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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, 2000
Commission File No. 1-11993
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 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 Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of March 1, 2001, was approximately $35.8
million. (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 1, 2001, there were outstanding 20,434,120 shares of the
registrant's Common Stock.
Documents Incorporated by Reference
None.
PART I
Item 1. Business
Overview
MIM Corporation (the "Company" or "MIM") is a pharmacy benefit
management, specialty pharmaceutical and fulfillment/e-commerce organization
that partners with healthcare providers and sponsors to control prescription
drug costs. MIM's innovative pharmacy benefit products and services use
clinically sound guidelines to ensure cost control and quality care. MIM's
specialty pharmaceutical division specializes in serving the chronically ill
afflicted with life threatening diseases and genetic impairments. MIM's
fulfillment and e-commerce pharmacy specializes in serving individuals that
require long-term maintenance medications. MIM's online pharmacy, www.MIMRx.com,
develops private label websites to offer affinity groups and healthcare
providers innovative and customized health information services and products on
the Internet for the benefit of their members.
PBM Services
The Company's pharmacy benefit management ("PBM") services offer plan
sponsors a broad range of services designed to ensure the cost-effective
delivery of clinically appropriate pharmacy benefits. The Company's PBM programs
include a number of design features and fee structures that are tailored to suit
a customer's particular needs and cost requirements. In addition to traditional
fee-for-service arrangements, under certain circumstances the Company will offer
alternative pricing methodologies for its various PBM services, including a
fixed fee per member (a "capitated" program), sharing costs exceeding
pre-established per member amounts and sharing savings where costs are less than
pre-established per member amounts. Under certain circumstances, the Company
will also enter into profit sharing arrangements with plan sponsors, thereby
incentivizing a plan sponsor to support fully the Company's cost containment
efforts of such sponsor's pharmacy program. Benefit design and formulary
parameters are managed through a point-of-sale ("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 and prescriptions are dispensed. The Company's
organization and programs are clinically oriented, with many staff members
having pharmacological certification, training and experience. The Company
markets its services to large public health plans (primarily in states with
large Medicaid populations), medium to smaller managed care organizations
("MCOs") emphasizing those operating in states with an active Medicaid waiver
program, self-funded groups, small employer groups, labor unions and third party
administrators representing some or all of the aforementioned groups. The
Company primarily relies on its own employees to solicit business from plan
sponsors, but also on third party administrators and commissioned independent
agents and brokers.
PBM services available to the Company's customers include the following:
Formulary Design and Compliance. The Company offers to its health
maintenance organization ("HMO") and other clients flexible formulary designs to
meet their specific requirements. Many of these plan sponsors do not restrict
coverage to a specific list of pharmaceuticals and are said to have "no"
formulary or an "open" formulary that generally covers all FDA-approved drugs
except certain classes of excluded pharmaceuticals (such as certain vitamins and
cosmetics, experimental, investigative or over-the-counter drugs). As a result
of rising pharmacy program costs, the Company believes that both public and
private health plans have become increasingly receptive to controlling pharmacy
costs by restricting the availability of certain drugs within a given
therapeutic class, other than in cases of medical necessity or other
pre-established prior authorization guidelines, to the extent clinically
appropriate. Once a determination has been made by a plan sponsor to utilize a
"restricted" or "closed" formulary, the Company actively involves its clinical
staff with a plan sponsor's Pharmacy and Therapeutics Committees (which
typically consists of local plan sponsors, prescribers, pharmacists and other
health care professionals) to design clinically appropriate formularies in order
to control pharmacy costs. The composition of the formulary is the
responsibility of, and subject to the final approval of, the plan sponsor.
Controlling program costs through formulary design focuses primarily on
two areas to the extent consistent with accepted medical and pharmacy practices
and applicable law: (i) generic substitution, which involves the selection of
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generic drugs as a cost-effective alternative to their bio-equivalent brand name
drugs, and/or (ii) therapeutic interchange, which involves the selection of a
lower cost brand name drug as an alternative to a higher priced brand name drug
within a therapeutic category. Generic substitution may also take place in
combination with therapeutic interchange where a bio-equivalent generic
alternative for a selected lower cost brand drug exists after a therapeutic
interchange has occurred. Increased usage of generic drugs by Company-managed
programs also enables the Company to obtain purchasing concessions and other
financial incentives on generic drugs, which may be shared with plan sponsors.
After a formulary has been established by a plan sponsor, rebates on brand name
drugs are also negotiated with drug manufacturers and are often shared with plan
sponsors.
The primary method for assuring formulary compliance on behalf of a
plan sponsor is by controlling pharmacy reimbursement to ensure that
non-formulary drugs are not dispensed to a plan member, subject to certain
limited exceptions. Formulary compliance is managed with the active assistance
of participating network pharmacies, primarily through prior authorization
procedures, and on-line POS edits as to particular subscribers and other network
communications. Overutilization of medication is monitored and managed through
quantity limitations, based upon nationally recognized standards and guidelines
regarding maintenance versus non-maintenance therapy. Step protocols, which are
procedures requiring that preferred therapies be tried and shown ineffective
before less favored therapies are covered, are also established by the Company
in conjunction with the plan sponsors' Pharmacy and Therapeutics Committees to
control improper utilization of certain high-risk or high-cost medications.
Clinical Services. The clients' formularies typically provide a selection
of covered drugs within each therapeutic class to treat appropriately medical
conditions. However, provision is made for the coverage of non-formulary drugs
(other than excluded products) to members when documented to be clinically
appropriate for that member. Since non-formulary drugs ordinarily are
automatically rejected for coverage by the real-time POS system, procedures are
employed to override restrictions on non-formulary medications for a particular
patient and period of treatment. Restrictions on the use of certain high-risk or
high-cost formulary drugs may be similarly overridden through prior
authorization procedures. Non-formulary overrides and prior authorizations are
processed on the basis of documented, clinically supported medical information
and typically are granted or denied within 48 hours after request. Requests for,
and appeals of denials of coverage in those cases are handled by the Company
through its staff of trained pharmacists and board certified pharmacotherapy
specialists, subject to a plan sponsor's ultimate authority over all such
appeals. Further, in the case of a medical emergency, as determined by the
dispensing network pharmacist, the Company authorizes, without prior approval,
short-term supplies of all medication unless specifically excluded by a plan.
Mail Order Pharmacy. Another way in which the Company believes that
program costs may be reduced is through the distribution of pharmaceutical
products directly to plan sponsors' members via mail order pharmacy services.
The Company provides mail order pharmacy services from a new, fully automated
fulfillment facility in Columbus, Ohio for plan members typically receiving
maintenance medications. The facility utilizes the latest pharmacy technology in
the market place. The mail operation is supported by a customer service
department that is available 24 hours per day, 7 days per week. This affords the
Company and its plan sponsors the ability to reduce cost through mail
distribution as opposed to the more costly retail distribution of prescription
products. The Company's mail order facility provides services to the members of
the Company's PBM customers and other individuals and, as discussed below, is a
key component of the Company's specialty pharmacy programs.
Drug Usage Evaluation. Drug usage is evaluated on a concurrent,
prospective and retrospective basis utilizing the real-time POS system and
proprietary information systems for multiple drug interactions, drug-health
condition interactions, duplication of therapy, step therapy protocol
enforcement, minimum/maximum dose range edits, compliance with prescribed
utilization levels and early refill notification. The Company also maintains an
on-going drug utilization review program in which select medication therapies
are reviewed and data is collected, analyzed and reported for management
applications.
Pharmacy Data Services. The Company utilizes claims data to analyze and
evaluate pharmaceutical utilization and cost trends to support our customers'
understanding of such information through the generation of reports for
management and plan sponsor use, and presentation of information vital to the
plan sponsors understanding of their particular pharmaceutical utilization and
cost trends. These services include drug utilization review, quality assurance,
claims analysis and rebate contract administration. The Company has developed
proprietary systems to provide plan sponsors with real-time access to pharmacy,
financial, claims, prescriber and dispensing data.
Disease Management. The Company designs and administers programs to
maximize the benefits of pharmaceutical utilization as a tool in achieving
therapy goals for certain targeted diseases. Programs focus on preventing
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high-risk events, such as asthma exacerbation or stroke, through appropriate use
of pharmaceuticals, while eliminating unnecessary or duplicate therapies. Key
components of these programs include health care provider training, integration
of care between health disciplines, monitoring of patient compliance,
measurement of care process and quality, and providing feedback for continuous
improvement in achieving therapy goals. As described more fully below under
"Specialty Pharmacy Programs," many of these same tools are used by the Company
in delivering specialty pharmaceutical services and products to patients
afflicted with the chronic diseases managed by the Company.
Behavioral Health Pharmacy Services. In recent years, plan sponsors,
particularly MCOs have recognized the particular and specialized behavioral
health needs of certain individuals within an MCOs membership. As a result, many
MCOs have separated the behavioral health population into a separate management
area. The Company provides services that encourage the proper and cost-effective
utilization of behavioral health medication to enrollees of behavioral health
organizations, which are traditionally (but not always) affiliated with MCOs.
