UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2 TO
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File No. 0-28740
MIM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 05-0489664
(State of incorporation) (IRS Employer Identification No.)
One Blue Hill Plaza, Pearl River, New York 10965
(914) 735-3555
(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. __
The aggregate market value of the registrant's Common Stock (its only
voting stock) held by non-affiliates of the registrant as of July 30, 1998 was
approximately $34.6 million. (Reference is made to the final paragraph of Part
II, Item 5 herein for a statement of the assumptions upon which this calculation
is based.)
On July 30, 1998 there were outstanding 13,822,000 shares of the
registrant's Common Stock.
1
MIM Corporation's ("MIM" or the "Company") Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, filed with the Securities and Exchange
Commission (the "Commission") on March 31, 1997, as amended by Amendment No. 1
thereto on Form 10-K/A filed with the Commission on April 30, 1998 (as amended,
the "Annual Report"), is hereby amended as follows:
Items 7 and 8 of the Annual Report are hereby amended and restated and
replaced in their entirety as follows:
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Report contains statements which constitute forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. The
matters discussed in this Report include statements regarding the intent, belief
or current expectations of the Company, its directors or its officers with
respect to the future operating performance of the Company and the results and
the effect of legal proceedings, arbitration and disputes. Investors are
cautioned that any such forward looking statements are not guarantees of future
performance or the ultimate outcome of litigation, arbitration or disputes and
involve risks and uncertainties, and that actual results and/or outcomes may
differ materially from those in the forward looking statements as a result of
various factors. The Company undertakes no obligation to publicly release the
results of any revisions to these forward looking statements that may be made to
reflect any future events and circumstances.
The accompanying information contained in this Report identifies important
factors that could cause such differences, including: the effect of government
regulations on the Company's business; the effect of the outcome of certain
legal proceedings, arbitration proceedings and/or disputes; and the effect of
the Merger with Continental or the failure to consummate such Merger.
Overview
A majority of the Company's revenues to date have been derived from
operations in the State of Tennessee in conjunction with RxCare. The Company
assisted RxCare in defining and marketing pharmacy benefit management services
to private health plan sponsors on a consulting basis in 1993, but did not
commence substantial operations through the management of pharmacy benefits to
plan sponsors until January 1994 when RxCare began servicing several of the
health plan sponsors involved in the newly instituted TennCare(R) state health
program. See "Business -- The TennCare Program." At December 31, 1997, the
Company provided pharmacy benefit management services to a total of 36 public
and private plan sponsors with an aggregate of approximately 1.7 million plan
members on both a risk and non-risk basis throughout the United States. TennCare
represents 1.2 million members.
Results of Operations
Year ended December 31, 1997 compared to year ended December 31, 1996
For the year ended December 31, 1997, the Company recorded revenues of
$242.3 million compared with 1996 revenues of $283.2 million, a decrease of
$40.9 million, or 14%. In an effort to stem future losses and increase
profitability, the Company through RxCare, terminated the capitated BCBS - TN
contract effective March 31, 1997. Although this contract previously had been
renegotiated and extended, high utilization rates continued to hamper the
Company's ability to gain profitability under the contract even though the
Company was able to lower the average cost of each prescription. Subsequent to
the termination of the original BCBS - TN contract, the Company had negotiated a
new contract directly with an affiliate of BCBS - TN to begin providing pharmacy
benefit management services on April 1, 1997. Although the Company continued to
provide essentially the same services under such restructured contract as it did
before the restructuring, the new contract eliminates capitation risk to MIM and
provides for MIM to be paid for certain administrative and clinical consulting
services on a fee-for service basis. The restructuring in April 1997 of the
BCBS-TN contract decreased revenue for the year ended December 31, 1997 compared
to December 31, 1996 by $107.0 million. This decrease in revenues was offset by
an increase of $34.8 million in other TennCare revenue resulting from increased
enrollment and several favorable contract restructurings. Further revenue
increases of $31.3 million resulted from increased enrollment in existing
commercial plans as well as the servicing of 11 new commercial plans covering
approximately 418,000 new members throughout the United States. In 1997, 53% of
the Company's revenue was generated from risk-based contracts, compared with 82%
during 1996. The Company believes that this decrease in risk-based arrangements
during 1997 will minimize the Company's exposure to potential losses.
Cost of revenue for 1997 decreased to $239.0 million from $278.1 million
for 1996, a decrease of $39.1 million. The above-described restructuring of a
major TennCare contract resulted in a decrease in cost of revenue of $111.6
million. Costs relating to the remaining TennCare contracts increased by $34.2
million due to eligibility increases, increasing drug prices
2
and increasing utilization of prescription drugs. Increased enrollment in
existing commercial plans together with several new commercial contracts
resulted in a $38.3 million increase in cost of revenue. Included in cost of
revenues for commercial business is a $4.1 million reserve established to cover
anticipated future costs under the Sierra Agreement described below. As a
percentage of revenue, cost of revenue increased to 98.6% in 1997 from 98.2% in
1996.
For the year ended December 31, 1997, gross profit decreased $1.8 million
to $3.3 million, after recording the $4.1 million reserve previously described,
from $5.1 million in 1996. Gross profit increases of $5.0 million in TennCare
business resulted from favorable contract renegotiations as well as increased
eligibility, offset by decreases of $6.8 million in commercial business
resulting primarily from the Sierra Agreement. The Sierra Agreement generated
$7.3 million in gross losses in the fourth quarter of 1997 (including a $4.1
million reserve for future contract losses).
Generally, loss contracts arise only on risk-based (capitated) contracts
and primarily result from higher than expected pharmacy utilization rates,
higher than expected inflation in drug costs and the inability to restrict
formularies, resulting in higher than expected drug costs. At such time as
management estimated that a contract will sustain losses over its remaining
contractual life, a reserve is established for these estimated losses. After
analyzing those factors described above, the Company recorded a $4.1 million
reserve in December 1997 with respect to the Sierra Agreement. Management
believes that the reserve is sufficient to cover any further losses on the
Sierra Agreement. Management does not believe that there is an overall trend
towards losses on its existing capitated contracts.
On April 14, 1998, the Company resolved its dispute with certain
subsidiaries of Sierra Health Services, Inc., a Nevada corporation ("Sierra"), a
party to a pharmacy benefit management services agreement (the "Sierra
Agreement") with MIM. The Sierra Agreement was entered into by Pro-Mark and
became effective October 1, 1997. This dispute related to the parties' divergent
interpretation of certain provisions of the Sierra Agreement, which led to
Sierra's dispute of certain amounts which the Company claimed were owed to it.
Under the terms of the settlement, both parties dismissed their respective
claims pending in the United States District Court, District of Nevada as well
as the American Arbitration Association. The settlement provides that the
parties work together to develop and manage a new drug formulary to be used by
one of the larger Sierra plans. In addition, the parties modified a number of
provisions of the Sierra Agreement, including the addition of a provision
permitting any party to terminate the Sierra Agreement at any time and for any
reason upon 90 days' prior written notice. On May 8, 1998, the Company notified
Sierra of its intention to terminate the Sierra Agreement 90 days after notice
thereof in accordance with the terms of Agreement. MIM continues to provide
pharmacy benefit management services to Sierra under the Sierra Agreement for
such 90-day period. The termination of the Sierra Agreement will reduce revenues
by approximately $3.5 million per month. The termination will have no impact on
1998 net income as the Company reserved for all expected losses under the Sierra
Agreement in 1997.
Selling, general and administrative expenses increased $7.5 million to
$19.1 million in 1997 from $11.6 million in 1996, an increase of 65.0%. The $7.5
million increase was attributable to expenses associated with an expanded
national sales force, additional headquarter personnel and operations support
needed to service new business and increases in legal and consulting fees. As a
percentage of revenue, general and administrative expenses increased to 7.9% in
1997 from 4.1% in 1996.
