UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] PERIODIC REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to ________________
Commission file number: 1-11993
MIM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 05-0489664
(State of incorporation) (IRS Employer Identification No.)
100 Clearbrook Road, Elmsford NY 10523
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 914-460-1600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common Stock, $.0001
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No ___
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of March 6, 2003, was approximately $140.3
million. *
On March 20, 2003, there were outstanding 22,967,531 shares of the registrant's
Common Stock.
Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement for its 2003 Annual
Meeting of Stockholders to be filed with the Commission within 120 days after
the close of the registrant's fiscal year are incorporated by reference into
Part III of this Form 10-K.
* Without acknowledging that any individual director or executive officer of
the registrant is an affiliate, the shares over which they have voting
control have been included as owned by affiliates solely for purposes of
this calculation.
PART I
Item 1. Business
Overview
MIM Corporation (the "Company" or "MIM") is a pharmaceutical healthcare
organization delivering innovative pharmacy benefit management, specialty
pharmaceutical management and 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 pharmacy benefit recipients. The
Company provides a broad array of pharmacy benefits and pharmacy products and
services to individual enrollees ("Members") receiving health benefits,
principally through health insurers, including managed care organizations
("MCOs") and other insurance companies, and, to a lesser extent, labor unions,
self-funded employer groups, government agencies, and other self-funded plan
sponsors, directly or indirectly through third party administrators
(collectively, "Plan Sponsors"). These services are organized under two
reportable operating segments: pharmacy benefit management and mail services
(collectively, "PBM Services") and specialty pharmacy distribution and clinical
management services ("Specialty Management and Distribution Services").
The Company's Specialty Management and Distribution Services programs are
offered to the chronically ill and genetically impaired, directly through Plan
Sponsors of all sizes, and include the distribution of biotech and other
prescription medications and the provision of pharmacy-related clinical
management services and disease state programs. Specialty services are also
offered to physicians (in group practice and hospital settings) on behalf of
their patients, in conjunction with Plan Sponsors. These physicians are
typically affiliated with Plan Sponsors which in turn have a provider
relationship with the Company.
The Company offers Plan Sponsors a broad range of PBM Services designed to
promote the cost-effective delivery of clinically appropriate PBM Services
through its network of retail pharmacies and its own dedicated mail service
distribution facility.
Depending on the goals and objectives of the 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/or Specialty Management and
Distribution Services, all of which are described below in greater detail:
pharmacy case management, therapy assessment, compliance monitoring, health risk
assessment, patient education, 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.
Specialty Management and Distribution Services
Through its BioScrip(R) specialty injectable and infusion therapy programs,
the Company distributes high-cost pharmaceuticals and provides clinically
focused case and disease management programs to Members afflicted with chronic
illnesses or genetic impairments. The disease states or conditions for which the
Company has such programs include HIV/AIDS, oncology, hemophilia, multiple
sclerosis, growth hormone deficiency, Gaucher's disease, rheumatoid arthritis,
infertility, respiratory syncytial virus (RSV), hepatitis C, Crohn's disease and
transplants. The specialty drugs distributed through the BioScrip(R) programs
are dispensed and serviced from the Company's various dispensing locations in
Columbus, Ohio; Livingston, New Jersey; and Roslyn Heights, New York. The Roslyn
Heights facility has been utilized since January 2002, the acquisition date of
Vitality Home Infusion Services, Inc. ("Vitality"), a New York-based provider of
specialty pharmaceutical injectable therapy services. The Livingston location
has been utilized since August 2000, the acquisition date of American Disease
Management Associates, LLC ("ADIMA"), a New Jersey-based provider of specialty
injectable and infusion therapy services.
The Company's specialty injectable and infusion therapy programs are
marketed principally to Plan Sponsors and physicians in order to control the
high cost trends associated with medications for the chronically ill and
genetically impaired. As part of a bundled offering, the Company distributes
prescription products to Plan Sponsors' Members and clinically manages each
Member's condition from a pharmacoeconomic perspective.
Unlike many of the Company's competitors, which focus on particular
pharmaceutical products within a limited number of chronic disease states, the
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Company offers numerous products within a larger number of disease states since
it is attempting to control a Plan Sponsor's overall pharmacy and medical
expenditures in the most clinically appropriate manner. In contrast, many of the
Company's competitors focus on increasing the market share of a particular
product and increasing profitability through its relationship with the
manufacturer of that particular product. Viewed another way, the Company
considers its ultimate customer(s) Plan Sponsors and their respective Members.
The following services are available through the Company's specialty programs:
Pharmacy Case Management. The Company provides Plan Sponsors' Members with
access to its BioScrip(R) pharmacy case management team ("PCM Team"), which is a
specialized unit of skilled professionals including Pharmacists, Registered
Nurses, Certified Pharmacy Technicians, Insurance Verification and Reimbursement
Specialists, and Customer Service Representatives. The PCM Team is available via
phone to both providers and patients, 24 hours per day, seven days per week.
Each PCM Team member is cross trained in case management as well as individual
disease states, in order to provide Plan Sponsors and its Members with a variety
of basic services, including:
Prior Authorizations. The Company assists its Plan Sponsors in developing
formal criteria and protocols for the effective management of specialty
pharmaceutical care. Criteria are reviewed prior to the onset of therapy to
minimize incorrect prescribing, thereby reducing unnecessary costs.
Infusion Therapy. The Company also distributes and administers high cost
specialty infusion therapies to patients requiring principally immunosuppression
blood products, parenteral nutrition products, and infused antibiotic therapies.
Hence, the Company attempts to maximize Member patient outcomes through strict
adherence to the clinical guidelines or protocols for a particular prescription
therapy while at the same time managing the costs of such therapies on behalf of
the Plan Sponsor. In adhering to the guidelines, the Company also attempts to
minimize or control the costs associated with a Member's condition. Unlike the
Company's other specialty programs, infusion patients have their therapies
administered intravenously by IV certified nurses.
Therapy Assessment. The PCM Team monitors on an on-going basis each
patients therapy to assure adherence to that therapy, desired response to
therapy and any necessary interventions to improve patient care.
Patient Enrollment. The PCM Team is the main point of contact for both
physicians and patients during the enrollment process. PCM Team members are
responsible for identifying immediate patient needs, triggering important
patient and physician mailings and following through on the enrollment process
and delivery of the initial prescription.
Risk Assessment. The PCM Team initially assesses all new patients to
determine the patient's knowledge level, self-care ability and non-compliance
risk. Depending on the results of this assessment, patients are classified and
an appropriate monitoring program is selected and administered. Patients are
reassessed at appropriate times during their treatment as determined by the PCM
Team.
Education. Each PCM Team member is trained in disease state management and
treatment issues and serves as a valuable resource for both patients and
physicians in answering treatment questions pertaining to such topics as side
effects, self-administration and compliance issues.
Compliance Monitoring. The PCM Team collectively tracks the patient's
progress and initiates reminders, reinforcements and non-compliance alerts to
both physicians and the patient. The PCM Team is responsible for understanding
compliance risks and coordinating the support necessary to maximize the
patient's treatment.
Coordinated Medication Delivery. The Company's pharmacies provide express
delivery of medications to the patient's point of service, whether that is his
or her home or a physician's office. Special handling techniques and/or
refrigeration (including shipping with dry-ice packing) are utilized in
compliance with a manufacturer's specified requirements. In addition to the
injectable medication, the Company also provides Sharps containers, syringes and
ancillary materials needed for administration of the product. Express delivery
via overnight courier is provided without additional charge to the patient or
physician.
Pharmacy Data Services. The Company utilizes claims, medical and laboratory
data to analyze and evaluate pharmaceutical utilization and cost trends to
support Plan Sponsors' understanding of such information through the generation
of reports for management and Plan Sponsor use, and presentation of information
vital to the Plan Sponsors' understanding of their particular pharmaceutical
utilization and cost trends. These services include drug utilization review,
quality assurance and claims and laboratory analysis. The Company has developed
proprietary systems to provide Plan Sponsors with real-time access to pharmacy,
financial, claims, prescriber and dispensing data.
3
Disease Management. The Company designs and administers programs to
maximize the benefits of pharmaceutical utilization as a tool in achieving
therapy goals for certain targeted diseases. Programs focus on preventing
high-risk events, such as asthma exacerbation or stroke, through appropriate use
of pharmaceuticals while eliminating unnecessary or duplicate therapies. Key
components of these programs include health care provider training, integration
of care between pharmacy and medical health disciplines, monitoring of patient
compliance, measurement of care process and quality, and providing feedback for
continuous improvement in achieving therapy goals.
The Company offers its specialty programs to Plan Sponsors as a
comprehensive pharmaceutical service that manages all aspects of a Plan
Sponsor's pharmaceutical needs, including the specialty pharmacy services
described above. Alternatively, the Company may limit the number of products
and/or therapeutic categories which it manages. The Company believes that its
ability to offer a full line of services, including its specialty pharmacy
products and services, provides it an advantage over its competition, many of
which focus on a limited number of disease states and/or products. Likewise, the
Company believes that the implementation of a broad-based specialty pharmacy
program affords Plan Sponsors greatest overall Member outcomes as well as the
greatest degree of cost control or savings. The Company has also been successful
in contracting to provide specialty pharmacy services, typically on a
non-exclusive or preferred basis to Plan Sponsors, clinics, hospitals and
physician groups not previously contracted with the Company for PBM Services.
The Company markets its specialty pharmaceutical programs to MCOs without
regard to the size of a plan's enrollment, third party administrators, physician
practice groups and hospitals. Unlike many of its competitors, the Company also
markets these programs to other pharmacy benefit managers, which may not have
the same resources as the Company or which otherwise have determined not to
develop independent specialty pharmacy operations.
PBM Services
The Company's PBM Services offer Plan Sponsors a broad range of services
designed to ensure the cost-effective delivery of clinically appropriate
pharmacy benefits. PBM Services available to the Company's customers include the
following:
Formulary and Benefit Design. The Company advises its Plan Sponsors with
respect to the development of customized, flexible formulary and benefit plan
designs to meet its specific program requirements. Formulary design may assist
in controlling program costs by focusing, to the extent consistent with accepted
medical and pharmacy practices and applicable law, primarily on two areas: (i)
generic substitution, which involves the selection of generic drugs as a
cost-effective alternative to their bio-equivalent brand name drugs within a
therapeutic category, and/or (ii) therapeutic interchange, which involves the
selection of a lower cost brand name drug as an alternative to a higher priced
brand name drug within a therapeutic category. After a formulary has been
established by a Plan Sponsor, rebates on brand name drugs are typically
negotiated with drug manufacturers and are often shared with Plan Sponsors.
Many Plan Sponsors do not restrict coverage to a specific list of
pharmaceuticals and are said to have "no" formulary or an "open" formulary that
generally covers all FDA-approved drugs except certain classes of excluded
pharmaceuticals (such as certain vitamins and cosmetics, experimental,
investigative or over-the-counter drugs). As a result of rising pharmacy program
costs, however, the Company believes that both public and private health plans
have become increasingly receptive to controlling pharmacy costs by restricting
the availability of certain drugs within a given therapeutic class, other than
in cases of medical necessity or other pre-established prior authorization
guidelines, to the extent clinically appropriate. Once a Plan Sponsor decides to
utilize a "restricted" or "closed" formulary, the Company actively involves its
clinical staff with a Plan Sponsor's Pharmacy and Therapeutics Committees ("P&T
Committee")(which typically consists of local Plan Sponsors, prescribers,
pharmacists and other health care professionals) to assist that P&T committee in
its design of clinically appropriate formularies in order to control pharmacy
costs. The composition of the formulary is the responsibility and, ultimately
approved by of the Plan Sponsor.
The primary method for assuring formulary compliance on behalf of a Plan
Sponsor is by controlling pharmacy reimbursement to ensure that non-formulary
drugs are not dispensed to a Member, subject to certain limited exceptions.
Benefit design and formulary parameters are managed through a point-of-sale
("POS") claims processing system through which real-time electronic messages are
transmitted to pharmacists to ensure compliance with specified benefit design
and formulary parameters before services are rendered and prescriptions are
dispensed. Over utilization of medication is monitored and managed through
quantity limitations based upon nationally recognized standards and guidelines
regarding maintenance versus non-maintenance therapy. Step protocols, which are
procedures requiring that preferred therapies be tried and shown ineffective
4
before more expensive therapies are covered are also established by the Company
in conjunction with the Plan Sponsor P&T Committee to control improper
utilization of certain high-risk or high-cost medications.
Clinical Services. Plan Sponsors' formularies typically identify a limited
number of drugs for preferred status within each therapeutic class to be the
covered drugs in order to treat most medical conditions appropriately. Provision
is also made, however, for coverage of non-formulary or non-preferred drugs
(other than certain excluded products) when documented to be clinically
appropriate for a particular patient. Since non-formulary drugs ordinarily are
automatically rejected for coverage by the real-time POS system, the Company
employs procedures to override restrictions on non-formulary medications for a
particular patient and period of treatment. Similarly, restrictions on the use
of certain high-risk or high-cost formulary drugs may be overridden through
prior authorization procedures. Non-formulary overrides and prior authorizations
are processed on the basis of documented, clinically supported medical
information and typically are granted or denied within 48 hours after request.
Requests for, and appeals of denials, of coverage in those cases are handled by
the Company through its staff of trained pharmacists and board certified
pharmacotherapy specialists, subject to a Plan Sponsor's ultimate authority over
all such requests and appeals. Further, in the case of a medical emergency, as
determined by the dispensing network pharmacist, the Company authorizes, without
prior approval, short-term supplies of all medication unless specifically
excluded by a Plan Sponsor.
Drug Usage Evaluation. Drug usage is evaluated on a concurrent, prospective
and retrospective basis utilizing the real-time POS system and proprietary
information systems for multiple drug interactions, drug-health condition
interactions, duplication of therapy, step therapy protocol enforcement,
minimum/maximum dose range edits, compliance with prescribed utilization levels
and early refill notification. The Company also maintains a drug utilization
review program in which select medication therapies are reviewed and data is
collected, analyzed and reported for management applications.
Pharmacy Data Services. The Company utilizes claims data to analyze and
evaluate pharmaceutical utilization and cost trends to support Plan Sponsors'
understanding of such information through the generation of reports for
management and Plan Sponsor use, and presentation of information vital to the
Plan Sponsors' understanding of its particular pharmaceutical utilization and
cost trends. These services include drug utilization review, quality assurance
review, claims analysis and rebate contract administration. The Company has
developed proprietary systems to provide Plan Sponsors with real-time access to
pharmacy, financial, claims, prescriber and dispensing data.
Disease Management. The Company designs and administers programs to
maximize the benefits of pharmaceutical utilization as a tool in achieving
therapy goals for certain targeted diseases, such as diabetes and asthma.
Programs focus on preventing high-risk events, such as asthma exacerbation or
stroke, through appropriate use of pharmaceuticals, while eliminating
unnecessary or duplicate therapies. Key components of these programs include
health care provider training, integration of care between medical and pharmacy
disciplines, monitoring of patient compliance, and providing feedback for
continuous improvement in achieving therapy goals. As described more fully above
under "Specialty Management and Distribution Services," many of these same tools
are used by the Company in delivering specialty pharmaceutical services and
products to patients afflicted with the disease states managed by the Company.
Behavioral Health Pharmacy Services. In recent years, Plan Sponsors,
particularly MCOs, have recognized the specialized behavioral health needs of
certain of their Members. As a result, many MCOs have "carved out" those
afflicted with behavioral health issues into separately managed programs. The
Company provides pharmaceutical-related services that encourage the proper and
cost-effective utilization of behavioral health medication to enrollees within
the segregated population within separate behavioral health organizations
("BHOs"), which are traditionally (but not always) affiliated with that MCO.
Through the development of provider education programs, utilization protocols
and prescription dispensing evaluation tools, the Company is able to integrate
pharmaceutical behavioral or mental health therapies with other medical
therapies to enhance patient compliance and minimize unnecessary or sub optimal
prescribing practices. These services are integrated into the Plan Sponsor's
package of behavioral health care products for marketing to private insurers,
public managed care programs and other health providers.