Through the development of provider education programs, utilization protocols
and prescription dispensing evaluation tools, the Company is able to integrate
pharmaceutical behavioral or mental health therapies with other medical
therapies to enhance patient compliance and minimize unnecessary or sub optimal
prescribing practices. These services are integrated into the plan sponsor's
package of behavioral health care products for marketing to private insurers,
public managed care programs and other health providers.
At December 31, 2000, the Company provided PBM services to 126 plan
sponsors with approximately 5.5 million plan members, including six plan
sponsors providing health care benefits to State of Tennessee residents who were
formerly Medicaid-eligible and certain uninsured state residents under
Tennessee's TennCare(R) Medicaid waiver program. See "The TennCare(R) Program"
below.
Specialty Pharmacy Programs
BioScrip(TM), the Company's specialty pharmacy program, offers clients a
menu of services ranging from a distribution only model to a complete pharmacy
management program. The Company provides specialized pharmaceutical products and
services to plan sponsors' members afflicted with specific chronic illnesses,
genetic impairments or other life threatening conditions. The Company has
developed specialty pharmacy programs for the following chronic illnesses:
HIV/AIDS, multiple sclerosis, hemophilia, Gaucher's disease, arthritis,
infertility, respiratory syncytial virus (RSV), growth hormone deficiency,
hepatitis C, Crohn's disease and transplants. As discussed more fully below, the
Company provides infusion and other high cost pharmaceutical therapies to
patients through IV certified nurse practitioners or a patient's treating
physician through its subsidiary American Disiease Management Associates
("ADIMA").
The Company provides specialty pharmacy products and services to MCOs,
third party administrators and other plan sponsors currently utilizing the
Company's PBM services and to plan sponsors and directly to individuals not
currently utilizing such services. These specialty programs utilize the
Company's clinical and design management expertise to manage chronically ill
patients requiring long-term maintenance therapies and receive such clinical
services in conjunction with the distribution of pharmaceutical prescription
products to patients afflicted with the chronic illnesses managed by the
Company. The goal of these programs is to, among other things, manage the
pharmaceutical utilization of those patients to ensure compliance with
prescribed therapies, thereby avoiding costly follow-up therapies including
hospital admission.
The Company provides specialty pharmaceutical services to patients with
high cost chronic illnesses, chronic disorders and other life threatening
conditions in an effort to improve outcomes for these patients and to reduce the
associated cost of care for the plan sponsor providing health care benefits to
such patients.
The injectable and oral specialty products are generally dispensed to
patients (directly or to their physician's or other clinician's office) from the
Company's mail order fulfillment facility in Columbus, Ohio.
In addition to the delivery of efficacious prescription pharmaceutical
products to patients afflicted with the chronic illnesses managed by the
Company, the Company has designed and administers disease state management
programs to ensure a patient's utilization compliance and to minimize the
debilitating effects of a patient's illness and any associated side effects. The
principal specialty pharmacy services provided by the Company include disease
state management and compliance programs, expert customer service and patient
education programs.
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Generally infusion patients are not afflicted with chronic illnesses
but are being administered intravenous medications typically after a patient's
discharge from a hospital after a surgical or other procedure requiring the
administration of post operative intravenous medication, which is most cost
effectively delivered to a patient in their home. Infusion therapy integrates a
combination of services that focus primarily on the administration and
preparation of pharmaceutical infusion solutions for chemotherapy, pain
management, antibiotic therapy and nutritional (parenteral) support.
PBM and Specialty Marketing Efforts
Since the development of the injectable BioScrip(TM) programs and the
ADIMA acquisition, the Company offers plan sponsors comprehensive pharmacy
services that manages all aspects of a plan sponsor's pharmaceutical needs,
including traditional PBM services, specialty pharmacy services to cater to the
needs of the chronically ill and genetically impaired and to those patients
receiving intravenous therapies upon discharge from a hospital environment. The
Company's goal is to provide pharmacy-related pharmaceutical products and
services to all of a plan sponsor's members regardless of that patient's
condition or stage of life.
The Company cross markets its specialty pharmacy products and services
to its existing PBM customers, including MCOs and other plan sponsors to which
the Company provides PBM services. The Company intends to cross-market its
infusion products and services to its injectable program customers and vice
versa. The Company also intends to cross-market its PBM services to its
specialty customers. The Company is actually marketing its specialty
pharmaceutical products and services to other plan sponsors as a result of the
pharmacy services industry's recognition of the Company's superior clinical
expertise. The Company has been successful in contracting to provide specialty
pharmacy services, generally on a non-exclusive basis, to MCOs that would not
have selected the Company as its PBM, although the Company has recently begun to
generate sales through the enrollment of specific patients in these programs.
e-Commerce Services
MIMRx.com, a subsidiary of the Company, markets and sells customized
private label pharmacy related websites for plan sponsors, affinity groups and
other e-commerce merchants ("e-commerce partners"). These websites offer and
sell prescription pharmaceuticals, vitamins, minerals and supplements,
over-the-counter products, nutritional and herbal remedies and supplements,
health and beauty aids and other products typically offered for sale in large
retail pharmacies. In addition, these websites provide users with general
healthcare information and specific information on prescription and
over-the-counter products, as well as on most vitamins, minerals and herbal
products. MIMRx.com, through the Company's fulfillment and mail order
operations, handles all aspects of the fulfillment, distribution of, and in some
cases billing and collection for, products (including prescriptions, vitamins,
OTC's and health and beauty aids) purchased through each e-commerce partner's
private label website. Although numerous competitors dominate the e-commerce
marketplace, many of which have significantly greater resources, MIMRx.com's
strategic goal is to become a leader in developing and providing innovative
customized health information services and products through the Internet. See
"Competition" below.
The TennCare(R) Program
Historically, a majority of the Company's revenues have been derived
from providing PBM services in the State of Tennessee to MCOs participating in
the State of Tennessee's TennCare(R) program and behavioral health organizations
("BHOs") participating in the State of Tennessee's TennCare(R) Partners program.
From January 1994 through December 31, 1998, the Company provided its PBM
services as a subcontractor to RxCare of Tennessee, Inc. ("RxCare"). RxCare is a
pharmacy services administrative organization owned by the Tennessee Pharmacists
Association. Under the agreement with RxCare ("RxCare Contract"), the Company
performed essentially all of RxCare's obligations under its PBM agreements with
plan sponsors and paid RxCare certain amounts, including a share of the profit
from the contracts, if any.
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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 under contract with RxCare at such time)
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 resulted in the Company executing agreements
with all of the MCOs for the TennCare(R) lives previously managed under the
RxCare Contract, as well as substantially all third party administrators
("TPAs") and employer groups previously managed under the RxCare Contract.
The TennCare(R) program operates under a demonstration waiver from the
United States Health Care Financing Agency ("HCFA"). That waiver is the basis of
the Company's ongoing service to those MCOs in the TennCare(R) program. The
waiver is due to expire on December 31, 2001. However, the Company believes that
pharmacy benefits will continue to be provided to Medicaid and other eligible
TennCare(R) enrollees through MCOs in one form or another, although there can be
no assurances that such pharmacy benefits will continue or that the Company
would be chosen to continue to provide pharmacy benefits to enrollees of a
successor program. If the waiver is not renewed and the Company is not providing
pharmacy benefits to those lives under a successor program or arrangement, then
the failure to provide such services would have a material and adverse affect on
the financial position and results of operations of the Company. The ongoing
funding for the TennCare(R) program has been the subject of significant
discussion at various governmental levels since its inception. Should the
funding sources for the TennCare(R) program change significantly, the Company's
ability to serve those customers could be impacted and would also materially and
adversely affect the financial position and results of operations of the
Company.
On November 1, 2000, the TennCare(R) program adopted new rules for
recipients to allow for a 14-day supply of a non-formulary medication or a
medication requiring a prior authorization or medical necessity determination
should the dispensing pharmacist be unable to contact the prescribing physician
to switch to a formulary medication or process a prior authorization request for
approval. This mechanism allows for TennCare(R) members to obtain medication
while their request is in an appeal process with TennCare(R) MCOs and the
TennCare(R) Solutions Bureau. The implementation of these rules may impact
formulary adherence resulting in a change to the amount of pharmaceutical
manufacturers rebates earned by the Company. A reduction in rebates would
adversely impact the financial results of the Company. At this time the Company
cannot estimate the financial impact, if any, as a result of the implementation
of new rules.
Other Matters
As a result of providing capitated PBM services to certain TennCare(R)
MCOs, the Company's pharmaceutical claims costs historically have been subject
to significant increases from October through February, which the Company
believes is due to the need for increased medical attention to, and intervention
with, an MCOs' members due to seasonality. The resulting increase in
pharmaceutical costs impacts the profitability of capitated contracts and other
capitated arrangements. For the year ended December 31, 2000, approximately 28%
of the Company's revenues were generated from capitated contracts compared to
approximately 32% in 1999 while non-capitated business (including mail order
services) represented approximately 72% and 68%, respectively. Non-capitated
arrangements mitigate the adverse effect on profitability of higher
pharmaceutical costs incurred under capitated contracts, as higher utilization
positively impacts profitability under fee-for-service (or non-capitated)
arrangements. The Company presently anticipates that approximately 20% of its
revenues in fiscal 2001 will be derived from capitated arrangements.
