994, the State of Tennessee instituted its
TennCare program by contracting with MCO's to provide mandated health services
to TennCare beneficiaries on a capitated basis. In turn, certain of these MCO's
contracted with RxCare to provide TennCare mandated pharmaceutical benefits to
their TennCare beneficiaries through RxCare's network of retail pharmacies, in
most cases on a corresponding capitated basis.
From January 1994 through December 31, 1998, the Company provided a broad
range of PBM services with respect to RxCare's TennCare, TennCare Partners, the
TennCare behavioral health program, and commercial PBM business under an
agreement with RxCare (the "RxCare Contract"). Under the RxCare Contract, the
Company performed essentially all of RxCare's obligations under its PBM
contracts with plan sponsors, including designing and marketing PBM programs and
services. Under the RxCare Contract, the Company paid certain amounts to RxCare
and shared with RxCare the profit, if any, derived from services performed under
RxCare's contracts with the plan sponsors.
As of December 31, 1998, the Company serviced six TennCare plan sponsors
with approximately 1.2 million members under the RxCare Contract. The RxCare
Contract accounted for 72.2% of the Company's revenues for the year ended
December 31, 1998 and approximately 83.6% of the Company's revenues for the year
ended December 31, 1997. RxCare's contracts with Tennessee Managed Care Network,
Inc., Tennessee Behavioral
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Health, Inc., Premier Behavioral Systems of Tennessee and Phoenix Healthcare of
Tennessee accounted for approximately 16%, 11%, 16% and 12%, respectively, of
the Company's revenues in 1998.
The Company and RxCare did not renew the RxCare Contract which expired on
December 31, 1998. The negotiated termination of its relationship with RxCare,
among other things, allowed the Company to directly market its services to
Tennessee customers (including those then under contract with RxCare) prior to
the expiration of the RxCare Contract. The RxCare Contract had previously
prohibited the Company from soliciting and/or marketing its PBM services in
Tennessee other than on behalf of, and for the benefit of, RxCare. The Company's
marketing efforts during this period resulted in the Company executing
agreements effective as of January 1, 1999 to provide PBM services directly to
five of the six TennCare MCO's and 900,000 of the TennCare lives previously
managed under the RxCare Contract as well as substantially all third party
administrators ("TPA's") and employer groups previously managed under the RxCare
Contract. The Company anticipates that approximately 32% of its revenues for
fiscal 1999 will be derived from providing PBM services to these five TennCare
MCO's. To date, the Company has been unable to secure a contract with the two
TennCare BHO's to which it previously provided PBM services under the RxCare
Contract. For the year ended December 31, 1998, amounts paid to the Company by
these BHO's represented approximately 27% of the Company's revenues.
Other Matters
The Company's pharmaceutical claims costs historically have been subject to
significant increase over annual averages from October through February, which
the Company believes is due to increased medical requirements during the colder
months. The resulting increase in pharmaceutical costs impacts the profitability
of capitated contracts or other risk-based arrangements. Risk-based business
represented approximately 32% of the Company's revenues while non-risk business
(including the provision of mail order services) represented approximately 68%
of the Company's revenues for the year ended December 31, 1998. Non-risk
arrangements mitigate the adverse effect on profitability of higher
pharmaceutical costs incurred under risk-based contracts. The Company presently
anticipates that approximately 28% of its revenues in fiscal 1999 will be
derived from risk-based arrangements.
Changes in prices charged by manufacturers and wholesalers or distributors
for pharmaceuticals, a component of pharmaceutical claims, have historically
affected the Company's cost of revenue. The Company believes that it is likely
for prices to continue to increase which could have an adverse effect on the
Company's gross profit. To the extent such cost increases adversely effect the
Company's gross profit, the Company may be required to increase contract rates
on new contracts and upon renewal of existing contracts. However, there can be
no assurance that the Company will be successful in obtaining these rate
increases. The higher level of non-risk contracts with the Company's customers
in 1998 compared to prior years mitigates the adverse effects of price
increases, although no assurance can be given that the recent trend towards
non-risk arrangements will continue.
Competition
The PBM business is highly competitive, and certain of the Company's
current and potential competitors have considerably greater financial,
technical, marketing and other resources than the Company. The PBM business
includes a number of large, well capitalized companies with nationwide
operations and many smaller organizations typically operating on a local or
regional basis. Among larger companies offering pharmacy benefit management
services are Medco Containment Services, Inc. (a subsidiary of Merck & Co.,
Inc.), PCS, Inc., Express Scripts, Inc., Advance ParadigM, Inc. and Diversified
Pharmaceutical Services, Inc. Numerous insurance and Blue Cross and Blue Shield
plans, managed care organizations and retail drug chains also have their own
pharmacy benefit management capabilities.
Competition in the PBM business to a large extent is based upon price,
although other factors, including quality, technology and breadth of services
and products, are also important. The Company believes that its ability and
willingness, where appropriate, to assume or share its customers' financial
risks and its emphasis on clinical management services represent distinct
competitive advantages in the PBM industry.
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Government Regulation
The Company believes that it is in substantial compliance with all legal
requirements material to its operations. Among the various Federal and state
laws and regulations which may govern or impact the Company's current and
planned operations are the following:
Anti-Kickback Laws. Subject to certain statutory and regulatory exceptions
(including exceptions relating to certain managed care, discount, group
purchasing and personal services arrangements), Federal law prohibits the
payment or receipt of remuneration to induce, arrange for or recommend the
purchase of health care items or services paid for in whole or in part by the
Medicare or state health care programs (including Medicaid and TennCare), and
certain state laws may extend the prohibition to items or services that are paid
for by private insurance and self-pay patients. The Company's arrangements with
pharmacy service administration organizations, drug manufacturers, marketing
agents, brokers, health plan sponsors, pharmacies and others parties routinely
involve payments to or from persons who provide or purchase, or recommend or
arrange for the purchase of, goods or services paid in part by the TennCare
program, the U.S. HealthCare Finance Administration ("HCFA") on behalf of
Medicaid or by other programs covered by such laws. Management carefully
considers the import of such "anti-kickback" laws when structuring its
operations, and believes the Company is in compliance therewith. However, the
laws in this area are subject to rapid change and often are uncertain in their
application, and there can be no assurance that one or more of such arrangements
will not be challenged or found to violate such laws. Violation of the Federal
anti-kickback statute could subject the Company to substantial criminal and
civil penalties, including exclusion from the Medicare and Medicaid (including
TennCare) programs. There are a number of states in which the Company does
business which have laws analogous to Federal anti-kickback laws and regulations
which likewise govern or impact the Company's current and planned operations.
Antitrust Laws. Numerous lawsuits have been filed throughout the United
States by retail pharmacies against drug manufacturers challenging certain brand
drug pricing practices under various state and Federal antitrust laws. A
settlement in one such suit would require defendant drug manufacturers to
provide the same types of discounts on pharmaceuticals to retail pharmacies and
buying groups as are provided to managed care entities to the extent that their
respective abilities to affect market share are comparable, a practice which, if
generally followed in the industry, could increase competition from pharmacy
chains and buying groups and reduce or eliminate the availability to the Company
of certain discounts, rebates and fees currently received in connection with its
drug purchasing and formulary administration programs. In addition, to the
extent that the Company or an associated business appears to have actual or
potential market power in a relevant market, business arrangements and practices
may be subject to heightened scrutiny from an anti-competitive perspective and
possible challenge by state or Federal regulators or private parties. To date,
enforcement of antitrust laws have not had any material adverse effect on the
Company's business.