For the year ended December 31, 1997, the Company recorded interest income
of $2.3 million compared to $1.4 million for the year ended December 31, 1996,
an increase of $0.9 million. The increase resulted from funds invested from the
Offering being invested for the entire year in 1997 and only five months in
1996.
For the year ended December 31, 1997, the Company recorded a net loss of
$13.5 million or $1.07 per share. This compares with a net loss of $5.1 million,
or $0.54 per share (before recording a $26.6 million nonrecurring, non-cash
stock option charge, representing the difference between the exercise price and
the deemed fair market value of the Common Stock granted by the Company's
principal stockholder to certain executive officers and directors of the
Company) for the year ended December 31, 1996. This 164% increase in net loss is
the result of the above described changes in revenue, cost of revenue and
expenses.
Year ended December 31, 1996 compared to year ended December 31, 1995
For the year ended December 31, 1996, the Company recorded revenues of
$283.2 million compared with 1995 revenues of $213.9 million. The increase of
$69.3 million in revenues was due primarily to the addition of the BCBS-TN
contract in April 1995 (representing approximately $36 million of such increase)
and increased revenue from new and renegotiated contracts of approximately $33
million. In 1996, approximately 82% of the Company's revenue was generated
through capitated contracts, compared with 90% during 1995.
3
Cost of revenue for 1996 increased to $278.1 million compared with 1995
cost of revenue of $213.4 million for the same reasons revenues increased as
described above. As a percentage of revenue, cost of revenue decreased from
99.8% in 1995 to 98.2% in 1996. As a result of the termination of the BCBS-TN
contract on March 31, 1997, the Company reserved $3.5 million at December 31,
1996 to cover future claims in excess of capitated payments to the Company.
Excluding this contract, the Company would have earned $2.2 million in 1996
before taking the stock option charge (as described below). The BCBS - TN
contract represented approximately 495,000 lives and accounted for $132.8
million of revenue and $7.3 million in net losses in 1996.
Selling, general and administrative expenses were $11.6 million in 1996 and
$8.0 million in 1995, an increase of 45.0%. The $3.6 million increase was
attributable to increases in operations, sales and marketing and headquarters
personnel to support the anticipated needs of the business as well as increases
in consulting and legal fees, depreciation expense and costs related to further
development of the Company's management information systems. As a percentage of
revenue, general and administrative expenses increased from 3.8% in 1995 to 4.1%
in 1996.
For the year ended December 31, 1996, the Company recorded a net loss of
$5.1 million, or $0.54 per share (before recording a $26.6 million nonrecurring,
non-cash stock option charge representing the difference between the exercise
price and the deemed fair market value of the Common Stock at the date of grant
of options to purchase an aggregate of 3,600,000 shares of Common Stock granted
by the Company's principal stockholder to certain executive officers and
directors of the Company) compared with a 1995 net loss of $6.8 million, or
$1.43 per share. This improvement was a result of the above-described changes in
revenue and expenses. After recording the effect of the stock option charge, the
Company reported a net loss of $31.8 million, or $3.32 per share, for 1996.
Liquidity and Capital Resources
For the year ended December 31, 1997, net cash used by the Company for
operating activities totaled $3.1 million, primarily due to the funding of a
$13.5 million net operating loss and an increase in accounts receivable of $5.3
million. Such uses were offset by a $9.7 million increase in claims payable and
a $2.8 million increase in deferred revenue. Investing activities generated
$10.9 million in cash from proceeds of maturities of investment securities of
$41.9 million offset by the purchase of investment securities of approximately
$29.8 million. The Company also purchased $1.6 million of equipment with cash on
hand, primarily to upgrade and enhance information systems. The Company plans to
purchase $.5 million of property and equipment in fiscal 1998 with cash on hand,
primarily to upgrade and enhance information systems necessary to strengthen and
support the Company's ability to better manage its customers' pharmacy benefits
payments. The Company did not have any additional material commitments for
capital expenditures as of December 31, 1997.
At December 31, 1997, the Company had working capital of $9.3 million
including $19.2 million in investment securities, compared to $19.6 million at
December 31, 1996. The decrease in working capital of $10.3 million is mainly
due to an increase in claims payable of $9.7 million and an increase in deferred
revenue of 2.8 million offset by an increase in accounts receivable of $5.0
million. Cash and cash equivalents were $9.6 million at December 31, 1997
compared with $1.8 million of cash and cash equivalents at December 31, 1996.
The Company had investment securities held to maturity of $22.6 million at
December 31, 1997. These investments were and currently are primarily corporate
debt securities rated A or better. The Company has $2.3 million invested in the
Series B Preferred Stock, par value $0.01 per share, of Wang Healthcare
Information Systems, Inc.
At December 31, 1997, the Company had, for tax purposes, unused net
operating loss carryforwards of approximately $18.3 million which will begin
expiring in 2008. As it is certain whether the Company will realize the full
benefit from its deferred tax assets, the Company has recorded a valuation
allowance for the same amount. The Company will assess the need for a valuation
allowance at each balance sheet date. The amount of net operating loss
carryforwards which may be utilized in any given year may become limited by the
Internal Revenue Code of 1986, as amended, and the rules and regulations
promulgated thereunder, if a cumulative change of ownership of more than 50%
occurs within a three year period.
The Company believes that its financial condition and capital structure as
a result of the Offering has enhanced its ability to negotiate and obtain
additional contracts with plan sponsors and other potential customers. The
Company believes that it has sufficient cash on hand or available to fund the
Company's anticipated working capital and other cash needs for at least the next
12 months.
4
The Company intends to offset, against profit sharing amounts, if any, due
RxCare in the future under the RxCare Contract, approximately $6.5 million,
representing RxCare's share of the Company's losses and amounts previously
advanced or paid to RxCare as of December 31, 1997.
As part of its continued efforts to expand its pharmacy benefit management
business, the Company expects to incur additional sales and marketing expenses.
The Company also may pursue joint venture arrangements, business acquisitions
and other transactions designed to expand its pharmacy benefit management
business, which the Company would expect to fund from cash on hand or future
indebtedness or, if appropriate, the sale of equity securities of the Company.
Other Matters
The Company's pharmaceutical reimbursement claims have historically been
subject to a significant increase over annual averages from October through
February, which the Company believes is due to increased medical problems during
the colder months.
Changes in prices charged by manufacturers and wholesalers for
pharmaceuticals, a component of pharmaceutical claims, have historically
affected the Company's cost of revenue. The Company believes that it is likely
for prices to continue to increase which could have an adverse effect on the
Company's gross profit. To the extent such cost increases adversely effect the
Company's gross profit, the Company may be required to increase contract rates
on new contracts and upon renewal of existing contracts. However, there can be
no assurance that the Company will be successful in obtaining these new rates.
The TennCare program has been controversial since its inception and has
generated government investigations and adverse publicity. There can be no
assurances that the Company's association with the TennCare program will not
adversely affect the Company's business in the future.
The so-called "year 2000 problem", which is common to many companies,
concerns the inability of information systems, primarily computer software
programs, to recognize properly and process date sensitive information as the
year 2000 approaches. The Company believes that it does not and will not have
any material year 2000 problems. This belief is based upon a review of its
internally-generated programs, representations made by external software program
and hardware suppliers, experience processing information with dates on or after
the year 2000 and the known availability of software which the Company may
utilize and which is free of year 2000 problems.
The Company does not believe that inflation has had or, assuming inflation
remains at current levels, will have in the near term, a material impact on the
results of its operations.