Changes in prices charged by manufacturers and wholesalers or
distributors for pharmaceuticals, a component of pharmaceutical claims costs,
directly affects the Company's cost of revenue. The Company believes that it is
likely that prices will continue to increase, which could have an adverse effect
on the Company's gross profit on capitated arrangements. Because plan sponsors
are billed for the cost of all prescriptions dispensed in fee-for-service
arrangements, the Company's gross profit is not adversely affected by changes in
pharmaceutical prices. However, under capitated arrangements, the Company is
responsible for increases in prescription costs, which adversely affects the
Company's gross profit. In such instances, the Company may be required to
increase capitated contract rates on new contracts and upon renewal of existing
capitated contracts. However, there can be no assurance that the Company will be
successful in obtaining these rate increases. The greater proportion of
fee-for-service contracts with the Company's customers in 2000 compared to prior
years reduced the potential adverse effects of price increases, although no
assurance can be given that the recent trend towards fee for service
arrangements will continue or that a substantial increase in drug costs or
utilization would not negatively affect the Company's overall profitability in
any period.
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Generally, loss contracts arise only on capitated contracts and primarily
result from higher than expected pharmacy utilization rates, higher than
expected inflation in drug costs and the inability of the Company to restrict an
MCOs' formulary to the extent anticipated by the Company at the time contracted
PBM services are implemented, thereby resulting in 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. There are currently no loss contracts and management does not
believe that there is an overall trend towards losses on its existing capitated
contracts.
Competition
The PBM Market. The PBM and specialty businesses are highly
competitive, and many 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. One of the larger organizations is owned
by or otherwise related to a brand name drug manufacturer and may have
significant influence on the distribution of pharmaceuticals. Among larger
companies offering PBM services are Merck-Medco Managed Care, L.L.C. (a
subsidiary of Merck & Co., Inc.), Caremark Rx Inc., Advance PCS, Express Scripts
Inc., and National Prescription Administrators, Inc. Numerous health insurance
and Blue Cross Blue Shield plans, MCOs and retail drugstores, such as CVS
Corporation and Rite Aid Corporation also have their own PBM capabilities.
Competition in the PBM business to a large extent is based upon price,
although other factors, including quality 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, its clinical
orientation, its proprietary suite of technology products and its willingness to
customize pharmacy programs to suit a particular MCO client's particular needs
represent distinct competitive advantages in the PBM business.
Specialty Pharmaceutical. The Company also competes with several
national and regional companies that primarily provide therapeutic
pharmaceutical services to the chronically ill and genetically impaired, such as
Accredo Health Inc., Priority Health Corporation and Gentiva Health Services
Inc., all of which have substantial financial resources. Some of these
competitors have been in the specialty pharmaceutical industry considerably
longer than the Company and have secured long term supply or distribution
arrangements for prescription pharmaceuticals necessary to treat certain chronic
disease states on price terms substantially more favorable than the terms
currently available to the Company. As a result of such advantageous pricing,
the Company may be unable to compete with these companies on particular
prescription products or in particular disease states.
Contracting parties choose a specialty pharmacy supplier for a variety of
reasons including the suppliers technical capabilities, their ability to access
and provide support through pharmaceutical manufacturers programs (including
cost of purchasing product), ability and programs to manage costs, clinical
knowledge, expertise and protocols, support of the patient, including intake and
distribution and the ability to provide tools for reporting global outcomes.
Among the larger competitors offering on-line pharmacy products and
services are Drugstore.com, Inc. (which recently acquired the customers of
PlanetRx.com), CVS.com and WebRx.com (which recently acquired Drug
Emporium.com). Although individual consumers may purchase directly from
MIMRx.com, its sales and marketing efforts do not directly target individual
consumers. Rather, the Company markets its on-line products and content to its
PBM and affinity marketing customers.
e-Commerce. The on-line pharmacy market, like all consumer e-commerce,
is relatively new and rapidly evolving. MIMRx.com's competitors also have
considerable financial resources and include a number of well-capitalized
organizations, some of which are nationally recognized retail chain pharmacies.
Government Regulation
General. As a participant in the healthcare industry, the Company's
operations and relationships are subject to federal and state laws and
regulations and enforcement by federal and state governmental agencies. Various
federal and state laws and regulations govern the purchase, distribution and
management of prescription drugs and related services and affect or may affect
the Company. The Company believes that it is in substantial compliance with all
legal requirements material to its operations.
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The Company entered into a corporate integrity agreement with the Office
of Inspector General (the "OIG") within the U.S. Department of Health and Human
Services ("HHS") in connection with the Global Settlement Agreement entered into
with the OIG and the State of Tennessee in June 2000. In order to assist the
Company in maintaining compliance with laws and regulations and the corporate
integrity agreement, the Company implemented its corporate compliance program in
August of 2000. This program includes educational training for all employees on
compliance with laws and regulations relevant to the Company's business and
operations and a formal program of reporting and resolution of possible
violations of laws or regulations, as well as increased oversight by the OIG.
Should the oversight procedures reveal credible evidence of any violation of
federal law, the Company is required to report such potential violations to the
OIG and the U.S. Department of Justice ("DOJ"). The Company is therefore subject
to increased regulatory scrutiny and, if the Company commits legal or regulatory
violations, they may be subject to an increased risk of sanctions or penalties,
including exclusion from participation in the Medicare or Medicaid programs. The
Company anticipates maintaining certain compliance related oversight procedures
after the expiration of the corporate integrity agreement in June 2005.
Among the various Federal and state laws and regulations, which may
govern or impact the Company's current and planned operations are the following:
Mail Service Pharmacy Regulation. The Company is licensed to do business
as a pharmacy in each state in which it is required to be so licensed. Many of
the states into which the Company delivers pharmaceuticals have laws and
regulations that require out-of-state mail service pharmacies to register with,
or be licensed by, the boards of pharmacy or similar regulatory bodies in those
states. These states generally permit the dispensing pharmacy to follow the laws
of the state within which the dispensing pharmacy is located.
However, various states have enacted laws and adopted regulations
directed at restricting or prohibiting the operation of out-of-state pharmacies
by, among other things, requiring compliance with all laws of the states into
which the out-of-state pharmacy dispenses medications, whether or not those laws
conflict with the laws of the state in which the pharmacy is located. To the
extent that such laws or regulations are found to be applicable to the Company's
operations, the Company would be required to comply with them. In addition, to
the extent that any of the foregoing laws or regulations prohibit or restrict
the operation of mail service pharmacies and are found to be applicable to the
Company, they could have an adverse effect on the Company's prescription mail
service operations.
Other statutes and regulations may affect the Company's mail service
operations. The Federal Trade Commission requires mail order sellers of goods
generally to engage in truthful advertising, to stock a reasonable supply of the
products to be sold, to fill mail orders within 30 days, and to provide clients
with refunds when appropriate.
Licensure Laws. Many states have licensure or registration laws governing
certain types of ancillary healthcare organizations, including preferred
provider organizations, third party administrators, and companies that provide
utilization review services. The scope of these laws differs significantly from
state to state, and the application of such laws to the activities of pharmacy
benefit managers often is unclear. The Company has registered under such laws in
those states in which the Company has concluded that such registration is
required.
The Company dispenses prescription drugs pursuant to orders received
through its MIMRx.com internet website, as well as other affiliated websites.
Accordingly, the Company may be subject to laws affecting on-line pharmacies.
Several states have proposed laws to regulate on-line pharmacies and require
on-line pharmacies to obtain state pharmacy licenses. Additionally, federal
regulation by the United States Food and Drug Administration (the "FDA"), or
another federal agency, of on-line pharmacies that dispense prescription drugs
has been proposed. To the extent that such state or federal regulation could
apply to the Company's operations, certain of the Company's operations could be
adversely affected by such licensure legislation.
Other Laws Affecting Pharmacy Operations. The Company is subject to state
and federal statutes and regulations governing the operation of pharmacies,
repackaging of drug products, wholesale distribution, dispensing of controlled
substances, medical waste disposal, and clinical trials. Federal statutes and
regulations govern the labeling, packaging, advertising and adulteration of
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prescription drugs and the dispensing of controlled substances. Federal
controlled substance laws require the Company to register its pharmacies and
repackaging facilities with the United States Drug Enforcement Administration
and to comply with security, recordkeeping, inventory control and labeling
standards in order to dispense controlled substances.
State controlled substance laws require registration and compliance with
state pharmacy licensure, registration or permit standards promulgated by the
state pharmacy licensing authority. Such standards often address the
qualification of an applicant's personnel, the adequacy of its prescription
fulfillment and inventory control practices and the adequacy of its facilities.
In general, pharmacy licenses are renewed annually. Pharmacists and pharmacy
technicians employed by each branch must also satisfy applicable state licensing
requirements.