Pharmacy Dispensing Facility. The Company believes that pharmacy benefit
program costs may also be reduced through the distribution of pharmaceutical
products directly to Plan Sponsors' Members by the use of mail service programs
through its own proprietary pharmacy dispensing facility. The Company provides
these mail service dispensing services from a fully automated fulfillment
facility in Columbus, Ohio. Mail service is typically provided to Members who
receive maintenance medications. The use of mail service affords the Company and
its Plan Sponsors with the ability to reduce cost as compared to the more costly
retail distribution of prescription products.
5
Capitated Billing Arrangements. In addition to traditional fee-for-service
billing arrangements, the Company has historically offered capitated fee billing
arrangements to its MCO customers. A capitated fee arrangement permits a Plan
Sponsor to incur a fixed fee per Member (a "capitated" program), which allows
for cost shifting to the Company where aggregate PBM costs exceed
pre-established per Member amounts and a premium, or greater financial benefit
to the Company where costs are less than pre-established per Member amounts. For
2003, the Company has two remaining material capitated arrangements with an MCO.
For the year ended December 31, 2002, 12.9% of the Company's PBM Services
revenues were generated from capitated contracts compared to 23.3% in 2001,
while non-capitated business (including mail services) represented 87.1% and
76.7% for 2002 and 2001, respectively.
Sales and Marketing
In late 2002 and early 2003, the Company consolidated its sales force and
structured its resources on a regional basis in order to more effectively focus
on specific opportunities. The Company believes that this consolidation will
enhance its ability to market PBM Services and Specialty Management and
Distribution Services. In addition, the Company believes that a consolidated
sales force will increase the cross selling opportunities that exist within the
Company's customer base, specifically, and within the healthcare market,
generally.
The TennCare(R) Program
Historically, a majority of the Company's revenues were derived from
providing services in the State of Tennessee to MCOs participating in the State
of Tennessee's TennCare(R) program and BHOs participating in the State of
Tennessee's TennCare(R) Partners program. Revenues generated from MCOs and BHOs
participating in TennCare(R), as a percentage of the Company's revenue, is
decreasing and is expected to continue to decrease given the Company's growth in
the specialty area.
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 expires on 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, 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 MCO's ability to pay the Company, could materially
and adversely affect the Company's financial position and results of operations.
Competition
The Company faces substantial competition within the pharmaceutical
healthcare services industry. This industry includes a number of large,
well-capitalized companies with nationwide operations, such as AdvancePCS Inc.,
Caremark Rx, Inc., Express Scripts, Inc., Medco Health Solutions, Inc.,
MedImpact Healthcare Systems, Inc. and WellPoint Pharmacy Management, as well as
many smaller organizations typically operating on a local or regional basis. The
Company also competes with several national and regional specialty
pharmaceutical distribution companies that have substantial financial resources
and which also provide products and services to the chronically ill and
genetically impaired. These competitors include Accredo Health Inc., Chronimed,
Inc. and Priority Healthcare Corporation, as well as a number of the pharmacy
benefit managers mentioned above. Some of the Company's competitors are under
common control with, or ownership, by, brand name drug manufacturers or retail
pharmacy chains and may be better positioned with respect to the cost-effective
distribution of pharmaceuticals and/or the pricing of PBM Services. Some of the
Company's primary competitors have a substantially larger market share than the
Company's existing market share. Moreover, some of the Company's competitors may
have secured long-term supply or distribution arrangements for prescription
pharmaceuticals necessary to treat certain chronic disease states on price terms
substantially more favorable than the terms currently available to the Company.
As a result of such advantageous pricing, the Company may be less price
competitive than some of these competitors with respect to certain
pharmaceutical products. However, as it relates to its specialty programs, the
Company does not believe that it competes strictly on the selling price of
particular products; rather, it offers customers the opportunity to lower
overall pharmaceutical and medical costs while providing high quality care.
6
Financial Information about Segments
The following table presents revenue and income from operations by
segments. In 2002, the Company began operating in two segments. For comparative
purposes, 2001 and 2000 have been reclassified to those segments, since the
Company had only one operating segment prior to 2002. Operating segment
financial information is provided in Note 3 of Notes to Consolidated Financial
Statements.
Segment Financial Information
(in thousands)
-------------- ------------- --------------
2002 2001 2000
-------------- ------------- --------------
Revenues:
PBM Services $407,093 $415,099 $ 320,317
Specialty Management and Distribution Services 169,503 41,547 17,854
-------- -------- ---------
Total $576,596 $456,646 $ 338,171
======== ======== =========
Income from operations:
PBM Services $ 8,372 $ 11,422 $ (262)
Specialty Management and Distribution Services 15,776 3,768 83
-------- -------- ---------
Total $ 24,148 $ 15,190 $ (179)
======== ======== =========
Government Regulation
General. As a participant in the healthcare industry, the Company's
operations and relationships are subject to federal and state laws and
regulations and enforcement by federal and state governmental agencies. Various
federal and state laws and regulations govern the purchase, dispensing or
distribution and management of prescription drugs and related services and may
affect the Company. The Company believes that it is in compliance with all legal
requirements material to its operations.
In the second quarter of 2000, the Company entered into a global settlement
agreement with the Office of Inspector General (the "OIG"), within the U.S.
Department of Health and Human Services ("HHS"), and the State of Tennessee
relating to certain civil and criminal charges brought against former officers
of the Company's predecessor. The Company did not admit any wrongdoing in the
global settlement agreement but agreed to enter into a corporate integrity
agreement in order to ensure ongoing compliance with the requirements of
Medicare, Medicaid and all other Federal health care programs. Under the terms
of that agreement, the Company is required to, among other things, implement a
corporate compliance program, conduct ongoing educational programs to inform
employees regarding compliance with relevant laws and regulations and institute
a formal reporting procedure to disclose possible violations of law to the OIG.
In addition to these requirements, the Company must submit annual reports with
respect to the status of its compliance activities. Although compliance with the
corporate integrity agreement is designed to reduce the risk of violations of
laws and regulations relevant to our business, the Company is required to report
any such potential violations to the OIG and the U.S. Department of Justice. The
Company is therefore subject to increased regulatory scrutiny and, if the
Company commits legal or regulatory violations, it may be subject to an
increased risk of sanction or penalty, including exclusion from participation in
the Medicare or Medicaid programs.
On October 1, 2002, the OIG released its Draft Compliance Program Guidance
for Pharmaceutical Manufacturers (the "Draft Guidance") designed to provide
voluntary, nonbinding guidance to assist pharmaceutical manufacturers in
devising effective legal compliance programs. The Draft Guidance identifies in
general terms certain areas of potential legal risk that the OIG encourages
pharmaceutical manufacturers to consider in structuring compliance programs. The
OIG has solicited public comment on the Draft Guidance and will at some time in
the future publish final guidance along with a discussion of relevant comments.
The Company currently maintains a compliance program that includes many of the
key compliance program elements described in the Draft Guidance. We do not
believe that the Draft Guidance, if adopted in its current form, would have a
material effect on our business operations or financial results. However, it is
possible that the Draft Guidance could be changed prior to publication of the
final version, and any such changes could impact our business operations,
possibly materially. However, the Company does not believe that any such changes
could have a material adverse effect on the Company's financial performance,
results of operation, or liquidity.
Among the various Federal and state laws and regulations which may govern
or impact the Company's current and planned operations are the following:
7
Mail Service Pharmacy Regulation. Many of the states into which the Company
delivers pharmaceuticals have laws and regulations that require out-of-state
mail service pharmacies to register with, or be licensed by, the boards of
pharmacy or similar regulatory bodies in those states. These states generally
permit the dispensing pharmacy to follow the laws of the state within which the
dispensing pharmacy is located.
However, various states have enacted laws and adopted regulations directed
at restricting or prohibiting the operation of out-of-state pharmacies by, among
other things, requiring compliance with all laws of the states into which the
out-of-state pharmacy dispenses medications, whether or not those laws conflict
with the laws of the state in which the pharmacy is located. To the extent that
such laws or regulations are found to be applicable to the Company's operations,
the Company would be required to comply with them. In addition, to the extent
that any of the foregoing laws or regulations prohibit or restrict the operation
of mail service pharmacies and are found to be applicable to the Company, they
could have an adverse effect on the Company's prescription mail service
operations.
Other statutes and regulations may also affect the Company's mail service
operations. The Federal Trade Commission requires mail order sellers of goods
generally to engage in truthful advertising, to stock a reasonable supply of the
products to be sold, to fill mail orders within 30 days, and to provide clients
with refunds when appropriate.
Licensure Laws. Many states have licensure or registration laws governing
certain types of ancillary healthcare organizations, including preferred
provider organizations, third party administrators, and companies that provide
utilization review services. The scope of these laws differs significantly from
state to state, and the application of such laws to the activities of pharmacy
benefit managers often is unclear. The Company has registered under such laws in
those states in which the Company has concluded that such registration or
licensure is required.
The Company dispenses prescription drugs pursuant to orders received
through its ScripPharmacy.com Web site, as well as other affiliated private
label Web sites. Accordingly, the Company may be subject to laws affecting
on-line pharmacies. Several states have proposed laws to regulate on-line
pharmacies and require on-line pharmacies to obtain state pharmacy licenses.
Additionally, federal regulation by the United States Food and Drug
Administration (the "FDA"), or another federal agency, of on-line pharmacies
that dispense prescription drugs has been proposed. To the extent that such
state or federal regulation could apply to the Company's operations, certain of
the Company's operations could be adversely affected by such licensure
legislation. Management does not believe that the adoption of any of these
internet related laws would have a material adverse effect on the Company's
business or operations.
Other Laws Affecting Pharmacy Operations. The Company is subject to state
and federal statutes and regulations governing the operation of pharmacies,
repackaging of drug products, wholesale distribution, dispensing of controlled
substances, medical waste disposal, and clinical trials. Federal statutes and
regulations govern the labeling, packaging, advertising and adulteration of
prescription drugs and the dispensing of controlled substances. Federal
controlled substance laws require the Company to register its pharmacies and
repackaging facilities with the United States Drug Enforcement Administration
and to comply with security, recordkeeping, inventory control and labeling
standards in order to dispense controlled substances.
State controlled substance laws require registration and compliance with
state pharmacy licensure, registration or permit standards promulgated by
state's pharmacy licensing authority. Such standards often address the
qualification of an applicant's personnel, the adequacy of its prescription
fulfillment and inventory control practices and the adequacy of its facilities.
In general, pharmacy licenses are renewed annually. Pharmacists and pharmacy
technicians employed at each of the Company's dispensing locations must also
satisfy applicable state licensing requirements.
FDA Regulation. The FDA generally has authority to regulate drug
promotional information and materials that are disseminated by a drug
manufacturer or by other persons on behalf of a drug manufacturer. In January
1998, the FDA issued Draft Guidance regarding its intent to regulate certain
drug promotion and switching activities of pharmaceutical manufacturers that
control, directly or indirectly, a PBM. The FDA effectively withdrew the Draft
Guidance and has indicated that it would not issue a new draft guidance.
However, there can be no assurance that the FDA will not assert jurisdiction
over certain aspects of the Company's PBM business, including the internet sale
of prescription drugs.
Network Access Legislation. A majority of states now have some form of
legislation affecting the ability of the Company to limit access to a pharmacy
provider network or remove network providers. Such legislation may require the
Company or its client to admit any retail pharmacy willing to meet the plan's
8
price and other terms for network participation ("any willing provider"
legislation), or may prohibit the removal of a provider from a network except in
compliance with certain procedures ("due process" legislation) or may prohibit
days' supply limitations or co-payment differentials between mail and retail
pharmacy providers. Many states with any willing provider statutes also permit a
Member suspected of substance abuse or who otherwise need oversight by a
pharmacist to be "locked into" one particular pharmacy for the purchase of his
or her prescription medication. Many states have exceptions to the applicability
of these statutes for managed care arrangements or other government benefit
programs, including Tennessee.
Legislation Imposing Plan Design Mandates. Some states have enacted
legislation that prohibits Plan Sponsors from implementing certain restriction
design features, and many states have introduced legislation to regulate various
aspects of managed care plans. Including legislation that prohibits or restricts
therapeutic substitution, requires coverage of all drugs approved by the FDA, or
prohibits denial of coverage for non-FDA approved uses. For example, some states
provide that Members may not be required to use network providers, but that they
must instead be provided with benefits even if they choose to use non-network
providers ("freedom of choice" legislation), or provide that a Member may sue
his or her health plan if care is denied. Some states have enacted, and other
states have introduced, legislation regarding plan design mandates. Some states
mandate coverage of certain benefits or conditions. Such legislation does not
generally apply to the Company, but it may apply to certain of the Company's
customers (generally, HMOs and health insurers). If any such legislation was to
become widespread and broad in scope, it could have the effect of limiting the
economic benefits achievable through pharmacy benefit management. To the extent
that such legislation is applicable and is not preempted by the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (as to plans
governed by ERISA), certain operations of the Company could be adversely
affected.
Other states have enacted legislation purporting to prohibit health plans
from requiring or offering Members financial incentives for use of mail order
pharmacies.
Anti-Kickback Laws. Subject to certain statutory and regulatory exceptions
(including exceptions relating to certain managed care, discount, group
purchasing and personal services arrangements), Federal law prohibits the
payment or receipt of remuneration to induce, arrange for or recommend the
purchase of health care items or services paid for in whole or in part by
Medicare or state health care programs (including Medicaid programs and Medicaid
waiver programs). Certain state laws may extend the prohibition to items or
services that are paid for by private insurance and self-pay patients.
Management carefully considers the importance of such "anti-kickback" laws when
structuring its operations, and believes the Company is in compliance therewith.
Violation of the Federal anti-kickback statute could subject the Company to
criminal and/or civil penalties, including suspension or exclusion from Medicare
and Medicaid (including TennCare(R)) programs or state-funded programs in the
case of state enforcement.
The federal anti-kickback law has been interpreted broadly by courts, the
OIG and administrative bodies. Because of the broad scope of those statutes,
federal regulations establish certain safe harbors from liability. Safe harbors
exist for certain properly reported discounts received from vendors, certain
investment interests held by a person or entity, and certain properly disclosed
payments made by vendors to group purchasing organizations, as well as for other
transactions or relationships. Nonetheless, a practice that does not fall within
a safe harbor is not necessarily unlawful, but may be subject to scrutiny and
challenge. In the absence of an applicable exception or safe harbor, a violation
of the statute may occur even if only one purpose of a payment arrangement is to
induce patient referrals or purchases. Among the practices that have been
identified by the OIG as potentially improper under the statute are certain
"product conversion programs" in which benefits are given by drug manufacturers
to pharmacists or physicians for changing a prescription (or recommending or
requesting such a change) from one drug to another. Anti-kickback laws have been
cited as a partial basis, along with state consumer protection laws discussed
below, for investigations and multi-state settlements relating to financial
incentives provided by drug manufacturers to retail pharmacies in connection
with such programs.
Certain governmental entities have commenced investigations of PBM
companies and other companies having dealings with the PBM industry and have
identified issues concerning selection of drug formularies, therapeutic
substitution programs and discounts or rebates from prescription drug
manufacturers and whether best pricing requirements are being complied with.
Additionally, at least one state has filed a lawsuit concerning similar issues
against a health plan. To date, the Company has not been the subject of any such
investigation or suit and has not received subpoenas or been requested to
produce documents for any such investigation or suit. However, there can be no
assurance that the Company will not receive subpoenas or be requested to produce
documents in pending investigations or litigation in the future.
The Company believes that it is in compliance with the legal requirements
imposed by the anti-remuneration laws and regulations, and the Company believes
that there are material and substantial differences between drug switching
programs that have been challenged under these laws and the therapeutic
interchange practices and formulary management programs offered by the Company
to Plan Sponsors. However, there can be no assurance that the Company will not
be subject to scrutiny or challenge under such laws or regulations, or that any
such challenge would not have a material adverse effect upon the Company.
9
The Stark Laws. The federal law known as "Stark II" became effective in
1995 and was a significant expansion of an earlier federal physician
self-referral law commonly known as "Stark I". Stark II prohibits physicians
from referring Medicare or Medicaid patients for "designated health services" to
an entity with which the physician, or an immediate family member of the
physician, has a financial relationship. Possible penalties for violation of the
Stark laws include denial of payment, refund of amounts collected in violation
of the statute, civil monetary penalties and program exclusion. The Stark laws
standards contain certain exceptions for physician financial arrangements.
