FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------- ------------------
Commission file number 0-28740
--------------
MIM CORPORATION
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 05-0489664
- ---------------------------------------- -------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
100 Clearbrook Road, Elmsford, NY 10523
(Address of principal executive offices)
(914) 460-1600
--------------
(Registrant's telephone number, including area code)
------------------------------------------------------------------------
(Former name, former address and former fiscal
year if changed since last report)
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 12 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
On November 1, 2001 there were outstanding 21,477,740 shares of the
Company's common stock, $.0001 par value per share ("Common Stock").
INDEX
PART I FINANCIAL INFORMATION Page Number
- ----------------------------------------------------------------------------------------------------------------------
Item 1 Financial Statements
Consolidated Balance Sheets at September 30, 2001 (unaudited)
and December 31, 2000 1
Unaudited Consolidated Statements of Income for the three and nine
months ended September 30, 2001 and 2000 2
Unaudited Consolidated Statements of Cash Flows for the
nine months ended September 30, 2001 and 2000 3
Notes to the Unaudited Consolidated Interim Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II OTHER INFORMATION 13
Item 1 Legal Proceedings 13
Item 2 Changes in Securities and Use of Proceeds 13
Item 3 Defaults Upon Senior Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 5 Other Information 13
SIGNATURES 14
ii
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
September 30, December 31,
2001 2000
--------------- ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 1,412 $ 1,290
Receivables, less allowance for doubtful accounts of $5,718 and $8,333
at September 30, 2001 and December 31, 2000, respectively 71,059 60,808
Inventory 4,052 2,612
Prepaid expenses and other current assets 1,476 1,680
--------- ---------
Total current assets 77,999 66,390
Property and equipment, net 9,905 10,813
Due from officer 2,108 2,012
Other assets, net 2,366 2,163
Intangible assets, net 39,378 39,023
--------- ---------
Total assets $ 131,756 $ 120,401
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligations $ 581 $ 592
Current portion of long-term debt 0 165
Accounts payable 4,810 2,964
Claims payable 43,476 39,337
Payables to plan sponsors and others 22,306 29,040
Accrued expenses 4,404 5,476
--------- ---------
Total current liabilities 75,577 77,574
Capital lease obligations, net of current portion 1,184 1,621
Other non current liabilities 132 589
Minority interest -- 1,112
Stockholders' equity
Preferred stock, $.0001 par value; 5,000,000 shares authorized,
250,000 Series A junior participating shares issued and outstanding -- --
Common stock, $.0001 par value; 40,000,000 shares authorized,
21,445,405 and 21,547,312 shares issued and outstanding
at September 30, 2001 and December 31, 2000, respectively 2 2
Treasury stock at cost (2,934) (338)
Additional paid-in capital 103,180 97,010
Accumulated deficit (45,385) (56,398)
Stockholder notes receivable -- (771)
--------- ---------
Total stockholders' equity 54,863 39,505
--------- ---------
Total liabilities and stockholders' equity $ 131,756 $ 120,401
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
1
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three months ended Nine months ended
September 30, September 30,
-------------------------------------------------------------------
2001 2000 2001 2000
--------------------------------- ------------------------------
(Unaudited) (Unaudited)
Revenue $ 119,886 $ 76,919 $ 332,773 $ 246,542
Cost of revenue 106,231 67,196 294,047 221,683
--------- --------- --------- ---------
Gross profit 13,655 9,723 38,726 24,859
Selling, general and administrative expenses 9,826 9,164 27,599 22,693
TennCare reserve adjustment (1,496) -- (2,476) --
Amortization of goodwill and other intangible assets 551 391 1,631 905
--------- --------- --------- ---------
Income from operations 4,774 168 11,972 1,261
Interest income (expense), net (43) 15 (27) 729
--------- --------- --------- ---------
Income before taxes 4,731 183 11,945 1,990
Provision for income taxes 409 -- 932 --
--------- --------- --------- ---------
Net income $ 4,322 $ 183 $ 11,013 $ 1,990
========= ========= ========= =========
Basic income per common share $ 0.20 $ 0.01 $ 0.53 $ 0.10
========= ========= ========= =========
Diluted income per common share $ 0.19 $ 0.01 $ 0.51 $ 0.10
========= ========= ========= =========
Weighted average common shares used
in computing basic income per share 21,361 20,551 20,894 19,266
========= ========= ========= =========
Weighted average common shares used
in computing diluted income per share 22,589 20,646 21,624 19,563
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
2
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30, September 30,
--------------------------------
2001 2000
--------------------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 11,013 $ 1,990
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other 5,288 2,233
Provision for losses on receivables 883 237
Issuance of stock to employees 28 --
Changes in assets and liabilities, net of acquired assets:
Receivables (11,134) 9,673
Inventory (1,440) (177)
Prepaid expenses and other current assets 205 (173)
Due from officer (96) (264)
Other assets 100 (898)
Accounts payable 1,846 (2,190)
Claims payable 4,139 (9,456)
Payables to plan sponsors and others (6,734) 4,677
Accrued expenses (1,072) (2,879)
Other non current liabilities (457) 849
-------- --------
Net cash provided by operating activities 2,569 3,622
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (2,281) (4,329)
Stockholder loans, net -- 745
Cost of acquisitions, net of cash acquired (1,987) (19,362)
Purchase of investment securities -- (4,000)
Maturities of investment securities -- 9,033
-------- --------
Net cash (used in) investing activities (4,268) (17,913)
-------- --------
Cash flows from financing activities:
Principal payments on capital lease obligations (448) 121
Repayment of long term debt (165) 1,509
Exercise of stock options 5,030 332
Purchase of treasury stock (2,596) --
-------- --------
Net cash provided by financing activities 1,821 1,962
-------- --------
Net increase (decrease) in cash and cash equivalents 122 (12,329)
Cash and cash equivalents--beginning of period 1,290 15,306
-------- --------
Cash and cash equivalents--end of period $ 1,412 $ 2,977
======== ========
(continued)
The accompanying notes are an integral part of these consolidated financial statements.
3
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(In thousands)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 151 $ 285
======= ======
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Reclassification of stockholder notes to other assets $ 771 $ --
======= ======
Contribution of minority interest to additional paid-in
capital upon dissolution of subsidiary $ 1,112 $ --
======= ======
Equipment acquired under capital lease obligations $ -- $ 292
======= ======
Stock issued in connection with acquisition $ -- $5,035
======= ======
The accompanying notes are an integral part of these consolidated financial statements.
4
MIM CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated interim financial statements of MIM
Corporation and its subsidiaries (collectively, the "Company" or "MIM") have
been prepared pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission (the "Commission"). Pursuant to such rules and regulations,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. In the opinion of the Company's management, all
adjustments considered necessary for a fair presentation of the financial
statements, primarily consisting of normal recurring adjustments, have been
included. The results of operations and cash flows for the nine months ended
September 30, 2001, are not necessarily indicative of the results of operations
or cash flows, which may be reported for the remainder of 2001.
These unaudited consolidated interim financial statements should be read in
conjunction with the Company's audited consolidated financial statements, notes
and information included in the Company's Annual Report on Form 10-K (the "Form
10-K") for the fiscal year ended December 31, 2000, filed with the Commission.
The accounting policies followed for interim financial reporting are the
same as those disclosed in Note 2 to the consolidated financial statements
included in the Form 10-K.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic earnings per share
and diluted earnings per share:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------
2001 2000 2001 2000
----------- ----------- ------------ ---------
Numerator:
Net income .......................... $ 4,322 $ 183 $11,013 $ 1,990
======= ======= ======= =======
Denominator - Basic:
Weighted average number of common
shares outstanding .................. 21,361 20,551 20,894 19,266
======= ======= ======= =======
Basic income per share .............. $ 0.20 $ 0.01 $ 0.53 $ 0.10
======= ======= ======= =======
Denominator - Diluted:
Weighted average number of common
shares outstanding ............... 21,361 20,551 20,894 19,266
Common share equivalents of outstanding
stock options .................... 1,228 95 730 297
------- ------- ------- -------
Total shares outstanding ............ 22,589 20,646 21,624 19,563
======= ======= ======= =======
Diluted income per share ............ $ 0.19 $ 0.01 $ 0.51 $ 0.10
======= ======= ======= =======
NOTE 3 - MINORITY INTEREST
On June 28, 2001, the Company dissolved MIM Strategic Marketing, LLC
("Strategic"), a joint venture of which the Company was the majority investor.
The Company does not have any repayment obligation to the
5
minority interest investor under Strategic's operating agreement or under the
laws of the state of its formation. As a result of this dissolution the minority
interest balance of $1,112 has been reclassified to additional paid in capital.
NOTE 4 - STOCKHOLDER NOTES RECEIVABLE
In March 2001, the Company reclassified stockholders notes receivable of
approximately $771 from a reduction of stockholders' equity to other assets.
Although the loans did not originate from the issuance of, or were otherwise
collateralized by, the Company's equity securities, the Company initially
classified the promissory notes in equity due to the nature of the borrowers'
relationship to the Company at the time of the notes' origination. At that time,
the borrowers were affiliated (through common ownership) with an individual (the
"Founder") who was the President and majority stockholder of the Company. As
such, the borrowers and the Company were entities under common control at that
time and the promissory notes were therefore treated as equity. That stockholder
is no longer an officer, director or majority stockholder of the company and
accordingly, the borrowers and the Company are no longer considered to be
entities under common control.
NOTE 5 - TREASURY STOCK
In February 2001, the Company repurchased 1,298,183 shares of the Company's
common stock for $2,596, at a price of $2.00 per share.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
In 1998, the Company recorded a $2,200 special charge against earnings in
connection with an agreement in principle with respect to a civil settlement of
a Federal and State of Tennessee investigation in connection with conduct
involving, among others, two former officers of the Company occurring prior to
the Company's August 1996 initial public offering. The definitive agreement
covering that settlement was executed on June 15, 2000, and required payment of
$775 in 2000, payment of $900 in 2001, and payment of $525 in 2002. $750 and
$1,425 were outstanding at September 30, 2001 and December 31, 2000,
respectively, and are included in accrued expenses.
The Company's liquidity, facilities and overall financial condition were
not affected by the terrorist attacks against the United States on September 11,
2001. The Company's primary operational systems functioned throughout the
crisis. The attack has already caused, and may continue to cause, additional
weakness in the business and economic environment. Management will continue to
evaluate the effect of these events on the Company's fourth quarter results of
operations.
NOTE 7 - ACQUISITIONS
On August 4, 2000, the Company, acquired all of the issued and outstanding
membership interests of American Disease Management Associates, L.L.C., a
Delaware limited liability company ("ADIMA"). The aggregate purchase price
approximated $24,000, and included $19,000 in cash and 2,700 shares of MIM
common stock valued at the time of the acquisition at $5,000.
On May 1, 2001, the Company acquired Community Prescription Services'
("CPS") for $1,500. The acquisition was treated as a purchase for financial
reporting purposes. The Company recorded intangible assets in connection with
that acquisition which will be amortized over three to seven years. Operating
results of CPS, which are included in the accompanying statement of income from
the date of acquisition, were not material to the results of operations for the
nine months ended September 30, 2001.
ADIMA Pro Forma Financial Information
The following unaudited consolidated pro forma financial information for
the three and nine months ended September 30, 2000, has been prepared assuming
ADIMA was acquired as of January 1, 2000, with pro forma adjustments for
amortization of goodwill and interest income. The pro forma financial
information is presented for informational purposes only and is not necessarily
indicative of the results that would have been realized had the
6
acquisition occurred on January 1, 2000. In addition, this pro forma financial
information is not intended to be a projection of future operating results.
Pro forma Income Statement
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, 2000 September 30, 2000
--------------------- -------------------
Revenues $ 78,909 $ 257,092
Net income 965 3,814
Basic income per common share 0.04 0.18
Diluted income per common share 0.04 0.17
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
In January 2001, the Company adopted Emerging Issues Task Force Issue No.
00-22 ("EITF 00-22"), "Accounting for `Points' and Certain Other Time-Based or
Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to
Be Delivered in the Future". EITF 00-22, states, among other things, that
rebates received from pharmaceutical manufacturers should be recognized as a
reduction of revenue. Prior to adoption of EITF 00-22, the Company recorded the
difference between the net rebates received and the rebates shared with
customers as a reduction of cost of revenue. The adoption of EITF 00-22 required
the Company to classify $4,450 and reclassify $8,183 of rebates shared as
reductions of revenue for the three-month periods ended September 30, 2001 and
2000, respectively. For the nine-month periods ended September 30, 2001 and
2000, $19,449 and $23,353 of rebates shared were classified as reductions of
revenue.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets," which establishes accounting
and reporting standards governing business combinations, goodwill and intangible
assets. SFAS No. 141 requires all business combinations initiated after June 30,
2001, to be accounted for using the purchase method. SFAS No. 142 states that
goodwill is no longer subject to amortization over its estimated useful life.
Rather, goodwill will be subject to at least an annual assessment for impairment
by applying a fair-value based test. Under the new rules, an acquired intangible
asset should be separately recognized and amortized over its useful life (unless
an indefinite life) if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented or exchanged regardless of the acquirer's intent
to do so. The Company is required to adopt these standards on January 1, 2002,
until which time the Company will continue to amortize its existing goodwill and
intangible assets. The Company has not determined the impact that the adoption
of these standards will have on future financial statements.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses
financial accounting and reporting obligations associated with
7
the retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 is effective for fiscal years beginning after June 14, 2002.
The Company does not expect that the adoption of SFAS No. 143, which is
effective for the Company as of January 1, 2003, will have any effect on its
results of operations, financial position or cash flows.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which is
effective for fiscal years beginning after December 15, 2001, and addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This statement supersedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. The
company plans to adopt the standard at the beginning of 2002, and does not
expect that the adoption of SFAS No. 144 will have any effect on its results of
operations, financial position or cash flows.
NOTE 9 - RECLASSIFICATIONS
Certain amounts in the 2000 financial statements have been reclassified to
conform to current year presentation.
* * * *
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following management's discussion and analysis should be read in
conjunction with the consolidated financial statements of MIM Corporation and
its subsidiaries (collectively, "MIM" or the "Company"), the related notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000 filed with the U.S. Securities and
Exchange Commission (the "Commission") (the "Form 10-K"), as well as the
Company's unaudited consolidated interim financial statements and the related
notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 2001, filed with the Commission (this
"Report").
This Report contains statements not purely historical and which may be
considered forward looking statements within the meaning of Section 27A of the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), including statements regarding the Company's
expectations, hopes, beliefs, intentions or strategies regarding the future.
Forward looking statements may include statements relating to the Company's
business development activities, sales and marketing efforts, the status of
material contractual arrangements and expenditures associated with one or more
of these relationships, the effects of regulation and competition on the
Company's business, future operating performance and the results, 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, and 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, the status of contract
negotiations, increased governmental regulation related to the healthcare 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 provides integrated pharmaceutical related healthcare benefits to its
client groups, which include managed care organizations, insurance carriers,
unions, government agencies, employers, third party administrators and other
funded plan sponsors. The Company's comprehensive pharmaceutical benefit
management ("PBM") services include the delivery of pharmaceutical products
through a contracted network of retail pharmacies and other distribution
facilities, including the Company's pharmacy dispensing facilities, pharmacy
claims processing, benefit design consultation, drug utilization review,
formulary management, drug data analysis and rebate administration. As part of
the Company's PBM services, it offers innovative BioScrip(TM) specialty
injectable and infusion therapy programs. MIM performs these PBM services using
clinically sound guidelines to ensure cost control while maintaining the highest
quality care for its clients. The Company's organization and programs are
clinically oriented, with many staff members having pharmaceutical
certification, training and experience.
Business
The Company derives its revenues primarily from agreements to provide PBM
services, which includes prescription mail service to the members of health plan
sponsors in the United States, as well as specialty pharmacy services to
chronically ill or genetically impaired patients that require injection or
infusion therapies, and infusion therapies and home healthcare products and
services to patients recently discharged from hospitals.
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 September 30, 2001, the
Company provided PBM services to 133 health plan sponsors with an aggregate of
approximately 8.2 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 31.6% of the
Company's revenues at September 30, 2001, compared to 42.5% of the Company's
revenues at September 30, 2000.
9
Results of Operations
Three months ended September 30, 2001 compared to three months ended September
30, 2000
Revenues for the quarter were up 55.9% to $119.9 million compared with
$76.9 million for the third quarter a year ago. The increase is primarily
related to more lives under contract compared to 2000, as well as a full quarter
of operations from ADIMA in 2001. For the three months ended September 30, 2001,
20.3% of the Company's revenues were generated from capitated contracts,
compared to 30.3% for the same period in 2000.
Cost of revenue for the three months ended September 30, 2001, was $106.2
million, compared with $67.2 for the same period in 2000, an increase of $39.0
million. Cost of revenue increased as a result of higher PBM and mail order
costs because of increases in contracted lives and the inclusion of ADIMA's
operations. Gross margins as a percentage of revenue totaled 11.4% for the three
months ended September 30, 2001 compared to 12.6% for the same period in 2000.
The gross profit percentage decline was the result of revenue growth coming
primarily from the PBM business, which is historically a lower margin business.
Selling, general and administrative expenses were $9.8 million for the
three months ended September 30, 2001, or 8.2% of revenue, compared to $9.2
million for the three months ended September 30, 2000 or 11.9% of revenue. This
increase of $0.6 million was primarily the result of the inclusion of a full
quarter of ADIMA's operating expenses in 2001, (as opposed to a partial quarter
of results for 2000, the year ADIMA was acquired), as well as the hiring of
additional key management personnel in the third quarter of 2001.
For the three months ended September 30, 2001, the Company recorded
amortization of goodwill and other intangibles of $0.6 million compared to $0.4
million for the same period in 2000. This increase primarily reflects
amortization related to the increase of goodwill associated with the acquisition
of ADIMA in August 2000.
The TennCare(R) reserve adjustment for the three months ended September 30,
2001 was approximately $1.5 million resulting from the collection of receivables
from Xantus Healthplans of Tennesee, Inc. ("Xantus") and the adjustment of
related reserves provided for in prior years.
Tax expense for the three months ended September 30, 2001, was $0.4 million
compared to zero for the same period last year. In 2001, the Company will be
obligated to pay state taxes. In 2000, NOL's were available to cover state tax
obligations.
For the three months ended September 30, 2001, the Company recorded net
income of $4.3 million or $0.19 per diluted share. This compares with net income
of $0.2 million, or $0.01 per diluted share for the three months ended September
30, 2000.
Earnings before interest, taxes, depreciation and amortization was $6.6
million for the three-month period ended September 30, 2001, compared to $1.6
million for the three-month period ended September 30, 2000.
Nine months ended September 30, 2001 compared to nine months ended September 30,
2000
Revenues for the nine months ended September 30, 2001, increased 35.0% to
$332.8 million compared to $246.5 million for the same period a year ago. The
increase is primarily due to more lives under contract, as well as the inclusion
of a full nine months of consolidated operating performance for ADIMA. For the
nine months ended September 30, 2001, 24.1% of the Company's revenues were
generated from capitated contracts, compared to 34% for the same period in 2000.
Cost of revenue for the nine months ended September 30, 2001, was $294.0
million, compared to $221.7 million for the same period in 2000, an increase of
$72.3 million. Cost of revenue increased as a result of higher PBM and mail
order costs because of increases in contracted lives and the inclusion of
ADIMA's operations. These increases were partially offset by a decrease in costs
of revenue as a result of additional rebates received in the first quarter of
2001 for prior years. Gross margin as a percentage of revenue totaled 11.6% for
the nine months ended September 30, 2001 compared to 10.1% for the same period
in 2000. Gross margins were positively impacted by lower pharmaceutical
utilization on the Company's capitated contracts.
10
Selling, general and administrative expenses were $27.6 million for the
nine months ended September 30, 2001, or 8.3% of revenue, compared to $22.7
million for the nine months ended September 30, 2000, or 9.2% as a percentage of
revenue. These increases were primarily the result of the Company's increased
operating expenses as a result of its acquisition of ADIMA in August 2000 and
increased sales and marketing expenses.
The TennCare(R) reserve adjustment for the nine months ended September 30,
2001, includes approximately $1.0 million resulting from a settlement with
Tenncare Health Partnership during the first quarter of 2001 and approximately
$1.5 million resulting from the collection of receivables from Xantus and the
adjustment of related reserves provided for in prior years.
For the nine months ended September 30, 2001, the Company recorded
amortization of goodwill and other intangibles of $1.6 million compared to $0.9
million for the same period in 2000. This increase primarily reflects the
inclusion of goodwill associated with the acquisition of ADIMA in August 2000.
Interest income, net, decreased by $0.8 million for the nine months ended
September 30, 2001 compared to the nine months ended September 30, 2000,
primarily due to the excess cash on hand in 2000 which was used to acquire ADIMA
during the third quarter of 2000.
For the nine months ended September 30, 2001, the Company recorded net
income of $11.0 million or $0.51 per diluted share as compared to $2.0 million,
or $0.10 per diluted share for the same period a year ago.
Earnings before interest, taxes, depreciation and amortization was $17.3
million for the nine months ended September 30, 2001, and $4.7 million for the
nine months ended September 30, 2000 an increase of $12.6 million.
Liquidity and Capital Resources
The Company utilizes both funds generated from operations and funds
available to it under the Facility (as defined below) for capital expenditures
and other working capital needs. For the nine months ended September 30, 2001,
net cash generated by the Company from operations totaled $2.6 million. This was
primarily due to net income of $11.0 million, partially offset by an increase in
receivables, an increase in claims payable and a decrease in payables to plan
sponsors and others for rebates. Receivables and claims payables have increased
as a result of higher revenues from increased business in the first three
quarters of 2001.
Net cash used in investing activities was $4.3 million. The Company
purchased property and equipment equal to approximately $2.3 million, which
included the final payment for the automation system at the mail service
facility. In addition, $1.5 million was used to pay for the acquisition of CPS.
For the nine months ended September 30, 2001, net cash provided by
financing activities was $1.8 million. These proceeds were principally from the
exercise of stock options by Company employees. This was partially offset by the
repurchase of a number of the Company's shares, in private transactions.
At September 30, 2001, as a result of the comments above the Company had
working capital of $2.4 million compared to a working capital deficit of $11.2
million at December 31, 2000.
On November 1, 2000, the Company entered into a $45 million revolving
credit facility (the "Facility") with HFG Healthco-4 LLC, an affiliate of
Healthcare Finance Group, Inc. ("HFG"), to be used for working capital purposes
and future acquisitions. The Facility replaced the Company's existing credit
facilities with its former lenders. The Facility has a three-year term and is
secured by the Company's receivables. Interest is payable monthly and provides
for borrowing of up to $45 million at the London Inter-Bank Offered Rate (LIBOR)
plus 2.1%. In connection with the issuance of the Facility, the Company incurred
financing costs of $1.6 million which are included in other assets and are being
amortized over the term of the Facility. The Facility contains various covenants
that, among other things, require the Company to maintain certain financial
ratios, as defined in the agreements governing the Facility. As of September 30,
2001, there are no amounts outstanding under this Facility.
The Company's liquidity, facilities and overall financial condition were
not affected by the terrorist attacks against the United States on September 11,
2001. The Company's primary operational systems functioned throughout the
crisis. The attack has already caused, and may continue to cause, additional
weakness in the business and economic environment. Management will continue to
evaluate the effect of these events on the Company's fourth quarter results of
operations.
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. Management does not
presently believe that there are any current matters of a material nature,
threatened or pending, which could have a material adverse effect on the
liquidity, financial position or results of operations of the Company.
11
At December 31, 2000, the Company had, for federal tax purposes, unused net
operating loss carryforwards of approximately $44.2 million, which will begin
expiring in 2009. As it was uncertain whether the Company would realize the full
benefit from these carryforwards, the Company has recorded a valuation allowance
equal to the deferred tax asset generated by the carryforwards. In 1998, the
company underwent 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 existing at the time
of the "change in control" totaled approximately $34.8 million, which are
subject to a limitation as a result of this change. The annual limitation is
approximately $2.7 million. Actual utilization in any year will vary based on
the Company's tax position in that year. In 2001, the company only recorded a
provision for alternative minimum federal income taxes as a result of the
Company's existing net operating loss carryforwards.
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 or available credit under the Facility to fund the
Company's anticipated working capital and other cash needs for at least the next
12 months. The Company also may pursue joint venture arrangements, business
acquisitions and other transactions designed to expand its businesses, which the
Company would expect to fund from cash on hand, the Facility, other future
indebtedness or, if appropriate, the sale or exchange of equity securities of
the Company.
Other Matters
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 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 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. The Company has not experienced
material adverse affects from this new rule.
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 winter months. The resulting increase in
pharmaceutical costs impacts the profitability of capitated contracts. Capitated
business represented approximately 20.3% of the Company's revenues while
fee-for-service business (including mail order services and specialty)
represented approximately 79.7% of the Company's revenues for the three months
ended September 30, 2001 as compared to 30.3% and 69.7% for the three months
ended September 30, 2000, 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 12.8% of its revenues in fiscal 2001
will be derived from capitated arrangements.
12
On October 18, 2001, the State of Tennessee seized the assets of Access
MedPlus, one of the TennCare(R) MCOs for which the Company performed PBM
services. As a result, the State transferred the lives managed by Access MedPlus
and serviced by the Company into the State's ASO program, TennCare Select, the
interim program into which TennCare lives are placed prior to the re-enrollment
or involuntary placement of such lives with one or more of the other TennCare(R)
MCOs. Access MedPlus has filed several lawsuits against the State to prevent the
liquidation of the plan and reacquire its assets, including its lives under
management. The ultimate outcome of these lawsuits is unknown at this time. In
the event that these lawsuits are ultimately unsuccessful, the Company believes
that, through voluntary re-enrollment or involuntary placement with other
TennCare MCO's for which it currently performs PBM services, it will reacquire
at least one-half of the former Access MedPlus lives that it serviced prior to
the State's seizure, although the Company anticipates that the contracts
relating to such reacquired lives may be less profitable. There can be no
assurance that a substantial number of such former Access MedPlus members will
be reenrolled or placed with MCOs for which the Company currently provides PBM
services. The Company is currently unable to determine the impact of the State
seizure of Access MedPlus on its operations and results due to, among other
things, the uncertain outcome of the lawsuits and the re-enrollment process. The
failure to reacquire a substantial portion of the former Access MedPlus lives
through re-enrollment or involuntary transfer or to otherwise offset the
transfer of the Access MedPlus lives through the addition of other lives or
reduction of related expenses would have a material adverse affect on the
Company's results of operations.
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 from plan sponsors. The greater
proportion of fee-for-service contracts with the Company's customers in 2001 as
compared to prior years mitigates the potential adverse effects of any such
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 is authorized to repurchase up to $5
million of the Company's Common Stock from time to time on the open market or in
private transactions. To date, the Company has used, in the aggregate,
approximately $2,596,000 towards the repurchase of its Common Stock under this
program.
* * * *
13
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. None.
(b) Reports on Form 8-K
The Company filed no current reports on Form 8-K during the three
months ended September 30, 2001.
* * * *
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on November 14, 2001.
MIM CORPORATION
Date: November 14, 2001 /s/ Donald Foscato
-------------------
Donald Foscato
Chief Financial Officer
15