FDA Regulation. The FDA generally has authority to regulate drug
promotional information and materials that are disseminated by a drug
manufacturer or by other persons on behalf of a drug manufacturer. In January
1998, the FDA issued a Draft Guidance regarding its intent to regulate certain
drug promotion and switching activities of PBM companies that are controlled,
directly or indirectly, by drug manufacturers. The FDA effectively withdrew the
Draft Guidance and has indicated that it would not issue a new draft guidance.
However, there can be no assurance that the FDA will not assert jurisdiction
over certain aspects of the Company's PBM business, including the internet sale
of prescription drugs, which could materially adversely affect the Company's
operations.
Network Access Legislation. A majority of states now have some form of
legislation affecting the ability of the Company to limit access to a pharmacy
provider network or remove network providers. Such legislation may require the
Company or its client to admit any retail pharmacy willing to meet the plan's
price and other terms for network participation ("any willing provider"
legislation), or may prohibit the removal of a provider from a network except in
compliance with certain procedures ("due process" legislation) or may prohibit
days' supply limitations or co-payment differentials between mail and retail
pharmacy providers. Many states have exceptions to the applicability of these
statutes for managed care arrangements or other government benefit programs,
including Tennessee.
Legislation Imposing Plan Design Mandates. Some states have enacted
legislation that prohibits a health plan sponsor from implementing certain
restriction design features, and many states have introduced legislation to
regulate various aspects of managed care plans, including provisions relating to
pharmacy benefits. For example, some states provide that members of the plan may
not be required to use network providers, but that must instead be provided with
benefits even if they choose to use non-network providers ("freedom of choice"
legislation), or provide that a patient may sue his or her health plan if care
is denied. Some states have enacted and other states have introduced legislation
regarding plan design mandates, including legislation that prohibits or
restricts therapeutic substitution; requires coverage of all drugs approved by
the FDA; or prohibits denial of coverage for non-FDA approved uses. Some states
mandate coverage of certain benefits or conditions. Such legislation does not
generally apply to the Company, but it may apply to certain of the Company's
customers (generally, HMOs and health insurers). If such legislation were to
become widespread and broad in scope, it could have the effect of limiting the
economic benefits achievable through pharmacy benefit management. To the extent
that such legislation is applicable and is not preempted by the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (as to plans
governed by ERISA), certain operations of the Company could be adversely
affected.
Other states have enacted legislation purporting to prohibit health plans
from requiring or offering members financial incentives for use of mail order
pharmacies.
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
Medicare or state health care programs (including Medicaid programs or Medicaid
waiver programs, such as TennCare(R)). 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 RxCare and other pharmacy
network administrators, 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, items or services paid in part by the TennCare(R) program or by other
programs covered by such laws. Management carefully considers the importance of
such "anti-kickback" laws when structuring its operations, and believes the
Company is in compliance therewith. Violation of the Federal anti-kickback
statute could subject the Company to criminal and/or civil penalties, including
exclusion from Medicare and Medicaid (including TennCare(R)) programs or
state-funded programs in the case of state enforcement.
9
The federal anti-kickback law has been interpreted broadly by courts, the
OIG and administrative bodies. Because of the federal statutes broad scope,
federal regulations establish certain safe harbors from liability. Safe harbors
exist for certain properly reported discounts received from vendors, certain
investment interest, and certain properly disclosed payments made by vendors to
group purchasing organizations, as well as for other transactions or
relationships. In late 1999, the HHS adopted final rules revising the discount
safe harbor to protect certain rebates. Because this revision is fairly recent,
the guidance on how the safe harbor revision will be interpreted is not fully
developed. Nonetheless, a practice that does not fall within a safe harbor is
not necessarily unlawful, but may be subject to scrutiny and challenge. In the
absence of an applicable exception or safe harbor, a violation of the statue may
occur even if only one purpose of a payment arrangement is to induce patient
referrals or purchases. Among the practices that have been identified by the OIG
as potentially improper under the statute are certain "product conversion
programs" in which benefits are given by drug manufacturers to pharmacists or
physicians for changing a prescription (or recommending or requesting such a
change) from one drug to another. Anti-kickback laws have been cited as a
partial basis, along with state consumer protection laws discussed below, for
investigations and multi-state settlements relating to financial incentives
provided by drug manufacturers to retail pharmacies in connection with such
programs.
Certain governmental entities have commenced investigations of PBM
companies and other companies having dealings with the PBM industry and have
identified issues concerning selection of drug formularies, therapeutic
substitution programs and discounts or rebates from prescription drug
manufacturers. Additionally, at least one state has filed a lawsuit concerning
similar issues against a health plan. To date, the Company has not been the
subject of any such investigation or suit and has not received subpoenas or been
requested to produce documents for any such investigation or suit. However,
there can be no assurance that the Company will not receive subpoenas or be
requested to produce documents in pending investigations or litigation in the
future.
The Company believes that it is in compliance with the legal requirements
imposed by the anti-remuneration laws and regulations, and the Company believes
that there are material and substantial differences between drug switching
programs that have been challenged under these laws and the therapeutic
interchange practices and formulary management programs offered by the Company
to its customers. However, there can be no assurance that the Company will not
be subject to scrutiny or challenge under such laws or regulations, or that any
such challenge would not have a material adverse effect upon the Company.
The Stark Laws. The federal law known as "Stark II" became effective in
1995, and was a significant expansion of an earlier federal physician
self-referral law commonly known as "Stark I". Stark II prohibits physicians
from referring Medicare or Medicaid patients for "designated health services" to
an entity with which the physician or an immediate family member of the
physician has a financial relationship. Possible penalties for violation of the
Stark laws include denial of payment, refund of amounts collected in violation
of the statute, civil monetary penalties and program exclusion. The Stark law
standards contain certain exceptions for physician financial arrangements, and
HCFA has released Stark II final regulations, which describe the parameters of
these exceptions in more detail. The Stark II regulations are scheduled to
become effective in January 2002, with the exception of one section relating to
physician referrals to home health care agencies, which was scheduled to become
effective in February 2001.
State Self-Referral Laws. The Company is subject to state statutes and
regulations that prohibit payments for referral of patients and referrals by
physicians to healthcare providers with whom the physicians have a financial
relationship. Some state statutes and regulations apply to services reimbursed
by governmental as well as private payors. Violation of these laws may result in
prohibition of payment for services rendered, loss of pharmacy or health
provider licenses, fines, and criminal penalties. The laws and exceptions or
safe harbors may vary from the federal Stark laws and vary significantly from
state to state. The laws are often vague, and, in many cases, have not been
widely interpreted by courts or regulatory agencies; however, the Company
believes it is in compliance with such laws.
Statutes Prohibiting False Claims and Fraudulent Billing Activities. A
range of federal civil and criminal laws target false claims and fraudulent
billing activities. One of the most significant is the Federal False Claims Act,
which prohibits the submission of a false claim or the making of a false record
or statement in order to secure a reimbursement from a government-sponsored
program. In recent years, the federal government has launched several
initiatives aimed at uncovering practices, which violate false claims or
fraudulent billing laws. Claims under these laws may be brought either by the
government or by private individuals on behalf of the government, through a
"whistleblower" or "qui tam" action.
10
Reimbursement. Approximately 52.0% of the Company's revenue is derived
directly from Medicare or Medicaid or other government-sponsored healthcare
programs subject to the federal anti-kickback laws and/or the Stark laws. Also,
the Company indirectly provides benefits to managed care entities that provide
services to beneficiaries of Medicare, Medicaid and other government-sponsored
healthcare programs. Should there be material changes to federal or state
reimbursement methodologies, regulations or policies, the Company's
reimbursements from government-sponsored healthcare programs could be adversely
affected. In addition, certain state Medicaid programs only allow for
reimbursement to pharmacies residing in the state or in a border state. While
the Company believes that it can service its current Medicaid patients through
existing pharmacies, there can be no assurance that additional states will not
enact in-state dispensing requirements for their Medicaid programs. To the
extent such requirements are enacted, certain therapeutic pharmaceutical
reimbursements could be adversely affected.
Legislation and Other Matters Affecting Drug Prices. Some states have
adopted legislation providing that a pharmacy participating in the state
Medicaid program must give the state the best price that the pharmacy makes
available to any third party plan ("most favored nation" legislation). Such
legislation may adversely affect the Company's ability to negotiate discounts in
the future from network pharmacies. At least one state has enacted "unitary
pricing" legislation, which mandates that all wholesale purchasers of drugs
within the state be given access to the same discounts and incentives. Such
legislation has not yet been enacted in the states where the Company's mail
service pharmacies are located. Such legislation, if enacted in other states,
could adversely affect the Company's ability to negotiate discounts on its
purchase of prescription drugs to be dispensed by its mail service pharmacies.
