FORM 10-Q
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 March 31, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-28740
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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)
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(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 [ ]
On May 1, 2002 there were outstanding 22,918,291 shares of the Company's
common stock, $.0001 par value per share ("Common Stock").
INDEX
PART I FINANCIAL INFORMATION Page Number
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Item 1 Financial Statements
Consolidated Balance Sheets at March 31, 2002 (unaudited)
and December 31, 2001 1
Unaudited Consolidated Statements of Income for the three
months ended March 31, 2002 and 2001 2
Unaudited Consolidated Statements of Cash Flows for
the three months ended March 31, 2002 and 2001 3
Notes to the Unaudited Consolidated Interim Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosure About Market Risk 13
PART II OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds 14
Item 6 Exhibits and Reports on Form 8-K 14
SIGNATURES 15
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 31, December 31,
2002 2001
-------------- ---------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 1,990 $ 12,487
Receivables, less allowance for doubtful accounts of
$3,198 and $5,543 at March 31, 2002 and December 31,
2001, respectively 81,140 70,089
Inventory 10,009 3,726
Prepaid expenses and other current assets 1,708 1,439
--------- ---------
Total current assets 94,847 87,741
Property and equipment, net 8,989 9,287
Due from affiliates, net -- 2,132
Other assets, net 1,635 1,650
Intangible assets, net 80,408 39,009
--------- ---------
Total assets $ 185,879 $ 139,819
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Cash overdrafts $ 9,698 $ --
Current portion of capital lease obligations 608 594
Line of credit 9,014 --
Accounts payable 11,881 4,468
Claims payable 51,520 46,564
Payables to plan sponsors 19,117 21,063
Accrued expenses and other current liabilities 5,929 5,745
--------- ---------
Total current liabilities 107,767 78,434
Capital lease obligations, net of current portion 873 1,031
Other non current liabilities 58 58
--------- ---------
Total Liabilities 108,698 79,523
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,
22,903,664 and 22,004,101 shares issued and outstanding
at March 31, 2002 and December 31, 2001, respectively 2 2
Treasury stock, 1,393,183 shares at cost (2,934) (2,934)
Additional paid-in capital 117,102 105,424
Accumulated deficit (36,989) (42,196)
--------- ---------
Total stockholders' equity 77,181 60,296
--------- ---------
Total liabilities and stockholders' equity $ 185,879 $ 139,819
========= =========
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
March 31,
2002 2001
--------------------------------
(Unaudited)
Revenue $ 151,651 $ 106,036
Cost of revenue 135,623 94,400
--------- ---------
Gross profit 16,028 11,636
Selling, general and administrative expenses 9,929 8,403
TennCare(R)reserve adjustment (851) (980)
Amortization of intangibles 256 519
--------- ---------
Income from operations 6,694 3,694
Interest (expense) income, net (186) 42
--------- ---------
Income before provision for income taxes 6,508 3,736
Provision for income taxes 1,301 253
--------- ---------
Net income $ 5,207 $ 3,483
========= =========
Basic income per common share $ 0.23 $ 0.17
========= =========
Diluted income per common share $ 0.22 $ 0.17
========= =========
Weighted average common shares used
in computing basic income per common share 22,541 20,884
========= =========
Weighted average common shares used
in computing diluted income per common share 23,991 20,980
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
2
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
----------------------------------
March 31, March 31,
2002 2001
----------------------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 5,207 $ 3,483
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,343 1,416
TennCare(R)reserve adjustment (851) (980)
Provision for losses on receivables 169 305
Changes in assets and liabilities, net of acquired assets:
Receivables, net (4,463) (5,479)
Inventory (2,185) (1,296)
Prepaid expenses and other current assets (158) 283
Accounts payable 1,482 930
Claims payable 4,956 8,788
Cash overdrafts 9,698 --
Payables to plan sponsors and others (1,946) (3,423)
Accrued expenses (321) 86
Non-current liabilities -- (232)
-------- --------
Net cash provided by operating activities 12,931 3,881
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (735) (1,144)
Cost of acquisitions, net of cash acquired (35,024) (275)
Due from affiliates, net 2,132 (37)
Decrease in other assets 6 210
-------- --------
Net cash used in investing activities (33,621) (1,246)
-------- --------
Cash flows from financing activities:
Borrowings on line of credit 9,014 --
Principal payments on capital lease obligations (144) (159)
Proceeds from exercise of stock options 1,323 --
Purchase of treasury stock -- (2,596)
Decrease in debt -- (56)
-------- --------
Net cash provided by (used in) financing activities 10,193 (2,811)
-------- --------
Net decrease in cash and cash equivalents (10,497) (176)
Cash and cash equivalents--beginning of period 12,487 1,290
-------- --------
Cash and cash equivalents--end of period $ 1,990 $ 1,114
======== ========
(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)
Three Months Ended
----------------------------------
March 31, March 31,
2002 2001
----------------------------------
(Unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 224 $ 151
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Reclassification of stockholder notes to other assets $ -- 771
========= =========
Stock issued in connection with acquisition,
including certain transaction costs for services received $ 10,355 $ --
========= =========
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") 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 three months ended
March 31, 2002 are not necessarily indicative of the results of operations or
cash flows which may be reported for the remainder of 2002.