Management carefully considers the importance of Stark II in structuring
its sales and marketing arrangements and its operations and believes the Company
is in compliance therewith. Violation of the Stark II laws could subject the
Company to civil and/or criminal penalties, including suspension or exclusion
from Medicare and Medicaid (including TennCare) programs or state-funded
programs in the case of state enforcement.
State Self-Referral Laws. The Company is subject to state statutes and
regulations that prohibit payments for referral of patients and referrals by
physicians to healthcare providers with whom the physicians have a financial
relationship. Some state statutes and regulations apply to services reimbursed
by governmental as well as private payors. Violation of these laws may result in
prohibition of payment for services rendered, loss of pharmacy or health
provider licenses, fines and criminal penalties. The laws and exceptions or safe
harbors may vary from the federal Stark laws and vary significantly from state
to state. The laws are often vague, and in many cases, have not been widely
interpreted by courts or regulatory agencies; however, the Company believes it
is in compliance with such laws.
Statutes Prohibiting False Claims and Fraudulent Billing Activities. A
range of federal civil and criminal laws target false claims and fraudulent
billing activities. One of the most significant is the Federal False Claims Act,
which prohibits the submission of a false claim or the making of a false record
or statement in order to secure a reimbursement from a government-sponsored
program. In recent years, the federal government has launched several
initiatives aimed at uncovering practices which violate false claims or
fraudulent billing laws. Claims under these laws may be brought either by the
government or by private individuals on behalf of the government, through a
"whistleblower" or "qui tam" action.
Reimbursement. Approximately 40% of the Company's revenues are derived
directly from Medicare or Medicaid or other government-sponsored healthcare
programs subject to the federal anti-kickback laws and/or the Stark laws. Also,
the Company indirectly provides benefits to managed care entities that provide
services to beneficiaries of Medicare, Medicaid and other government-sponsored
healthcare programs. Should there be material changes to federal or state
reimbursement methodologies, regulations or policies, the Company's
reimbursements from government-sponsored healthcare programs could be adversely
affected. In addition, certain state Medicaid programs only allow for
reimbursement to pharmacies residing in the state or in a border state. While
the Company believes that it can service its current Medicaid patients through
existing pharmacies, there can be no assurance that additional states will not
enact in-state dispensing requirements for their Medicaid programs. To the
extent such requirements are enacted, certain therapeutic pharmaceutical
reimbursements could be adversely affected.
Legislation and Other Matters Affecting Drug Prices. Some states have
adopted legislation providing that a pharmacy participating in the state
Medicaid program must give the state the best price that the pharmacy makes
available to any third party plan ("most favored nation" legislation). Such
legislation may adversely affect the Company's ability to negotiate discounts in
the future from network pharmacies. At least one state has enacted "unitary
pricing" legislation, which mandates that all wholesale purchasers of drugs
within the state be given access to the same discounts and incentives. Such
legislation has not yet been enacted in the states where the Company's mail
service pharmacies are located. Such legislation, if enacted in other states,
could adversely affect the Company's ability to negotiate discounts on its
purchase of prescription drugs to be dispensed by its Mail Service pharmacies.
Confidentiality. Most of the Company's activities involve the receipt, use
and disclosure by the Company of confidential medical, pharmacy or other
health-related information concerning individual Members, including the
disclosure of the confidential information to the Member's health benefit plan.
In addition, the Company uses aggregated and blinded (anonymous) data for
research and analysis purposes.
In December 2000, HHS issued final regulations regarding the privacy of
individually identifiable health information pursuant to the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA"). On August 14, 2002, HHS
published final changes to the HIPAA privacy regulations (the "Privacy
Regulations"). The Company will be required to comply with the Privacy
Regulations by April 14, 2003.
10
The Privacy Regulations are designed to protect the medical information of
a health care patient or health plan enrollee that could be used to identify the
individual. The Company refers to this information as "protected health
information". The Privacy Regulations apply directly to certain entities known
as "covered entities," which include Plan Sponsors and most health care
providers. In addition, the Privacy Regulations require covered entities to
enter into contracts requiring their "business associates" to agree to certain
restrictions regarding the use and disclosure of protected health information.
The Privacy Regulations apply to protected health information maintained in any
format, including both electronic and paper records, and impose extensive
restrictions on the way in which covered entities (and indirectly their business
associates) may use and disclose protected health information. In addition, the
Privacy Regulations also give patients significant rights to understand and
control how their protected health information is used and disclosed. Often, use
and disclosure of protected health information must be limited to the minimum
amount necessary to achieve the purpose of the use or disclosure. Certain of the
Company's businesses will be covered entities directly subject to the Privacy
Regulations, and other of the Company's businesses will be "business associates"
of covered entities, such as Plan Sponsors.
Also in 2000, HHS published a final rule on transaction standards and code
sets pursuant to HIPAA (the "Transactions Standards"). The Transactions
Standards establish uniform standards to be utilized by covered entities in the
electronic transmission of health information in connection with certain common
health care financing transactions, such as health care claims. The compliance
deadline for the Transactions Standards was October 16, 2002; however, HHS
granted the Company and all other entities that applied on a timely basis a
one-year extension of the compliance deadline to October 16, 2003.
In addition, in February 2003, HHS issued final regulations governing the
security of PHI pursuant to HIPAA (the "Security Standards"). The Security
Standards impose substantial requirements on covered entities and their business
associates regarding the storage, utilization of, and access to and transmission
of PHI. The Security Standards must be complied with beginning on April 21,
2005.
Sanctions for failing to comply with standards issued pursuant to HIPAA can
include possible jail time, criminal penalties of up to $250,000 and civil fines
of up to $25,000.
The requirements imposed by the Privacy Regulations, the Transactions
Standards, and the Security Standards are extensive and have required
substantial cost and effort by MIM to assess and implement. MIM will take the
steps it believes are reasonable to ensure that its policies and procedures are
in compliance with the Privacy Rule, the Transactions Standards and the Security
Standards. The requirements imposed by HIPAA will likely increase our burden and
costs of regulatory compliance (including with respect to our health improvement
programs and other information-based products), alter our reporting to Plan
Sponsors and may reduce the amount of information we can use or disclose if
patients and health plan enrollees do not authorize such uses or disclosures.
Consumer Protection Laws. Most states have consumer protection laws that
have been the basis for investigations and multi-state settlements relating to
financial incentives provided by drug manufacturers to pharmacies in connection
with drug switching programs. No assurance can be given that the Company will
not be subject to scrutiny or challenge under one or more of these laws.
Disease Management Services Regulation. All states regulate the practice of
medicine. To the Company's knowledge, no PBM has been found to be engaging in
the practice of medicine by reason of its disease management services. However,
there can be no assurance that a federal or state regulatory authority will not
assert that such services constitute the practice of medicine, thereby
subjecting such services to federal and state laws and regulations applicable to
the practice of medicine.
Comprehensive PBM Regulation. Although no state has passed legislation
regulating PBM activities in a comprehensive manner, such legislation has been
introduced in the past in several states. Such legislation, if enacted in a
state in which the Company conducts a significant amount of business, could have
a material adverse impact on the Company's operations.
Antitrust Laws. Numerous lawsuits have been filed throughout the United
States by retail pharmacies against drug manufacturers challenging certain brand
drug pricing practices under various state and Federal antitrust laws. A
settlement in one such suit would require defendant drug manufacturers to
provide the same types of discounts on pharmaceuticals to retail pharmacies and
buying groups as are provided to managed care entities to the extent that their
respective abilities to affect market share are comparable, a practice which, if
generally followed in the industry, could increase competition from pharmacy
11
chains and buying groups and reduce or eliminate the availability to the Company
of certain discounts, rebates and fees currently received in connection with its
drug purchasing and formulary administration programs. In addition, to the
extent that the Company or an associated business appears to have actual or
potential market power in a relevant market, business arrangements and practices
may be subject to heightened scrutiny from an anti-competitive perspective and
possible challenge by state or Federal regulators or private parties.
While management believes that the Company is in substantial compliance
with all existing laws and regulations stated above, such laws and regulations
are subject to rapid change and often are uncertain in their application. As
controversies continue to arise in the health care industry (for example,
regarding the efforts of Plan Sponsors and pharmacy benefit managers to limit
formularies, alter drug choice and establish limited networks of participating
pharmacies), Federal and state regulation and enforcement priorities in this
area may increase, the impact of which on the Company cannot be predicted. There
can be no assurance that the Company will not be subject to scrutiny or
challenge under one or more of these laws or that any such challenge would not
be successful. Any such challenge, whether or not successful, could have a
material adverse effect upon the Company's business and results of operations.
Employees
At February 28, 2003, the Company employed a total of 390 people, including
51 licensed pharmacists. The Company's employees are not represented by any
union and, in the opinion of management, the Company's relations with its
employees are satisfactory.
Available Information
The Company files annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements and other information filed by the Company at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
(800) SEC-0330 for further information on the Public Reference Room. The SEC
maintains an Internet web site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC. The Company's filings are also available to the public at the web site
maintained by the SEC, http://www.sec.gov.
The Company makes available, free of charge, through its web site its
reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, as soon as
reasonably practicable after they are filed with the SEC. The URL for the
Company's web site is www.mimcorporation.com
Item 2. Properties
The Company's corporate headquarters are located in leased office space in
Elmsford, New York. The Company also leases commercial office space for its
above-described operations in South Kingstown, Rhode Island; Columbus, Ohio;
Livingston, New Jersey; Roslyn Heights, New York; and Nashville, Tennessee.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of Security Holders for the
fourth quarter of the fiscal year reported on in this Form 10-K.
12
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
The Company's common stock, par value $0.0001 per share ("Common Stock"),
is traded on the National Market System of The Nasdaq Stock Market, Inc. under
the symbol "MIMS." The following table represents the range of high and low
sales prices for the Company's Common Stock for the last eight quarters. Such
prices reflect interdealer prices, without retail markup, markdown or
commissions and may not necessarily represent actual transactions.
High Low
--------------------------
2001: First Quarter................ $ 2.56 $ 0.81
Second Quarter............... $ 6.65 $ 2.16
Third Quarter................ $ 12.58 $ 5.93
Fourth Quarter............... $ 18.33 $ 9.46
2002: First Quarter................. $ 21.59 $ 13.25
Second Quarter............... $ 22.95 $ 9.21
Third Quarter................ $ 12.71 $ 7.30
Fourth Quarter............... $ 9.75 $ 5.08
As of March 15, 2003, there were 92 stockholders of record in addition to
approximately 10,489 stockholders whose shares were held in nominee name.
The Company has never paid cash dividends on its Common Stock and does not
anticipate doing so in the foreseeable future.
During the three months ended December 31, 2002, the Company did not sell
any securities without registration under the Securities Act of 1933, as amended
(the "Securities Act").
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data presented below should be read in
conjunction with, and is qualified in its entirety by reference to, Management's
Discussion and Analysis and the Company's Consolidated Financial Statements and
the Notes thereto appearing elsewhere in this Report.
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Revenues (1) $576,596 $ 456,646 $ 338,171 $ 350,693 $432,609
Special charges and TennCare(R)reserve (851)(2) (2,476)(2) -- 6,029 3,700(3)
Net income (loss) (2,4,5) 18,685 14,202 (1,823) (3,785) 4,271
Net income (loss) per basic share 0.83 0.67 (0.09) (0.20) 0.28
Net income (loss) per diluted share (6) 0.79 0.64 (0.09) (0.20) 0.26
Weighted average shares outstanding
used in computing basic income (loss)
per share 22,616 21,273 19,930 18,660 15,115
Weighted average shares outstanding
used in computing diluted income (loss)
per share 23,563 22,289 19,930 18,660 16,324
13
AS OF DECEMBER 31,
(IN THOUSANDS)
-----------------------------------------------------------------------------
BALANCE SHEET DATA 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 5,751 $ 12,487 $ 1,290 $ 15,306 $ 4,495
Investment securities -- -- -- 5,033 11,694
Working (deficit) capital 5,101 9,307 (11,184) 8,995 19,823
Total assets 182,231 139,819 120,401 115,683 110,106
Capital lease obligations,
net of current portion 430 1,031 1,621 718 598
Long-term debt, net of current portion -- -- -- 2,279 6,185(7)
Stockholders' equity 94,208 60,296 39,505 35,187 39,054
- ----------------------------
(1) Beginning in 2001, as required by EITF No. 00-22, the Company adopted a new
method of recording rebates received from manufacturers as a reduction of
cost of revenue and rebates shared with Plan Sponsors as a reduction of
revenue. Prior to 2001 the Company recorded the difference between rebates
billed and the rebates shared with customers as a reduction of cost of
revenue. For comparative purposes, the years 2000, 1999 and 1998 have all
been reclassified to give effect to this new methodology. In 2002, the
Company changed the terms with certain of its PBM clients, whereby the
Company no longer assumes credit risk. Revenue for these clients is
recorded net.
(2) In 1999, the Company recorded $6,029 of TennCare reserve adjustments for
estimated losses on contract receivables relating to Tennessee Health
Partnership ("THP"), Preferred Health Plans and Xantus Health Plans of
Tennessee, Inc. ("Xantus"), as further described in Note 12 of Notes to
Consolidated Financial Statements. During the first quarter of 2001, the
Company recorded a reserve adjustment credit of $980 to reflect a favorable
settlement with THP relative to the amount initially reserved in 1999. In
the third quarter of 2001 and the first quarter of 2002, the Company
recorded TennCare reserve adjustments of $1,496 and $851, respectively, as
a result of the collection of receivables from Xantus, which were
previously reserved in 1999. The remaining reserve is $357.
(3) In 1998, the Company recorded charges of $1,500 in connection with the
negotiated termination of a vendor contract and $2,200 paid in settlement
of a Federal and State of Tennessee investigation of the conduct of two
former officers of the Company.
(4) Net income (loss) includes legal expenses advanced for the defense of two
former officers for the years 2000, 1999, and 1998 in the amounts of
$2,700, $1,400, and $ 1,300, respectively.
(5) In the fourth quarter of 2000, the Company recorded a provision for loss of
$2,300 on its investment in Wang Healthcare Information Systems.
(6) The historical loss per common share for the years 2000 and 1999 excludes
the effect of common stock equivalents, as their inclusion would be
antidilutive.
(7) This amount represents long-term debt assumed by the Company in connection
with its acquisition of Continental Managed Pharmacy Services, Inc. and its
subsidiaries.
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjuction with the Consolidated
Financial Statements of MIM Corporation and subsidiaries (collectively, the
"Company") including the Notes thereto, included elsewhere in 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. These forward
looking statements may include statements relating to the Company's business
development activities, sales and marketing efforts, the status of material
contractual arrangements, including the negotiation or re-negotiation of such
arrangements, future capital expenditures, the effects of regulation and
competition on the Company's business, future operating performance of the
Company and the results, benefits and risks associated with integration of
acquired companies. Investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, that actual results may differ materially from those possible
results discussed in the forward-looking statements as a result of various
factors. These factors include, among other things, risks associated with
risk-based or "capitated" contracts, increased government regulation related to
the health care and insurance industries in general and more specifically,
pharmacy benefit management and specialty pharmaceutical distribution
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.
Business Overview
The Company is a pharmaceutical healthcare organization delivering
innovative pharmacy benefit management, specialty pharmaceutical management and
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 pharmacy benefit recipients covered by a customer's
pharmacy-related health benefits. These services are organized under two
reportable operating segments: PBM Services and Specialty Management and
Distribution Services.
The Company offers Plan Sponsors a broad range of PBM Services designed to
promote the cost-effective delivery of clinically appropriate pharmacy benefits
through its network of retail pharmacies and its own mail service distribution
facility.