Privacy and Confidentiality Legislation. Most of the Company's activities
involve the receipt or use by the Company of confidential medical, pharmacy or
other health-related information concerning individual members, including the
transfer of the confidential information to the member's health benefit plan. In
addition, the Company uses aggregated and blinded (anonymous) data for research
and analysis purposes. Confidentiality provisions of the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA") required the Secretary of
HHS to issue standards concerning health information privacy if Congress did not
enact health information privacy legislation by August 1999. Since Congress did
not enact health information privacy legislation, the Secretary issued a
proposed rule in November 1999 and the public comment period for this proposed
rule expired on February 17, 2000. The Secretary reopened the comment period on
the new rule until March 30, 2001, and has a scheduled effective date of April
14, 2001. The proposed rule would establish minimum standards and would preempt
state laws, which are less restrictive than HIPAA regarding health information
privacy, but would not preempt more restrictive state laws. The proposed rule
provides that the health information privacy standards would become effective
two years after final issuance. The final HHS rule is likely to require
substantial changes to the Company's systems, policies and procedures, which may
have a material adverse impact on the Company.
In addition to the proposed federal health information privacy
regulations described above, most states have enacted patient confidentiality
laws, which prohibit the disclosure of confidential medical information. It is
unclear which state laws may be preempted by the final HHS rule discussed above.
Consumer Protection Laws. Most states have consumer protection laws that
have been the basis for investigations and multi-state settlements relating to
financial incentives provided by drug manufacturers to pharmacies in connection
with drug switching programs. No assurance can be given that the Company will
not be subject to scrutiny or challenge under one or more of these laws.
Disease Management Services Regulation. All states regulate the practice
of medicine. To the Company's knowledge, no PBM has been found to be engaging in
the practice of medicine by reason of its disease management services. However,
there can be no assurance that a federal or state regulatory authority will not
assert that such services constitute the practice of medicine, thereby
subjecting such services to federal and state laws and regulations applicable to
the practice of medicine.
Comprehensive PBM Regulation. Although no state has passed legislation
regulating PBM activities in a comprehensive manner, such legislation has been
introduced in the past in several states. Such legislation, if enacted in a
state in which the Company conducts a significant amount of business, could have
a material adverse impact on the Company's 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
11
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. For
example, RxCare, which was investigated and found by the Federal Trade
Commission to have potential market power in Tennessee, entered into a consent
decree in June 1996 agreeing not to enforce a policy which had required
participating network pharmacies to accept reimbursement rates from RxCare as
low as rates accepted by them from other pharmacy benefits payors. To date,
enforcement of antitrust laws have not had any material affect on the Company's
business.
While management believes that the Company is in substantial compliance
with all existing laws and regulations stated above, 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.
Employees
At February 10, 2001, the Company employed a total of 288 people,
including 34 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 are located in leased office space
in Elmsford, New York. The Company also leases commercial office space for its
above-described operations in South Kingstown, Rhode Island; Nashville,
Tennessee; Columbus, Ohio; and Livingston, New Jersey.
Item 3. Legal Proceedings
Since April 1999, the Company has been engaged in commercial arbitration
with Tennessee Health Partnership ("THP") over a number of commercial disputes
surrounding the parties' relationship. The Company has been disputing several
improper reductions of payments by THP that the Company believes were properly
due and owing to it. In addition, a dispute exists over whether or not certain
items should have been included under the Company's capitated arrangements with
THP. In 1999, the Company recorded a special charge of $3.3 million for
estimated future losses related to this dispute and another TennCare(R)
provider.
In early 2001, the Company reached an agreement in principle with THP.
The Company will pay THP $1.3 million in satisfaction of all claims between the
parties. Upon final settlement, any excess of the reserve for future losses will
be credited to income.
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 year 2000.
12
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
The Company's common stock, par value $0.0001 per share ("Common Stock")
began trading on The NASDAQ National Market tier of The NASDAQ Stock Market on
August 15, 1996 under the symbol MIMS. The following table represents the range
of high and low sales prices for the Company's Common Stock for the last eight
quarters. Such prices are interdealer prices, without retail markup, markdown or
commissions, and may not necessarily represent actual transactions.
MIM Common Stock
High Low
------------------------
1999: First Quarter................. $ 4.44 $ 2.13
Second Quarter............... $ 3.13 $ 2.00
Third Quarter................ $ 3.00 $ 1.69
Fourth Quarter............... $ 4.63 $ 1.50
2000: First Quarter................. $ 8.63 $ 2.44
Second Quarter............... $ 4.38 $ 1.69
Third Quarter................ $ 2.75 $ 1.44
Fourth Quarter............... $ 2.13 $ 0.63
The Company has never paid cash dividends on its Common Stock and does
not anticipate doing so in the foreseeable future.
As of March 15, 2001, there were 127 stockholders of record in addition
to approximately 2,609 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 on Form 10-K (the "Report"), it has been assumed that all outstanding
shares of Common Stock were held by non-affiliates except for shares held by
directors and executive officers of the Company and any persons disclosed as
beneficial owners of greater than 10% of the Company's outstanding securities.
However, this should not be deemed to constitute an admission that any or all
such directors and executive officers of the Company are, in fact, affiliates of
the Company, or that there are not other persons who may be deemed to be
affiliates of the Company.
During the three months ended December 31, 2000, the Company did not sell
any securities without registration under the Securities Act of 1933, as amended
(the "Securities Act").
From August 15, 1996 through December 31, 2000, the $46.8 million net
proceeds from the Company's underwritten initial public offering of its Common
Stock (the "Offering"), affected pursuant to a Registration Statement assigned
file number 333-05327 by the Securities and Exchange Commission (the
"Commission") and declared effective by the Commission on August 15, 1996, have
been applied in the following approximate amounts (in thousands):
Construction of plant, building and facilities ................... $ --
Purchase and installation of machinery and equipment ............. $13,970
Purchases of real estate ......................................... $ --
Acquisition of other businesses .................................. $21,825
Repayment of indebtedness ........................................ $ --
Working capital .................................................. $ 9,703
Temporary investments:
Marketable securities ................................. $ --
Overnight cash deposits ............................... $ 1,290
13
To date, the Company has expended a relatively insignificant portion of
the Offering proceeds on expanding 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 prospectus, the Company intended to
apply approximately $18.6 million of Offering proceeds to fund the expansion of
that business. The Company determined not to apply any material portion of the
Offering proceeds to fund the expansion of that business.
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data presented below should be read
in conjunction with Item 7 of this Report and with the Company's Consolidated
Financial Statements and notes thereto appearing elsewhere in this Report.
Year Ended December 31,
(in thousands, except per share amounts)
----------------------------------------------------------------------
Statement of Operations Data 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
Revenue $ 369,794 $ 377,420 $ 451,070 $ 242,291 $ 283,159
Special charges - 6,029(1) 3,700(2) - 26,640(3)
Net (loss) income (4,5) (1,823) (3,785) 4,271 (13,497) (31,754)
Net (loss) income per basic share (0.09) (0.20) 0.28 (1.07) (3.32)
Net (loss) income per diluted share (6) (0.09) (0.20) 0.26 (1.07) (3.32)
Weighted average shares outstanding
used in computing net (loss) income
per basic share 19,930 18,660 15,115 12,620 9,557
Weighted average shares outstanding
used in computing net (loss) income
per diluted share 19,930 18,660 16,324 12,620 9,557
December 31,
(in thousands, except per share amounts)
---------------------------------------------------------------------
Balance Sheet Data 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 1,290 $ 15,306 $ 4,495 $ 9,593 $ 1,834
Investment securities - 5,033 11,694 22,636 37,038
Working (deficit) capital (11,184) 8,995 19,823 9,333 19,569
Total assets 116,402 115,683 110,106 62,727 61,800
Capital lease obligations,
net of current portion 1,621 718 598 756 375
Long-term debt, net of current portion - 2,279 6,185(7) - -
Stockholders' equity 39,505 35,187 39,054 16,810 30,143
- ----------------------------
(1) In 1999, the Company recorded $6,029 of special charges for estimated
losses on contract receivables.
(2) In 1998, the Company recorded $1,500 and $2,200 special 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.
Excluding these items, net income for 1998 would have been $8,000, or $0.48
per share.
(3) In 1996, the Company recorded a $26,600 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.
(4) Net loss (income) includes legal expenses advanced for the defense of two
former officers for the years 2000, 1999, 1998, and 1997 in the amounts of
$3,100, $1,400, $ 1,300, and $800, respectively.
(5) In the fourth quarter of 2000, the Company recorded a provision for loss of
$2,300 on its investment in Wang Healthcare Information Systems.
(6) The historical diluted loss per common share for the years 2000, 1999, 1997
and 1996 excludes the effect of common stock equivalents, as their
inclusion would be antidilutive.
(7) This amount represents long-term debt assumed by the Company in connection
with its acquisition of Continental.
* * * * * * * * * * * * * * *
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Report contains statements not purely historical and which may be
considered forward looking statements within the meaning of Section 27A of the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), including statements regarding the Company's
expectations, hopes, beliefs, intentions or strategies regarding the future.