Other State Laws. Many states have statutes and regulations that do or may
impact the Company's business operations. In some states, pharmacy benefit
managers may be subject to regulation under insurance laws or laws licensing
HMOs and other MCO's, in which event requirements could include satisfying
statutorily imposed performance obligations, the posting of bonds, maintenance
of reserves, required filings with regulatory agencies, and compliance with
disclosure requirements and other regulation of the Company's operations. State
insurance laws also may affect the structuring of certain risk-sharing programs
offered by the Company. A number of states have laws designed to restrict the
ability of PBM's to impose limitations on the consumer's choice of pharmacies,
or requiring that the benefits of discounts negotiated by managed care
organizations be passed along to consumers in proportionate reductions of
copayments. Some states require that pharmacies be permitted to participate in
provider networks if they are willing to comply with network requirements
(including price), while other states require PBM's to follow certain prescribed
procedures in establishing a network and admitting and terminating its members.
Many states require that Medicaid obtain the lowest prices from a pharmacy,
which may limit the Company's ability to reduce the prices it pays for drugs
below Medicaid prices. There are extensive state and federal laws applicable to
the dispensing of prescription drugs. Severe sanctions may be imposed for
violations of these laws. States have a variety of laws regulating pharmacists'
ability to switch prescribed drugs or to split fees and certain state laws have
been the basis for investigations and multi-state settlements requiring the
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discontinuance of certain financial incentives provided by manufacturers to
retail pharmacies to promote the sale of the manufacturers' drugs.
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 health
care 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 business and results of operations. 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 business and results of
operations.
Employees
At March 15, 1999, the Company employed approximately 275 persons including
33 licensed pharmacists. The Company's employees are not represented by any
union and, in the opinion of management, the Company's relations with its
employees are satisfactory.
Item 2. Properties
The Company's corporate headquarters is located in approximately 11,000
square feet of leased space in Elmsford, New York. This lease expires on
September 1, 2008. The Company's operating facilities are located in Wakefield,
Rhode Island and Cleveland, Ohio. In the Rhode Island location, the Company
leases space of approximately 27,000 square feet in several different facilities
under several leases with various lease expirations from May 2000 through
November 2004. In the Ohio location, the Company leases space of approximately
19,500 square feet, which lease expires in June 2001. The Company also leases
approximately 2,000 square feet in Nashville, TN for a regional sales
administration facility. This lease expires on April 30, 1999. The Company
believes that its leases provide for lease payments that reasonably approximate
market rates and that its facilities are adequate and suitable for its
requirements.
Item 3. Legal Proceedings
On March 5, 1996, Pro-Mark Holdings, Inc. ("Pro-Mark"), a subsidiary of MIM
Corporation, was added as a third-party defendant in a proceeding in the
Superior Court of the State of Rhode Island, and on September 16, 1996 the
third-party complaint was amended to add MIM Corporation as a third-party
defendant. The third-party complaint alleged that the Company interfered with
certain contractual relationships and misappropriated certain confidential
information. The third-party complaint sought to enjoin the Company from using
the allegedly misappropriated confidential information and sought an unspecified
amount of compensatory and consequential damages, interest and attorneys' fees.
On November 20, 1998, this action was settled pursuant to a settlement and
release agreement among the parties to the action. Under the terms of the
settlement, the Company was not required to make payment to any party and no
non-monetary restrictions or limitations were otherwise imposed against the
Company or any subsidiary or any of their respective officers, directors or
employees.
In February 1999, the Company reached an agreement in principle with
respect to a civil settlement of a Federal and State of Tennessee investigation
focusing mainly on the conduct of two former officers (one of which is a former
director and still principal stockholder of the Company) of a subsidiary prior
to the Company's Offering. Based upon the agreement in principle, the
investigation, as it relates to the Company, would be fully resolved through the
payment of a $2.2 million civil settlement and an agreement to implement a
corporate integrity program in conjunction with the Office of the Inspector
General of the U.S. Department of Health and Human Services. In that connection,
the Company recorded a non-recurring charge of $2.2 million against fourth
quarter 1998 earnings. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in
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Item 7 in Part II of this Annual Report. This settlement is subject to several
conditions, including the execution of a definitive agreement. The Company
anticipates that it will have no continued involvement in the governments' joint
investigation other than continuing to cooperate with the governments in their
efforts.
On March 29, 1999, Xantus Healthplan of Tennessee, Inc. ("Xantus"), one of
the TennCare MCO's to which the Company provides PBM services, filed a complaint
in the Chancery Court for Davidson County, Tennessee. Xantus alleged that the
Company advised Xantus in writing that it would cease providing PBM services on
Monday, March 29, 1999 to Xantus and its members in the event that Xantus failed
to pay approximately $3.3 million representing past due amounts in connection
with PBM services rendered by the Company in 1999. The complaint further alleged
that the Company does not have the right to cease providing services under the
agreement between Xantus and the Company. Additionally, Xantus applied for a
temporary restraining order as well as temporary injunction to prevent the
Company from ceasing to provide such PBM services. The hearing on the motion for
the temporary injunction was scheduled to be heard on Thursday, April 1, 1999.
However, on March 31, 1999, the State of Tennessee and Xantus entered into a
consent decree whereby, among other things, the Commissioner of Commerce and
Insurance for the State of Tennessee was appointed receiver of Xantus for
purposes of rehabilitation. Due to the fact that the receiver was appointed at
the time of the filing of this Annual Report, the Company is unable to predict
the consequences of this appointment on the Company's ability to retain Xantus's
business or its ability to collect monies owed to it by Xantus. As of March 31,
1999, Xantus owes the Company $9.8 million relating to PBM services rendered by
the Company in 1999. The failure of the Company to collect all or a substantial
portion of the monies owed to it by Xantus would have a material adverse effect
on the Company's financial condition and results of operations.
From time to time, the Company may be a party to legal proceedings arising
in the ordinary course of the Company's business. Management does not presently
believe that any current matters would have a material adverse effect on the
consolidated financial position or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of fiscal 1998.
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock began trading on The Nasdaq National Market Tier
of The Nasdaq Stock Market ("Nasdaq") on August 15, 1996 under the symbol
"MIMS". The following table represents the high and low sales prices for the
Company's Common Stock for the periods shown. Such prices are interdealer
prices, without retail markup, markdown or commissions, and may not necessarily
represent actual transactions.
MIM Common Stock
------------------------------
High Low
------- -------
1997:
First Quarter ................ $10.375 $4.75
Second Quarter ............... $16.75 $5.75
Third Quarter ................ $17.375 $9.062
Fourth Quarter ............... $9.875 $3.625
1998:
First Quarter ................ $6.50 $3.688
Second Quarter ............... $6.438 $4.00
Third Quarter ................ $6.438 $2.50
Fourth Quarter ............... $5.00 $2.281
The Company has never paid cash dividends on its Common Stock and does not
anticipate doing so in the foreseeable future.
As of March 12, 1999, there were 117 stockholders of record in addition to
approximately 2,000 stockholders whose shares were held in nominee name.