On January 27, 1998 the Company and its wholly owned subsidiary, CMP
Acquisition Corp. ("CMP") entered into an Agreement and Plan of Merger with
Continental and certain of its principal shareholders. Upon consummation of the
merger (the "Merger"), CMP and Continental would merge, whereupon Continental
would be the surviving corporation and the separate corporate existence of CMP
would terminate. Thereafter, Continental would become a wholly owned subsidiary
of the Company. The Merger is subject to a number of customary conditions to
closing. While it is anticipated that the Merger will occur during the third
quarter of 1998, there can be no assurances that the Merger will be consummated
at such time or at all.
5
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MIM Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of MIM
Corporation and Subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MIM
Corporation and Subsidiaries as of December 31, 1997 and 1996 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
financial statements is presented for the purpose of complying with the
Securities and Exchange Commissions'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 23, 1998
6
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(In thousands, except for share amounts)
1997 1996
---- ----
ASSETS
Current assets
Cash and cash equivalents ................................................................. $ 9,593 $ 1,834
Investment securities ..................................................................... 19,235 28,113
Receivables, less allowance for doubtful accounts of $1,386 and $1,088,
respectively .......................................................................... 23,666 18,646
Prepaid expenses and other current assets ................................................. 888 1,129
-------- --------
Total current assets .................................................................. 53,382 49,722
Investment securities, net of current portion .................................................. 3,401 8,925
Other investments .............................................................................. 2,300 --
Property and equipment, net .................................................................... 3,499 2,423
Due from affiliates, less allowance for doubtful accounts of $2,360 and $2,157,
respectively .............................................................................. -- 628
Other assets, net .............................................................................. 145 102
-------- --------
Total assets .............................................................................. $ 62,727 $ 61,800
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligations .............................................. $ 222 $ 213
Accounts payable .......................................................................... 931 1,562
Deferred revenue .......................................................................... 2,799 --
Claims payable ............................................................................ 26,979 17,278
Payables to plan sponsors and others ...................................................... 10,839 10,174
Accrued expenses .......................................................................... 2,279 926
-------- --------
Total current liabilities ................................................................. $ 44,049 $ 30,153
Capital lease obligations, net of current portion .............................................. 756 375
Commitments and contingencies (Note 6)
Minority interest .............................................................................. 1,112 1,129
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,
13,335,150 and 12,040,600 shares issued and outstanding , respectively .................... 1 1
Additional paid-in capital .................................................................... 73,585 73,443
Accumulated deficit ........................................................................... (55,061) (41,564)
Stockholder notes receivable .................................................................. (1,715) (1,737)
-------- --------
Total stockholders' equity ................................................................ 16,810 30,143
-------- --------
Total liabilities and stockholders' equity ................................................ $ 62,727 $ 61,800
======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
7
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
(In thousands, except for per share amounts)
1997 1996 1995
---- ---- ----
Revenue ................................................................... $ 242,291 $ 283,159 $ 213,929
Cost of revenue ........................................................... 239,002 278,068 213,398
--------- --------- ---------
Gross profit ......................................................... 3,289 5,091 531
Selling, general and administrative expenses .............................. 19,098 11,619 8,048
Non-cash stock option charge .............................................. -- 26,640 --
--------- --------- ---------
Loss from operations ................................................. (15,809) (33,168) (7,517)
Interest income, net ...................................................... 2,295 1,393 745
--------- --------- ---------
Loss before minority interest ........................................ (13,514) (31,775) (6,772)
Less: minority interest ................................................... (17) (21) --
--------- --------- ---------
Net loss ............................................................. $ (13,497) $ (31,754) $ (6,772)
========= ========= =========
Basic and diluted loss per common ......................................... $ (1.07) $ (3.32) $ (1.43)
========= ========= =========
Weighted average common shares used in computing basic
and diluted loss per share ........................................... 12,620 9,557 4,732
========= ========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
8
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
Retained Total
Additional Earnings Stockholder Stockholders'
Common Paid-In (Accumulated Notes Equity
Stock Capital Deficit) Receivable (Deficit)
-------- -------- -------- -------- ----------
Balance, December 31, 1994 ................................ $ 1 $ -- $ (2,416) $ (1,278) $ (3,693)
Stockholder loans, net ............................... -- -- -- (1,059) (1,059)
Net loss ............................................. -- -- (6,772) -- (6,772)
-------- -------- -------- -------- --------
Balance, December 31, 1995 ................................ 1 -- (9,188) (2,337) (11,524)
Stockholder loans, net ............................... -- -- -- (22) (22)
Stockholder distribution ............................. -- -- (622) 622 --
Net proceeds from initial public offering ............ -- 46,786 -- -- 46,786
Non-cash stock option charge ......................... -- 26,640 -- -- 26,640
Non-employee stock option compensation
expense ............................................ -- 17 -- -- 17
Net loss ............................................. -- -- (31,754) -- (31,754)
-------- -------- -------- -------- --------
Balance, December 31, 1996 ................................ 1 73,443 (41,564) (1,737) 30,143
-------- -------- -------- -------- --------
Stockholder loans, net .................................... -- -- -- 22 22
Exercise of stock options ................................. -- 113 -- -- 113
Non-employee stock option compensation expense ............ -- 29 -- -- 29
Net loss .................................................. -- -- (13,497) -- (13,497)
-------- -------- -------- -------- --------
Balance, December 31, 1997 ................................ $ 1 $ 73,585 $(55,061) $ (1,715) $ 16,810
======== ======== ======== ======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
9
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(In thousands)
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net loss ..................................................................... $(13,497) $(31,754) $ (6,772)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Net loss allocated to minority interest .................................... (17) (21) --
Depreciation and amortization .............................................. 1,091 781 366
Stock option charges ....................................................... 29 26,657 --
Provision for losses on receivables and due from affiliates ................ 501 928 1,977
Changes in assets and liabilities:
Receivables ................................................................ (5,318) (4,551) (4,728)
Prepaid expenses and other current assets .................................. 241 (648) 98
Accounts payable ........................................................... (631) 491 (376)
Deferred Revenue ........................................................... 2,799 -- --
Claims payable ............................................................. 9,701 (2,016) 9,031
Payables to plan sponsors and others ....................................... 665 1,738 2,003
Accrued expenses ........................................................... 1,353 755 (202)
-------- -------- --------
Net cash (used in) provided by operating activities ..................... (3,083) (7,640) 1,397
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment ........................................... (1,575) (870) (802)
Purchase of investment securities ............................................ (27,507) (37,038) --
Purchase of other investments ................................................ (2,300) -- --
Maturities of investment securities .......................................... 41,909 -- --
Stockholder notes receivable, net ............................................ 22 (22) (1,059)
Due from affiliates, net ..................................................... 425 (828) (1,759)
(Increase) decrease in other assets .......................................... (48) (93) 164
-------- -------- --------
Net cash (used in) provided by investing activities ..................... 10,926 (38,851) (3,456)
-------- -------- --------
Cash flows from financing activities:
Principal payments on capital lease obligations .............................. (197) (265) (220)
Proceeds from initial public offering ........................................ -- 46,786 --
Proceeds from exercise of stock options ...................................... 113 -- --
Minority interest investment ................................................. -- -- 1,150
-------- -------- --------
Net cash provided by (used in) financing activities ..................... (84) 46,521 930
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............................ 7,759 30 (1,129)
Cash and cash equivalents--beginning of period .................................. 1,834 1,804 2,933
-------- -------- --------
Cash and cash equivalents--end of period ........................................ $ 9,593 $ 1,834 $ 1,804
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes ............................................................... $ -- $ -- $ 286
======== ======== =========
Interest ................................................................... $ 41 $ 55 $ 31
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
TRANSACTIONS:
Equipment acquired under capital lease obligations ........................... $ 587 $ 527 $ 109
======== ======== ========
Distribution to stockholder through cancellation of
stockholder notes receivable ............................................... $ -- $ 622 $ --
======== ======== =========
The accompanying notes are an integral part
of these consolidated financial statements.