Forward looking statements may include statements relating to the Company's
business development activities, sales and marketing efforts, the status of
material contractual arrangements including the negotiation or re-negotiation of
such arrangements, future capital expenditures, the effects of regulation and
competition on the Company's business, future operating performance of the
Company and the results, the benefits and risks associated with integration of
acquired companies, the likely outcome and the effect of legal proceedings on
the Company and its business and operations 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
actual results may differ materially from those possible results discussed in
the forward looking statements as a result of various factors. These factors
include, among other things, risks associated with risk-based or "capitated"
contracts, increased government regulation related to the health care and
insurance industries in general and more specifically, pharmacy benefit
management organizations, the existence of complex laws and regulations relating
to the Company's business, increased competition from the Company's competitors,
including competitors with greater financial, technical, marketing and other
resources. This Report contains information regarding important factors that
could cause such differences. The Company does not undertake any obligation to
supplement these forward-looking statements to reflect any future events and
circumstances.
Overview
MIM is a PBM, specialty pharmaceutical and fulfillment/e-commerce
organization that partners with healthcare providers and sponsors to control
prescription drug costs. MIM's innovative pharmacy benefit products and services
use clinically sound guidelines to ensure cost control and quality care. MIM's
specialty pharmaceutical division specializes in serving the chronically ill
afflicted with life threatening diseases and genetic impairments. MIM's
fulfillment and e-commerce pharmacy specializes in serving individuals that
require long-term maintenance medications. MIM's online pharmacy, www.MIMRx.com,
develops private label websites to offer affinity groups and other health care
providers innovative, customized health information services and products on the
Internet for their members. A majority of the Company's revenues to date have
been derived from providing PBM services in the State of Tennessee (the "State")
to MCOs participating in the State's TennCare(R) program. At December 31, 2000,
the Company has various PBM service contracts with 126 health plan sponsors with
an aggregate of approximately 5.5 million plan members, of which TennCare(R)
represented six MCOs with approximately 1.2 million plan members. Revenues
derived from the Company's contracts with those TennCare(R) MCOs accounted for
43.4% of the Company's revenues for the year ended December 31, 2000, compared
to 54.0% of the Company's revenues for the year ended December 31, 1999.
Business
The Company derives its revenues primarily from agreements to provide
PBM services, which includes mail order services, to various health plan
sponsors in the United States. The Company also provides specialty pharmacy
services to chronically ill patients that require injection and infusion
therapies.
Acquisition of American Disease Management Associates, L.L.C.
On August 4, 2000, the Company, through its principal PBM operating
subsidiary, MIM Health Plans, Inc., acquired all of the issued and outstanding
membership interests of ADIMA, pursuant to a Purchase Agreement dated as of
August 3, 2000. ADIMA, located in Livingston, New Jersey, provides intravenous
and injectible specialty pharmaceutical products to chronically ill patients
receiving healthcare services from home by IV certified registered nurses,
typically after a hospital discharge.
The aggregate purchase price approximated $24.0 million, and included
$19.0 million in cash and 2.7 million shares of MIM common stock, valued at $5.0
million. The acquisition was treated as a purchase for financial reporting
purposes. Assets acquired approximated $4.5 million and liabilities assumed
approximated $0.1 million resulting in approximately $19.9 million of goodwill,
which will be amortized over the estimated useful life of 20 years. The
consolidated financial statements of the Company include the results of ADIMA
from the date of acquisition.
15
Results of Operations
Year ended December 31, 2000 compared to year ended December 31, 1999
For the year ended December 31, 2000, the Company recorded revenues of
$369.8 million compared with 1999 revenues of $377.4 million, a decrease of $7.6
million. Contracts with TennCare(R) sponsors accounted for decreased revenues of
$43.3 million, principally the result of the State of Tennessee assuming
financial responsibility for the TennCare(R) dual eligible members and the
decrease in the number of TennCare(R) contracts managed by the Company,
partially offset by an increase in revenue of $1.4 million related to a
settlement of fees associated with 1998 services. Revenue increases from the
acquisition of ADIMA and the increases in commercial PBM and mail order revenues
from both new and existing accounts increased revenue by $34.3 million. For the
years ended December 31, 2000, approximately 28% of the Company's revenue was
generated from capitated contracts compared to approximately 32% in 1999. Based
upon its present contracted arrangements, the Company anticipates that
approximately 20% of its revenues in 2001 will be derived from capitated
contracts.
Cost of revenue for 2000 decreased to $334.6 million from $347.1
million for 1999, a decrease of $12.5 million. Cost of revenue with respect to
contracts with TennCare(R) sponsors decreased $49.7 million from 1999 to 2000.
Cost of revenue from commercial business increased $37.2 million, which includes
an increase of $4.9 million from the purchase of ADIMA. For the year ended
December 31, 2000, gross profit increased $4.9 million to $35.2 million, from
$30.3 million at December 31, 1999. Gross profit increases of $6.4 million in
TennCare(R) business resulted primarily from lower pharmaceutical utilization on
TennCare(R) capitated agreements, as well as $1.4 million related to a
settlement of fees associated with 1998 that was recorded in 2000. Gross profit
increases in TennCare(R) business were offset by decreases in gross profit of
$5.3 million in commercial and mail order business, and increases of $3.8
million contributed by the Company's acquisition of ADIMA.
General and administrative expenses increased $5.9 million to $33.9
million in 2000 from $28.0 million in 1999, an increase of 21%. $2.6 million of
this increase is a result of increased legal expenditures primarily arising out
of the Company's obligations to advance legal fees to former officers. In
addition, the acquisition of ADIMA contributed $1.3 million of the increase and
the remainder was attributable to severance obligations to two executives,
higher levels of depreciation due to capital improvements in our fulfillment
facility, and increased costs associated with a complete sales force in 2000. As
a percentage of revenue, general and administrative expenses increased to 9.2%
in 2000 from 7.4% in 1999.
In 1999, the Company incurred one-time special charges of $6.0 million
for Xantus Healthplans of Tennessee, Inc. ("Xantus"), Preferred Health Plans
("PHP") and THP, as discussed below.
On May 4, 2000, the Company reached a negotiated settlement with PHP,
under which, among other things, the Company retained rebates that would have
otherwise been due and owing PHP. PHP paid the Company an additional $0.9
million and the respective parties released each other from any and all
liability with respect to past or future claims. This agreement did not have a
material effect on the Company's results of operations or financial positions.
In early 2001, the Company reached an agreement in principle with THP.
The Company will pay THP $1.3 million in satisfaction of all claims between the
parties. Upon final settlement, any excess of the reserve for future losses will
be credited to income.
For the year ended December 31, 2000, the Company recorded amortization
of goodwill and other intangibles of $1.5 million compared to $1.1 million in
1999. This increase is primarily due to the goodwill amortization for ADIMA.
For the year ended December 31, 2000, the Company recorded interest
income of $0.8 million compared to $1.0 million for the year ended December 31,
1999, a decrease of $0.2 million, primarily due to lower cash balances after the
purchase of ADIMA.
16
For the year ended December 31, 2000, the Company recorded a net loss
of $1.8 million or $0.09 per share. This includes a one time, non-operating
provision for $2.3 million relating to the Company's investment in Wang
Healthcare Information Systems. This compares with a net loss of $3.8 million,
or $0.20 per share for the year ended December 31, 1999. In 1997, the Company
purchased 1,150,000 shares of the Series B Convertible Preferred Stock of Wang
Healthcare Information Systems, Inc. ("WHIS"), par value $0.01 per share, for an
aggregate purchase price equal to $2.3 million. Due to changes in the financial
situation at WHIS and its ability to access capital, the Company recorded a
provision for loss on this investment in December 2000.
Earnings before interest, taxes, depreciation and amortization
("EBITDA") was $4.8 million for the year ended December 31, 2000, compared to
negative $1.4 million EBITDA for the year ended December 31, 1999. EBITDA for
the year ended December 31, 2000 was approximately $8.0 million, excluding the
Company's advances of legal defense costs of two former officers.
Year ended December 31, 1999 compared to year ended December 31, 1998
For the year ended December 31, 1999, the Company recorded revenues of
$377.4 million compared with 1998 revenues of $451.0 million, a decrease of
$73.6 million. Contracts with TennCare(R) sponsors accounted for decreased
revenues of $122.0 million, as the Company did not retain contracts as of
January 1, 1999 with the two TennCare(R) BHO's previously managed under the
RxCare Contract. In addition, PBM services to another TennCare(R) MCO previously
managed under the RxCare Contract did not begin until May 1, 1999. The loss of
these contracts represents $71.3 million and $47.6 million, respectively, of the
decrease in revenue with additional decreases in other contracts with
TennCare(R) sponsors of approximately $3.1 million. Commercial revenue increased
$69.8 million, offset by a decrease of $21.4 million due to the loss of a
contract with a Nevada-based managed care organization, representing a net
increase of $48.4 million in commercial revenue. The overall decrease in
revenues was partially offset by an increase in revenues of $22.9 million as a
result of the Company's acquisition of Continental.