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 for the
fiscal year ended December 31, 2001 (the "Form 10-K") filed with the Commission.
The accounting policies followed for interim financial reporting are the
same as those disclosed in Note 2 of Notes to Consolidated Financial Statements
included in the Form 10-K.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic income per common
share and diluted income per common share:
Three Months Ended
March 31,
2002 2001
--------- ---------
Numerator:
Net income ................................. $ 5,207 $ 3,483
======= =======
Denominator - Basic:
Weighted average number of common
shares outstanding .................... 22,541 20,884
======= =======
Basic income per common share .............. $ 0.23 $ 0.17
======= =======
Denominator - Diluted:
Weighted average number of common
shares outstanding .................... 22,541 20,884
Common share equivalents of outstanding
stock options ......................... 1,450 96
------- -------
Total shares outstanding ................... 23,991 20,980
======= =======
Diluted income per common share ............ $ 0.22 $ 0.17
======= =======
5
NOTE 3 - 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 promissory notes did not originate from the issuance of, or were
otherwise collateralized by, the Company's equity securities, the Company
initially classified the promissory notes as 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 founder, President, director 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 of the Company. The Founder is no longer an employee, officer,
director or majority stockholder of the Company, or otherwise associated or
affiliated with the Company, and, accordingly, the borrowers and the Company are
no longer considered to be entities under common control. The accounting
treatment of the promissory notes was therefore reclassified from a reduction of
stockholders' equity to other assets.
On March 23, 2002, Mr. Richard H. Friedman, the Company's Chairman and
Chief Executive Officer, repaid in full a $1,700 loan from the Company, together
with all accrued and unpaid interest thereon, totaling approximately $2,100.
NOTE 4 - TENNCARE RESERVE ADJUSTMENT
During the first quarter of 2002, the Company recorded an $851 adjustment
to a reserve established in a prior period relating to the collection of
receivables from Xantus Healthplans of Tennessee, Inc., which reserve is no
longer required.
During the first quarter of 2001, the Company settled a dispute with
Tennessee Health Partnership ("THP") relating to several improper reductions of
payments from THP for which the Company had provided services. The Company paid
THP $1,300 in satisfaction of all claims between the parties and the parties
released each other from any and all liability with respect to past or future
claims. The terms of the settlement were favorable to the Company and $980 of
excess reserves were credited to income during the first quarter of 2001 as a
result of the resolution of these disputes.
NOTE 5 - TREASURY STOCK
In February 2001, the Company repurchased 1,298 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. $300 is
outstanding at March 31, 2002 and is included in accrued expenses.
NOTE 7 - ACQUISITIONS
On January 31, 2002, the Company acquired all of the issued and outstanding
stock of Vitality Home Infusion Services, Inc. ("Vitality"). Vitality is a New
York based provider of specialty pharmaceutical services. Vitality provides such
services on a national basis to chronically ill and genetically impaired
patients, particularly focusing on oncology, infectious disease, immunology and
rheumatory disease.