10
MIM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share and per share amounts)
NOTE 1--NATURE OF BUSINESS
Corporate Organization
MIM Corporation was incorporated in Delaware in March 1996 for the purpose
of combining the businesses and operations of Pro-Mark Holdings, Inc., a
Delaware corporation ("Pro-Mark"), and MIM Strategic Marketing, LLC, a Rhode
Island limited liability company ("MIM Strategic"), (the "Formation"). The
Formation was effected in May 1996. Previously, Pro-Mark Drug Benefit Management
Services, LLC, a Rhode Island limited liability company, formed in June 1993
("Pro-Mark DBMS"), had merged into Pro-Mark in April 1994. Pro-Mark is a
wholly-owned subsidiary of MIM Corporation, and MIM Strategic is 90% owned by
MIM Corporation. As used in these notes, the "Company" refers to MIM Corporation
and its subsidiaries and predecessors.
Prior to the Formation, Pro-Mark DBMS, Pro-Mark and Strategic were
controlled by an officer of the Company (See Note 11) and his family who, before
subsequent stock transfers, collectively held a direct or indirect controlling
interest in MIM Corporation. The Formation has been accounted for using the
carryover basis of accounting, and MIM Corporation's consolidated financial
statements include the accounts and operations of the subsidiaries for all
periods presented from the date each entity was formed.
At incorporation, the authorized capital stock of MIM Corporation consisted
of 1,500,000 shares of common stock, $0.001 par value. In May 1996, the
certificate of incorporation of MIM Corporation was amended and restated to
provide for authorized capital stock consisting of 40,000,000 shares of common
stock, $0.0001 par value ("Common Stock"), and 5,000,000 shares of Preferred
Stock, $0.0001 par value. In May 1996, 8,023,800 shares of Common Stock were
issued in connection with the Formation.
In the Formation, MIM Corporation acquired all of the outstanding stock of
Pro-Mark and 90% of the ownership and membership interests in MIM Strategic. In
exchange, Pro-Mark's stockholders received 150 shares of Common Stock of MIM
Corporation for each Pro-Mark share (or an aggregate of 4,500,000 shares of
Common Stock), and certain members of MIM Strategic received an aggregate of
3,523,800 shares of Common Stock for their 90% interest in MIM Strategic. Zenith
Goldline Pharmaceuticals, Inc., a Florida corporation ("Zenith Goldline"), has
held a 10% interest in MIM Strategic since its inception and did not participate
in the Formation.
In the Formation, outstanding stock options granted by Pro-Mark to
employees and key contractors were exchanged for options from MIM Corporation on
substantially similar terms (see Note 8). Except as otherwise indicated, all
stock and stock option amounts (including share, per share par value and
exercise price) pertaining to Pro-Mark DBMS, Pro-Mark and MIM Strategic prior to
the Formation have been restated to reflect the equivalent amounts pertaining to
Common Stock as if the Formation had already occurred.
MIM Strategic was formed in 1995 by MIM Holdings, LLC ("MIM Holdings"),
which is controlled by an officer of the Company (See Note 11) and his family.
MIM Holdings and Zenith Goldline contributed various intangibles and $1,150 in
cash, respectively, to the capital of MIM Strategic in exchange for their 90%
and 10% interests, respectively, in MIM Strategic. No accounting recognition has
been given to the intangibles for financial reporting purposes since their value
is not objectively determinable, and the entire $1,150 of capital contributed by
Zenith Goldline has been presented as minority interest in the accompanying
consolidated balance sheets. Profits and losses of MIM Strategic are allocated
90% to the Company and 10% to Zenith Goldline.
Business
The Company's revenues have been derived primarily from agreements to
provide pharmacy benefit management services to sponsors of public and private
health plans. To date, a majority of the services provided by the Company have
been to sponsors of Tennessee-based plans who have entered into pharmacy benefit
management contracts with RxCare of Tennessee, Inc. ("RxCare"), a subsidiary of
the Tennessee Pharmacists Association, including contracts ("TennCare
contracts") to provide mandated pharmaceutical services to formerly
Medicaid-eligible and uninsured and uninsurable Tennessee residents under the
State's TennCare Medicaid waiver program ("TennCare").
11
Under an agreement with RxCare formalized in March 1994 and thereafter
amended (the "RxCare Contract"), the Company is responsible for operating and
managing RxCare's pharmacy benefit management contracts. In return for receipt
of all sponsor payments due RxCare under its pharmacy benefit management
contracts and all rebates negotiated with pharmaceutical manufacturers in
connection with RxCare programs, the Company implements and enforces the drug
benefit programs, bears all program costs including payments to dispensing
pharmacies and certain payments to RxCare and sponsors, and shares with RxCare
the remaining profit, if any, under the pharmacy benefit management contracts
(see Note 2). The RxCare Contract is scheduled to expire in December 1998 unless
renewed in accordance with its terms.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Capitated Agreements. Certain pharmacy benefit management contracts are
capitated agreements pursuant to which the Company receives a fixed monthly fee
for each member enrolled in a particular health plan. In exchange for this fee,
the Company is obligated to provide covered pharmacy services to plan members.
Typically, capitated agreements have a one-year term and are subject to
automatic renewal unless notice of termination is given. These contracts are
subject to earlier termination upon the occurrence of certain events.
Capitation payments under TennCare contracts are based upon the latest
eligible member data provided by the State of Tennessee. On a monthly basis, the
Company receives payments (and recognizes revenue) for those members eligible
for the current month, plus or minus capitation amounts for those persons
determined to be retroactively eligible or ineligible for prior months under the
contract. The related receivables at December 31, 1997 and 1996 were
approximately $120 and $1,056, respectively. The related capitated revenue for
the years ended December 31, 1997, 1996 and 1995 was approximately $127,477,
$232,395 and $192,625, respectively.
Fee-for-Service Agreements. Certain pharmacy benefit management contracts
are fee-for-service agreements pursuant to which the Company is paid by the plan
sponsor an amount reflecting the cost of a prescription plus a per prescription
service fee. Under these contracts, the Company is obligated to pay network
pharmacies for pharmacy services provided to plan members. The Company
recognizes the cost incurred to pay network pharmacies with its corresponding
fees for service revenue at the time a pharmacy prescription claim is
adjudicated. The related fee-for-service revenue for the years ended December
31, 1997, 1996 and 1995 was approximately $114,654, $49,941 and $16,525,
respectively.
Receivables. Receivables include amounts due from plan sponsors under the
Company's pharmacy benefit management contracts and amounts due from
pharmaceutical manufacturers, which represent rebates resulting from the
distribution of certain drugs through retail pharmacies.
Cost of Revenue. Cost of revenue includes pharmacy claims, fees paid to
pharmacists and other direct costs associated with pharmacy management and
claims processing operations, offset by rebates received from pharmaceutical
manufacturers in connection with the Company's pharmacy management programs.
Rebates are earned in accordance with contractual agreements between the Company
and pharmaceutical manufacturers. For the years ended December 31, 1995, 1996
and 1997, rebates earned net of rebate sharing arrangements on pharmacy benefit
management contracts were approximately $7,141, $7,738 and $13,290,
respectively.