For purposes of calculating the aggregate market value of the shares of
Common Stock held by non-affiliates, as shown on the cover page of this Annual
Report, it has been assumed that all outstanding shares were held by
non-affiliates, except for shares held by directors and executive officers of
the Company and stockholders owning 5% or more of the outstanding Common Stock
based upon public filings made with the Securities and Exchange Commission
("Commission"). However, this should not be deemed to constitute an admission
that such persons are, in fact, affiliates of the Company, or that there are not
other persons who may be deemed to be affiliates of the Company. Further
information concerning ownership of Common Stock by executive officers,
directors and principal stockholders of the Company is included in Item 12 in
Part III of this Annual Report.
Except for the performance units and restricted shares of Common Stock
issued to certain executive officers of the Company on December 2, 1998, which
were issued in reliance on Section 4(2) of the Securities Act, during the three
months ended December 31, 1998, the Company did not sell any securities without
registration under the Securities Act of 1933, as amended (the "Securities
Act"). See Long-Term Incentive Plan - Awards in Last Fiscal Year in Item 11 in
Part III of this Annual Report.
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From August 14, 1996 through December 31, 1998, the $46,788,000 net
proceeds from the Company's Offering of its Common Stock, affected pursuant to a
Registration Statement assigned file number 333-05327 by the Commission and
declared effective by the Commission on August 14, 1996, have been applied in
the following approximate amounts:
Construction of plant, building and facilities .......... $ -
Purchase and installation of machinery and equipment .... $ 3,345,000
Purchases of real estate ................................ $ -
Acquisition of other businesses ......................... $ 2,325,000
Repayment of indebtedness ............................... $ -
Working capital ......................................... $ 24,929,000
Temporary investments:
Marketable securities .......................... $ 11,694,000
Overnight cash deposits......................... $ 4,495,000
To date, the Company has expended a relatively insignificant portion of the
Offering proceeds on expansion of the Company's "preferred generics" business
which was described more fully in the Offering prospectus and the Company's
Annual Report on Form 10-K for the year ended December 31, 1996. At the time of
the Offering, however, as disclosed in the Offering prospectus and subsequent
Forms SR, the Company intended to apply approximately $18.6 million of Offering
proceeds to fund an expansion of the "preferred generics" program. The Company
has determined not to apply any material portion of the Offering proceeds to
fund any expansion of this program. The Company presently intends to use the
remaining Offering proceeds to support the continued growth of its PBM and mail
order business.
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" set forth in Item 7 of this Annual Report and with
the Company's Consolidated Financial Statements and Notes thereto appearing in
Item 8 of this Annual Report.
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Year Ended December 31,
Statement of Operations Data 1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(in thousands, except per share amounts)
Revenue ............................................... $451,070 $242,291 $283,159 $213,929 $109,326
Non-recurring charges ................................. $3,700(1) -- $26,640(2) -- --
Net income (loss) ..................................... $4,271 ($13,497) ($31,754) ($6,772) ($2,456)
Net income (loss) per basic share ..................... $0.28 ($1.07) ($3.32) ($1.43) ($0.55)
Net income (loss) per diluted share (3) ............... $0.26 ($1.07) ($3.32) ($1.43) $(0.55)
Weighted average shares outstanding
used in computing net income per basic share ........ 15,115 12,620 9,557 4,732 4,500
Weighted average shares outstanding used
in computing net income per diluted share ........... 16,324 12,620 9,557 4,732 4,500
December 31,
Balance Sheet Data 1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(in thousands)
Cash and cash equivalents ............................. $ 4,495 $ 9,593 $ 1,834 $ 1,804 $ 2,933
Investment securities ................................. 11,694 22,636 37,038 -- --
Working capital (deficit) ............................. 19,823 9,333 19,569 (12,080) (5,087)
Total assets .......................................... 110,106 62,727 61,800 18,924 15,260
Capital lease obligations, net of
current portion ..................................... 598 756 375 110 239
Long-term debt, net of current portion ................ 6,185(4) -- -- -- --
Stockholders' equity (deficit) ........................ $ 39,054 $ 16,810 $ 30,143 $(11,524) $ (3,693)
(1) In 1998, the Company recorded $1.5 million and $2.2 million non-recurring
charges, respectively, against earnings in connection with the negotiated
termination of the RxCare relationship and amounts paid in settlement of
the Federal and State of Tennessee investigation relating to the conduct of
two former officers of the Company prior to the Offering, respectively. See
"Business - The TennCare Program" in Item 1 and Item 3, Legal Proceedings,
of Part I of this Annual Report. Excluding these items, net income for 1998
would have been $8.0 million, or $0.48 per diluted share.
(2) In 1996, the Company recorded a $26.6 million non-recurring, non-cash stock
option charge in connection with the grant by the Company's then majority
stockholder of certain options to then unaffiliated third parties, who
later became officers of the Company. See Note 9 to the Consolidated
Financial Statements. Excluding this item, the net loss for 1996 would have
been $5.1 million, or $0.54 per share.
(3) The historical diluted loss per common share for the years 1997 through
1994 excludes the effect of common stock equivalents, as their inclusion
would be antidilutive.
(4) This amount represents long-term debt assumed by the Company in connection
with its acquisition of Continental.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Annual Report contains statements that may be considered forward
looking statements within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act, including statements regarding the Company's
and its management's expectations, hopes, intentions or strategies regarding the
future, as well as other statements which are not historical facts. Forward
looking statements may include statements relating to the Company's and its
management's business development activities, sales and marketing efforts, the
status of material contractual arrangements, including the negotiation,
continuation, renewal or re-negotiation of such arrangements, future capital
expenditures, the effects of government regulation and competition on the
Company's business, future operating performance of the Company, the results,
benefits and risks associated with the integration of acquired companies, the
effect of year 2000 problems on the Company's operations (see "Year 2000
disclosure" below), and/or effect of legal proceedings or investigations and/or
the resolution or settlement thereof. Investors are cautioned that any such
forward looking statements are not guarantees of future performance and involve
risks and uncertainties that may cause actual results to differ materially from
those in the forward looking statements as a result of various factors. These
factors include, among other things, risks associated with "capitated" contracts
or other risk-sharing arrangements, increased government regulation related to
the health care and insurance industries in general and more specifically,
pharmacy benefit management organizations, increased competition from the
Company's competitors, the existence of complex laws and regulations relating to
the Company's business and risks associated with the Company's reliance on the
TennCare MCO's for substantial percentages of its revenues and gross profit and
its need to maintain favorable relations with these clients. This Annual Report,
together with the Company's other filings with the Commission under the Exchange
Act and Securities Act, contains information regarding other important factors
that could also cause such differences. The Company does not undertake any
obligation to publicly release the results of any revisions to these forward
looking statements that may be made to reflect any future events and
circumstances.
Overview
A majority of the Company's revenues to date have been derived from
operations in the State of Tennessee under the RxCare Contract. The Company
assisted RxCare in defining and marketing PBM services to private health plan
sponsors on a consulting basis in 1993, but did not commence substantial
operations through the provision of PBM services to such plan sponsors until
January 1994 when the Company, through the RxCare Contract, began servicing
several of the health plan sponsors involved in the then newly instituted
TennCare health care benefits program. See "Business - The TennCare Program" in
Item 1 in Part I of this Annual Report.
At December 31, 1998, the Company provided PBM services to a total of 127
plan sponsors with an aggregate of approximately 1.9 million plan members. As of
December 31, 1998, under the RxCare Contract, the Company serviced six TennCare
plan sponsors with approximately 1.2 million plan members. The RxCare Contract
accounted for 72.2% of the Company's revenues for the year ended December 31,
1998 and 83.6% of the Company's revenues for the year ended December 31, 1997.