The aggregate purchase price for Vitality was $45,000, payable $35,000 in cash
and $10,000 in the Company's common stock. The purchase price for Vitality has
been allocated to assets and liabilities, based on management's best estimates
of fair value and based on a preliminary valuation performed by an outside
6
valuation firm. These allocations are subject to change pending a final
appraisal. The following table sets forth the allocation of the purchase price
as of March 31, 2002:
Purchase price:
Funded from the Company's line of credit $35,000
Common stock value 10,000
Transaction costs 1,216
Total purchase price 46,216
Less - Net tangible assets as of January 31, 2002 4,673
--------
Excess of purchase price over net tangible assets acquired $41,543
========
Preliminary allocation of excess purchase price
and amortizable life:
Customer relationships (20 years) $11,000
Trademarks (indefinite) 4,700
Non-compete agreements (3 years) 730
Goodwill 25,113
-------
$41,543
=======
Vitality Pro Forma Financial Information
The following unaudited consolidated pro forma financial information for
the three months ended March 31, 2002 and 2001 has been prepared assuming
Vitality was acquired as of January 1, 2001, utilizing the purchase method of
accounting, with pro forma adjustments for non-amortizing goodwill, amortizing
intangibles, interest expense, rent expense and income tax benefit. 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
acquisition occurred on January 1, 2001. 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)
Three Months ended March 31,
2002 2001
----------- -------------
(Unaudited)
Revenues $ 158,695 $ 117,984
Net income 4,972 5,087
Basic income per common share 0.22 0.24
Diluted income per common share 0.21 0.24
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
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 establish 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 adopted these standards on January 1, 2002.
7
Pursuant to SFAS No. 142, substantially all of the Company's intangible
assets will no longer be amortized and the Company is required to perform an
annual impairment test for goodwill and intangible assets. Goodwill and
intangible assets are allocated to various reporting units, which are either the
operating segment or one reporting level below the operating segment. The
Company operates in one segment and has identified two reporting units for
purposes of applying the provisions of SFAS No. 142. These reporting units are
pharmaceutical benefit management and specialty pharmaceutical. SFAS No. 142
requires the Company to compare the fair value of the reporting unit to its
carrying amount on an annual basis to determine if there is potential
impairment. If the fair value of the reporting unit is less than its carrying
value an impairment loss would be recorded to the extent that the fair value of
the goodwill within the reporting unit is less than the carrying value. The
impairment test for intangible assets consists of comparing the fair value of
the intangible asset to its carrying value. If the carrying value of the
intangible asset exceeds its fair value an impairment loss is recognized. Fair
value for goodwill and intangible assets are determined based on discounted cash
flows and appraised values. During the quarter, the Company completed its
initial impairment review which indicated that there was no impairment.
The following table provides a reconciliation of reported net income for
the three months ended March 31, 2001 to adjusted net income as if SFAS 142 had
been applied as of January 1, 2001.
Three Months Ended
March 31, 2001
------------------
Diluted Income Per
Amount Common Share
Net income reported/EPS $ 3,483 $ 0.17
Add back goodwill amortization (net of tax) 434 0.02
------ ----
Net income adjusted/EPS $ 3,917 $ 0.19
======== =======
The changes in the carrying amount of goodwill for the quarter ended March
31, 2002 are as follows:
Balance as of December 31, 2001 $51,189
Goodwill acquired during quarter 25,230
--------
Balance as of March 31, 2002 $ 76,419
========
Amortizable intangible assets with definite lives at March 31, 2002 consist
of customer relationships of $13,536 amortized over six to twenty years,
noncompete agreements of $830 amortized over three to four years and $127 of
trademarks amortized over three years. Intangible assets with indefinite lives
at March 31, 2002 are trademarks of $4,700 and goodwill of $76,419.
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 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 adopted SFAS No. 144 as of January 1, 2002. Adoption of SFAS No. 144 did
not have any effect on the Company's results of operations, financial position
or cash flows.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement
8
No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishments of Debt," and an amendment of that
Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." This statement also rescinds SFAS No. 44 "Accounting for
Intangible Assets of Motor Carriers." This statement amends SFAS No. 13,
"Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
provisions of this statement must be adopted on or after May 15, 2002, with the
adoption of certain of these provisions to occur no later than January 1, 2003.