Payables to Plan Sponsors and Others
Certain pharmacy benefit management contracts provide for an income or loss
share with the plan sponsor. The income or loss share is calculated by deducting
all related costs and expenses from revenues earned under the contract. To the
extent revenues exceed costs, the Company records a payable representing the
plan sponsor's share of the profit attributable to that contract, and to the
extent costs exceed revenues the Company records a receivable. Agreements
between RxCare and certain plan sponsors also provide for the sharing of
pharmaceutical manufacturers' rebates with the plan sponsor. The Company is also
obligated to share with RxCare the cumulative profit, if any, under the
Company's agreement with RxCare (see Note 4). The Company estimates that any
difference between the recorded liability on the accompanying consolidated
balance sheets and the ultimate exposure under those contract provisions will
not have a material adverse effect on the consolidated financial statements.
12
Cash and Cash Equivalents
For the purpose of the accompanying consolidated statements of cash flows,
cash and cash equivalents are defined as demand deposits and overnight
investments at banks.
Property and Equipment
The Company provides for depreciation and amortization using the
straight-line method over the estimated useful lives of assets ranging from
three to five years or, in the case of leases, over the life of the lease.
Maintenance and repairs are expensed as incurred.
Long-Lived Assets
The provisions of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121") requires, among other things, that an entity review
its long-lived assets and certain related intangibles for impairment whenever
changes in circumstances indicate that the carrying amount of an asset may not
be fully recoverable. Impairment of long-lived assets exist if, at a minimum,
the future expected cash flows (undiscounted and without interest charges) from
operations are less than the carrying value of those assets. An impairment loss,
if any, would be measured as the amount by which the carrying amount of the
asset exceeds its fair value. Management does not believe that any such change
in circumstances has occurred.
Deferred Revenue
Deferred revenues represent fees received in advance from certain plan
sponsors and are recognized as revenue in the month these fees are earned.
Claims Payable
The Company is responsible for all covered prescriptions provided to plan
members during the contract period. At December 31, 1997 and 1996, certain
prescriptions were dispensed to members for which the related claims had not yet
been presented to the Company for payment. Estimates of $1,858 and $3,296 at
December 31, 1997 and 1996, respectively, have been accrued for these claims in
the accompanying consolidated balance sheets. Unpaid claims incurred and
reported amounted to $20,786 and $10,482 at December 31, 1997 and 1996,
respectively.
The Company entered into several commercial risk-based contract during 1997
(See Note 6) for which future losses are expected. Based on management's
estimate of losses to be incurred the Company has accrued $4,335 at December 31,
1997. The Company also experienced losses on one of the TennCare contracts since
the contract was entered into as of April 1, 1995. RxCare exercised its option
to terminate the contract on March 31, 1997, before its scheduled expiration
date of December 31, 1997. At December 31, 1996 the Company accrued $3,500 to
cover management's estimate of losses to be incurred during the remainder of the
original contract. This amount is included in claims payable in the accompanying
consolidated balance sheets.
Minority Interest
The minority interest in the loss of MIM Strategic is reflected as a
reduction of net loss in the accompanying consolidated statements of operations.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 utilizes the liability method, and deferred taxes are determined
based on the estimated future tax effects of differences between the financial
statement and tax bases of assets and liabilities at currently enacted tax laws
and rates.
Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, investment securities (see Note 3), accounts receivable and
accounts payable. The carrying amounts of cash and cash equivalents, accounts
receivable and accounts payable approximate fair value due to their short-term
nature.
13
Accounting for Stock-Based Compensation
The Company accounts for employee stock based compensation plans and
non-employee director stock incentive plans in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"). Stock options granted
to anyone other than employees and non-employee directors are accounted for in
accordance with Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123") (See Note 8).
Earnings Per Share
Effective for the year ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards, No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 requires the presentation of basic earnings (loss) per
share and diluted earnings (loss) per share. Basic loss per share is based on
the average number of shares outstanding during the year. Diluted loss per share
is the same as basic loss per share as the inclusion of common stock equivalents
would be anti-dilutive. Common shares outstanding and per share amounts reflect
the formation (see Note 1) and are considered outstanding from the date each
entity was formed.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") and No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 130 establishes standards for reporting
comprehensive income and its components. SFAS 131 establishes standards for
reporting financial and descriptive information regarding an enterprise's
operating segments. Both are effective for periods beginning after December 15,
1997. These standards increase financial reporting disclosures and will have no
impact on the Company's financial position or results of operations.
NOTE 3 - INVESTMENT SECURITIES AND OTHER INVESTMENTS
Investment Securities
The Company's marketable investment securities are classified as
held-to-maturity and are carried at amortized cost on the accompanying balance
sheet as of December 31, 1997 and 1996. Management believes that it has the
positive intent and ability to hold such securities to maturity. Amortized cost
(which approximates fair value), of these securities as of December 31, 1997 and
1996 is as follows:
1997 1996
---- ----
Held-to-maturity securities:
U.S. government $ 3,600 $ 1,000
States and political subdivision 295 545
Corporate securities 18,741 35,493
------- -------
Total investment securities $22,636 $37,038
======= =======
The contractual maturities of all held-to-maturity securities at December
31, 1997 are as follows:
Amortized Cost
--------------
Due in one year or less $19,235
Due after one year through five years 3,401
-------
Total investment securities $22,636
=======
Other Investments
On June 23, 1997, the Company, along with other strategic partners, made an
investment in Wang Healthcare Information Systems, Inc. ("WHIS"), a company
engaged in the development, marketing and servicing of PC-based clinical
information systems for physicians and their staff, using patented image-based
technology. The Company purchased 1,150,000 shares of the Series B Convertible
Preferred Stock, par value $0.01 per share, of WHIS (the "WHIS Shares")
representing a minority 8% interest for an aggregate purchase price equal to
$2,300. An executive officer on administrative leave from the Company, assumed
the Company's board seat and was elected Chairman of WHIS. The preferred stock
is not registered on a securities exchange and, therefore, the fair value of
these securities is not readily determinable.
14
NOTE 4--RELATED PARTY TRANSACTIONS
During 1995, the Company advanced RxCare approximately $1,957 to fund the
losses RxCare had incurred in connection with one of its pharmacy benefit
management contracts. Although the Company does not currently intend to seek
repayment of the advance, the Company intends to offset such amount against
future profit sharing amounts, if any, due RxCare under the Company's agreement
with RxCare. As RxCare's revenue is largely dependent upon the Company's results
of operations in Tennessee, the collectibility of this amount is uncertain, and
a full reserve has been recorded against the advance. During October 1996, the
Company advanced approximately $349 directly to individual pharmacies in
Tennessee on behalf of RxCare. This advance was repaid in full in March 1997.
As part of its agreement with RxCare, the Company is obligated to share
with RxCare the Company's cumulative profit, if any, from the RxCare pharmacy
benefit management contracts. No amount was due RxCare for the years ended
December 31, 1997 or 1996.
The Company entered into two three-year contracts with Zenith Goldline in
December 1995. Pursuant to the contract, the Company is entitled to receive fees
based on a percentage of the growth in Zenith Goldline's gross margins from
related sales. Included in due from affiliates at December 31, 1997 and 1996 is
management's estimate of revenues earned under these agreements. At December 31,
1997 the collectibility of the amounts is uncertain and a full reserve has been
recorded against the revenues earned.
During 1996, the Company made short-term advances to MIM Holdings and
Alchemie Properties, LLC ("Alchemie") of $99 and $25, respectively. Alchemie is
controlled by an executive officer of the Company (See Note 11).
Repayments by MIM Holdings and Alchemie through December 31, 1996 were $13
and $25, respectively. The remaining $86 principal amount owed by MIM Holdings
and accrued interest from September 1996 was paid in full at December 31, 1997.