Through its BioScrip(R) specialty injectable and infusion therapy programs,
the Company distributes high-cost pharmaceuticals and provides clinically
focused case and disease management programs to Members afflicted with chronic
illnesses or genetic impairments. The disease states or conditions for which the
Company has such programs include HIV/AIDS, oncology, hemophilia, multiple
sclerosis, growth hormone deficiency, Gaucher's disease, rheumatoid arthritis,
infertility, respiratory syncytial virus (RSV), hepatitis C, Crohn's disease and
transplants. The specialty drugs distributed through the BioScrip(R) programs
are dispensed and serviced from the Company's various dispensing locations in
Columbus, Ohio; Livingston, New Jersey; and Roslyn Heights, New York. The Roslyn
Heights facility has been utilized since January 2002, the acquisition date of
Vitality Home Infusion Services, Inc. ("Vitality"), a New York-based provider of
specialty pharmaceutical injectable therapy services. The Livingston location
has been utilized since August 2000, the acquisition date of American Disease
Management Associates, LLC ("ADIMA"), a New Jersey-based provider of specialty
injectable and infusion therapy services.
Recent Developments
On February 27, 2003, the Executive Committee of the Board of Directors
approved a stock repurchase program pursuant to which the Company is authorized
to repurchase up to an aggregate of $10 million of its Common Stock in open
market or private transactions. As of March 25, 2003, the Company has
repurchased 799,893 shares of its Common Stock in the open market at an
aggregate purchase price of $5.1 million.
15
Critical Accounting Policies
Revenue Recognition
Revenues consist principally of sales of prescription drugs to Members,
either through the Company's own pharmacies or through the Company's network of
contractually affiliated retail pharmacies, and are recognized when those
prescriptions are dispensed. Revenue is primarily derived from the following
types of arrangements:
Fee-For-Service. Approximately 91% of revenues are generated from
fee-for-service contracts. Under these contracts, revenues from orders dispensed
by the retail pharmacy networks are recognized when the pharmacy services are
reported to the Company by the dispensing pharmacist through the POS claims
processing systems and the drug is dispensed.
The Company evaluates each contract using the indicators of Emerging Issues
Task Force No. 99-19 "Reporting Gross Revenue as a Principal vs. Net as an
Agent" ("EITF 99-19") to determine whether the Company acts as a principal or as
an agent in the fulfillment of prescriptions through the retail pharmacy
network. When the Company independently has a contractual obligation to pay a
network pharmacy provider for benefits provided to its Plan Sponsors Members,
and has other indicators of risk and reward, the Company includes payments from
these Plan Sponsors as revenue and payments to the network pharmacy providers as
cost of revenue ('gross') in accordance with EITF 99-19, as these transactions
require the Company to assume credit risk and act as a principal. If the Company
was merely administering Plan Sponsors' network pharmacy contracts in which the
Company does not assume credit risk, but acts as an agent, the Company records
only the administrative or dispensing fees as revenue ('net').
Capitated Agreements. Approximately 9% of revenues are generated from
capitated contracts. The Company's capitated contracts with Plan Sponsors
require the Company to provide covered pharmacy services to Plan Sponsor Members
in return for a fixed fee per Member per month paid by the Plan Sponsor.
Capitated contracts have terms varying from six months to one year. These
contracts are subject to rate adjustment or termination upon the occurrence of
certain events. 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 expected loss contracts.
Co-payments. When prescriptions are filled and the Company is the
participating pharmacy, the Company is entitled to receive co-payments from
Members and record these co-payments as revenue when the amounts are deemed
collectible and reasonably estimable. When prescriptions are filled through its
retail pharmacy networks, the Company is not entitled to these amounts and does
not account for co-payments in its financial statements as these amounts are
never billed or collected by the Company and it has no legal right or obligation
to co-payments collected by the retail pharmacies.
Allowance for Doubtful Accounts
Allowances for doubtful accounts are based on estimates of losses related
to customer receivable balances. Estimates are developed by using standard
quantitative measures based on historical losses, adjusting for current economic
conditions and, in some cases, evaluating specific customer accounts for risk of
loss. The establishment of reserves requires the use of judgment and assumptions
regarding the potential for losses on receivable balances.
Rebates
Manufacturers' rebates are recorded as estimates until such time as the
rebate monies are received. These estimates are based on historical results and
trends as well as the Company's forecasts. In January 2001, the Company adopted
Emerging Issues Task Force Issue No. 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"). EITF 00-22,
states, among other things, that rebates received from pharmaceutical
manufacturers should be recognized as a reduction of cost of revenue and rebates
shared with Plan Sponsors as a reduction of revenue.
Accounting for Stock-Based Compensation
The Company accounts for employee stock-based compensation plans and
non-employee director stock incentive plans in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"). Stock options granted
to non-employees are accounted for in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation" (See Note 14 of Notes to Consolidated Financial
Statements). Stock options granted to
16
non-employees are also accounted for in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation", as well as Emerging Issues Task Force
No. 96-18 "Accounting for Equity Instruments That Are Issued To Other Than
Employees for Acquiring, or In Conjunction with Selling, Goods or Services("EITF
96-18")."
Purchase Price Allocation
The Company accounts for its acquisitions under the purchase method of
accounting and, accordingly, the acquired assets and liabilities assumed are
recorded at their respective fair values. The recorded values of assets and
liabilities are based on estimates and independent valuations when available.
The remaining values are based on management's judgments and estimates and,
accordingly, the Company's financial position or results of operations may be
affected by changes in estimates and judgments.
Income Taxes
As part of the process of preparing the Company's consolidated financial
statements, management is required to estimate income taxes. The process
involves estimating actual current tax expense along with assessing temporary
differences resulting from differing treatment of items for book and tax
purposes. These timing differences result in deferred tax assets, which are
included in the Company's consolidated balance sheet.
Deferred Tax Assets
Deferred tax assets are recognized based on temporary differences between
book and tax basis of assets and liabilities. A valuation allowance is recorded
against these assets when, in the opinion of the Company, it is uncertain that
the Company will realize the benefit from its deferred tax assets.
Impairment of Long Lived Assets
The Company evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of long lived assets, including
intangible assets, may warrant revision or that the remaining balance of an
asset may not be recoverable. The measurement of possible impairment is based on
the ability to recover the balance of assets from expected future operating cash
flows on an undiscounted basis. Impairment losses, if any, would be determined
based on the present value of the cash flows using discount rates that reflect
the inherent risk of the underlying business. It is the Company's belief that no
such impairment existed as of December 31, 2002 and 2001.
Results of Operations
Specialty Management and Distribution Services
The following table provides details for the segment for the years ended
December 31, 2002, 2001 and 2000.
Specialty Management and Distribution Services
($ in thousands)
2002 Inc/(Dec) 2001 Inc/(Dec) 2000
- --------------------------------------------------------------------------------
Revenues $169,503 308% $41,547 133% $17,854
Cost of revenues 130,990 28,398 11,211
------- ------ ------
Gross profit $ 38,513 $13,149 $ 6,643
======== ======= =======
Gross profit percentage 22.7% 31.7% 37.2%
Year ended December 31, 2002 vs. year ended December 31, 2001
Revenues increased $128 million to $169.5 million in 2002 compared to $41.5
million in 2001. This increase was primarily the result of the revenue generated
from the Vitality business purchased on January 31, 2002 (see Note 4 of Notes to
Consolidated Financial Statements) and continued growth in the Company's
BioScrip(R) injectable and infusion therapy programs.
17
Cost of revenue increased $102.6 million to $131 million in 2002 compared
to $28.4 million in 2001. This increase is commensurate with the business
generated from the Vitality business purchased on January 31, 2002 and the
growth in the Company's BioScrip(R) programs from 2001.
Gross profit increased $25.4 million to $38.5 million in 2002 compared to
$13.1 million in 2001. This is a result of the business generated from the
Vitality business purchased on January 31, 2002 as well as increases from the
BioScrip(R) programs, reflecting their revenue growth from 2001.
The gross profit percentage declined in 2002 compared to 2001 as a result
of increases in the lower margin BioScrip(R) injectable therapy programs. The
current gross profit percentages now reflect a higher proportion of injectable
therapy programs compared to 2001. Infusion therapy historically has yielded a
higher gross profit percentage.
Year ended December 31, 2001 vs. year ended December 31, 2000
Revenues increased $23.6 million to $41.5 million in 2001, compared to
$17.9 million in 2000. The year 2001 included a full year of revenue generated
from the ADIMA business purchased in August 2000.
Cost of revenue increased $17.2 million to $28.4 million in 2001 compared
to $11.2 million in 2000. This increase is commensurate with the increase in
revenues discussed above.
Gross profit increased $6.5 million to $13.1 million in 2001 compared to
$6.6 million in 2000. This is a result of the same changes in revenue discussed
above. The gross profit percentage declined from 2001 to 2000 as a result of an
increase in the BioScrip(R) injectable therapy revenue which has a lower gross
profit percentage than infusion therapy.
PBM Services
The following table provides details for the segment for the years ended
December 31, 2002, 2001 and 2000:
PBM Services
($ in thousands)
2002 Inc/(Dec) 2001 Inc/(Dec) 2000
-------------------------------------------------------
Revenues $407,093 (2%) $415,099 30% $320,317
Cost of revenues 375,008 374,845 291,780
-------- -------- --------
Gross profit $ 32,085 $ 40,254 $ 28,537
======== ======== ========
Gross profit percentage 7.9% 9.7% 8.9%
Year ended December 31, 2002 vs. year ended December 31, 2001
Revenues decreased $8 million to $407.1 million in 2002 compared to $415.1
million in 2001. In the second quarter of 2002 the Company changed the terms of
some of its PBM customers so that the Company no longer accepted financial or
credit risk for these customers. Those changes resulted in the Company recording
revenue from these customers on a net basis where previously it was recorded on
a gross basis. This change reduced gross revenue and cost of revenue by $53.5
million for the twelve months ended December 31, 2002, with no resulting effect
on reported gross profit. Revenue was also reduced in 2002 as a result of the
Company's termination of certain unprofitable PBM clients and the liquidation of
Access MedPLUS in the fourth quarter of 2001. These decreases were partially
offset by increases in the Company's retail network and mail service contracts.
For 2002, approximately 13% of the Company's PBM Services revenues were derived
from capitated contracts compared to approximately 23% in 2001.
Cost of revenue increased slightly to $375 million in 2002 from $374.8
million in 2001. This change is a result of the same reasons discussed above.
18
Gross profit for the PBM Services segment decreased $8.2 million to $32.1
million in 2002 compared to $40.3 million in 2001. This is a result of the
Company's termination of certain less profitable PBM accounts and the liqudation
of a former TennCare MCO customer. These decreases were partially offset by
increases from continued growth in the Company's retail network and mail
services.
The gross profit percentage decreased to 7.9% in 2002 from 9.7% in 2001 as
result of the liquidation of a former TennCare MCO customer, the change in the
mix of PBM clients from 2001 as well as new growth in the Company's retail
network and mail services for 2002 which generated lower gross profit
percentages.
Year ended December 31, 2001 vs. year ended December 31, 2000
Revenues increased $94.8 million in 2001 to $415.1 million compared to
$320.3 million in 2000. This increase is primarily due to growth in new PBM and
mail services clients as well as increased member utilization and eligibility
for existing PBM clients. For 2001, approximately 23% of PBM Services revenues
were derived from capitated contracts compared to approximately 32% in 2000.
In the first quarter of 2001 the Company adopted a new method of recording
pharmaceutical manufacturers' rebates that are shared with some of the Company's
PBM customers. As a result, the Company has recorded rebates shared with its
customers as a reduction of revenue and rebates billed to manufacturers as a
reduction to cost of revenue. Prior to this, the Company recorded the net
difference between rebates billed and rebates shared with customers as a
reduction of cost of revenue.
Cost of revenue increased $83.0 million to $374.8 million in 2001 compared
to $291.8 million in 2000. This increase is the result of increased business
in the retail network and mail services, as discussed above.
Gross profit increased $11.8 million to $40.3 million in 2001 compared to
$28.5 million in 2000. This is a result of the same reasons discussed above.
CONSOLIDATED RESULTS
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $7.4 million, or
19%, to $45.9 million in 2002 compared to $38.5 million in 2001. This increase
is principally the result of the inclusion of Vitality's business since February
2002, additional expenses incurred to support the growth of the Company's
businesses and higher insurance premiums. Selling, general and administrative
expenses as a percentage of revenue decreased to 8% in 2002 from 8.4% in 2001.
Selling, general and administrative expenses increased $4.6 million, or
13.6%, to $38.5 million in 2001 compared to $33.9 million in 2000. This increase
was primarily the result of the inclusion of ADIMA's business and increases
related to the Company's general growth, including the hiring of additional key
management in support of the Company's Specialty Management and Distribution
Services and PBM Services businesses. These increases were partially offset by
the termination of the legal defense costs associated with two former officers
of the Company. As a percentage of revenue, selling, general and administrative
expenses decreased to 8.4% in 2001 from 10% in 2000.
TennCare(R) Reserve Adjustments
In 1999, the Company recorded $6.0 million of TennCare(R) reserve
adjustments for estimated losses on contract receivables relating to Tennessee
Health Partnership ("THP"), Preferred Health Plans and Xantus Health Plans of
Tennessee, Inc. ("Xantus"), as further described in Note 12 of Notes to
Consolidated Financial Statements. There were no reserve adjustments in 2000.
During the first quarter of 2001, the Company recorded a reserve adjustment
credit of $1.0 million to reflect a favorable settlement with THP relative to
the amount initially reserved in 1999. In the third quarter of 2001 and the
first quarter of 2002, the Company recorded reserve adjustment credits of $1.5
million and $0.9 million, respectively, as a result of the collection of
receivables from Xantus, which were previously reserved in 1999.
19
Amortization of Intangibles
In 2002 and 2001 the Company recorded amortization of intangibles of $1.4
million and $2.2 million, respectively. The decrease of $0.8 million in 2002 is
a result of the adoption of SFAS No. 142 (see Note 5 of Notes to Consolidated
Financial Statements), partially offset by increased amortization of intangibles
acquired from Vitality on January 31, 2002.
In 2001, the Company recorded amortization of goodwill and other
intangibles of $2.2 million compared to $1.5 million in 2000. This increase is
due to the inclusion of a full year of goodwill amortization for ADIMA in 2001.
Net Interest Expense
Net interest expense was $0.8 million and $0.06 million for 2002 and 2001,
respectively. Interest expense for 2002 is primarily a result of increased
borrowings under the Company's revolving credit facility to fund the $35 million
cash portion of purchase price for the Vitality acquisition.
Net interest expense was $0.06 million for 2001 compared to net interest
income of $0.8 million for 2000.
Provision for Income Taxes
Tax expense for 2002 and 2001 was $4.7 million and $0.9 million,
respectively. The effective tax rate for 2002 was 20% compared to 6.2% for 2001.
The Company was able to fully offset 2001 taxable income with its Federal net
operating loss carry forwards ("NOLs"), but was only able to partially offset
2002 taxable income with NOLs. At December 31, 2002, the Company has remaining
NOLs of approximately $21.5 million which will begin expiring in 2009. As
opposed to the Company's NOLs that reduced the effective tax rate in 2002 and
2001, the remaining NOLs will be recorded directly in Stockholders' Equity when
utilized rather than as a reduction of tax expense as they were generated
primarily as a result of the exercise of stock options in prior years. However,
the Company will receive the cash flow benefit from the reduction in its income
tax liability when the remaining NOLs are utilized. For 2003, the Company
believes that its effective tax rate will be approximately 40%. The Company did
not have tax expense in 2000 because it did not have any taxable income.
As of January 1, 2003, certain of the NOLs described above were subject to
limitation and may be utilized in a future year upon release of the limitation
and recorded directly in Stockholders' Equity as discussed above. If the NOLs
are not utilized in the year they are available they may be utilized in a future
year to the extent they have not expired.
Net Income and Earnings Per Share
Net income for 2002 increased 32% to $18.7 million, or $0.79 per diluted
share, compared to net income of $14.2 million, or $0.64 per diluted share, for
2001. Excluding 2002 and 2001 gains associated with TennCare(R) reserve
adjustments of $0.03 and $0.10 per diluted share, respectively, and the $0.08
impact of amortization of goodwill in 2001, net income for 2002 was $18.0
million, or $0.76 per diluted share, compared to net income of $13.6 million, or
$0.61 per diluted share, for 2001.
For 2001, the Company recorded net income of $14.2 million, or $0.64 per
diluted share, including gains associated with the TennCare(R) reserve
adjustment of $0.10 per diluted share, compared with a net loss of $1.8 million,
or $0.09 per share, for 2000, which included charges of $5.4 million relating to
the legal defense costs of two former officers and the write off of a
non-operating investment.