The Company does not expect that the adoption of this statement will have any
effect on its results of operations, financial position or cash flows.
* * * *
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the audited
consolidated financial statements of MIM Corporation and subsidiaries
(collectively, the "Company") including the 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, 2001 (the "Form 10-K") filed with the U.S. Securities and Exchange
Commission (the "Commission") as well as the Company's unaudited consolidated
interim financial statements and the related notes thereto included elsewhere in
this Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2002
(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 of 1933, and Section 21E of the Securities Exchange Act of 1934,
as amended, 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
The Company is a pharmaceutical healthcare organization delivering
innovative pharmacy benefit, specialty pharmaceutical distribution and other
pharmacy-related healthcare solutions. The Company combines its clinical
management expertise, sophisticated data management and therapeutic fulfillment
capabilities to serve the particular needs of each of its customers and
respective benefit recipients covered by the customers' pharmacy related health
benefit.
The Company provides a broad array of pharmacy benefit and pharmacy
products and services to individuals ("Members") receiving health benefits
principally through health insurers (including managed care organizations
("MCOs")) and other insurance companies, and, to a lesser extent, third party
administrators, labor unions, self-funded employer groups, government agencies,
and other funded plan sponsors (collectively, "Plan Sponsors"). The Company's
programs include the distribution of biotech and other specialty prescription
medications and pharmacy related clinical management services to the chronically
ill and genetically impaired, the provision of pharmacy benefit management
("PBM") services to Members of Plan Sponsors, and the distribution of
prescription maintenance medications to Plan Sponsors' Members by mail ("Mail
Service"). Depending on the goals and objectives of Plan Sponsors with which the
Company does business, the Company provides some or all of the following
clinical services as part of its PBM and specialty pharmacy programs: pharmacy
case management, therapy assessment, compliance monitoring, health risk
assessment, patient education and drug usage and interaction evaluation,
pharmacy claims processing, Mail Service and related prescription distribution,
benefit design consultation, drug utilization review, formulary management and
consultation, drug data analysis, drug interaction management, patient
compliance, program management and pharmaceutical rebate administration.
Significant Accounting Policies
We rely on the use of estimates and make assumptions that impact our
financial condition and results. These estimates and assumptions are based on
10
historical results and trends as well as our forecasts as to how these might
change in the future. Our significant accounting policies that impact our
results are included in Note 2 of the Notes to Consolidated Financial Statements
included in the Form 10-K.
Results of Operations
Three months ended March 31, 2002 compared to three months ended March 31, 2001
Revenues for the first quarter of 2002 increased 43.1% to $151.7 million
compared to $106.0 million for the same period a year ago. This increase was the
result of continued growth in the Company's specialty pharmacy services, PBM and
Mail Service and includes results of the Vitality acquisition since February 1,
2002 (see Note 7 of Notes to Unaudited Consolidated Financial Statements).
Revenues for the first quarter of 2001 included $20 million from Tennessee
Coordinated Care Network (d/b/a "Access MedPLUS"), a TennCare(R) Plan Sponsor
that commenced liquidation proceedings in the fourth quarter of 2001. Effective
October 26, 2001, Access MedPLUS' members were transferred to TennCare Select,
the interim State program for which the Company is not the PBM. Since the first
quarter of 2002, a portion of these members were and continued to be transferred
from TennCare Select to various other Plan Sponsors for which the Company may be
the PBM. It is estimated that during the first quarter of 2002, the Company has
increased its revenues by $4 million as a result of these members being assigned
to Plan Sponsors where the Company is the PBM. The Company anticipates that the
revenues from Plan Sponsors, as a result of such new enrollment, will increase
in the second and third quarters of 2002.
Cost of revenue for the three months ended March 31, 2002 was $135.6
million compared to $94.4 million for the same period in 2001, an increase of
$41.2 million. This increase is the result of growth in the Company's businesses
and the Vitality acquisition, partially offset by the loss of revenue associated
with Access MedPLUS, as discussed above. Gross margins as a percentage of
revenue totaled 10.6% for the three months ended March 31, 2002 compared to
11.0% for the same period in 2001. Gross margins were impacted as a result of a
change in the mix in the Company's specialty business and the loss of the Access
MedPLUS contract.