Cost of revenue for 1999 decreased to $347.1 million from $421.4
million for 1998, a decrease of $74.3 million. Cost of revenue with respect to
contracts with TennCare(R) sponsors decreased $108.6, million as the Company did
not retain contracts as of January 1, 1999 with the two TennCare(R) BHO's
previously managed under the RxCare Contract and did not begin providing PBM
services to another TennCare(R) MCO previously managed under the RxCare Contract
until May 1, 1999. The loss of these contracts represents $68.5 million and
$46.0 million, respectively, of the decrease, with additional increases in other
contracts with TennCare(R) sponsors of approximately $5.9 million. Cost of
revenue from commercial business increased $60.2 million, which included a
decrease in cost of revenue of $25.9 million due to the loss of a contract with
a Nevada-based MCO, representing a net increase of $34.3 million. Such decreases
in cost of revenue were partially offset by increases of $17.1 million as a
result of the Company's acquisition of Continental. As a percentage of revenue,
cost of revenue decreased to 92.0% for the twelve months ended December 31,
1999, from 93.4% for the twelve months ended December 31, 1998, a decrease of
1.4%. This decrease is primarily due to the contribution of Continental's mail
service drug distribution business, which experienced higher profit margins than
historically experienced by the Company's PBM business.
For the years ended December 31, 1999 and 1998, approximately 32% of
the company's revenues were generated from capitated or other risk-based
contracts. Effective January 1, 1999, the Company began providing PBM services
directly to five of the six TennCare(R) MCOs previously managed under the RxCare
Contract. The Company is compensated on a capitated basis under three of the
five TennCare(R) 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 20% of its revenues in 2000 will be
derived from capitated or other risk-based contracts.
For the year ended December 31, 1999, gross profit increased $0.6
million to $30.3 million, from $29.7 million at December 31, 1998. Gross profit
decreases of $13.4 million in TennCare(R) business resulted primarily from the
termination of the two TennCare(R) BHO contracts, as well as increases in costs
on some of the capitated contracts. Gross profit decreases in TennCare(R)
business were offset by increases in gross profit of $8.3 million in commercial
business, and increases of $5.7 million contributed by the Company's acquisition
of Continental.
General and administrative expenses increased $4.9 million to $28.0
million in 1999 from $23.1 million in 1998, an increase of 21.3%. The
acquisition of Continental comprised $4.5 million of the increase and the
17
remaining $0.4 million increase was attributable to expenses associated with an
expanded national sales effort and additional operations support needed to
service new business. As a percentage of revenue, general and administrative
expenses increased to 7.4% in 1999 from 5.1% in 1998.
On March 31, 1999, the State of Tennessee, (the "State"), and Xantus,
entered into a consent decree under which Xantus was placed in receivership
under the laws of the State of Tennessee. On September 2, 1999, the Commissioner
of the Tennessee Department of Commerce and Insurance (the "Commissioner"),
acting as receiver of Xantus, filed a proposed plan of rehabilitation (the
"Plan"), as opposed to a liquidation of Xantus. A rehabilitation under
receivership, similar to reorganization under federal bankruptcy laws, was
approved by the Chancery Court (the "Court") of the State of Tennessee, and
allows Xantus to remain operating as a TennCare(R) MCO, providing full health
care related services to its enrollees. Under the Plan, the State, among other
things, agreed to loan to Xantus approximately $30 million to be used solely to
repay pre-petition claims of providers, which claims aggregate approximately $80
million. Under the Plan, the Company received $4.2 million, including $0.6
million of unpaid rebates to Xantus, which the Company was allowed to retain
under the terms of the preliminary rehabilitation plan for Xantus. A plan for
the payment of the remaining amounts has not been finalized and the recovery of
any additional amounts is uncertain. The Company recorded a special charge in
1999 of $2.7 million for the estimated loss to the Company.
The Company has been disputing several improper reductions of payments by
THP. In addition, there exists a dispute over whether or not certain items
should have been included under the Company's respective capitated arrangements
with THP and PHP. In 1999, the Company recorded a special charge of $3.3 million
for estimated future losses related to these disputes.
For the year ended December 31, 1999, the Company recorded amortization
of goodwill and other intangibles of $1.1 million in connection with its
acquisition of Continental, compared to $0.3 million in 1998. This increase
reflects an entire year of amortization in 1999.
For the year ended December 31, 1999, the Company recorded interest
income of $1.0 million compared to $1.7 million for the year ended December 31,
1998, a decrease of $0.7 million.
For the year ended December 31, 1999, the Company recorded a net loss of
$3.8 million or $0.20 per share. This compares with net income of $4.3 million,
or $0.28 per share for the year ended December 31, 1998.
EBITDA was negative $1.4 million for the year ended December 31, 1999,
and $4.2 million for the year ended December 31, 1998.
Liquidity and Capital Resources
The Company utilizes both funds generated from operations and available
credit under its credit facility for capital expenditures and working capital
needs. For the year ended December 31, 2000, net cash provided to the Company
from operating activities totaled $11.3 million primarily due to a reduction of
$9.0 million in accounts receivable as a result of increased collection efforts,
offset by a decrease of $4.4 million in claims payable as a result of the
decrease in TennCare(R) enrollees due to the dual eligible members and an
increase of $4.9 million in payables to plan sponsors and others which
represents changes in rebate share agreements.
Cash used in investing activities was $22.6 million primarily due to the
purchases of ADIMA and Health Management Ventures ("HMV") in August 2000, which
used cash of $19.6 million. The Company also purchased $6.6 million in equipment
primarily in support of the new fulfillment facility in Columbus, Ohio.
Cash used for financing activities in the year ended December 31, 2000
was $2.8 million. In the year ended December 31, 2000, the Company reduced
long-term debt by $2.6 million.
At December 31, 2000, the Company had a working capital deficit of $11.2
million compared to working capital of $9.0 million at December 31, 1999. This
is primarily due to the acquisitions, which reduced cash and cash equivalents by
$14.0 million at December 31, 2000, as well as reducing investment securities by
$5.0 million.
On November 1, 2000 the Company entered into a $45 million secured
revolving credit facility (the "Facility") with HFG Healthco-4 LLC, an affiliate
of Healthcare Finance Group, Inc. ("HFG"). The Facility replaced the Company's
18
existing credit facilities with its former lenders. The Facility will be used
for working capital purposes and future acquisitions in support of the Company's
business plan. The Facility has a three-year term, provides for borrowing of up
to $45 million at the London InterBank Offered Rate (LIBOR) plus 2.1% and is
secured by receivables of the Company's principal operating subsidiaries. The
facility contains various covenants that, among other things, requires the
Company to maintain certain financial ratios as defined in the agreement
governing the Facility.
As the Company continues to grow, it anticipates that its working
capital needs will also continue to increase. The Company believes that it has
sufficient cash on hand and available credit to fund the Company's anticipated
working capital and other cash needs for at least the next 12 months.
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, 2000, the Company had, for federal tax purposes, unused
net operating loss carry forwards of approximately $44.2 million, which will
begin expiring in 2009. 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. The annual limitation approximates $2.7 million. Actual utilization
in any year will vary based on the Company's tax position in that year.
The Company also may pursue joint venture arrangements, business acquisitions
and other transactions designed to expand its PBM, e-commerce or specialty
pharmacy businesses, which the Company would expect to fund from cash on hand,
the Facility, other future indebtedness or, if appropriate, the private and/or
public sale or exchange of equity securities of the Company.
Other Matters
In 1998, the Company recorded a $2.2 million special charge against
earnings in connection with an agreement in principle with respect to a civil
settlement of the Federal and State of Tennessee investigation in connection
with the conduct of two former officers of the Company, prior to the Company's
initial public offering. The definitive agreement covering this settlement was
executed on June 15, 2000, and, among other things, provides for the execution
and delivery by the Company of a $1.8 million promissory note secured by certain
tangible assets.
From January 1994 through December 31, 1998, the Company provided a
broad range of PBM services on behalf of RxCare, to the TennCare(R), TennCare(R)
Partners and other commercial PBM clients under the RxCare Contract. A majority
of the Company's revenues have been derived from providing PBM services in the
State of Tennessee to MCOs participating in the State of Tennessee's TennCare(R)
program and BHO's participating in the State of Tennessee's TennCare(R) Partners
program. From January 1994 through December 31, 1998, the Company provided its
PBM services to the TennCare(R) MCOs as a subcontractor to RxCare.
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 resulted in the Company executing agreements with all of the
MCOs for the TennCare(R) lives previously managed under the RxCare Contract as
well as substantially all TPAs and employer groups previously managed under the
RxCare Contract.
The TennCare(R) program operates under a demonstration waiver from HCFA.
That waiver is the basis of the Company's ongoing service to those MCOs in
19
the TennCare(R) program. The waiver is due to expire on December 31, 2001.
However, the Company believes that pharmacy benefits will continue to be
provided to Medicaid and other eligible TennCare(R) enrollees through MCOs in
one form or another, although there can be no assurances that such pharmacy
benefits will continue or that the Company would be chosen to continue to
provide pharmacy benefits to enrolles of a successor program. If the waiver is
not renewed and the Company is not providing pharmacy benefits to those lives
under a successor program or arrangement, then the failure to provide such
services would have a material and adverse affect on the financial position and
results of operations of the Company. The ongoing funding for the TennCare(R)
program has been the subject of significant discussion at various governmental
levels since its inception. Should the funding sources for the TennCare(R)
program change significantly, the Company's ability to serve those customers
could be impacted and would also materially and adversely affect the financial
position and results of operations of the Company.