In June 1996, an executive officer of the Company loaned $500 to the
Company for working capital purposes pursuant to an unsecured, 10% promissory
note that was payable upon demand. The loan amount plus $2.5 for interest and
fees was repaid by December 31, 1996.
Other Activities
Pursuant to the RxCare Contract, which expires in December 1998, the
Company makes monthly payments to RxCare to defray the cost of office space and
equipment provided by RxCare on behalf of the Company and to provide RxCare with
cash flow to meet its operating expenses. Expenses under this agreement were
$240 for the years ended December 31, 1997 and 1996 and $140 for the year ended
December 31, 1995. In addition, from November 1995 through October 1996 the
Company paid RxCare $6.5 monthly to cover expenses associated with a regional
cost containment initiative.
In December 1994, the Company entered into a ten-year agreement to lease a
facility from Alchemie. The lease provides for monthly payments of $3 plus real
estate taxes and condominium association fees. Rent expense was approximately
$56, $52 and $60 for the years ended December 31, 1997, 1996 and 1995,
respectively. The Company has expended an aggregate of approximately $513 for
alterations and improvements to this space through December 31, 1997, which upon
termination of the lease will revert to the lessor. The future minimum rental
payments under these agreements are included in Note 6 with the Company's other
operating leases.
Consulting and Service Agreements
In January 1994, the Company entered into consulting agreements with three
minority stockholders of the Company. These agreements expire in 1999 and
provide for payments to be made as services are rendered. No amounts were paid
in 1997, 1996 or 1995.
In January 1994, the Company entered into a consulting agreement with an
officer of RxCare which provided for payments by the Company of $5.5 per month,
and additional compensation as agreed by the parties for special projects,
through December 1996. The Company made no payments in 1997 and $66 in both 1996
and 1995. The Company was reimbursed $225 of the amount paid to such officer and
recorded a reduction of general and administrative expenses.
15
In September 1995, the Company entered into a contract with MIM Holdings to
receive management consulting services in return for monthly payments to MIM
Holdings of $75. Consulting expenses amounted to $225 and $300 for the year
ended December 31, 1996 and 1995, respectively. The contract was terminated on
March 31, 1996.
A professional services agreement was entered into as of January 1, 1996
between MIM Holdings and the Company. Under this agreement, MIM Holdings
provided the Company with operational professional services required to perform
the Company's obligations under a Marketing Services Agreement with Zenith
Goldline (see Note 1), for which the Company paid MIM Holdings $150 in 1996. The
agreement was terminated in May 1996.
Stockholder Notes Receivable
In June 1994, the Company advanced to an executive officer, who has since
resigned as an employee and officer and who has been on administrative leave,
approximately $979 for purposes of acquiring a principal residence, $975 of
which is secured by a first mortgage on the residence. In exchange for the
funds, the Company received two promissory notes, the aggregate outstanding
principal balance of which was $979 and $955 at December 31, 1997 and 1996,
respectively. Originally scheduled to be repaid by June 15, 1997 and bearing
interest at 5.42% per annum payable monthly, the remaining principle balance
currently is due and payable on June 15, 2000 together with 7.125% interest.
Interest income on the notes for the years ended December 31, 1997, 1996 and
1995 was $60, $52 and $55, respectively.
In August 1994, the Company advanced to Alchemie $299 for the purposes of
acquiring a building leased by the Company, of which approximately $280 was
outstanding at December 31, 1997 and 1996. The note bears interest at a rate of
10% per annum with principal due on December 1, 2004. Interest income was $29
for the years ended December 31, 1997, 1996 and 1995.
In December 1995, the Company advanced to MIM Holdings $800 for certain
consulting services to be performed for the Company in 1996. During 1995, the
Company also paid $278 for certain expenses on behalf of MIM Holdings including
$150 for consulting services to MIM Holdings by an officer of RxCare. These
amounts, totaling $1,078, were recorded as a stockholder note receivable at
December 31, 1995. The Company has received a note from MIM Holdings for $456.
As originally written, the note bore interest at 10% per annum, payable
quarterly, with principal due on March 31, 2001. The note was rewritten in
December 1996 to make all interest from January 1, 1996 to September 30, 1997
payable on September 30, 1997. Thereafter, interest will be paid quarterly, in
arrears, until March 31, 2001. The note is guaranteed by an officer of the
Company and further secured by the assignment to the Company of a note in favor
of MIM Holdings in the aggregate principal amount of $100. The remaining balance
of $622 will not be repaid and was recorded as a stockholder distribution during
the first quarter of 1996. The outstanding balance at December 31, 1997 and 1996
was $456 and $502, respectively.
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following at December 31,:
1997 1996
---- ----
Computer and office equipment, including equipment under
capital leases ....................................... $ 4,227 $ 2,794
Furniture and fixtures ................................... 442 364
Leasehold improvements ................................... 540 506
------- -------
5,209 3,664
Less: Accumulated depreciation ........................... (1,710) (1,241)
------- -------
$ 3,499 $ 2,423
======= =======
NOTE 6--COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is currently a third-party defendant in a proceeding in the
Superior Court of the State of Rhode Island. The third-party complaint alleges
that the Company interfered with certain contractual relationships and
misappropriated certain confidential information. The third-party complaint
seeks to enjoin the Company from using the allegedly misappropriated
confidential information and seeks an unspecified amount of compensatory and
consequential damages, interest and
16
attorneys' fees. Although the Company believes that the third-party plaintiffs'
allegations are without merit, the loss of this litigation could have a material
adverse effect on the Company's financial position and results of operations.
Pro-Mark is currently engaged in efforts to recover amounts it believes are
reimbursable from Sierra Health Services, Inc. collectively, on behalf of its
subsidiaries, Sierra Health and Life Insurance Company, Inc., Sierra Healthcare
Options, Inc., Sierra Healthplan of Nevada, Inc. and HMO Texas L.C.
(collectively, "Sierra") under a pharmacy benefit management services agreement
(the "Sierra Agreement") dated as of August 6, 1997, which went into effect on
October 1, 1997. The Company and Sierra disagree with respect to the
interpretation of certain provisions of the Sierra Agreement.
On February 13, 1998, Pro-Mark gave Sierra notice of termination of the
agreement which provided for the termination of the Sierra Agreement 30 days
from the date of such notice and commenced an arbitration of the dispute before
the American Arbitration Association, which the agreement specifies as the sole
forum for resolving disputes arising under the agreement. The terminated date
was extended an additional ten days upon neutral agreement of the parties.
On March 13, 1998, Sierra filed a lawsuit against Pro-Mark in the United
States District Court, District of Nevada. The suit claims Pro-Mark breached the
Sierra Agreement and that Sierra was misled as to the nature of that agreement.
Sierra has asked the court to issue an order preventing Pro-Mark from
terminating the Sierra Agreement under its February 13, 1998 notice of
termination.
In ruling upon Sierra's motion, the court directed that if Sierra elected
to post as $5 million bond in Pro-Mark's favor, a temporary restraining order
would be issued, pending a motion for a preliminary injunction. Sierra elected
to post such bond. The Court will schedule a hearing on Sierra's request for a
preliminary injunction. Pro-Mark is opposing Sierra's request for a preliminary
injunction and is asking the court to refer Sierra's contentions and claims to
the arbitration proceeding before the American Arbitration Association. The
Company believes that it has the right to receive the disputed funds from Sierra
under the Sierra Agreement, and that the Company has the right to terminate the
agreement; however, if the court were to rule in favor of Sierra, and if
Pro-Mark were both unable to terminate the agreement and unable to recover from
Sierra the amounts Pro-Mark claimed were owed, then the Company's business would
be materially adversely affected.
Government Regulation
Various Federal and state laws and regulations affecting the healthcare
industry do or may impact the Company's current and planned operations
including, without limitation, Federal and state laws prohibiting kickbacks in
government health programs (including TennCare), Federal and state antitrust and
drug distribution laws, and a wide variety of consumer protection, insurance and
other state laws and regulations. While management believes that the Company is
in substantial compliance with all existing laws and regulations material to the
operation of its business, such laws and regulations are subject to rapid change
and often are uncertain in their application. As controversies continue to arise
in the healthcare industry (for example, regarding the efforts of plan sponsors
and pharmacy benefit managers to limit formularies, alter drug choice and
establish limited networks of participating pharmacies), Federal and state
regulation and enforcement priorities in this area can be expected to increase,
the impact of which on the Company cannot be predicted. There can be no
assurance that the Company will not be subject to scrutiny or challenge under
one or more of these laws or that any such challenge would not be successful.
Any such challenge, whether or not successful, could have a material adverse
effect upon the Company's financial position and results of operations.
Violation of the Federal anti-kickback statute, for example, may result in
substantial criminal penalties as well as exclusion from the Medicare and
Medicaid (including TennCare) programs. Further, there can be no assurance that
the Company will be able to obtain or maintain any of the regulatory approvals
that may be required to operate its business, and the failure to do so could
have a material adverse effect on the Company's financial position and results
of operations.
Non-Compete Covenant
In connection with his resignation from Zenith Laboratories, Inc. a
manufacturer and distributor of generic drugs ("Zenith"), in January 1996 the
Company's Chief Executive Officer agreed that he would provide consultative
services to Zenith through December 31, 1998 and that, until then, neither he,
nor any business in which he has a direct or indirect
17
interest, will own, manage or be employed or engaged by any business that is
substantially competitive with any material portion of the business of Zenith or
its subsidiaries as conducted in early 1996. Such covenant may restrict the
Company's ability to compete in certain areas including any future drug
distribution business in which the Company may engage.
Employment Agreements
The Company has entered into employment agreements with certain key
employees which expire at various dates through May 2000. Total minimum
commitments under these agreements are approximately as follows:
1998.................................................. $1,088
1999.................................................. 958
2000.................................................. 399
------
$2,445
======
Other Agreements
The Company has two consulting agreements which will require payments of
$300 in the aggregate through 1998. As discussed in Note 4, the Company rents
one of its main facilities from Alchemie. Rent expense for non-related party
leased facilities and equipment was approximately $477, $208 and $116 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Operating Leases
The Company leases its facilities and certain equipment under various
operating leases. The future minimum lease payments under these operating leases
at December 31, 1997 are as follows:
1998 .................................................. $ 584
1999 .................................................. 436
2000 .................................................. 383
2001 .................................................. 378
2002 .................................................. 363
Thereafter ............................................ 272
------
$2,416
======
Capital Leases
The Company leases certain equipment under various capital leases. Future
minimum lease payments under the capital lease agreements at December 31, 1997
are as follows:
1998................................................... $ 292
1999................................................... 292
2000................................................... 292
2001................................................... 267
------
Total minimum lease payments........................... 1,143
Less: amount representing interest..................... 165
------
Obligations under leases............................... 978
Less: current portion of lease obligation......... 222
------
$ 756
=====
NOTE 7--INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 109. Under
SFAS 109, deferred tax assets or liabilities are computed based on the
differences between the financial statement and income tax bases of assets and
liabilities as measured by currently enacted tax laws and rates. Deferred income
tax expenses and benefits are based on changes in the deferred assets and
liabilities from period to period.
18
The effect of temporary differences which give rise to a significant
portion of deferred taxes is as follows as of December 31, 1997 and 1996:
1997 1996
---- ----
Deferred tax assets:
Reserves and accruals not yet deductible for tax purposes $ 3,700 $ 3,327
Net operating loss carryforward ......................... 7,427 2,475
-------- --------
Subtotal ............................................ 11,127 5,802
Less: valuation allowance ............................... (11,196) (5,734)
-------- --------
Total deferred tax assets .................................... (69) 68
-------- --------
Deferred tax liabilities:
Property basis differences .............................. 69 (68)
-------- --------
Total deferred tax liability ................................. 69 (68)
-------- --------
Net deferred taxes ........................................... $ -- $ --
======== ========
It is uncertain whether the Company will realize full benefit from its
deferred tax assets, and it has therefore recorded a valuation allowance. The
Company will assess the need for the valuation allowance at each balance sheet
date.
There is no provision (benefit) for income taxes for the years ended
December 31, 1997 and 1996. A reconciliation to the tax provision (benefit) at
the Federal statutory rate is presented below:
1997 1996
---- ----
Tax benefit at statutory rate..................................... $4,589) $(10,796)
State tax benefit, net of federal taxes .......................... (891) (2,096)
Provision for valuation allowance ................................ 5,460 2,065
Non-deductible executive stock option compensation charge ........ -- 10,816
Other ....................................................... 20 11
------ ------
Recorded income taxes ............................................ $ -- $ --
====== ======
At December 31, 1997, the Company had, for tax purposes, unused net
operating loss carryforwards of approximately $18.3 million that may be
available to offset future taxable income, if any, and which will begin expiring
in 2008. The amount of net operating loss carryforwards which may be utilized in
any one period may become limited by federal income tax requirements if a
cumulative change in ownership of more than 50% occurs within a three year
period.
NOTE 8--STOCKHOLDERS' EQUITY
Public Offering
On August 14, 1996, the Company completed its initial public offering of
4,000,000 shares of Common Stock sold at $13.00 per share. Net proceeds amounted
to $46,786 after offering costs of $1,574.
Stock Option Plans
In 1994, Pro-Mark established the Pro-Mark Holdings, Inc. 1994 Stock Plan
(the "Pro-Mark Plan"). The Pro-Mark Plan provided for, among other awards,
options to employees, contractors and consultants to purchase up to 60,000
shares of Pro-Mark common stock at an option price not less than 100% of the
fair market value of the shares on the grant date. The period during which an
option may be exercised varied, but no option could be exercised after 15 years
from the date of grant. During 1994, options to purchase 560,700 shares of the
Company's Common Stock at $0.0067 per share were granted. During 1995, options
to purchase 2,494,200 shares of the Company's Common Stock at $0.0067 per share
were granted. (See Note 1).
In May 1996, the Company adopted the MIM Corporation 1996 Stock Incentive
Plan (the "Plan"). The Plan provides for the granting of incentive stock options
(ISOs) and non-qualified stock options to employees and key contractors of the
19
Company. Options granted under the Plan generally vest over a three-year period,
but vest in full upon a change in control of the Company or at the discretion of
the Company's compensation committee, and generally are exercisable for from 10
to 15 years after the date of grant subject to earlier termination in certain
circumstances. The exercise price of ISOs granted under the Plan will not be
less than 100% of the fair market value on the date of grant (110% for ISOs
granted to more than a 10% shareholder). If non-qualified stock options are
granted at an exercise price less than fair market value on the grant date, the
amount by which fair market value exceeds the exercise price will be charged to
compensation expense over the period the options vest. The number of shares
authorized for issuance under the Plan, initially 4,000,000, was increased to
4,375,000 in December 1996. At December 31, 1997, 368,369 shares remained
available for grant under the Plan.
As of December 31, 1997 and 1996, the exercisable portion of outstanding
options was 2,004,306 and 2,793,550, respectively. No options were exercisable
at December 31, 1994. Stock option activity under the Plan through December 31,
1997 is as follows:
Average
Options Price
---------- ----------
Balance, December 31, 1994 ................ 552,300 $ 0.0067
Granted .............................. 2,494,200 $ 0.0067
Canceled ............................. (24,600)
---------
Balance, December 31, 1995 ................ 3,021,900 $ 0.0067
Granted .............................. 1,124,902 $ 11.26
Canceled ............................. (46,421)
Exercised ............................ (16,800)
---------
Balance, December 31, 1996 ................ 4,083,581 $ 2.99
Granted .............................. 85,000 $ 9.49
Canceled ............................. (178,750)
Exercised ............................ 1,294,550
---------
Balance, December 31, 1997 ................ 2,695,281 $ 4.21
=== ==== ========= ========
In July 1996, the Company adopted the MIM Corporation 1996 Non-Employee
Directors Stock Incentive Plan (the "Directors Plan"). The purpose of the
Directors Plan is to attract and retain qualified individuals to serve as
non-employee directors of the Company ("Outside Directors"), to provide
incentives and rewards to such directors and to associate more closely the
interests of such directors with those of the Company's stockholders. The
Directors Plan provides for the automatic granting of non-qualified stock
options to Outside Directors joining the Company since the adoption of the
Directors Plan. Each such Outside Director receives an option to purchase 20,000
shares of Common Stock upon his or her initial appointment or election to the
Board of Directors. The exercise price of such options is equal to the fair
market value of the Common Stock on the date of grant. Options granted under the
Directors Plan generally vest over three years. A total of 100,000 shares of
Common Stock are authorized for issuance under the Directors Plan. At December
31, 1997, options to purchase 40,000 shares of Common Stock were outstanding
under the Directors Plan at an exercise price of $13.00 per share, 13,334 of
which were exercisable.
Accounting for Stock-Based Compensation
In May 1996, the then majority stockholder of the Company granted to three
individuals who were unaffiliated with the Company (each of whom became a
director of the Company and two of whom also became officers of the Company)
options to purchase an aggregate of 3,600,000 shares of Common Stock owned by
him at $0.10 per share. These options are immediately exercisable and have a
term of ten years, subject to earlier termination upon a change in control of
the Company, as defined. In connection with these options, under APB 25, for the
year ended December 31, 1996 the Company recorded a nonrecurring, non-cash stock
option charge (and a corresponding credit to additional paid-in capital) of
$26,640, representing the difference between the exercise price and $7.50, the
deemed fair market value of the Common Stock at the date of grant. In January
1998, two of these individuals who are officers of the Company exercised a total
of 3,300,000 of these options.
In July 1996, the then majority stockholder also granted to one of these
individuals an additional option ("additional option") to purchase 1,860,000
shares of Common Stock owned by him at $13 per share. The additional option has
a term of ten years, subject to earlier termination upon a change in control of
the Company, as defined, or within certain specified periods following the
grantee's death, disability or termination of employment for any reason. The
additional option vests in
20
installments of 620,000 shares each on December 31, 1996, 1997 and 1998, and is
immediately exercisable upon the approval of a change in control of the Company,
as defined, by the Company's Board of Directors and, if required, stockholders.
Had compensation cost for the Company's stock option plans for employees
and directors been determined based on the fair value method in accordance with
SFAS 123, the Company's net loss would have been increased to the pro forma
amounts indicated below for the years ended December 31,:
1997 1996 1995
---- ---- ----
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- ---------- ----------- --------- ----------- ---------
Net loss $(13,497) $(14,416) $(31,754) $(32,131) (6,772) $(6,779)
-------- -------- -------- -------- -------- --------
Basic and diluted loss per common share $ (1.07) $ (1.14) (3.32) (3.36) (1.43) (1.43)
-------- -------- -------- -------- -------- --------
Weighed average shares
outstanding 12,620 12,620 9,557 9,557 4,732 4,732
======== ======== ======== ======== ======== ========
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expected in future years.
Pro forma compensation expense for options granted is reflected over the vesting
period, therefore future pro forma compensation expense may be greater as
additional options are granted.
The fair value of each option grant was estimated on the grant date using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
1997 1996 1995
---- ---- ----
Volatility 60% 50% 50%
Risk-free interest rate 5% 5% 5%
Expected life of options 4 years 4 years 4 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
NOTE 9--CONCENTRATION OF CREDIT RISK
The majority of the Company's revenues have been derived from TennCare
contracts pursuant to the RxCare Contract. The following table outlines
contracts with plan sponsors having revenues which individually exceeded 10% of
total revenues during the applicable time period:
Plan Sponsor
--------------------------------------------------------
A B C D
Year ended December 31, 1995
% of total revenue.................................... 30% 45% -- -
% of total accounts receivable at period end.......... * 28% -- -
Year ended December 31, 1996
% of total revenue.................................... 18% 47% 11% -
% of total accounts receivable at period end.......... * 13% 14% -
Year ended December 31, 1997
% of total revenue.................................... 21% 10% 13% 10%
% of total accounts receivable at period end.......... * * * *
- ----------
* Less than 10%.
21
There were no other contracts representing 10% or more of the Company's
total revenue for the years ended December 31, 1997, 1996 and 1995. It is
possible that the State of Tennessee or the Federal government could require
modifications to the TennCare program. The Company is unable to predict the
effect of any such future changes to the TennCare program. Effective April
1,1997, one of the TennCare contracts was terminated which represented 1996
revenues and net losses of $132,846 and $7,321 (including a $3,500 loss
reserve), respectively (see Note 2).
NOTE 10--PROFIT SHARING PLAN
The Company maintains a deferred compensation plan under Section 401(k) of
the Internal Revenue Code. Under the plan, employees may elect to defer up to
15% of their salary, subject to Internal Revenue Service limits. The Company may
make a discretionary matching contribution. The Company made no matching
contributions for the years ended December 31, 1997, 1996 and 1995.
NOTE 11--SUBSEQUENT EVENTS
The Company has entered into an agreement to acquire Continental Managed
Pharmacy, Inc., a Cleveland based pharmacy benefit management company, for
approximately 3.9 million shares of the Company's Common Stock. The acquisition
is subject to shareholder approval and will be treated as a purchase for
accounting and financial reporting purposes.
Effective March 31, 1998, Mr. E. David Corvese, the Vice Chairman and a
director of the Company and an officer and director of certain Company
subsidiaries resigned as an employee and officer of the Company and its
subsidiaries, pursuant to a spearation agreement between Mr. Corvese and the
Company. Under that agreement, he also agreed not to stand for re-election as a
director of the Company at its annual shareholders meeting. Effective January 1,
1998, Mr. Corvese had requested, and was granted, an administrative leave from
his responsibilities with the Company and its subsidiaries. This leave was
requested so that Mr. Corvese could attend to matters of a personal nature. Mr.
Corvese's former responsibilities were allocated among the Company's senior
management.
22
In addition, footnote 1 to the "Option Grants in Last Fiscal Year" Table of
Item 11 - "Executive Compensation" in the Annual Report is hereby amended to add
at the end of such footnote the following:
Effective July 6, 1998, under a company repricing program, Mr. Posner
elected to reprice the exercise price of this option to $6.50 per share. As
a result of the conditions imposed upon such repricing program, the vested
portion of this option became unvested and all 50,000 shares of MIM Common
Stock subject to this option become exercisable in three equal installments
on July 6, 1999, July 6, 2000 and July 6, 2001. The repricing program
offered all employees holding options the right to reprice all outstanding
options held by them on the same terms described above.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has caused this Amendment to
No. 2 Annual Report on Form 10-K/A to be signed on its behalf by the undersigned
thereunto duly authorized.
MIM Corporation
By: /s/ Barry A. Posner
----------------------------
Date: August 4, 1998 Name: Barry A. Posner
Title: Vice President