Throughout this Annual Report, all references to the number of members or lives
managed by the Company under the TennCare program excludes members or lives
duplicatively covered under an agreement between the Company and TennCare
behavioral health plan sponsors. In prior periodic reports under the Exchange
Act and in previous press releases, the Company has counted such members and
lives twice when covered under more than one agreement.
The Company and RxCare did not renew the RxCare Contract which expired on
December 31, 1998. The negotiated termination of its relationship with RxCare,
among other things, allowed the Company to directly market its services to
Tennessee customers (including those then under contract with RxCare) prior to
the expiration of the RxCare Contract. The RxCare Contract had previously
prohibited the Company from soliciting and/or marketing its PBM services in
Tennessee other than on behalf of, and for the benefit of, RxCare. The Company's
marketing efforts during this period resulted in the Company executing
agreements effective as of January 1, 1999 to provide PBM services directly to
five of the six TennCare MCO's and 900,000 of the TennCare lives previously
managed under the RxCare Contract as well as substantially all TPA's and
employer groups previously managed under the RxCare Contract. The Company
anticipates that approximately 32% of its revenues for fiscal 1999 will be
derived from providing PBM services to these five TennCare MCO's. To date, the
Company has been unable to secure a contract with the two TennCare BHO's to
which it previously provided PBM services
-13-
under the RxCare Contract. For the year ended December 31, 1998, amounts paid to
the Company by these BHO's represented approximately 27% of the Company's
revenues. The Company has made operational adjustments determined to be
necessary due to the BHO and MCO contract losses.
1998 Acquisition
On August 24, 1998, the Company completed its acquisition of Continental, a
company which provides pharmacy benefit management services and mail order
pharmacy services. The acquisition was treated as a purchase for financial
reporting purposes. The Company issued 3,912,448 shares of Common Stock as
consideration for the purchase. The aggregate purchase price, including
acquisition costs of approximately $1.0 million, approximated $19.0 million. The
fair value of assets acquired approximated $11.3 million and liabilities assumed
approximated $12.0 million, resulting in approximately $18.4 million of goodwill
and $1.3 million of other intangible assets which will be amortized over their
estimated useful lives (25 years and 6.5 years, respectively). The Consolidated
Financial Statements of the Company included in Item 8 of this Annual Report for
the year ended December 31, 1998 include the results of operations and financial
position of Continental from and after the date of acquisition.
Results of Operations
Year ended December 31, 1998 compared to year ended December 31, 1997
For the year ended December 31, 1998, the Company recorded revenue of
$451.1 million, an increase of $208.8 million over the prior year. Approximately
$62.6 million of the increase in revenues resulted from increased commercial
business, including $19.4 million from a Nevada based managed care organization
(the "Nevada Plans"). The acquisition of Continental resulted in increased
revenues of $23.1 million, including $13.6 million attributable to mail order
pharmacy services. The Company anticipates that mail order pharmacy services
will generate approximately 8% of the Company's revenues in fiscal 1999. The
increase in commercial revenues resulted from managing an additional 91 plans
covering an additional 207,000 lives under new and existing commercial plans.
Revenue from TennCare contracts increased approximately $123.1 million as a
result of two new contracts entered into in the fourth quarter of 1997 ($85.1
million) and contract renewals on more favorable terms and increased enrollment
in the TennCare plans ($63.0 million), partially offset by a decrease in
revenues of $25.0 million resulting from the restructuring of a major TennCare
contract in April 1997.
For the year ended December 31, 1998, approximately 32% of the Company's
revenues were generated from capitated or other risk-based contracts, compared
to 53% for the year ended December 31, 1997. Effective January 1, 1999, the
Company began providing PBM services directly to five of the six TennCare MCO's
previously managed under the RxCare Contract. The Company will be compensated on
a capitated basis under three of the five TennCare contracts, thereby increasing
the Company's financial risk in 1999 as compared to 1998. Based upon its present
contracted arrangements, the Company anticipates that approximately 28% of its
revenues in 1999 will be derived from capitated or other risk-based contracts.
Cost of revenue for the year ended December 31, 1998 increased $182.4
million to $421.4 million compared to the prior year. New commercial contracts
together with increased enrollment in existing commercial plans accounted for
$54.0 million of the increase in cost of revenue, including $20.2 million
relating to the Nevada Plans. Costs attributable to the acquisition of
Continental accounted for $18.4 million of the increase in cost of revenue.
Costs related to TennCare contracts increased cost of revenue $110.0 million.
Costs relating to the two new TennCare contracts accounted for $80.3 million of
such increase, while increased enrollment in existing TennCare plans increased
cost of revenue $58.7 million. These cost increases were offset by the
restructuring of a major TennCare contract in April 1997, which resulted in a
decrease in cost of revenue of $25.5 million. As a percentage of revenue, cost
of revenue decreased to 93.4% for the year ended December 31, 1998 from 98.6%
for the year ended December 31, 1997 primarily as a result of contract renewals
on more favorable terms.
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 to
restrict formularies to the extent contemplated by the Company at the time a
contract is entered into, thereby resulting in
-14-
higher than expected drug costs. At such time as management estimates that a
contract will sustain losses over its remaining contractual life, a reserve is
established for these estimated losses. After analyzing those factors described
above, the Company recorded a $4.1 million reserve in December 1997 with respect
to the Nevada Plans. The arrangements with the Nevada Plans were terminated in
August 1998. The reserve established was adequate to absorb the actual losses.
Management does not believe that there is an overall trend towards losses on its
existing capitated contracts.
Selling, general and administrative expenses were $23.1 million for the
year ended December 31, 1998, an increase of $4.0 million as compared to $19.1
million for the year ended December 31, 1997. The acquisition of Continental
accounted for $3.8 million of the increase. The remaining $0.2 million increase
in expenses reflects expenditures incurred in connection with the Company's
continuing commitment to enhance its ability to manage efficiently pharmacy
benefits by investing in additional operational and clinical personnel and
information systems to support new and existing customers, partially offset by
lower legal costs. As a percentage of revenue, selling, general and
administrative expenses decreased to 5.1% for the year ended December 31, 1998
from 7.9% for the year ended December 31, 1997 as revenue increases did not
result in proportional increases in expenditures.
The Company recorded a non-recurring charge against earnings of $1.5
million in connection with its negotiated termination of its relationship with
RxCare ("RxCare Settlement"). See "Overview." In addition, the Company recorded
a non-recurring charge against earnings of $2.2 million in connection with the
conclusion of an agreement in principle with respect to a civil settlement of
the Federal and State of Tennessee investigation ("Tennessee Settlement")
relating to the conduct of two former officers (one of which is a former
director and still principal stockholder of the Company) of a subsidiary prior
to the Company's Offering. The Tennessee Settlement is subject to several
conditions, including the execution of a definitive agreement. The Company
anticipates that the investigation will be fully resolved with this Settlement.
See Item 3, Legal Proceedings, in Part I of this Annual Report.
For the year ended December 31, 1998, the Company recorded amortization of
goodwill and other intangibles of $0.3 million in connection with its
acquisition of Continental. The Continental acquisition resulted in the
recording of approximately $18.4 million of goodwill and $1.3 million of other
intangible assets, which will be amortized over their estimated useful lives (25
years and 6.5 years, respectively). The Company anticipates that its annual
amortization of goodwill and other intangibles will be approximately $0.9
million in fiscal 1999.
For the year ended December 31, 1998, the Company recorded interest income,
net of interest expense, of $1.7 million. Interest income was $1.8 million, a
decrease of $0.5 million from a year ago, resulting from a reduced level of
invested capital due to the additional working capital needs of the Company. See
"Liquidity and Capital Resources."
For the year ended December 31, 1998, the Company recorded net income of
$8.0 million, or $.48 per diluted share, before recording the $1.5 million and
$2.2 million non-recurring charges for the RxCare Settlement and Tennessee
Settlement, respectively. Net income for the year ended December 31, 1998, after
recording the non-recurring charges, was $4.3 million, or $.26 per diluted
share. For the year ended December 31, 1997, the Company recorded a net loss of
$13.5 million, or $(1.07) per share.
For the year ended December 31, 1998, accounts receivable increased $41.0
million to $64.7 million from $23.7 million for the prior year. The increase
resulted primarily from a proportionate increase in PBM business during the
period. In addition, the Company's acquisition of Continental accounted for
approximately $10.4 million of the increase in accounts receivable and delays in
the receipt of payments from certain fee-for-service PBM clients and drug
manufacturers accounted for approximately $13.6 million of the increase in
accounts receivable. Because a substantial majority of these payments were
collected by the Company in the first quarter of 1999, the Company does not
believe that this increase in accounts receivable in 1998 due to delayed
payments reflects a trend or that the Company's liquidity has been or will be
materially adversely affected.
-15-
Year ended December 31, 1997 compared to year ended December 31, 1996
For the year ended December 31, 1997, the Company recorded revenues of
$242.3 million compared with 1996 revenues of $283.2 million, a decrease of
$40.9 million, or 14%. In an effort to stem future losses and increase
profitability, the Company through RxCare, terminated the capitated contract
with Blue Cross/Blue Shield of Tennessee, Inc. ("BCBS") effective March 31,
1997. Although this contract previously had been renegotiated and extended, high
utilization rates continued to hamper the Company's ability to gain
profitability under the contract even though the Company was able to lower
average cost of each prescription. Subsequent to the termination of the original
BCBS contract, the Company had negotiated a contract directly (rather than
through RxCare) with an affiliate of BCBS to begin pharmacy benefit management
services on April 1, 1997. Although the Company continued to provide essentially
the same services under such restructured contract as it did before the
restructuring, the new contract eliminated capitation risk to the Company and
provides for payment of certain administrative and clinical consulting services
on a fee-for-service basis. The restructuring in April 1997 of the BCBS contract
decreased revenue for the year ended December 31, 1997 compared to December 31,
1996 by $107.0 million. This decrease in revenues was offset by an increase of
$34.8 million in other TennCare business resulting from increased enrollment and
several favorable contract restructurings. Further revenue increases of $31.3
million resulted from increased enrollment in existing commercial plans as well
as the servicing of 11 new commercial plans covering approximately 418,000 new
members throughout the United States.
Cost of revenue for 1997 decreased to $239.0 million from $278.1 million
for 1996, a decrease of $39.1 million. The above-described restructuring of the
BCBS contract resulted in a decrease in cost of revenue of $111.6 million. Costs
relating to the remaining TennCare contracts increased by $34.2 million due to
eligibility increases, increased drug prices and increased utilization of
prescription drugs. Increased enrollment in existing commercial plans together
with several new commercial contracts resulted in a $38.3 million increase in
cost of revenue. Included in cost of revenues for commercial business is a $4.1
million reserve established to cover anticipated future losses under certain of
the Nevada Plans. As a percentage of revenue, cost of revenue increased to 98.6%
in 1997 from 98.2% in 1996.
For the year ended December 31, 1997, gross profit decreased $1.8 million
to $3.3 million, after recording the $4.1 million reserve previously described,
from $5.1 million at December 31, 1996. Gross profit increases of $5.0 million
in TennCare business resulted from favorable contract renegotiations as well as
increased eligibility, offset by decreases of $6.8 million in commercial
business resulting primarily from the Nevada Plans. The Nevada Plans generated
$7.3 million in gross losses in the fourth quarter of 1997 (including a $4.1
million reserve for anticipated future losses). The Company believed this
reserve to be a reasonable estimate of its exposure.
Selling, general and administrative expenses increased $7.5 million to
$19.1 million in 1997 from $11.6 million in 1996, an increase of 65.0%. The $7.5
million increase was attributable to expenses associated with an expanded
national sales effort, additional headquarter personnel and operations support
needed to service new business and increases in legal and consulting fees. As a
percentage of revenue, general and administrative expenses increased to 7.9% in
1997 from 4.1% in 1996.
For the year ended December 31, 1997, the Company recorded interest income
of $2.3 million compared to $1.4 million for the year ended December 31, 1996,
an increase of $0.9 million. The increase resulted from funds invested from the
Company's Offering being invested for the entire year in 1997 as opposed to only
five months in 1996.
For the year ended December 31, 1997, the Company recorded a net loss of
$13.5 million, or $1.07 per share. This compares with a net loss of $5.1
million, or $0.54 per share for the year ended December 31, 1996 before
recording a $26.6 million nonrecurring, non-cash stock option charge. The charge
in 1996 represented the difference between the exercise price and the deemed
fair market value of the Common Stock granted by the Company's then principal
stockholder to certain then unaffiliated third parties who later become
executive officers and directors of the Company. This increase in net loss is
the result of the above-described changes in revenue, cost of revenue and
expenses.
-16-
Liquidity and Capital Resources
The Company utilizes both funds generated from operations, if any, and
funds raised in the Offering for capital expenditures and working capital needs.
For the year ended December 31, 1998, net cash used by the Company for operating
activities totaled $16.4 million, primarily due to an increase in accounts
receivable of $41.0 million. The increase in accounts receivable resulted from
increased PBM business, the acquisition of Continental's accounts receivable
($10.4 million) and certain changes in payment patterns primarily attributable
to certain delays in payments ($13.6 million). Because a substantial majority of
the delayed payments were collected by the Company in the first quarter of 1999,
the Company does not believe that this increase in accounts receivable in 1998
due to delayed payments reflects a trend or that the Company's liquidity has
been or will be materially adversely affected. Such uses were offset by a $5.3
million increase in claims payable, a $5.7 million increase in payables to plan
sponsors and others and an increase in accrued expenses of $1.9 million. The
increases in claims payable and payables to plan sponsors and others increased
primarily due to increases in PBM business, partially offset by reductions in
the percentage of drug manufacturer rebates owed by the Company to certain
clients under rebate sharing arrangements. Accrued expenses increased due to the
accrual of $2.2 million in connection with the Tennessee Settlement.
Investing activities generated $7.8 million in cash from proceeds of
maturities of investment securities of $39.8 million, offset by the purchase of
investment securities of approximately $28.9 million. The Company purchased $2.2
million of equipment primarily to upgrade and enhance information systems
necessary to strengthen and support the Company's ability to manage its
customer's pharmacy benefit programs and to be competitive in the PBM industry.
Financing activities generated $3.5 million of cash primarily from an increase
in debt of $3.6 million.
At December 31, 1998, the Company had working capital of $19.8 million,
including $11.7 million in investment securities, compared to $9.3 million at
December 31, 1997. Cash and cash equivalents decreased to $4.5 million at
December 31, 1998 compared with $9.6 million at December 31, 1997. The Company
had investment securities held to maturity of $11.7 million and $22.6 million at
December 31, 1998 and 1997, respectively. The decrease in cash and investment
securities was due to the Company's increased working capital requirements. With
the exception of the Company's $2.3 million preferred stock investment in Wang
Healthcare Information Systems, Inc. ("WHIS"), the Company's investments are
primarily corporate debt securities rated AA or higher and government
securities. In June 1997, the Company's invested $2.3 million in the preferred
stock of WHIS, a company engaged in the development, sales and marketing of
PC-based information systems for physicians and their staff, using image-based
technology.
As discussed above, effective January 1, 1999, the Company began to provide
PBM services directly to five of the six TennCare MCO's and 900,000 of the
TennCare lives previously managed under the RxCare Contract. To date, however,
the Company has been unable to secure a contract with the sixth TennCare MCO or
with either of the two TennCare BHO's for which it previously provided PBM
services under the RxCare Contract. The Company does not believe that the loss
of these contracts will have a material adverse effect on its liquidity in
fiscal 1999.
On March 31, 1999, the State of Tennessee and Xantus entered into a consent
decree whereby, among other things, the Commissioner of Commerce and Insurance
for the State of Tennessee was appointed receiver of Xantus for purposes of
rehabilitation. Due to the fact that the receiver was appointed at the time of
the filing of this Annual Report, the Company is unable to predict the
consequences of this appointment on the Company's ability to retain Xantus's
business or its ability to collect monies owed to it by Xantus. As of March 31,
1999, Xantus owes the Company $9.8 million relating to PBM services rendered by
the Company in 1999. The failure of the Company to collect all or a substantial
portion of the monies owed to it by Xantus would have a material adverse effect
on the Company's financial condition and results of operations.
Under Section 145 of the Delaware General Corporation Law ("Section 145")
and the Company's Amended and Restated By-Laws ("By-Laws"), the Company is
obligated to indemnify two former officers (one of which is a former director
and still principal stockholder of the Company) of a subsidiary who are the
subject of the Federal and State of Tennessee investigation described above,
unless it is ultimately determined by the Company's Board of Directors that
these former officers failed to act in good faith and in a manner they
reasonably believed to be in the best interests of the Company, that they had
reason to believe that their conduct was unlawful or for any other reason
consistent with Section 145 or the By-Laws. In addition, until the Board makes
such a determination, the Company is obligated under Section 145 and its By-Laws
to advance the costs of defense to such persons; however, if the Board
determines that either or both of these former officer are not entitled to
indemnification, such individuals would be obligated to reimburse the Company
for all amounts so advanced. The Company is not presently in a position to
assess the likelihood that either or both of these former officers will be
entitled to such indemnification and advancement of defense costs or to estimate
the total amount that it may have to pay in connection with such obligations or
the time period over which such amounts may have to be advanced. No assurance
can be given, however, that the Company's obligations to either or both of these
former officers would not have a material adverse effect on the Company's
results of operations or financial condition.
From time to time, the Company may be a party to legal proceedings or
involved in related investigations, inquiries or discussions, in each case,
arising in the ordinary course of the Company's business. Although no assurance
can be given, management does not presently believe that any current matters
would have a material adverse effect on the liquidity, financial position or
results of operations of the Company.
At December 31, 1998, the Company had, for tax purposes, unused net
operating loss carry forwards of approximately $47 million which will begin
expiring in 2008. As it is uncertain whether the Company will realize the full
benefit from these carryforwards, the Company has recorded a valuation allowance
equal to the deferred tax asset generated by the carryforwards. The Company
assesses the need for a valuation allowance at each balance sheet date. The
Company has undergone a "change in control" as defined by the Internal Revenue
Code of 1986, as amended ("Code"), and the rules and regulations promulgated
thereunder. The amount of net operating loss carryforwards that may be utilized
in any given year will be subject to a limitation as a result of this change.
-17-
The annual limitation approximates $2.7 million. Actual utilization in any year
will vary based on the Company's tax position in that year.
As the Company continues to grow, it anticipates that its working capital
needs will also continue to increase. The Company expects to spend approximately
$1.7 million on capital expenditures during fiscal 1999 primarily for expansion
and upgrading of information systems. The Company believes that it has
sufficient cash on hand or available to fund the Company's anticipated working
capital and other cash needs for at least the next 12 months.
The Company also may pursue joint venture arrangements, business
acquisitions and other transactions designed to expand its PBM business, which
the Company would expect to fund from cash on hand or future indebtedness or, if
appropriate, the sale or exchange of equity securities of the Company.
Other Matters
The Company's pharmaceutical claims costs historically have been subject to
significant increase over annual averages from October through February, which
the Company believes is due to increased medical requirements during the colder
months. The resulting increase in pharmaceutical costs impacts the profitability
of capitated contracts or other risk-based arrangements. Risk-based business
represented approximately 32% of the Company's revenues while non-risk business
(including the provision of mail order services) represented approximately 68%
of the Company's revenues for the year ended December 31, 1998. Non-risk
arrangements mitigate the adverse effect on profitability of higher
pharmaceutical costs incurred under risk-based contracts. The Company presently
anticipates that approximately 28% of its revenues in fiscal 1999 will be
derived from risk-based arrangements.
Changes in prices charged by manufacturers and wholesalers or distributors
for pharmaceuticals, a component of pharmaceutical claims, have historically
affected the Company's cost of revenue. The Company believes that it is likely
for prices to continue to increase which could have an adverse effect on the
Company's gross profit. To the extent such cost increases adversely effect the
Company's gross profit, the Company may be required to increase contract rates
on new contracts and upon renewal of existing contracts. However, there can be
no assurance that the Company will be successful in obtaining these rate
increases. The higher level of non-risk contracts with the Company's customers
in 1998 and 1999 compared to prior years mitigates the adverse effects of price
increases, although no assurance can be given that the recent trend towards
no-risk arrangements will continue.
Year 2000 disclosure
The so-called "year 2000 problem," which is common to many companies,
concerns the inability of information systems, primarily computer hardware and
software programs, to recognize properly and process date sensitive information
following December 31, 1999. The Company has committed substantial resources
(approximately $2.4 million) over the past two years to improve its information
systems ("IS project"). The Company has used this IS project as an opportunity
to evaluate its state of readiness, estimate expected costs and identify and
quantify risks associated with any potential year 2000 issues.
State of Readiness:
In evaluating the Company's exposure to the year 2000 problem, management
first identified those systems that were critical to the ongoing business of the
Company and that would require significant manual intervention should those
systems be unable to process dates correctly following December 31, 1999. Those
systems were the Company's claims adjudication and processing system and the
internal accounting system (which includes pharmacy reimbursement). Once those
systems were identified, the following steps were identified as those that would
be required to be taken to ascertain the Company's state of readiness:
I. Obtaining letters from software and hardware vendors concerning the ability
of their products to properly process dates after December 31, 1999;
II. Testing the operating systems of all hardware used in the identified
information systems to determine if dates after December 31, 1999 can be
processed correctly;
-18-
III. Surveying other parties who provide or process information in electronic
format to the Company as to their state of readiness and ability to process
dates after December 31, 1999; and
IV. Testing the identified information systems to confirm that they will
properly recognize and process dates after December 31, 1999.
The Company (excluding for purposes of this year 2000 discussion only,
Continental) has completed Step I. The Company will continue to obtain letters
from new hardware and software vendors. The Company is currently in the process
of implementing Step II. The Company has begun testing its operating systems,
and where appropriate software patches have been acquired. Any software or
hardware determined to be non-compliant will be modified, repaired or replaced.
Installation of patches and full operating systems testing is anticipated to be
completed during the second quarter of 1999. The Company cannot estimate the
costs of such modifications, repairs and replacements at this time, but does not
believe that the costs of such modifications, repairs or replacements will be
material. The Company will disclose the results of its testing and attempt to
further quantify this estimate in future periodic reports following its
completion of Step II.
With respect to Step III above, the Company has engaged in discussions with
the third party vendors that transmit data from member pharmacies and based upon
such discussions it believes that such third party vendors' systems will be able
to properly recognize and process dates after December 31, 1999. The Company is
in the process of surveying member pharmacies in its network as to their ability
to transmit data correctly to such third party vendors and anticipates
completing this survey during the second quarter of 1999. Once this survey is
complete, the Company will evaluate any additional steps required to allow
member pharmacies to transmit data after December 31, 1999 and will disclose
such additional steps, if any, and their related costs in future periodic
reports.
With respect to Step IV above, the Company intends to perform a
comprehensive year 2000 compliance test of the claims adjudication and
processing systems as part of the next regularly scheduled disaster recovery
drill, which is currently planned for June 1999. This date has been postponed
from the previously scheduled March 1999 test in order to incorporate software
upgrades during the second quarter of 1999. The Company's internal accounting
and other administrative systems generally have been internally developed during
the last few years or are presently being developed. Accordingly, in light of
the fact that such systems were developed with a view to year 2000 compliance,
the Company fully expects that these systems will be able to properly recognize
and process dates after December 31, 1999. The Company intends to test these
systems for year 2000 compliance as part of the disaster recovery drill
described above.
Continental's computer systems related to the delivery of medications
through mail order were upgraded in the fourth quarter of 1998 to become year
2000 compliant. The Company will disclose its ongoing assessment of
Continental's state of readiness in future periodic reports.
Costs:
As noted above, the Company spent approximately $2.4 million over the past
two years to improve its information systems. In addition, the Company
anticipates that it will spend approximately $1.7 million over the next 12
months to further improve its information systems. These improvements were not
specifically instituted to address the year 2000 issue, but rather to address
other business issues. Nonetheless, the IS project provided the Company with a
platform from which to address any year 2000 issues. Management does not believe
that the amount of funds expended in connection with the IS project would have
differed materially in the absence of the year 2000 problem. The Company's cash
on hand as a result of the Offering has provided all of the funds expended to
date on the IS project and is expected to provide substantially all of the funds
expected to be spent in the next 12 months on the IS project.
Risks:
On July 29, 1998, the Commission issued Release No. 33-7558 (the "Release")
in an effort to provide further guidance to reporting companies concerning
disclosure of the year 2000 problem. In this Release the Commission
-19-
required that registrants include in its year 2000 disclosure a description of
its "most reasonably likely worst case scenario." Based on the Company's
assessment and the results of remediation performed to date as described above,
the Company believes that all problems related to the year 2000 will be
addressed in a timely manner so that the Company will experience little or no
disruption in its business immediately following December 31, 1999. However, if
unforeseen difficulties arise, if the Company's assessment of Continental
uncovers significant problems (which is not presently expected to occur) or if
compliance testing is delayed or necessary remediation efforts are not
accomplished in accordance with the Company's plans described above, the Company
anticipates that its "most reasonably likely worst case scenario" (as required
to be described by the Release) is that some percentage of the Company's claims
would need to be processed manually for some limited period of time. At this
point in time, the Company cannot reasonably estimate the number of pharmacies
or the level of claims involved or the costs that would be incurred if the
Company were required to hire temporary staff and incur other expenses to
manually process such claims. The Company expects to be better able to quantify
the number of pharmacies and level of claims involved as well as the related
costs following its completion of the survey of member pharmacies in the second
quarter of 1999 and presently intends to disclose such estimates in future
periodic reports. In addition, the Company anticipates that all businesses
(regardless of their state of readiness), including the Company, will encounter
some minimal level of disruption in its business (e.g., phone and fax systems,
alarm systems, etc.) as a result of the year 2000 problem. However, the Company
does not believe that it will incur any material expenses or suffer any material
loss of revenues in connection with such minimal disruptions.
Contingency Plans:
As discussed above, in the event of the occurrence of the "most reasonably
likely worst case scenario" the Company would hire an appropriate level of
temporary staff to manually process the pharmacy claims submitted on paper. As
discussed above, at this time the Company cannot reasonably estimate the number
of pharmacies or level of claims involved or the costs that would be incurred if
the Company were required to hire temporary staff and incur other expenses to
manually process such claims. While some level of manual processing is common in
the industry and while manual processing increases the time it takes the Company
to pay the member pharmacies and invoice the related payors, the Company does
not foresee any material lost revenues or other material expenses in connection
with this scenario. However, an extended delay in processing claims, making
payments to pharmacies and billing the Company's customers could materially
adversely impact the Company's liquidity.
In addition, while not part of the "most reasonably likely worst case
scenario," the delay in paying such pharmacies for their claims could result in
adverse relations between the Company and the pharmacies. Such adverse relations
could cause certain pharmacies to drop out of the Company's networks which in
turn could cause the Company to be in breach under service area provisions under
certain of its services agreements with its customers. The Company does not
believe that any material relationship with any pharmacy will be so affected or
that any material number of pharmacies would withdraw from the Company's
networks or that it will breach any such service area provision of any contract
with its customers. Notwithstanding the foregoing, based upon past experience,
the Company believes that it could quickly replace any such withdrawing pharmacy
so as to prevent any breach of any such provision. The Company cannot presently
reasonably estimate the possible impact in terms of lost revenues, additional
expenses or litigation damages or expenses that could result from such events.
Forward Looking Statements:
Certain information set forth above regarding the year 2000 problem and the
Company's plans to address those problems are forward looking statements under
the Securities Act and the Exchange Act. See the first paragraph in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of forward looking statements and related risks and
uncertainties. In addition, certain factors particular to the year 2000 problem
could cause actual results to differ materially from those contained in the
forward looking statements, including, without limitation: failure to identify
critical information systems which experience failures, delays and errors in the
compliance and remediation efforts described above, unexpected failures by key
vendors, member pharmacies, software providers or business partners to be year
2000 compliant or the inability to repair critical information systems in the
time frames described above. In any such event, the Company's results of
operations and financial condition could be materially adversely affected. In
addition, the failure to be year 2000
-20-
compliant of third parties outside of the Company's control such as electric
utilities or financial institutions could adversely effect the Company's results
of operations and financial condition.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk represents the only market risk exposure applicable to
the Company. The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investments in marketable securities. All of
these instruments are classified as held-to-maturity on the Company's
consolidated balance sheet and were entered into by the Company solely for
investment purposes and not for trading purposes. The Company does not invest in
or otherwise use derivative financial instruments. The Company's investments
consist primarily of corporate debt securities, corporate preferred stock and
State and local governmental obligations, each rated AA or higher. The table
below presents principal cash flow amounts and related weighted average
effective interest rates by expected (contractual) maturity dates for the
Company's financial instruments subject to interest rate risk:
1999 2000 2001 2002 2003 Thereafter
---- ---- ---- ---- ---- ----------
Short-term investments
Fixed rate investments ........ 11,650 -- -- -- -- --
Weighted average rate ......... 6.41% -- -- -- -- --
Long-term investments:
Fixed rate investments ........ -- -- -- -- -- --
Weighted average rate ......... -- -- -- -- -- --
Long-term debt:
Variable rate instruments ...... 208 312 5,873 -- -- --
Weighted average rate ....... 9.00% 9.00% 7.76% -- -- --
In the table above, the weighted average interest rate for fixed and
variable rate financial instruments in each year was computed utilizing the
effective interest rate at December 31, 1998 for that instrument multiplied by
the percentage obtained by dividing the principal payments expected in that year
with respect to that instrument by the aggregate expected principal payments
with respect to all financial instruments within the same class of instrument.
At December 31, 1998, the carrying values of cash and cash equivalents,
accounts receivable, accounts payable, claims payable and payables to plan
sponsors and others approximate fair value due to their short-term nature.
Because management does not believe that its exposure to interest rate
market risk is material at this time, the Company has not developed or
implemented a strategy to manage this market risk through the use of derivative
financial instruments or otherwise. The Company will assess the significance of
interest rate market risk from time to time and will develop and implement
strategies to manage that risk as appropriate.
Item 8. Financial Statements and Supplementary Data
-21-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MIM Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of MIM
Corporation (a Delaware corporation) and Subsidiaries as of December 31, 1998
and 1997 and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These consolidated financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MIM
Corporation and Subsidiaries as of December 31, 1998 and 1997 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
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.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 12, 1999 (except with respect to the
matter described in Note 7
as to which the date is March
31, 1999.)
-22-
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands of dollars, except for share amounts)
1998 1997
--------- ---------
ASSETS
Current assets
Cash and cash equivalents ..................................................................... $ 4,495 $ 9,593
Investment securities ......................................................................... 11,694 19,235
Receivables, less allowance for doubtful accounts of $1,307 and $1,386, respectively .......... 64,747 23,666
Inventory ..................................................................................... 1,187 --
Prepaid expenses and other current assets ..................................................... 857 888
--------- ---------
Total current assets ....................................................................... 82,980 53,382
Investment securities, net of current portion ...................................................... -- 3,401
Other investments .................................................................................. 2,311 2,300
Property and equipment, net ........................................................................ 4,823 3,499
Due from affiliates, less allowance for doubtful accounts of $403 and $2,360, respectively ......... 34 --
Other assets, net .................................................................................. 293 145
Deferred income taxes .............................................................................. 270 --
Goodwill and other intangible assets, net .......................................................... 19,395 --
--------- ---------
Total assets ............................................................................... $ 110,106 $ 62,727
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligations .................................................. $ 277 $ 222
Current portion of long-term debt ............................................................. 208 --
Accounts payable .............................................................................. 6,926 931
Deferred revenue .............................................................................. -- 2,799
Claims payable ................................................................................ 32,855 26,979
Payables to plan sponsors and others .......................................................... 16,490 10,839
Accrued expenses .............................................................................. 6,401 2,279
--------- ---------
Total current liabilities .................................................................. 63,157 44,049
Capital lease obligations, net of current portion .................................................. 598 756
Long-term debt, net of current portion ............................................................. 6,185 --
Commitments and contingencies
Minority interest .................................................................................. 1,112 1,112
Stockholders' equity
Preferred stock, $.0001 par value; 5,000,000 shares authorized, no shares issued or
outstanding ................................................................................. -- --
Common stock, $.0001 par value; 40,000,000 shares authorized, 18,090,748 and
13,335,150 shares issued and outstanding, respectively ...................................... 2 1
Additional paid-in capital ........................................................................ 91,603 73,585
Accumulated deficit ............................................................................... (50,790) (55,061)
Stockholder notes receivable ...................................................................... (1,761) (1,715)
--------- ---------
Total stockholders' equity ................................................................ 39,054 16,810
--------- ---------
Total liabilities and stockholders' equity ................................................ $ 110,106 $ 62,727
========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
-23-
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
(In thousands of dollars, except for per share amounts)
1998 1997 1996
--------- --------- ---------
Revenue ...................................................................... $ 451,070 $ 242,291 $ 283,159
Cost of revenue .............................................................. 421,374 239,002 278,068
--------- --------- ---------
Gross profit ............................................................. 29,696 3,289 5,091
General and administrative expenses .......................................... 23,092 19,098 11,619
Amortization of goodwill and other intangibles .............................. 330 -- --
Non-recurring charges ........................................................ 3,700 -- --
Executive stock option compensation expense .................................. -- -- 26,640
--------- --------- ---------
Income (loss) from operations ............................................ 2,574 (15,809) (33,168)
Interest income, net ......................................................... 1,712 2,295 1,393
Other ........................................................................ (15) 17 21
--------- --------- ---------
Net income (loss) ........................................................ $ 4,271 $ (13,497) $ (31,754)
========= ========= =========
Basic income (loss) per common share ......................................... $ .28 $ (1.07) $ (3.32)
========= ========= =========
Diluted income (loss) per common share ....................................... $ .26 $ (1.07) $ (3.32)
========= ========= =========
Weighted average common shares used in computing basic income
(loss) per share ............................................................. 15,115 12,620 9,557
========= ========= =========
Weighted average common shares used in computing diluted income
(loss) per share ............................................................. 16,324 12,620 9,557
========= ========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
-24-
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands of dollars)
Total
Additional Stockholder Stockholders'
Common Paid-In Accumulated Notes Equity
Stock Capital Deficit Receivable (Deficit)
-------- -------- -------- -------- --------
Balance, December 31, 1995 ..................................... $ 1 $ -- $ (9,188) $ (2,337) $(11,524)
Stockholder loans, net .................................... -- -- -- (22) (22)
Stockholder distribution .................................. -- -- (622) 622 --
Net proceeds from initial public offering ................. -- 46,786 -- -- 46,786
Non-cash stock option charge .............................. -- 26,640 -- -- 26,640
Non-employee stock option compensation
expense ............................................... -- 17 -- -- 17
Net loss .................................................. -- -- (31,754) -- (31,754)
-------- -------- -------- -------- --------
Balance, December 31, 1996 ..................................... 1 73,443 (41,564) (1,737) 30,143
Stockholder loans, net .................................... -- -- -- 22 22
Exercise of stock options ................................. -- 113 -- -- 113
Non-employee stock option compensation
expense ............................................... -- 29 -- -- 29
Net loss .................................................. -- -- (13,497) -- (13,497)
-------- -------- -------- -------- --------
Balance, December 31, 1997 ...................................... 1 73,585 (55,061) (1,715) 16,810
Stockholder loans, net .................................... -- -- -- (46) (46)
Shares issued in connection with the acquisition
of Continental ....................................... 1 17,997 -- -- 17,998
Exercise of stock options ................................. -- 5 -- -- 5
Non-employee stock option compensation
expense ................................................. -- 16 -- -- 16
Net income ................................................ -- -- 4,271 -- 4,271
-------- -------- -------- -------- --------
Balance, December 31, 1998 ..................................... $ 2 $ 91,603 $(50,790) $ (1,761) $ 39,054
======== ======== ======== ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
-25-
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(In thousands of dollars, except for share data)
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net income (loss) ................................................................... $ 4,271 $(13,497) $(31,754)
Adjustments to reconcile net income (loss)