The ongoing funding for the TennCare(R) program has been the subject of
significant discussion at various governmental levels for some time. Should the
funding sources for the TennCare(R) program change significantly the Company's
ability to serve those customers could be impacted. This would materially affect
the financial position and results of operations of the Company.
On November 1, 2000, the TennCare(R) program adopted new rules for
recipients to appeal adverse determinations in the delivery of health care
services and products requiring prior approval including the rejections of
certain pharmaceutical products under existing formularies or guidelines and to
possibly receive a larger supply of the rejected products at the point of
service. The implementation of these rules may impact the quantity of formulary
products excluded or requiring prior approval that are dispensed to the
recipients potentially resulting in a change to the amount of pharmaceutical
manufacturers rebates earned by the Company. A reduction in rebates would
adversely impact the financial results of the Company. At this time the Company
cannot estimate the financial impact, if any, as a result of the implementation
of new rules.
As a result of providing capitated PBM services to certain TennCare(R)
MCOs, the Company's pharmaceutical claims costs historically have been subject
to significant increases from October through February, which the Company
believes is due to the need for increased medical attention to, and intervention
with, MCOs members during the colder months. The resulting increase in
pharmaceutical costs impacts the profitability of capitated contracts. Capitated
business represented approximately 28% of the Company's revenues while fee-for-
service business (including mail order services) represented approximately 72%
of the Company's revenues for the year ended December 31, 2000 as compared to
32% and 68% for the year ended December 31, 1999, respectively. Fee for service
arrangements mitigate the adverse effect on profitability of higher
pharmaceutical costs incurred under capitated contracts, as higher utilization
positively impacts profitability under fee-for-service (or non-capitated)
arrangements. The Company presently anticipates that approximately 20% of its
revenues in fiscal 2001 will be derived from capitated arrangements.
Changes in prices charged by manufacturers and wholesalers or
distributors for pharmaceuticals, a component of pharmaceutical claims costs,
directly affects the Company's cost of revenue. The Company believes that it is
likely that prices will continue to increase, which could have an adverse effect
on the Company's gross profit on capitated arrangements. Because plan sponsors
are billed for the cost of all prescriptions dispensed in fee-for-service
arrangements, the Company's gross profit is not adversely affected by changes in
pharmaceutical prices. To the extent such cost increases adversely affect the
Company's gross profit, the Company may be required to increase capitated
contract rates on new contracts and upon renewal of existing capitated
contracts. However, there can be no assurance that the Company will be
successful in obtaining these rate increases. The potential greater proportion
of fee-for-service contracts with the Company's customers in 2000 compared to
prior years mitigates the potential adverse effects of price increases, although
no assurance can be given that the recent trend towards fee-for-service
arrangements will continue or that a substantial increase in drug costs or
utilization would not negatively affect the Company's overall profitability in
any period.
Generally, loss contracts arise only on capitated or other risk-based
contracts and primarily result from higher than expected pharmacy utilization
rates, higher than expected inflation in drug costs and the inability of the
Company to restrict its MCO clients' formularies to the extent anticipated by
the Company at the time contracted PBM services are implemented, thereby
resulting in 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. There are currently
no loss contracts and management does not believe that there is an overall trend
towards losses on its existing capitated contracts.
In the first quarter of 2001, the Company commenced a stock repurchase
program pursuant to which the Company intends to repurchase up to $5 million of
the Company's Common Stock from time to time on the open market or in private
transactions. In February, 2001, the Company repurchased 1,298,183 shares of
Common Stock at a price of $2.00 per share in private transactions. See "Certain
Relationships and Related Transactions" below.
20
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 debt. The Company does not invest in or
otherwise use derivative financial instruments. 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:
2001 2002 2003 2004 Thereafter
----------------------------------------------------------
Long-term debt:
Variable rate instruments 165 - - - -
Weighted average rate 7.50% - - - -
In the table above, the weighted average interest rate for fixed and
variable rate financial instruments was computed utilizing the effective
interest rate for that instrument at December 31, 2000, and multiplying 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, 2000, the carrying values of cash and cash equivalents,
accounts receivable, accounts payable, claims payable, payables to plan sponsors
and others, and debt 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.
21
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of MIM Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of MIM
Corporation (a Delaware corporation) and Subsidiaries as of December 31, 2000
and 1999 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. 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 based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present
fairly, in all material respects, the financial position of MIM Corporation and
Subsidiaries as of December 31, 2000 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
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
March 1, 2001
22
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(In thousands, except for share amounts)
2000 1999
----------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 1,290 $ 15,306
Investment securities - 5,033
Receivables, less allowance for doubtful accounts of $8,333 and $8,576
at December 31, 2000 and December 31, 1999, respectively 56,809 62,919
Inventory 2,612 777
Prepaid expenses and other current assets 1,680 1,347
----------- --------------
Total current assets 62,391 85,382
Other investments - 2,300
Property and equipment, net 10,813 5,942
Due from affiliate and officer, less allowance for doubtful accounts of $0
and $403 at December 31, 2000 and December 31, 1999, respectively 2,012 1,849
Other assets, net 2,163 249
Intangible assets, net 39,023 19,961
----------- --------------
Total assets $ 116,402 $ 115,683
=========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligations $ 592 $ 514
Current portion of long-term debt 165 493
Accounts payable 2,964 5,039
Claims payable 35,338 39,702
Payables to plan sponsors 29,040 24,171
Accrued expenses and other current liabilities 5,476 6,468
----------- --------------
Total current liabilities 73,575 76,387
Capital lease obligations, net of current portion 1,621 718
Long-term debt, net of current portion - 2,279
Other non-current liabilities 589 -
Minority interest 1,112 1,112
Commitments and contingencies
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,
21,547,312 and 18,829,198 shares issued and outstanding
at December 31, 2000 and December 31, 1999, respectively 2 2
Additional Paid in Capital 97,010 91,614
Accumulated deficit (56,398) (54,575)
Treasury stock, 100,000 shares at cost (338) (338)
Stockholder notes receivable (771) (1,516)
----------- --------------
Total stockholders' equity 39,505 35,187
----------- --------------
Total liabilities and stockholders' equity $ 116,402 $ 115,683
=========== ==============
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, except per share amounts)
2000 1999 1998
--------------- -------------- ------------
Revenue $ 369,794 $ 377,420 $ 451,070
Cost of revenue 334,614 347,115 421,374
--------------- -------------- ------------
Gross profit 35,180 30,305 29,696
General and administrative expenses 30,811 26,656 21,817
Legal fees due to indemnification responsibility 3,098 1,353 1,275
Amortization of goodwill and other intangibles 1,450 1,064 330
Special charges - 6,029 3,700
--------------- -------------- ------------
(Loss) income from operations (179) (4,797) 2,574
Interest income, net 766 1,012 1,712
Provision for loss on investment (2,300) - -
Other - - (15)
--------------- -------------- ------------
(Loss) income before taxes $ (1,713) $ (3,785) $ 4,271
Income taxes 110 - -
--------------- -------------- ------------
Net (loss) income $ (1,823) $ (3,785) $ 4,271
============== ============= ============
Basic (loss) income per common share (0.09) (0.20) 0.28
============== ============= ============
Diluted (loss) income per common share (0.09) (0.20) 0.26
============== ============= ============
Weighted average common shares used
in computing basic (loss) income per share 19,930 18,660 15,115
============== ============= ============
Weighted average common shares used
in computing diluted (loss) income per share 19,930 18,660 16,324
============== ============= ============
The accompanying notes are an integral part of these consolidated financial statements.
24
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Additional Accumulated Stockholder Total Stockholders'
Common Stock Treasury Stock Paid-In Capital Deficit Notes Receivable Equity
------------ ------------ ------------- ------------ -------------- ------------
Balance December 31, 1997 $ 1 $ - $ 73,585 $ (55,061) $ (1,715) $ 16,810
============ ============ ============= ============ ============== ============
Stockholder loans, net - - - - (46) (46)
Shares issued in connection with
Continental acquisition 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
============ ============ ============= ============ ============== ============
Payments of stockholder loans - - - - 245 245
Exercise of stock options - - 5 - - 5
Non-employee stock option
compensation expense - - 6 - - 6
Purchase of treasury stock - (338) - - - (338)
Net loss - - - (3,785) - (3,785)
------------ ------------ ------------- ------------ -------------- ------------
Balance December 31, 1999 $ 2 $ (338) $ 91,614 $ (54,575) $ (1,516) $ 35,187
============ ============ ============= ============ ============== ============
Payments of stockholder loans - - - - 745 745
Exercise of stock options - - 333 - - 333
Shares issued in connection with
ADIMA acquisition - - 5,034 - - 5,034
Non-employee stock option
compensation expense - - 29 - - 29
Net loss - - - (1,823) - (1,823)
------------ ------------ ------------- ------------ -------------- ------------
Balance December 31, 2000 $ 2 $ (338) $ 97,010 $ (56,398) $ (771) $ 39,505
============ ============ ============= ============ ============== ============
The accompanying notes are an integral part of these consolidated financial statements.
25
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS