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FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] AMENDMENT NO. 1 TO QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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 it charter)
Delaware 05-0489664
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Blue Hill Plaza, Pearl River, New York 10965
(Address of principal executive offices)
(914) 735-3555
(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 July 30, 1998, there were outstanding 13,822,000 shares of the Company's
$0.0001 per value per share common stock ("Common Stock").
MIM Corporation's ("MIM" or the "Company") Quarterly Report on Form 10-Q
(the "Quarterly Report") for the period ended March 31, 1998 is hereby amended
as follows:
Item 1, "Financial Statements," in the Quarterly Report is hereby amended
to delete Note 3 and to add Notes 3 and 4 as follows:
NOTE 3- OTHER COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" ("SFAS 130") for the three months ended March
31, 1998. There were no transactions during this period that would be required
to be reported as a component of other comprehensive income.
NOTE 4- SUBSEQUENT EVENTS
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 PBM Services Agreement (the "Sierra Agreement") with the Company. As
disclosed in the Company's Form 10-K, this dispute related to the parties'
divergent interpretations 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 and the American Arbitration Association. 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. The Company
continues to provide pharmacy benefit management services to Sierra under the
Sierra Agreement.
Effective May 15, 1998, Mr. John H. Klein, then the Company's Chief
Executive Officer, Chairman of the Board of Directors and a director, resigned
from such positions with the Company. Effective on that date, Mr. Richard H.
Friedman, the Company's Chief Operating Officer, Chief Financial Officer and a
director through May 15, 1998, succeeded Mr. Klein as the Company's Chief
Executive Officer. Mr. Scott R. Yablon, then a director of the Company, joined
the Company as an employee on May 1, 1998, and effective May 15, 1998, assumed
the titles of President, Chief Financial Officer and Chief Operating Officer of
the Company.
Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," in the Quarterly Report is hereby amended and restated
and replaced in its entirety as follows:
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements, the related Notes to the Consolidated
Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Form 10-K as well as the
unaudited consolidated interim financial statements and the related notes to the
unaudited consolidated interim financial statements included in Item 1 of this
Report.
Certain statements contained in this report are not purely historical and
are considered forward looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended (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, intentions or
strategies regarding the future, as well as statements which are not historical
fact. Forward looking statements may include statements relating to business
development activities, future capital expenditures, the effects of regulation
and competition on the Company's business, future operating performance of the
Company and the results and/or effect of legal proceedings or investigations
and/or the resolution or settlement thereof. Investors are cautioned that any
such forward looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those in the forward looking statements as a result of various factors.
These factors include, among other things, risks associated with capitated
(i.e., risk-based) contracts, increased government regulation related to the
health care industry in general and more specifically, pharmacy benefit
management organizations, increased competition from the Company's competitors,
including competitors which are vertically integrated with pharmaceutical
manufacturers, and the existence of complex laws and regulations relating to the
Company's business. This Report and the Form 10-K contain information regarding
important factors which could cause such differences.
Overview
A majority of the Company's revenues to date have been derived from
operations in the State of Tennessee in conjunction with RxCare of Tennessee,
Inc. ("RxCare"), a pharmacy services administrative organization owned by the
Tennessee Pharmacists Association. The Company assisted RxCare in defining and
marketing pharmacy benefit services to private health plan sponsors on a
consulting basis in 1993, but did not commence substantial operations until
January 1994 when RxCare began servicing health plan sponsors involved in the
newly instituted TennCare(R) state health program. At March 31, 1998, the
Company provided pharmacy benefit management services to 46 health plan sponsors
with an aggregate of approximately 1.9 million plan members. TennCare(R)
represented 1.2 million members.
Results of Operations
Three months ended March 31, 1998 compared to three months ended March 31, 1997
For the three months ended March 31, 1998, the Company recorded revenue of
$98.0 million compared with revenue of $70.8 million for the three months ended
March 31, 1997, an increase of $27.2 million. $17.6 million of the increase
resulted from servicing 14 new plans covering approximately 490,000 lives
throughout the United States as well as increased enrollment in existing
commercial plans. Sierra, enrolled in October 1997, accounted for $10.0 million
of the increased commercial revenue. TennCare(R) sponsors were responsible for
an additional $9.6 million increase of revenue. In the last quarter of 1997, the
Company entered into new contracts with two TennCare(R) managed care
organizations to which the Company previously provided pharmacy benefit
management services. These new contracts increased revenues by $17.1
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million. In addition, favorable contract renegotiations and increased enrollment
in other existing TennCare(R) sponsors increased revenues by $18.4 million.
These increases in TennCare(R) revenues were partially offset by a decrease of
$25.9 million from the restructuring in April 1997 of a major TennCare(R)
contract (as discussed below). The contract was restructured from a risk-based
(capitated) arrangement to a non-risk (fee-for-service) arrangement, although
the Company continued to provide essentially the same services under the
restructured contract. During the three months ended March 31, 1998,
approximately 39% of the Company's revenues were generated from risk (capitated)
contracts, compared to 68% during the three months ended March 31, 1997.
Cost of revenue for the quarter ended March 31, 1998 increased to $92.4
million from $66.8 million for the quarter ended March 31, 1997, an increase of
$25.6 million. New commercial contracts together with increased enrollment in
existing commercial plans resulted in $18.4 million of such increases in cost of
revenue. Such increase includes costs of $10.1 million resulting from the Sierra
Agreement TennCare(R) contracts contributed $7.2 million of increased cost of
revenue. Costs relating to TennCare(R) contracts increased by $32.7 million due
to the two new TennCare(R) contracts referred to above ($16.5 million) and
eligibility increases in existing plans, increased drug prices, and increased
utilization of prescription drugs ($16.2 million). These costs were offset by
the above-mentioned restructuring of a major TennCare(R) contract, which
resulted in a decrease in cost of revenue of $25.5 million. As a percentage of
revenue, cost of revenue was 94.3% for the three months ended March 31, 1998
compared to 94.4% for the three months ended March 31, 1997.
At December 31, 1997, a reserve of $4.1 million was established for the
anticipated losses on the Sierra Agreement. These losses resulted from
unfavorable factors, including higher pharmacy utilization rates than contained
in Sierra's historic claims data, higher than expected inflation in drug costs
and the inability to restrict the formularies under certain Sierra plans,
resulting in higher than anticipated drug costs. For the three months ended
March 31, 1998, $2.6 million of this $4.1 million reserve was utilized.
Management believes that the remaining reserve is adequate to cover any further
losses under the Sierra Agreement.
Selling, general and administrative expenses were $4.5 million for the
three months ended March 31, 1998 compared to $3.9 million for the three months
ended March 31, 1997, an increase of 15%. The additional $.6 million reflects an
increase in the Company's revenue along with a continuing commitment to enhance
its ability to manage efficiently pharmacy benefits by investing in additional
operational and clinical personnel and information systems to support new and
existing customers. In addition, the Company experienced an increase in legal
fees. As a percentage of revenue, selling, general and administrative expenses
decreased to 4.5% for the three months ended March 31, 1998 from 5.5% for the
three months ended March 31, 1997.
For the three months ended March 31, 1998, the Company recorded interest
income of $.5 million compared with $.6 million for the three months ended March
31, 1997, a decrease of $.1 million. The decrease resulted from a lower level of
invested funds in the first quarter of 1998 compared to the first quarter of
1997. The level of invested funds decreased due to the operating needs of the
Company.
For the three months ended March 31, 1998, the Company recorded net income
of $1.6 million, or $.12 per basic share. This compares with net income of $.7
million, or $.06 per basic share, for the three months ended March 31, 1997.
This decrease is due largely to the above-described changes in revenue and cost
of revenues.
Accounts receivable increased approximately $11.0 million (from $23.7
million to $34.7 million) from December 31, 1997 to March 31, 1998. This
increase resulted primarily from a proportionate increase in pharmacy benefit
management business during the period. In addition, the timing of billing and
collection for cetain TennCare clients previously being processed by an outside
vendor changed after the Company began processing these claims in-house. This
transition initially caused a delay in billing and collections for these
clients.
Liquidity and Capital Resources
For the three months ended March 31, 1998, net cash used in operating
activities totaled $9.5 million, primarily due to increases in receivables of
approximately $11.1 million resulting from increased revenues from both the
TennCare(R) and commercial contracts. Such uses were partially offset by
increases in claims payables of approximately $2.5 million. Investing activities
provided $5.8 million in cash due primarily to the proceeds from maturities of
investment securities of approximately $10.3 million, offset by the purchase of
new investment securities of approximately $4.0 million. The
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Company purchased $.5 million of property and equipment with cash on hand,
primarily to upgrade and enhance information systems necessary to strengthen and
support the Company's ability to manage better its customers' pharmacy benefits
programs. The Company did not have any additional material commitments for
capital expenditures as of December 31, 1997.
At March 31, 1998, the Company had working capital of $13.0 million,
compared to $9.3 million at December 31, 1997. Cash and cash equivalents
decreased to $5.8 million at March 31, 1998 compared with $9.6 million at
December 31, 1997. The Company had investment securities held to maturity of
$16.3 million and $22.6 million at March 31, 1998 and December 31, 1997,
respectively. With the exception of the Company's $2.3 million preferred stock
investment in Wang Healthcare Information Systems, Inc. ("WHIS"), the Company's
investments are primarily corporate debt securities rated A or better and
government securities. In June 1997, the Company invested $2.3 million in the
preferred stock of WHIS, a company engaged in the development, sales and
marketing of PC-based information systems for physicians and their staff, using
image-based technology.
At March 31, 1998, 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 uncertain whether the Company will realize the full benefit from
its deferred tax asset, 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 in 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 its initial public offering (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.
The Company intends to offset, against profit sharing amounts, if any, due
RxCare in the future under the Company's contract with RxCare, approximately
$4.9 million, representing RxCare's share of the Company's cumulative losses and
amounts previously advanced or paid to RxCare, as of March 31, 1998.
As part of its continued efforts to expand its pharmacy 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 management business,
which the Company would expect to fund from cash on hand or future indebtedness
or, if appropriate, the sale or exchange of equity securities of the Company.
Other Matters
The Company's pharmaceutical claims costs historically have been subject to
a significant increase over annual averages from October through February, which
the Company believes is due to increased medical problems during the colder
months. Currently, non-risk contracts represented 61% of the Company's revenue
for the quarter ended March 31, 1998. Under non-risk contracts, seasonally
higher utilization no longer materially adversely effects the Company's gross
margin.
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 increased
rates.
The TennCare(R) program has been controversial since its inception and has
generated federal and state government investigations and adverse publicity.
There can be no assurances that the Company's association with the TennCare(R)
program will not adversely affect the Company's business in the future.
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 Managed Pharmacy Services, Inc. ("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
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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.
On April 14, 1998, the Company resolved its dispute with certain
subsidiaries of Sierra. As disclosed in the Company's Form 10-K, this dispute
related to the parties' divergent interpretations 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 and the American Arbitration Association. 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 the
Sierra Agreement. The Company continues to provide pharmacy benefit management
services to Sierra under the Sierra Agreement for such 90-day period ending
August 6, 1998.
Effective May 15, 1998, John H. Klein, then the Company's Chief Executive
Officer, Chairman of the Board of Directors and a director, resigned from such
positions with the Company. Effective on that date, Richard H. Friedman, the
Company's Chief Operating Officer, Chief Financial Officer and a director
through May 15, 1998, succeeded Mr. Klein as the Company's Chief Executive
Officer. Scott R. Yablon, then a director of the Company, joined the Company as
an employee on May 1, 1998, and effective May 15, 1998, assumed the titles of
President, Chief Financial Officer and Chief Operating Officer of the Company.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 1 to Quarterly Report on Form
10-Q/A to be signed on its behalf by the undersigned thereunto duly authorized.
MIM Corporation
Date: August 4, 1998 /s/ Barry A. Posner
--------------------------
Barry A. Posner
Vice President
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