Selling, general and administrative expenses were $9.9 million for the
three months ended March 31, 2002 compared to $8.4 million for the three months
ended March 31, 2001, an increase of $1.5 million. As a percentage of revenue,
selling, general and administrative expenses decreased from 7.9% for the first
three months of 2001 to 6.5% for the first three months of 2002. The increase in
selling, general and administrative expenses in the first three months of 2002
was the result of operating cost increases commensurate with the Company's
business growth, the inclusion of Vitality's operating expenses for the second
two months of the first quarter, as well as the hiring of additional key
management personnel in the middle of 2001.
For the three months ended March 31, 2002, the Company recorded
amortization of intangibles of $0.3 million compared to $0.5 million for the
same period in 2001. This decrease in 2002 resulted from the adoption of SFAS
142 as discussed in Note 8 of Notes to Unaudited Consolidated Financial
Statements, which was partially offset by the amortization of intangibles
resulting from the acquisition of Vitality on January 31, 2002.
The TennCare(R) reserve adjustment for the three months ended March 31,
2002 was $0.9 million resulting from an adjustment to a reserve established in a
prior period relating to the collection of receivables from Xantus Healthplans
of Tennessee, Inc., which reserve is no longer required.
During the first quarter of 2001, the Company recorded an adjustment of
$1.0 million to the TennCare(R) reserve to reflect a settlement with Tennessee
Health Partnership ("THP"), relating to several improper reductions of payments
from THP for which the Company had provided services. The Company paid THP $1.3
million in satisfaction of all claims between the parties and the parties
released each other from any and all liability with respect to past or future
claims. The terms of the settlement were favorable to the Company and, as a
result thereof, $1.0 million of excess reserves were credited to income.
Tax expense for the three months ended March 31, 2002 was $1.3 million
compared to $0.3 million for the same period last year. The effective tax rate
for the current period was 20.0% compared to 6.8% for the same period last year.
The Company was able to fully offset taxable income in 2001 with its Federal net
operating loss carryforwards, but expects to only partially offset expected 2002
taxable income with available Federal net operating loss carryforwards.
For the three months ended March 31, 2002, the Company recorded net income
of $5.2 million, or $0.22 per diluted share, compared to net income of $3.5
million, or $.17 per diluted share, for the three months ended March 31, 2001.
Net income for the three months ended March 31, 2002 includes a special gain of
$0.9 million, or $0.03 per diluted share; and net income for the three months
ended March 31, 2001 also included a special gain of $1.0 million, or $0.04 per
diluted share.
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Earnings before interest, taxes, depreciation and amortization was $8.2
million for the three months ended March 31, 2002 compared to $5.2 million for
the three months ended March 31, 2001.
Liquidity and Capital Resources
The Company utilizes both funds generated from operations and available
credit under its $45 million revolving credit facility (the "Facility") for
acquisitions, capital expenditures and general working capital needs.
For the three months ended March 31, 2002, net cash provided by operating
activities totaled $12.9 million. This is the result of higher net income for
the current period, reflecting continued business growth, the inclusion of
Vitality's operating results for the last two months of the first quarter of
2002, as well as further improvement in the Company's collection of its
receivables and the timing of payments for pharmacy claims and trade payables.
Net cash used in investing activities during the three months ended March
31, 2002 was $33.6 million. This reflects approximately $35 million used for the
acquisition of Vitality, as discussed in Note 7 of Notes to Unaudited
Consolidated Financial Statements, partially offset by the repayment in full of
an officer's loan totaling $2.1 million as discussed in Note 3 of Notes to
Unaudited Consolidated Financial Statements.
For the three months ended March 31, 2002, net cash provided by financing
activities was $10.2 million, primarily as the result of $9.0 million remaining
unpaid after repaying most of the borrowings under the Facility which were used
to pay the cash portion of the purchase price for the Vitality acquisition.
Additionally, proceeds of $1.3 million were received from the exercise of
employee stock options.
At March 31, 2002, the Company had a working capital deficit of $12.9
million compared to working capital of $9.3 million at December 31, 2001. This
change is primarily the result of the $35 million borrowed under the Facility
for the acquisition of Vitality.
On November 1, 2000, the Company entered into the Facility with HFG
Healthco-4 LLC, an affiliate of Healthcare Finance Group, Inc. ("HFG"). 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%. 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 March 31, 2002, there was $9.0 million outstanding under the Facility as a
result of the Company's acquisition of Vitality.
As the Company continues to grow it anticipates that its working capital
needs will also continue to increase. The Company believes that its cash on
hand, together with funds available under the Facility and cash expected to be
generated from operating activities will be sufficient 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 specialty pharmacy,
Mail Service and PBM businesses, which the Company would expect to fund from
cash on hand, borrowings under the Facility, other future indebtedness or, if
appropriate, the private and/or public sale or exchange of equity securities of
the Company.
At December 31, 2001, the Company had unused Federal net operating loss
carryforwards of $40.3 million, which will begin expiring in 2009. In the
opinion of management, as the Company has not had a history of consistent
profitability, it is uncertain whether the Company will realize the benefit from
its deferred tax assets and has provided a valuation allowance.
As of December 31, 2001, certain of the Company's Federal net operating
loss carryforwards are subject to limitation and may be utilized in a future
year upon release of the limitation. If Federal net operating loss carryforwards
are not utilized in the year they are available they may be utilized in a future
year to the extent they have not expired.
In 1998, the Company recorded a $2.2 million special charge against
earnings as a result of an agreement in principle with respect to a civil
settlement of a Federal and State of Tennessee investigation in connection with
conduct involving 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. At March 31, 2002, $0.3 million
is outstanding and included in accrued expenses.
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Other Matters
The TennCare(R) program operates under a demonstration waiver from The
United States Center for Medicare and Medicaid Services ("CMS"). That waiver is
the basis of the Company's ongoing service to those MCOs in the TennCare(R)
program. The waiver expired on December 31, 2001 and was renewed without
material modification through December 31, 2002. In addition, the State of
Tennessee and the Federal governments have agreed to negotiate towards an
additional two-year extension of the waiver through December 31, 2004. While 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
through at least December 31, 2004, there can be no assurances that such waiver
will be renewed after December 31, 2002, that pharmacy benefits will continue
under the TennCare(R) Program or that the MCO's currently being serviced by the
Company will continue their respective relationships with it under the existing
or a successor program or on the same or similar terms and conditions. If the
waiver is not renewed and the Company is not providing PBM services, clinical
management and/or distributing specialty pharmaceutical products to those lives
under a successor program or arrangement, then the failure to provide such
services could have a material and adverse affect on the Company's financial
position and results of operations of the Company. Moreover, should the funding
sources and/or conditions for the TennCare(R) program change significantly, the
TennCare(R) program's ability to pay the MCOs, and in turn the MCOs ability to
pay the Company, could materially and adversely affect the Company's financial
position and results of operations.
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 $2.6 million towards the repurchase of its Common Stock under this
program.
On March 23, 2002, Mr. Richard H. Friedman, the Company's Chairman and
Chief Executive Officer, repaid in full a $1.7 million loan from the Company,
together with all accrued and unpaid interest thereon, for an aggregate amount
of $2.1 million.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
There has been no material change from the information provided in Item 7a
of the Form 10-K.
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PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On January 31, 2002, in connection with the acquisition by the Company of
all of the issued and outstanding common stock of Vitality from its
stockholders, the Company issued to those stockholders 592,417 shares of its
Common Stock.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The exhibits required to be filed with this Report are incorporated by
reference to Exhibits 3.1, 3.2, 4.1 and 10.1 through 10.52 of the Form 10-K.
(b) Reports on Form 8-K
On April 16, 2002 the Company filed an amendment to its Current Report on
Form 8-K originally filed on February 5, 2002 in connection with the acquisition
of Vitality. The amendment to the Company's 8-K was filed to include financial
information for Vitality and pro-forma financial information of the Company
relative to its acquisition of Vitality as required by Item 7 of Form 8-K.
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SIGNATURES
Pursuant to the requirements 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.
MIM CORPORATION
Date: May 15, 2002 /s/ Donald Foscato
-------------------
Donald Foscato
Chief Financial Officer
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