Liquidity and Capital Resources
The Company utilizes both funds generated from operations and available
credit under its Facility (as defined below) for acquisitions, capital
expenditures and its general working capital needs.
For 2002, net cash provided to the Company from operating activities
totaled $20.8 million compared to $10.9 million for 2001. This improvement is
the result of continued growth in the Company's businesses resulting in
increased cash earnings.
As a percentage of accounts receivable, the allowance for doubtful accounts
was 4.4% and 7.3% at December 31, 2002 and 2001, respectively. The decrease in
2002 is due primarily to the reduction in reserves associated with the
TennCare(R) reserve adjustment in the first quarter of 2002 (see "TennCare(R)
Reserve Adjustments" discussion above).
20
Net cash used in investing activities in 2002 was $33.3 million compared to
$3.7 million used in 2001. This increase reflects approximately $35 million of
the Facility used for the cash portion of the purchase price for the Vitality
acquisition (see Note 4 of Notes to Consolidated Financial Statements),
partially offset by the repayment in full, in March 2002, of a $2.1 million
officer loan (see Note 7 of Notes to Consolidated Financial Statements).
Net cash provided by financing activities in 2002 was $5.7 million compared
to $3.9 million in 2001. The increase reflects $4.6 million currently
outstanding under the Facility after repaying most of the borrowings used to pay
the cash portion of the purchase price for the Vitality acquisition, offset by a
$5.6 million decrease in proceeds from the exercise of stock options and $2.6
million less of treasury stock purchases in 2001.
At December 31, 2002, the Company had working capital of $5.1 million
compared to $9.3 million at December 31, 2001. This change is primarily the
result of the acquisition of Vitality for $45 million, of which $35 million was
paid in cash. Goodwill and intangible assets, classified as non-current,
increased $39.4 million and the $4.6 million current unpaid balance under the
Facility was classified as a current liability. Amortizable intangibles are
amortized over 2 to 10 years.
On November 1, 2000, the Company entered into a $45 million secured
revolving credit facility (the "Facility") with HFG Healthco-4 LLC, an affiliate
of Healthcare Finance Group, Inc. ("HFG"). The Facility 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 InterBank 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 agreement governing the Facility. As of December 31, 2002, there was
outstanding $4.6 million under the Facility as a result of the Company's
acquisition of Vitality. The Facility terminates October 31, 2003. The Company
believes that it will be able to extend or renew the Facility or, alternatively,
obtain a new credit facility with another lender; however, there can be no
assurances that the Company will be able to renew or extend the Facility or
obtain a new one on terms favorable to the Company. Failure to renew or extend
the Facility or enter into a new credit facility could have a material adverse
effect on the Company.
The Facility is an asset-based loan, secured by the Company's receivables,
with any borrowings repaid by the cash flow from customer payments. The
borrowing and repayment processes under the Facility are outlined below:
Cash Received by the Company
Under the terms of the Facility, all remittances from customers are
sent/deposited into the Company's lock box accounts with authorized access by
HFG. Regardless of whether any portion of the Facility is outstanding on any
given day, all available cash in the lock box accounts is swept daily by HFG to
its account. If there are no amounts owed under the Facility, the swept cash is
transferred back the same day to the Company's main bank account. If any amounts
are currently outstanding under the Facility, the swept cash is immediately
applied by HFG against all or a portion of the loan balance. Any cash available
after repayment of the entire outstanding loan balance on any given day is
transferred back to the Company as discussed above.
Check Disbursements by the Company
All Company-issued checks are drawn on two disbursement accounts, one for
pharmacy claims payments and one for remaining accounts payable. Checks are
presented for payment daily to the disbursement accounts and are automatically
funded by a transfer from the Company's main concentration account. If there are
sufficient available balances in the concentration account, funds are
automatically transferred to the disbursement accounts to cover the
presentments. If there are not sufficient available balances in the
concentration account the Company must borrow from the Facility that day. An
authorized officer of the Company transmits a notice to HFG with the requested
amount by noon. Within an hour HFG wires the requested amount as available funds
to the concentration account, which amount is then automatically transferred the
same day to the disbursement accounts to cover the presentments.
On February 28, 2003, the Company announced a stock repurchase program
pursuant to which the Company is authorized to purchase up to $10 million of the
Company's Common Stock from time to time in the open market or in private
transactions. As of March 25, 2003, the Company has used, in the aggregate,
approximately $5.1 million of this authorization. The Board's current
authorization supersedes the repurchase program adopted by the Company in 2001.
In the first quarter of 2001, the Company commenced a stock repurchase
program under which it was authorized to repurchase up to $5 million of the
Company's Common Stock from time to time in the open market or in private
21
transactions. In February 2001, the Company repurchased 1,298,183 shares of
Common Stock at a price of $2.00 per share in private transactions. (See Note 11
of Notes to Consolidated Financial Statements). This program has been superseded
by the 2003 repurchase plan.
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, together with funds available under the Facility and
cash expected to be generated from operating activities, to fund the Company's
anticipated working capital needs, the current stock repurchase program and
other cash needs.
The Company also may pursue joint venture arrangements, business
acquisitions and other transactions designed to expand its Specialty Management
and Distribution Services and PBM Services businesses, which the Company would
expect to fund from cash on hand or debt, borrowings under the Facility, other
future indebtedness or, if appropriate, the private and/or public sale or
exchange of equity securities of the Company (see discussion of the Facility
above).
The following table sets forth the Company's contractual obligations
affecting cash in the future.
Payments Due by Period
(in thousands)
- -------------------------------------------------------------------------------------------------
Less than 1 After 5
Contractual Obligations Total year 1-3 years 4-5 years years
Line of Credit $ 4,608 $4,608 $ -- $ -- $ --
Capital Lease Obligations 1,150 695 455 -- --
Operating Leases 8,482 1,725 4,388 2,369 --
- ------------------------------------------------------------------------------------------------
Total Contractual Cash Obligations $14,240 $7,028 $4,843 $2,369 $ --
================================================================================================
Other Matters
In 1998, the Company recorded a $2.2 million 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
occurring prior to the Company's August 1996 initial public offering involving,
among others, two former officers of the Company. The definitive agreement
covering that settlement was executed on June 15, 2000, and required payment of
$0.8 million in 2000, $0.9 million in 2001, and $0.5 million in 2002. On July 1,
2002, this settlement was paid in full.
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 expires on 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, 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 MCO's ability to pay the Company, could materially
and adversely affect the Company's financial position and results of operations.
Revenues from the TennCare(R) program for the years 2002, 2001 and 2000 were
30.1%, 36.6% and 47.5%, respectively of total revenue.
Historically, as a result of providing capitated PBM services to certain
TennCare(R) MCOs, the Company's pharmaceutical claims costs had been subject to
significant increases from October through February, which the Company believes
is due to the need for increased medical attention to, and intervention with,
MCOs' Members during the colder months. The resulting increase in pharmaceutical
costs impacted the profitability of capitated contracts. Currently, the Company
has no capitated PBM arrangements with MCOs participating in the TennCare(R)
program. Fee-for-service arrangements mitigate the adverse effect on
profitability of higher pharmaceutical costs incurred under capitated contracts,
as higher utilization positively impacts profitability. The Company presently
anticipates that approximately 12% of its total revenues for 2003 will be
derived from capitated arrangements.
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
22
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.
On March 23, 2002, Mr. Richard Friedman, the Company's Chairman and Chief
Executive Officer, repaid in full a $1.7 million loan from the Company. This
loan, together with accrued and unpaid interest, totaled approximately $2.1
million.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's debt. At December 31, 2002 the Company did not have
any long term debt. The Company does not invest in, or otherwise use, derivative
financial instruments.
At December 31, 2002, the carrying values of cash and cash equivalents,
accounts receivable, accounts payable, claims payable, payables to Plan Sponsors
and others, and debt approximate fair value due to their short-term nature.
Because management does not believe that its exposure to interest rate
market risk is material at this time, the Company has not developed or
implemented a strategy to manage this market risk through the use of derivative
financial instruments or otherwise. The Company will assess the significance of
interest rate market risk from time to time and will develop and implement
strategies to manage that risk as appropriate.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
MIM Corporation
We have audited the accompanying consolidated balance sheet of MIM Corporation
and subsidiaries as of December 31, 2002, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. Our audit also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audit. The
financial statements and schedule of MIM Corporation as of December 31, 2001 and
for the years ended December 31, 2001 and 2000, were audited by other auditors
who have ceased operations and whose report dated February 16, 2002, expressed
an unqualified opinion on those statements, prior to restatement.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MIM Corporation at
December 31, 2002, and the consolidated results of their operations and their
cash flows for the year ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
In addition, as described in Note 5, these financial statements have been
further revised to include the transitional disclosures required by Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets",
which was adopted by the Company as of January 1, 2002. Our audit procedures
with respect to the disclosures in Note 5 with respect to 2001 and 2000 included
(a) agreeing the previously reported net income (loss) representing amortization
expense, (including any related tax effects) recognized in those periods related
to goodwill, to the Company's underlying records obtained from management, and
(b) testing the mathematical accuracy of the reconciliation of adjusted net
income (loss) to reported net income (loss) and the related earnings-per-share
amounts. In our opinion, the disclosures for 2001 and 2000 in Note 5 are
appropriate. However, we were not engaged to audit, review or apply any
procedures to the 2001 or 2000 financial statements of the Company other than
with respect to such adjustments and, accordingly, we do not express an opinion
or any other form of assurance on the 2001 or 2000 financial statements taken as
a whole.
/s/ Ernst & Young, LLP
- ----------------------
Ernst & Young, LLP
MetroPark, New Jersey
February 14, 2003
24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of MIM Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of MIM
Corporation (a Delaware corporation) and Subsidiaries as of December 31, 2001
and 2000 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MIM Corporation and
Subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
financial statements is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements, and in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 16, 2002
This is a copy of an Accountant's Report previously issued by Arthur Andersen
LLP, and has not been reissued by Andersen. See Exhibit 23.2 for further
information.
25
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(In thousands, except for share amounts)
2002 2001
------------ -----------
ASSETS
Current assets
Cash and cash equivalents $ 5,751 $ 12,487
Receivables, less allowance for doubtful accounts of $3,483 and $5,543
at December 31, 2002 and 2001, respectively 75,512 70,089
Inventory 9,320 3,726
Prepaid expenses and other current assets 2,104 1,439
--------- ---------
Total current assets 92,687 87,741
Property and equipment, net 7,388 9,287
Due from affiliates -- 2,132
Deferred taxes 3,046 --
Other assets and investments 704 1,650
Goodwill, net 61,085 37,033
Intangible assets, net 17,321 1,976
--------- ---------
Total assets $ 182,231 $ 139,819
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligations $ 634 $ 594
Line of credit 4,608 --
Accounts payable 17,302 4,468
Claims payable 34,869 46,564
Payables to plan sponsors 23,921 21,063
Accrued expenses and other current liabilities 6,252 5,745
--------- ---------
Total current liabilities 87,586 78,434
Capital lease obligations, net of current portion and other current liabilities 437 1,089
--------- ---------
Total liabilities 88,023 79,523
--------- ---------
Commitments and contingencies
Stockholders' equity
Common stock, $.0001 par value; 40,000,000 shares authorized, 22,744,694 and
22,004,101 shares issued and outstanding
at December 31, 2002 and 2001, respectively 2 2
Additional paid-in capital 120,651 105,424
Accumulated deficit (23,511) (42,196)
Treasury stock 1,398,183 shares at cost (2,934) (2,934)
--------- ---------
Total stockholders' equity 94,208 60,296
--------- ---------
Total liabilities and stockholders' equity $ 182,231 $ 139,819
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
26
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
(In thousands, except per share amounts)
2002 2001 2000
--------- --------- ---------
Revenue $ 576,596 $ 456,646 $ 338,171
Cost of revenue 505,998 403,243 302,991
--------- --------- ---------
Gross profit 70,598 53,403 35,180
Selling, general and administrative expenses 45,877 38,489 30,811
Legal fees due to indemnification responsibility -- -- 3,098
Amortization of intangibles 1,424 2,200 1,450
TennCare reserve adjustments (851) (2,476) --
--------- --------- ---------
Income (loss) from operations 24,148 15,190 (179)
Interest (expense) income, net (792) (56) 766
Provision for loss on investment -- -- 2,300
--------- --------- ---------
Income (loss) before provision for income taxes 23,356 15,134 (1,713)
Provision for income taxes 4,671 932 110
--------- --------- ---------
Net income (loss) $ 18,685 $ 14,202 $ (1,823)
========= ========= =========
Basic income (loss) per share $ 0.83 $ 0.67 $ (0.09)
========= ========= =========
Diluted income (loss) per share $ 0.79 $ 0.64 $ (0.09)
========= ========= =========
Weighted average shares used
in computing basic income (loss) per share 22,616 21,273 19,930
========= ========= =========
Weighted average shares used
in computing diluted income (loss) per share 23,563 22,289 19,930
========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
27
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
ADDITIONAL STOCKHOLDER TOTAL
COMMON TREASURY PAID-IN ACCUMULATED NOTES STOCKHOLDERS
STOCK STOCK CAPITAL DEFICIT RECEIVABLE EQUITY
----- ----- ------- ------- ---------- ------
Balance December 31, 1999 $ 2 $ (338) $ 91,614 $ (54,575) $ (1,516) $ 35,187
========== ============== =============== =============== ========= ===============
Payments of stockholder loans - - - - 745 745
Exercise of stock options - - 333 - - 333
Shares issued in connection with
ADIMA acquisition - - 5,034 - - 5,034
Non-employee stock option
compensation expense - - 29 - - 29
Net loss - - - (1,823) - (1,823)
---------- -------------- --------------- --------------- --------- ---------------
Balance December 31, 2000 $ 2 $ (338) $ 97,010 $ (56,398) $ (771) $ 39,505
========== ============== =============== =============== ========= ===============
Reclassification of stockholders
loans to other assets - - - - 771 771
Exercise of stock options - - 7,274 - - 7,274
Issuance of common stock to employees - - 28 - - 28
Dissolution of MIM Strategic - - 1,112 - - 1,112
Purchase of treasury stock - (2,596) - - - (2,596)
Net income - - - 14,202 - 14,202
---------- -------------- --------------- --------------- --------- ---------------
Balance December 31, 2001 $ 2 $ (2,934) $ 105,424 $ (42,196) - $ 60,296
========== ============== =============== =============== ========= ===============
Exercise of stock options
& other related activities - - 4,872 - - 4,872
Shares issued in connection with
Vitality acquisition - - 10,355 - - 10,355
Net income - - - 18,685 - 18,685
---------- -------------- --------------- --------------- --------- ---------------
Balance December 31, 2002 $ 2 $ (2,934) $ 120,651 $ (23,511) - $ 94,208
========== ============== =============== =============== ========= ===============
The accompanying notes are an integral part of these consolidated financial statements.
28
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
2002 2001 2000
------------- -------------- -------------
Cash flows from operating activities:
Net income (loss) $ 18,685 $ 14,202 $ (1,823)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities, net of acquisitions:
Depreciation 4,054 4,158 3,426
Amortization 2,010 2,200 1,450
Loss on investment -- -- 2,300
TennCare reserve adjustment (851) (2,476) --
Non-cash compensation expense 145 28 29
Provision for losses on receivables and due from affiliates 1,193 1,383 571
Changes in assets and liabilities, net of acquisitions
Receivables, net 142 (9,684) 8,989
Inventory (2,040) (1,114) (1,013)
Prepaid expenses and other current assets (554) 241 (297)
Accounts payable and accrued expenses 6,904 1,773 (2,236)
Claims payable (11,696) 8,723 (5,431)
Payables to plan sponsors and others 2,859 (7,977) 4,869
Non-current liabilities (50) (531) 500
-------- -------- --------
Net cash provided by operating activities 20,801 10,926 11,334
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment, net of disposals (2,101) (2,632) (6,634)
Purchases of investment securities -- -- (4,000)
Maturities of investment securities -- -- 9,033
Costs of acquisitions, net of cash acquired (34,851) (2,186) (19,638)
Due from affiliates, net 2,132 384 582
Decrease (increase) in other assets 1,555 780 (1,905)
-------- -------- --------
Net cash (used in) investing activities (33,265) (3,654) (22,562)
-------- -------- --------
Cash flows from financing activities:
Borrowings on line of credit 4,608 -- --
Principal payments on capital lease obligations (560) (588) (514)
Decrease in debt -- (165) (2,607)
Proceeds from exercise of stock options 1,680 7,274 333
Purchase of treasury stock -- (2,596) --
-------- -------- --------
Net cash provided by (used in) financing activities 5,728 3,925 (2,788)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (6,736) 11,197 (14,016)
Cash and cash equivalents--beginning of period 12,487 1,290 15,306
-------- -------- --------
Cash and cash equivalents--end of period $ 5,751 $ 12,487 $ 1,290
======== ======== ========
29
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(In thousands, except per share amounts)
Supplemental Disclosures:
The Company paid $853, $465 and $657 for interest of each of the years ended
December 31, 2002, 2001, and 2000, respectively.
Capital lease obligations of $1,495 were incurred to acquire equipment for the
year ended December 31, 2000. None were incurred for the years ended December
31, 2002, and 2001.
In connection with the acquisition of American Disease Management Associates
L.L.C. ("ADIMA"), the Company issued 2,700 shares of its common stock, par value
$0.0001 per share, valued at $5,034 during the year ended December 31, 2000.
In 2001, there was a contribution of a minority interest to additional paid-in
capital of $1,112 upon dissolution of a subsidiary.
In 2001, the Company reclassified stockholder notes receivable of $771 to other
assets. During 2001, the stockholder repaid $504 of the notes outstanding, with
the balance of $267 being repaid in 2002.
In connection with the acquisition of Vitality Home Infusion Services, Inc.
("Vitality"), the Company issued 612,419 shares of its common stock, par value
$0.0001 per share, valued at $10,355 during the year ended December 31, 2002.
The accompanying notes are an integral part of these consolidated financial
statements.
30
MIM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share and per share amounts)
NOTE 1--NATURE OF BUSINESS
Corporate Organization
MIM Corporation (the "Company" or "MIM") is a pharmaceutical healthcare
organization delivering innovative pharmacy benefit management, specialty
pharmaceutical management and 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 pharmacy benefit recipients
covered by a customer's pharmacy-related health benefits. The Company provides a
broad array of pharmacy benefits and pharmacy products and services to
individual enrollees ("Members") receiving health benefits, principally through
health insurers, including managed care organizations ("MCOs") and other
insurance companies, and, to a lesser extent, labor unions, self-funded employer
groups, government agencies, and other self-funded plan sponsors, directly or
indirectly through third party administrators (collectively, "Plan Sponsors").
These services are organized under two reportable operating segments: pharmacy
benefit management and mail services (collectively, "PBM Services"), and
specialty pharmacy distribution and clinical management services ("Specialty
Management and Distribution Services").
Business
In 2002, the Company derived revenues from agreements to provide PBM
services, which includes prescription Mail Service to the Members of Plan
Sponsors in the United States. The Company also provided Specialty Management
and Distribution Services to chronically ill or genetically impaired patients
that require injection and infusion therapies, as well as infusion therapies and
home healthcare services to patients recently discharged from hospitals.
Historically, a significant portion of the Company's revenues have been
derived from providing PBM services in the State of Tennessee to managed care
organizations ("MCOs") participating in the State of Tennessee's TennCare(R)
program. Revenue for the TennCare(R) program for the year 2002 was 30.1% of the
Company's revenue, compared to 36.6% and 47.5% for the years ended December 31,
2001 and 2000, respectively.
Through its BioScrip(R) specialty injectable and infusion therapy programs,
the Company distributes high-cost pharmaceuticals and provides clinically
focused case and disease management programs to Members afflicted with chronic
illnesses or genetic impairments. The disease states or conditions for which the
Company has such programs include HIV/AIDS, oncology, hemophilia, multiple
sclerosis, growth hormone deficiency, Gaucher's disease, rheumatoid arthritis,
infertility, respiratory syncytial virus (RSV), hepatitis C, Crohn's disease and
transplants. The specialty drugs distributed through the BioScrip(R) programs
are dispensed and serviced from the Company's various dispensing locations in
Columbus, Ohio; Livingston, New Jersey; and Roslyn Heights, New York. The Roslyn
Heights facility has been utilized since January 2002, the acquisition date of
Vitality Home Infusion Services, Inc. ("Vitality"), a New York-based provider of
specialty pharmaceutical injectable therapy services. The Livingston location
has been utilized since August 2000, the acquisition date of American Disease
Management Associates, LLC ("ADIMA"), a New Jersey-based provider of specialty
injectable and infusion therapy services.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of MIM
Corporation and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
certain estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
31
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits, overnight investments
and money market accounts, with maturities of ninety days or less.
Receivables
Receivables include amounts due from Plan Sponsors under the Company's PBM
contracts, amounts due from pharmaceutical manufacturers for rebates, service
fees resulting from the distribution of certain drugs through retail pharmacies
and amounts due from certain third party payors.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. Inventory consists principally of
purchased prescription drugs.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over the
estimated useful lives of assets. The estimated useful lives of the Company's
assets are as follows:
Asset Useful Life
- ----- -----------
Computer and office equipment................. 3-5 years
Furniture and fixtures........................ 5-7 years
Leasehold improvements and leased assets are amortized using a
straight-line basis over the related lease term or estimated useful life of the
assets, whichever is less. The cost and related accumulated depreciation of
assets sold or retired are removed from the accounts with the gain or loss, if
applicable, recorded in the statement of operations. Maintenance and repairs are
expensed as incurred.
Claims Payable
The Company is responsible for all covered prescriptions provided to plan
members during the contract period. Claims payable also includes estimates of
certain prescriptions that were dispensed to members for whom the related claims
had not yet been submitted.
Payables to Plan Sponsors
Payables to Plan Sponsors represent the sharing of pharmaceutical rebates
with the Plan Sponsors, and on a limited bases, profit sharing plans with
certain capitated contracts.
The Company estimates the portion of those pharmacy rebates that are shared
with its clients and adjusts pharmacy rebates payable to plan sponsors when the
amounts are paid typically on a quarterly basis, or as significant events occur.
These estimates are accrued periodically based on actual and estimated claims
data and agreed upon contractual rebate sharing rates. The Company records any
cumulative effect of these adjustments against costs as identified, and adjusts
its estimates prospectively to consider recurring matters. Adjustments generally
result from contract changes with clients, differences between the estimated and
actual product mix subject to rebates or whether the product was included in the
applicable formulary.
32
Revenue Recognition
Revenues consist principally of sales of prescription drugs to Members,
either through the Company's own pharmacies or through the Company's network of
contractually affiliated retail pharmacies, and are recognized when those
prescriptions are dispensed. Revenue is primarily derived from the following
types of arrangements:
Fee-For-Service. Approximately 91% of revenues are generated from
fee-for-service contracts. Under these contracts, revenues from orders dispensed
by the retail pharmacy networks are recognized when the pharmacy services are
reported to the Company by the dispensing pharmacist through the POS claims
processing systems and the drug is dispensed.
The Company evaluates each contract using the indicators of Emerging Issues
Task Force No. 99-19 "Reporting Gross Revenue as a Principal vs. Net as an
Agent" ("EITF 99-19") to determine whether the Company acts as a principal or as
an agent in the fulfillment of prescriptions through the retail pharmacy
network. When the Company independently has a contractual obligation to pay a
network pharmacy provider for benefits provided to its Plan Sponsors Members,
and has other indicators of risk and reward, the Company includes payments from
these Plan Sponsors as revenue and payments to the network pharmacy providers as
cost of revenue ('gross') in accordance with EITF 99-19, as these transactions
require the Company to assume credit risk and act as a principal. If the Company
was merely administering Plan Sponsors' network pharmacy contracts in which the
Company does not assume credit risk, but acts as an agent, the Company records
only the administrative or dispensing fees as revenue ('net').
Capitated Agreements. Approximately 9%, or $52,628 of the total company
revenues were generated from capitated contracts in the year ended December 31,
2002. The Company's capitated contracts with Plan Sponsors require the Company
to provide covered pharmacy services to Plan Sponsor Members in return for a
fixed fee per Member per month paid by the Plan Sponsor. Capitated contracts
have terms varying from six months to one year. These contracts are subject to
rate adjustment or termination upon the occurrence of certain events. 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 expected loss contracts.
Co-payments. When prescriptions are filled and the Company is the
participating pharmacy, the Company is entitled to receive co-payments from its
members and record these co-payments as revenue when the amounts are deemed
collectible and reasonably estimable. When prescriptions are filled through its
retail pharmacy networks, the Company is not entitled to these amounts and does
not account for co-payments in its financial statements as these amounts are
never billed or collected by the Company and it has no legal right or obligation
to co-payments collected by the pharmacies in its retail network.
Cost of Revenue
Cost of revenue includes pharmacy claims, fees paid to pharmacies and other
direct costs associated with pharmacy management, claims processing operations
and mail order services, offset by volume rebates received from pharmaceutical
manufacturers. The Company does not maintain cost of revenue information with
regards to product sales.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 utilizes the liability method, and deferred taxes are determined
based on the estimated future tax effects of differences between the financial
statement and tax basis of assets and liabilities at currently enacted tax laws
and rates.
Earnings per Share
Basic earnings (loss) per common share are based on the weighted average
number of shares outstanding and diluted earnings per share are based on the
weighted average number of shares outstanding, including common stock
equivalents. For the year ended December 31, 2000, diluted loss per share is the
same as basic loss per share because the inclusion of common stock equivalents
would be anti-dilutive.
33
Years Ended December 31,
-----------------------------------------------------
2002 2001 2000
----------------- ---------------- ---------------
Numerator:
Net Income (loss) ..................................... $18,685 $14,202 $(1,823)
======= ======= =======
Denominator - Basic:
Weighted average number of common
shares outstanding ................................ 22,616 21,273 19,930
======= ======= =======
Basic income (loss) per common share ................. $ 0.83 $ 0.67 $ (0.09)
======= ======= =======
Denominator - Diluted:
Weighted average number of common
shares outstanding................................. 22,616 21,273 19,930
Common share equivalents of outstanding
stock options...................................... 947 1,016 0
------- ------- -------
Total shares outstanding.............................. 23,563 22,289 19,930
======= ======= =======
Diluted income (loss) per common share................ $ 0.79 $ 0.64 $ (0.09)
======= ======= =======
Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, accounts payable and short-term debt. The
carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable and short-term debt approximate fair value due to their short-term
nature.
Accounting for Stock-Based Compensation
The Company accounts for employee stock based compensation plans and
non-employee director stock incentive plans in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"). Stock options granted
to non-employees are accounted for ("SFAS 123") in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation" (See Note 14). Stock options granted
to non-employees are also accounted for in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation", as well as Emerging Issues Task Force
No. 96-18 "Accounting for Equity Instruments That Are Issued To Other Than
Employees for Acquiring, or In Conjunction with Selling, Goods or Services."
("EITF 96-18")
The fair value of the Company's compensation cost for stock option plans for
employees and directors, had it been determined, in accordance with SFAS 123,
would have been as follows for the years ended December 31:
2002 2001 2000
----------------------------- ----------------------------- -----------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------------------------- ----------------------------- -----------------------------
Net income (loss).......... $ 18,685 $ 14,644 $ 14,202 $ 12,258 $ (1,823) $ (4,051)
Basic income (loss)
per common share....... $ 0.83 $ 0.65 $ 0.67 $ 0.58 $ (0.09) $ (0.20)
Diluted income (loss)
per common share....... $ 0.79 $ 0.62 $ 0.64 $ 0.55 $ (0.09) $ (0.20)
Because the fair value method prescribed by SFAS No. 123 has not been
applied to options granted prior to January 1, 1995, the resulting pro forma
compensation expense may not be representative of the amount of compensation
expense to be recorded in future years. As pro forma compensation expense for
options granted is recorded over the vesting period, future pro forma
compensation expense may be greater as additional options are granted.
Recent Accounting Pronouncements
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, and amendment of FASB Statement No. 123 (SFAS No. 148)." This
34
statement amends SFAS No. 123, to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. This statement also amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
transition guidance and disclosure provisions of SFAS No. 148 are effective for
fiscal years ending after December 31, 2002. The Company will continue to
account for stock-based employee compensation using the intrinsic value method
under APB No. 25, "Accounting for Stock Issued to Employees" with pro forma
disclosure of net income and earnings per share as if the fair value method
prescribed by SFAS No. 123 had been applied in accordance with SFAS No. 148.
NOTE 3 - OPERATING SEGMENTS
The Company operates in two operating segments: (1) PBM Services, which is
comprised of fully integrated pharmacy benefit management and mail services; and
(2) Specialty Management and Distribution Services, which is comprised of its
BioScrip(R) specialty injectable and infusion therapy programs for patients who
are chronically ill and genetically impaired.
Although the Company did offer its BioScrip(R) programs in 2001, it did not
manage this portion of its business separately from the PBM and mail services
business. Hence, the BioScrip(R) services were not an operating segment at that
time. In the first quarter of 2002, the Company substantially altered its
business model with the acquisition and integration of Vitality. Due to various
factors and industry projections (i.e., growth forecasts, penetration rates,
etc.) related to the specialty pharmaceutical area, management decided to
allocate a significant amount of resources to the growth of its specialty
pharmaceutical business. After this reorganization in the first quarter of 2002,
the Company determined that its specialty BioScrip(R) business met the
definition of a reportable operating segment.
The accounting policies applied to the business segments are the same as
those described in the Summary of Significant Accounting Policies.
With respect to the segment information below, the Company is required
under SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information to show comparable segment information for the same periods in 2001
and 2000, regardless of the fact that the Company had only one operating segment
prior to 2002. For purposes of 2001 and 2000 segment information disclosed
below, we made segment allocations based on methodologies used for 2002
information.
35
Segment Reporting Information
-------------- ------------- --------------
2002 2001 2000
-------------- ------------- --------------
Revenues:
PBM Services $407,093 $415,099 $ 320,317
Specialty Management and Distribution Services 169,503 41,547 17,854
-------- -------- ---------
Total $576,596 $456,646 $ 338,171
======== ======== =========
Depreciation expense:
PBM Services $ 3,074 $ 3,630 $ 2,988
Specialty Management and Distribution Services 980 473 258
-------- -------- ---------
Total $ 4,054 $ 4,103 $ 3,246
======== ======== =========
Income from operations:
PBM Services $ 8,372 $ 11,422 $ (262)
Specialty Management and Distribution Services 15,776 3,768 83
-------- -------- ---------
Total $ 24,148 $ 15,190 $ (179)
======== ======== =========
Total assets:
PBM Services $ 66,703 $103,482
Specialty Management and Distribution Services 115,528 36,337
--------- --------
Total $182,231 $139,819
========= ========
Capital expenditures:
PBM Services $ 885 $ 2,197 $ 5,152
Specialty Management and Distribution Services 1,241 589 1,323
-------- -------- ---------
Total $ 2,126 $ 2,786 $ 6,475
======== ======== =========
NOTE 4 - ACQUISITIONS
On January 31, 2002, the Company acquired all of the issued and outstanding
capital stock of Vitality Home Infusion Services, Inc. ("Vitality"). Vitality is
a New York-based provider of specialty pharmaceutical services. Vitality
provided such services to chronically ill and genetically impaired patients,
particularly focusing on oncology, infectious disease, immunology and rheumatory
disease.
The aggregate purchase price for Vitality was $46,416 (including $1,061 in
transaction costs), payable $35,000 in cash and 612,419 shares of MIM common
stock valued at $10,355. The common stock of MIM was valued using the average
market price of the Company's common stock over the period including the two
days before and after the terms of the acquisition were agreed to and announced.
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 final
valuation performed by an independent outside valuation firm. The following
table sets forth the allocation of the purchase price as of December 31, 2002:
36
Purchase price:
Funded from the Company's line of credit $35,000
Common stock value 10,355
Transaction costs 1,061
-------
Total purchase price 46,416
Less: net tangible assets as of January 31, 2002 5,641
Excess of purchase price over net tangible assets acquired $40,775
=======
Allocation of excess purchase price:
Customer relationships $11,000
Trademarks 4,700
Non-compete agreements 730
Goodwill 24,345
-------
Total $40,775
=======
The following table sets forth the assets and liabilities acquired with the
purchase of Vitality.
Vitality Balance Sheet
At January 31, 2002
ASSETS
Cash $ 1,136
Accounts receivable 7,217
Inventory 4,098
---------
12,451
Fixed and other assets 180
---------
Total assets $ 12,631
=========
LIABILITIES
Accounts payable and
accrued expenses $ 6,990
Stockholders equity 5,641
---------
Total liabilities and equity $ 12,631
=========
Vitality Pro Forma Financial Information
The following unaudited consolidated pro forma financial information for
the whole Company for the twelve months ended December 31, 2002 and 2001,
respectively, 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.
37
Pro Forma Income Statement
For the year ended December 31
----------------------------------------
2002 2001
------------------- -------------------
(unaudited) (unaudited)
Revenues $ 583,640 $ 531,417
Net income $ 18,497 $ 16,287
Basic income per common share $ 0.82 $ 0.74
Diluted income per common share $ 0.78 $ 0.71
NOTE 5 - GOODWILL
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," ("SFAS 141")and
No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142") 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 of accounting.
SFAS 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 July 1, 2002 and January 1, 2002.
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 the reporting units, which are either the
operating segment or one reporting level below the operating segment. SFAS 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 indefinite lived 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 first quarter of 2002, the Company
completed its initial impairment review, which indicated that there was no
impairment of goodwill or intangible assets. The Company also performed its
annual impairment test which indicated there was no impairment at December 31,
2002,
The following table provides a reconciliation of reported net income for
the years ended December 31, 2001 and 2000, to adjusted net income as if SFAS
No. 142 had been applied as of January 1, 2000.
For the Year Ended December 31,
2002 2001 2000
-------------------- ----------------------- -------------------------
Diluted Diluted Diluted
Dollars EPS Dollars EPS Dollars EPS
------- --- ------- --- ------- ---
Net income as reported $ 18,685 $0.79 $ 14,202 $ 0.64 $ (1,823) $ (0.09)
Add back goodwill amortization (net of tax) -- -- 1,732 0.07 1,227 0.06
------------ ----- ------------- --------- ------------- -----------
Net income as adjusted $ 18,685 $0.79 $ 15,934 $ 0.71 $ (596) $ (0.03)
============ ===== ============= ========= ============= ===========
38
Specialty
Management and
Distribution PBM
Services Services Total
------------- ----------- ------------
Balance as of December 31, 2001 $ 18,831 $ 18,202 $ 37,033
Goodwill acquired (Vitality) 24,345 24,345
Period purchase price adjustments (293) (293)
------------- ----------- ------------
Balance (net of amortization) as of December 31, 2002 $ 42,883 $ 18,202 $ 61,085
============= =========== ============
The changes in the net carrying amount of goodwill for the year ended
December 31, 2002, are as follows:
All goodwill assigned to our Specialty Management and Distribution Services
segment is expected to be deductible for income tax purposes. Goodwill
associated with the PBM Services segment is not tax deductible.
The following table details the acquired intangible assets and their accumulated
amortization as of December 31, 2002.
As of December 31, 2002 As of December 31, 2001
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible assets:
Non compete agreements $ 960 $ (453) $ 230 $ (230)
Customer relationships and trademarks 14,020 (1,906) 2,746 (770)
------------- -------------- ------------- --------------
Total $ 14,980 $ (2,359) $ 2,976 $ (1,000)
============= ============== ============= ==============
Unamortized intangible assets:
Trademarks $ 4,700 $ --
============= =============
The amortization expense for the year ended December 31, 2002 was $1,424.
The estimated amortization expense for the next five years is as follows:
For the year ending December 31,
2003 $1,841
2004 $1,755
2005 $1,402
2006 $1,377
2007 $1,377
39
NOTE 6 - INVESTMENT
On June 23, 1997, the Company acquired an 8% interest in Wang Healthcare
Information Systems, Inc. ("WHIS"), which markets PC-based clinical information
systems to physicians utilizing patented image-based technology. The Company
purchased 1,150,000 shares of the Series B Convertible Preferred Stock of WHIS,
for an aggregate purchase price equal to $2,300. Due to changes in the financial
situation at WHIS and its ability to access capital, the Company recorded a
provision for loss in the amount of $2,300 on this investment in 2000.
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company leases one of its facilities from Alchemie Properties, LLC
("Alchemie") pursuant to a ten-year agreement. Alchemie is controlled by Mr. E.
David Corvese, a stockholder and former officer and director of the Company (the
"Founder"). Rent expense was approximately $56 for each of the years ended
December 31, 2002, 2001, and 2000.
The Company has a consulting arrangement with one of its board members
which, in addition to customary board fees, the board member's company receives
a monthly fee to perform consulting work predominantly related to the
TennCare(R) program. Consulting fees under this contract were $549, $508 and
$494 for the years ended December 31, 2002, 2001 and 2000.
Stockholder Notes Receivable
On March 23, 2002, the Company's Chairman and Chief Executive Officer,
repaid in full a $1,700 loan, together with all accrued and unpaid interest
thereon, totaling approximately $2,100. Interest income on the note was $19,
$121 and $161 for the years ended December 31, 2002, 2001 and 2000,
respectively.
The Company had a $502 note receivable outstanding with the Founder as of
December 31, 2000. The note was repaid in 2001. Interest income on the note was
$41 for the year ended December 31, 2001, and $46 for the year ended December
31, 2000.
The Company had a $267 and $269 note receivable from Alchemie outstanding
as of December 31, 2001 and 2000, respectively. The note bears interest at a
rate of 10% per annum with principal due and payable on December 1, 2004.
Interest income was $2, $29 and $27 for the years ended December 31, 2002, 2001
and 2000. This note was paid in full on January 31, 2002.
The Company had a $780 note receivable from the Founder outstanding as of
December 31, 1999. The note was fully repaid in 2000. Interest income on the
notes was $27 for the year ended December 31, 2000.
In 2001, the Company reclassified the then outstanding stockholder notes
receivable from the Founder 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 Founder 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. The Founder 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.
Indemnification
Under certain circumstances, the Company may be obligated to indemnify and
has advanced defense costs to two former officers of a subsidiary of the Company
in connection with their involvement in the Federal and State of Tennessee
investigation of which they were the subject. During 2000, the Company advanced
and expensed approximately $2,700 for the former officers' legal costs in this
matter.
40
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following at December 31:
2002 2001
-----------------------------
Computer and office equipment,
(including equipment acquired under capital leases) $ 19,467 $ 18,000
Furniture and fixtures 1,551 1,149
Leasehold improvements 1,385 1,117
-----------------------------
22,403 20,266
Less: Accumulated depreciation (15,015) (10,979)
-----------------------------
Property and equipment, net $ 7,388 $ 9,287
=============================
NOTE 9 - LINE OF CREDIT
On November 1, 2000 the Company entered into a $45,000 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 has a three-year term and is secured by the Company's
receivables. Interest is payable monthly and provides for borrowing up to
$45,000 at the London Inter-Bank Offered Rate (LIBOR) plus 2.1% (3.5% as of
2002). A 0.5% annual fee is incurred monthly when the line is not utilized. In
connection with the issuance of the Facility, the Company incurred financing
costs of $1,642, which are included in other assets and are being amortized over
the term of the agreement. 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 December 31, 2002 and
2001, the Company had amounts outstanding of $4.6 million and $0, respectively.
NOTE 10 - 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 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 11 -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. This program has been
superceded by the 2003 repurchase plan.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Legal Proceedings
Until settled on April 2, 2001, the Company had been engaged in commercial
arbitration with Tennessee Health Partnership ("THP") over a number of
commercial disputes surrounding the parties' relationship. In 1999, the Company
recorded a TennCare reserve adjustment of $3,300 for estimated future losses
related to this dispute and another TennCare provider. In connection with the
above settlement, which was favorable to the Company, $1,300 was paid to THP in
satisfaction of all claims between the parties and a $980 TennCare reserve
adjustment credit was recorded in the first quarter of 2001.
On March 31, 1999, the State of Tennessee (the "State") placed Xantus
Health Plans of Tennessee, Inc. ("Xantus") in receivership. The State proposed a
plan of rehabilitation (the "Plan"), as opposed to a liquidation of Xantus, that
would allow Xantus to remain operating as a TennCare MCO. Under the Plan, the
State loaned Xantus $30,000 to repay pre-petition claims of providers, which
claims aggregate approximately $80,000. Under the Plan, during December 1999,
the Company received $4,200, including $600 of unpaid rebates to Xantus, which
the Company was allowed to offset in full against its pre-petition claims.
Because a plan for the payment of the remaining amounts had not been finalized
in time for completion of the annual audit, and the recovery of any additional
amounts was uncertain, the Company recorded a special charge in 1999 of $2,700
as a TennCare reserve adjustment for the estimated loss on the remaining amounts
owed. In the third quarter of 2001 the Company recorded $1,496 as credits to the
TennCare reserve, resulting from the collection of receivables from Xantus for
amounts previously reserved in 1999. In the first quarter of 2002, the Company
recorded $851 as a credit against that reserve based on management's
determination that amount was free from claims to third parties.
In 1998, the Company recorded a $2,200 charge against earnings in
connection with an agreement in principle with respect to a civil settlement of
the Federal and State of Tennessee investigation in connection with the conduct
of two former officers of the Company, prior to the Company's initial public
offering. This settlement was paid in full on July 1, 2002.
41
Government Regulation
Various Federal and state laws and regulations affecting the healthcare
industry do or may impact the Company's current and planned operations,
including, without limitation, Federal and state laws prohibiting kickbacks in
government health programs (including TennCare(R)), Federal and state antitrust
and drug distribution laws, and a wide variety of consumer protection, insurance
and other state laws and regulations. While management believes that the Company
is in substantial compliance with all existing laws and regulations material to
the operation of its business, such laws and regulations are subject to rapid
change and often are uncertain in their application. As controversies continue
to arise in the healthcare industry (for example, regarding the efforts of Plan
Sponsors and pharmacy benefit managers to limit formularies, alter drug choice
and establish limited networks of participating pharmacies), Federal and state
regulation and enforcement priorities in this area can be expected to increase,
the impact of which on the Company cannot be predicted. There can be no
assurance that the Company will not be subject to scrutiny or challenge under
one or more of these laws or that any such challenge would not be successful.
Any such challenge, whether or not successful, could have a material adverse
effect upon the Company's financial position and results of operations.
Violation of the Federal anti-kickback statute, for example, may result in
substantial criminal penalties, as well as exclusion from the Medicare and
Medicaid (including TennCare) programs. Further, there can be no assurance that
the Company will be able to obtain or maintain any of the regulatory approvals
that may be required to operate its business, and the failure to do so could
have a material adverse effect on the Company's financial position and results
of operations.
The Company entered into a corporate integrity agreement with the Office of
Inspector General (the "OIG") within the Department of Health and Human Services
("HHS") in connection with the Global Settlement Agreement entered into with the
OIG and the State of Tennessee in June 2000. In order to assist the Company in
maintaining compliance with laws and regulations and the corporate integrity
agreement the Company implemented its corporate compliance program in August of
2000. This program includes educational training for all employees on compliance
with laws and regulations relevant to the Company's business and operations and
a formal program of reporting and resolution of possible violations of laws or
regulations, as well as increased oversight by the OIG. Should the oversight
procedures reveal credible evidence of any violation of federal law, the Company
is required to report such potential violations to the OIG and the Department of
Justice ("DOJ"). The Company is therefore subject to increased regulatory
scrutiny and, if the Company commits legal or regulatory violations, they may be
subject to an increased risk of sanctions or penalties, including exclusion from
participation in the Medicare or Medicaid programs.
Employment Agreements
The Company has entered into employment agreements with certain key
employees that expire at various dates through February 2004. Total minimum
commitments under these agreements are approximately as follows:
2003 .................. $ 1,666
2004 .................. 234
--------------
Total $ 1,900
==============
Operating Leases
The Company leases its facilities and certain equipment under various
operating leases. The future minimum lease payments under these operating leases
at December 31 are as follows:
42
2003 ............... $ 1,725
2004 ............... 1,597
2005 ............... 1,466
2006 ............... 1,325
2007 ............... 1,018
Thereafter ......... 1,351
--------------
Total $ 8,482
==============
Rent expense for non-related party leased facilities and equipment was
approximately $1,820, $1,384 and $1,292 for the years ended December 31, 2002,
2001 and 2000, respectively.
Capital Leases
The Company leases certain equipment under various capital leases. Future
minimum lease payments under the capital lease agreements at December 31 are as
follows:
2003 .......................................... $ 706
2004 .......................................... 420
2005 .......................................... 35
--------
Total minimum lease payments .................. 1,161
Less: Amount representing interest ........... 97
--------
Obligations under leases ...................... 1,064
Less: Current portion of lease obligations ... 634
--------
Long term portion of lease obligations ........ $ 430
========
NOTE 13 - INCOME TAXES
The effect of temporary differences that give rise to a significant portion
of federal deferred taxes is as follows as of December 31:
2002 2001
--------------------------
Deferred tax assets (liabilities):
Reserves not currently deductible .................................................. $ 3,387 $ 2,181
Goodwill and intangibles ........................................................... (977) (596)
Federal net operating loss carryforwards generated from operations ................. -- 4,944
Federal net operating loss carryforwards generated from stock options .............. 7,543 9,145
Property basis differences ......................................................... 636 140
--------------------------
Subtotal ...................................................................... 10,589 15,814
Less: valuation allowance .......................................................... (7,543) (15,814)
--------------------------
Net deferred tax assets ....................................................... $ 3,046 $ --
==========================
The Company has recorded a net deferred tax asset of approximately $3
million at December 31, 2002. Realization of this asset is dependent on
generating sufficient taxable income in future periods. Management believes it
is more likely than not that the deferred tax asset will be realized. As
reflected in the preceding table, the majority of the valuation allowance
relates to net operating loss carry forwards generated from stock exercises,
where there is uncertainty regarding full realizability due to use limitations.
43
The Company's reconciliation of the expected provision (benefit) rate to
the effective income tax rate is as follows:
2002 2001 2000
---------------------------------------------
Tax provision (benefit) at statutory rate ............ $ 8,174 $ 5,297 $(582)
State tax provision , net of Federal taxes ........... 934 629 110
Change in the valuation allowance relating to
deferred tax assets and liabilities generated
from operations ...................................... (4,494) (5,464) 357
Amortization of goodwill and other intangibles ....... -- 359 361
Other ................................................ 507 111 (136)
--------------------------------------------
Provision for income taxes ...................... $ 4,671 $ 932 $ 110
============================================
At December 31, 2002, the Company has Federal NOLs ("NOLs") remaining of
approximately $21,500 million which will begin expiring in 2009. As opposed to
the Company's NOLs that reduced the effective tax rate in fiscal years' 2002 and
2001, the remaining NOLs will be recorded directly in Stockholders' Equity when
utilized rather than as a reduction of tax expense as the NOL's were generated
primarily from the exercise of stock options in prior years. However, the
Company will receive the cash flow benefit from the reduction in its income tax
liability when the remaining NOLs are utilized.
As of December 31, 2002, certain of the NOLs described above are subject to
limitation and may be utilized in a future year upon release of the limitation
and recorded directly in Stockholders' Equity as discussed above. If the NOLs
are not utilized in the year they are available they may be utilized in a future
year to the extent they have not expired.
NOTE 14 - STOCKHOLDERS' EQUITY
Stock Options
The 1996 Incentive Stock Plan (the "1996 Plan") provided for the granting
of incentive stock options ("ISOs") and non-qualified stock options ("NQSOs") to
employees, directors and consultants of the Company. Under the 1996 Plan there
were 5,200,450 shares authorized for issuance. In 2001, the stockholders
approved the Company's 2001 Incentive Stock Plan (the "2001 Plan," collectively
with the 1996 Plan, the "Plans"). Under the 2001 Plan an additional 950,000
shares were authorized for issuance. At the annual stockholders meeting in 2002
an amendment and restatement of the 2001 Plan was approved to increase the plan
by 800,000 shares, from 950,000 to 1,750,000. As of December 31, 2002, 450,688
shares remained available for grant under the Plans.
Options granted under the Plans vest over a three-year period and, in
certain limited instances, fully vest upon a change in control of the Company.
In addition, such options are generally exercisable for 10 years after the date
of grant, subject in some cases, to earlier termination in certain
circumstances. The exercise price of ISOs granted under the Plans will not be
less than 100% of the fair market value on the date of grant (110% for ISOs
granted to more than a 10% stockholder).
As of December 31, 2002 and 2001, the exercisable portion of outstanding
options was 1,096,071 shares and 874,699 shares, respectively. Stock option
activity under the Plans through December 31, 2002 is as follows:
44
Average Share
Options Price
----------------------------
Balance, December 31, 1999 ..................... 2,038,666 $4.2280
Granted ................................... 615,000 $2.1960
Canceled .................................. (360,027) $1.3852
Exercised ................................. (105,167) $3.1657
----------------------------
Balance, December 31, 2000 ..................... 2,188,472 $4.1756
Granted ................................... 1,087,000 $8.3392
Canceled .................................. (215,999) $3.4262
Exercised ................................. (510,831) $4.2416
----------------------------
Balance, December 31, 2001 ..................... 2,548,642 $5.7929
Granted ................................... 633,000 $13.6739
Canceled .................................. (184,663) $5.6851
Exercised ................................. (349,095) $4.4445
----------------------------
Balance, December 31, 2002 ..................... 2,647,884 $7.8702
============================
On April 17, 1998, the Company granted a former officer an option to
purchase 1,000,000 shares of Common Stock at $4.50 (then-current market price)
in connection with his employment agreement to become the Company's President,
Chief Operating Officer and Chief Financial Officer. This option was not granted
under the Plan. During 2001, all of the options granted to the former officer
were exercised.
The 1996 Directors Stock Incentive Plan, (the "Directors Plan") was adopted
to attract and retain qualified individuals to serve as non-employee directors
of the Company ("Outside Directors"), to provide incentives and rewards to such
directors and to associate more closely the interests of such directors with
those of the Company's stockholders. The Directors Plan provides for the
automatic granting of non-qualified stock options to Outside Directors joining
the Company. Each such Outside Director receives an option to purchase 20,000
shares of Common Stock upon his or her initial appointment or election to the
Board of Directors. The exercise price of such options is equal to the fair
market value of the Common Stock on the date of grant. Options granted under the
Directors Plan vest over three years. In 2002, an amendment and restatement of
the Directors Plan was approved at the annual stockholders meeting to add
200,000 shares to the 300,000 shares previously authorized and provide the
automatic annual grant of 5,000 options to each non-employee director of the
Company. Following the approval, 5,000 options at an exercise price of $9.94
were granted to each of the six Directors. In addition, 20,000 shares at an
exercise price of $8.77 were granted to the newly appointed director of the
Company. As of December 31, 2002, options to purchase 170,000 shares are
outstanding at an average exercise price of $6.88. At December 31, 2002, 100,000
shares under the Directors Plan were exercisable.
Accounting for Stock-Based Compensation
The fair value of the Company's compensation cost for stock option plans
for employees and directors, had it been determined, in accordance with SFAS
123, would have been as follows for the years ended December 31:
2002 2001 2000
---------------------------- ------------------------- ----------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
---------------------------- ------------------------- ----------------------------
Net income (loss) ............... $ 18,685 $ 14,644 $ 14,202 $ 12,258 $ (1,823) $ (4,051)
Basic income (loss)
per common share ............. $ 0.83 $ 0.65 $ 0.67 $ 0.58 $ (0.09) $ (0.20)
Diluted income (loss)
per common share ............. $ 0.79 $ 0.62 $ 0.64 $ 0.55 $ (0.09) $ (0.20)
Because the fair value method prescribed by SFAS No. 123 has not been
applied to options granted prior to January 1, 1995, the resulting pro forma
compensation expense may not be representative of the amount of compensation
expense to be recorded in future years. As pro forma compensation expense for
options granted is recorded over the vesting period, future pro forma
compensation expense may be greater as additional options are granted.
45
The fair value of each option grant was estimated on the grant date using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
2002 2001 2000
Volatility 104.6% 104.4% 106.6%
Risk-free interest rate 2.79% 1.25% 6.25%
Expected life of options 6 years 4 years 4 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Performance Shares
Under the Plans, the Company's Board of Directors may grant stock to key
employees. The Board of Directors may make the issuance of common stock subject
to the satisfaction of one or more employment, performance, purchase or other
conditions. As of December 31, 2002, the Company has 220,000 restricted stock
grants (the "Performance Shares") that vest and become exercisable 8 years from
the date of grant or earlier, if the Company exceeds certain earnings per share
levels in 2001 and 2002. During 2002, the Company did not meet the earnings per
share levels to accelerate vesting of the Performance Shares. The Company has
recorded cumulative compensation expense of $362,484 related to these
Performance Shares through December 31, 2002 based on the fair market value at
the date of grant.
Performance Units
Under the Plans, performance units may be granted by the Company's Board of
Directors to key employees. The terms and conditions of the performance units
including the performance goals, the performance period and the value for each
performance unit are established by the Company's Board of Directors. If the
performance goals are satisfied, the Company shall pay the key employee an
amount in cash equal to the value of each performance unit at the time of
payment. In no event shall a key employee receive an amount in excess of
$1,000,000 in respect of performance units for any given year. During 2002, 2001
and 2000, performance goals were not satisfied, thus there were no amounts paid
to employees related to performance. As of December 31, 2002, there were no
performance units outstanding as no amendments to the Plan were made and no
targets for any year were met.
NOTE 15 - CONCENTRATION OF CREDIT RISK
The following table outlines contracts with Plan Sponsors having revenues
and/or accounts receivable that individually exceeded 10% of the Company's total
revenues and/or accounts receivable during the applicable time period:
46
Plan Sponsor
------------------------------------------
A B C D
------------------------------------------
Year ended December 31, 2000
% of total revenue 22% 12% 12% *
% of total accounts receivable at period end * 14% 18% *
Year ended December 31, 2001
% of total revenue 14% 14% 11% *
% of total accounts receivable at period end * 23% 17% *
Year ended December 31, 2002
% of total revenue * * 12% 13%
% of total accounts receivable at period end * * * *
- --------------------------------------------------------
* Less than 10%.
These customers are in the PBM Services segment.
NOTE 16 - PROFIT SHARING PLAN
The Company maintains a deferred compensation plan under Section 401(k) of
the Internal Revenue Code. Under the plan, employees may elect to defer up to
50% of their salary, subject to Internal Revenue Service limits. The Company may
make a discretionary matching contribution. The Company recorded matching
contributions of $102, $86 and $65 for the years ended December 31, 2002, 2001,
and 2000, respectively.
NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of quarterly financial information for fiscal 2002 and 2001 is as
follows:
---------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------------------------------------------------------------------------------
2002:
Revenues $ 151,652 $ 135,732 $ 138,529 $ 150,683
Gross profit $ 16,028 $ 17,448 $ 17,964 $ 19,158
Net income $ 5,206 $ 4,605 $ 4,491 $ 4,383
Basic earnings per share $ 0.23 $ 0.20 $ 0.20 $ 0.19
Diluted earnings per share $ 0.22 $ 0.19 $ 0.19 $ 0.19
2001:
Revenues $ 106,036 $ 106,851 $ 119,886 $ 123,873
Gross profit $ 11,636 $ 13,434 $ 13,655 $ 14,678
Net income $ 3,483 $ 3,210 $ 4,321 $ 3,188
Basic earnings per share $ 0.17 $ 0.16 $ 0.20 $ 0.15
Diluted earnings per share $ 0.17 $ 0.15 $ 0.19 $ 0.14
NOTE 18- SUBSEQUENT EVENT
On February 27, 2003, the Executive Committee of the Board of Directors
approved a stock repurchase program pursuant to which the Company is authorized
to repurchase up to an aggregate of $10 million of its Common Stock in open
market or private transactions. As of March 25, 2003, the Company has
repurchased 799,893 shares of its Common Stock in the open market at an
aggregate purchase price of $5.1 million.
47
MIM CORPORATION AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
For the years ended December 31, 2002, 2001 and 2000
(In thousands)
Balance at Charged to Balance at
Beginning of Charges to Costs and Other End of
Period Receivables Expenses Charges Period
----------------------------------------------------------------
Year ended December 31, 2000
Accounts receivable ........................... $2,547 $ (376) $ 571 $ -- $ 2,742
Accounts receivable, TennCare(R) .............. $6,029 $ (438) $ 5,591
Accounts receivable, other .................... $ 403 $ (403) $ -- $ -- $ --
================================================================
Year ended December 31, 2001
Accounts receivable ........................... $2,742 $(1,286) $1,383 $ -- $ 2,839
Accounts receivable, TennCare(R) .............. $5,591 $(2,887) $(2,476)(1) $ 2,476(1) $ 2,704
Accounts receivable, other .................... $ -- $ -- $ -- $ -- $ --
================================================================
Year ended December 31, 2002
Accounts receivable ........................... $2,839 $ (906) $1,193 $ -- $ 3,126
Accounts receivable, TennCare(R) .............. $2,704 $(2,347) $ (851)(1) $ 851(1) $ 357
Accounts receivable, other .................... $ -- $ -- $ -- $ -- $ --
================================================================
(1) Amounts credited to the TennCare(R)reserve account and reductions in related liability accounts
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The information required by this item has been previously reported by the
Company in a Current Report on form 8-K filed with the Commission on May 29,
2002
48
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference from the
information contained in our definitive proxy statement to be filed with the SEC
on or before April 30, 2003 in connection with the Company's 2003 Annual Meeting
of Stockholders.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from the
information contained in our definitive proxy statement to be filed with the SEC
on or before April 30, 2003 in connection with the Company's 2003 Annual Meeting
of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from the
information contained in our definitive proxy statement to be filed with the SEC
on or before April 30, 2003 in connection with the Company's 2003 Annual Meeting
of Stockholders.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from the
information contained in our definitive proxy statement to be filed with the SEC
on or before April 20, 2003 in connection with our 2003 Annual Meeting of
Stockholders.
Item 14. Controls and Procedures
Under the supervision and with the participation of management, including
the Chief Executive Officer and Chief Financial Officer, the effectiveness of
the design and operation of disclosure controls and procedures has been
evaluated within 90 days of the filing date of this annual report, and, based on
that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these controls and procedures are effective. There were no
significant changes in internal controls or in other factors that could
significantly affect these controls subsequent to the date of that evaluation.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the reports
filed or submitted under the Securities Exchange Act of 1934 ("Exchange Act") is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in such reports is accumulated
and communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decision regarding required
disclosure.
49
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(A) Documents Filed as a Part of this Report
Page
1. Financial Statements:
Report of Independent Auditors .................................................................................24
Consolidated Balance Sheets as of December 31, 2002 and 2001....................................................26
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000......................27
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 2002, 2001 and 2000.............................................................................28
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000......................29
Notes to Consolidated Financial Statements......................................................................31
2. Financial Statement Schedules:
II. Valuation and Qualifying Accounts for the years ended December 31, 2002, 2001 and 2000.......................48
All other schedules not listed above have been omitted since they are not
applicable or are not required, or because the required information is included
in the Consolidated Financial Statements or Notes thereto.
50
3. Exhibits:
Exhibit
Number Description Location
- --------------------------------------------------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger by and Among MIM
Corporation, CMP Acquisition Corp., Continental
Managed Pharmacy Services, Inc. and Principal
Shareholders dated as of January 27, 1998 (4) (Exh. 2.1)
2.2 Purchase Agreement, dated as of August 3, 2000,
among American Disease Management Associates, LLC
its Members and Certain Related Parties, MIM Health
Plans, Inc., and MIM Corporation. (10) (Exh. 2.1)
3.1 Amended and Restated Certificate of Incorporation
of MIM Corporation. (1) (Exh. 3.1)
3.2 Amended and Restated By-Laws of MIM Corporation
4.1 Specimen Common Stock Certificate (4) (Exh. 4.1)
10.1 Drug Benefit Program Services Agreement between Pro-Mark
Holdings, Inc. and RxCare of Tennessee, Inc., dated as of
March 1, 1994, as amended January 1, 1995 (1) (Exh. 10.1)
10.2 Amendment No. 3 to Drug Benefit Program Services
Agreement dated October 1, 1998 (6) (Exh.10.2)
10.3 Software Licensing and Support Agreement between
ComCoTec, Inc. and Pro-Mark Holdings, Inc. dated
November 21, 1994 (1) (Exh. 10.6)
10.4 Indemnity letter from MIM Holdings, LLC dated
August 5, 1996. (1) (Exh. 10.36)
10.5 Employment Agreement between MIM Corporation and
Richard H. Friedman dated as of December 1, 1998. (6) (Exh.10.14)
10.6 Amendment No. 1 to Employment Agreement dated as
of May 15, 1998 between MIM Corporation and Barry
A. Posner (5) (Exh. 10.50)
10.7 Employment Agreement between MIM Corporation and
Barry A. Posner dated as of March 1, 1999 (6) (Exh.10.17)
10.8 Registration Rights Agreement-I between MIM
Corporation and John H. Klein, Richard H.
Friedman, Leslie B. Daniels, E. David Corvese and
MIM Holdings, LLC dated July 29, 1996 (1) (Exh. 10.30)
10.9 Registration Rights Agreement-II between MIM
Corporation and John H. Klein, Richard H. Friedman
and Leslie B. Daniels dated July 29, 1996 (1) (Exh. 10.31)
10.10 Registration Rights Agreement-III between MIM
Corporation and John H. Klein and E. David Corvese
dated July 29, 1996 (1) (Exh. 10.32)
51
10.11 Registration Rights Agreement-IV between MIM
Corporation and John H. Klein, Richard H.
Friedman, Leslie B. Daniels, E. David Corvese and
MIM Holdings, LLC dated July 31, 1996 (1) (Exh. 10.34)
10.12 Registration Rights Agreement-V between MIM
Corporation and Richard H. Friedman and Leslie B.
Daniels dated July 31, 1996 (1) (Exh. 10.35)
10.13 Amendment No. 1 dated August 12, 1996 to
Registration Rights Agreement-IV between MIM
Corporation and John H. Klein, Richard H.
Friedman, Leslie B. Daniels, E. David Corvese and
MIM Holdings, LLC dated July 31, 1996 (2) (Exh.10.29)
10.14 Amendment No 2 dated June 16, 1998 to
Registration Rights Agreement-IV between MIM
Corporation and John H. Klein, Richard H.
Friedman, Leslie B. Daniels, E. David Corvese and
MIM Holdings, LLC dated July 31, 1996 (6) (Exh.10.31)
10.15 MIM Corporation 1996 Stock Incentive Plan, as
Amended December 9, 1996 (2) (Exh. 10.32)
10.16 MIM Corporation 1996 Amended and Restated Stock
Incentive Plan, as amended December 2, 1998 (6) (Exh.10.33)
10.17 MIM Corporation 1996 Non-Employee Directors Stock
Incentive Plan* (1) (Exh. 10.29)
10.18 Lease between Alchemie Properties, LLC and
Pro-Mark Holdings, Inc., dated as of December 1,
1994. (1) (Exh. 10.27)
10.19 Lease Agreement between Mutual Properties
Stonedale L.P. and MIM Corporation dated April 23,
1997. (3) (Exh.10.41)
10.20 Agreement between Mutual Properties Stonedale L.P.
and MIM Corporation dated as of April 23, 1997. (3) (Exh.10.42)
10.21 Lease Amendment and Extension Agreement between
Mutual Properties Stonedale L.P. and MIM
Corporation dated December 10, 1997 (3) (Exh.10.43)
10.22 Lease Amendment and Extension Agreement-II between
Mutual Properties Stonedale L.P. and MIM
Corporation dated March 27, 1998. (3) (Exh.10.44)
10.23 Lease Agreement between Mutual Properties
Stonedale L.P. and Pro-Mark Holdings, Inc., dated
December 23, 1997 (3)(Exh.10.45)
52
10.24 Amendment No. 1 to Employment Agreement,
dated as of October 11, 1999 between
MIM Corporation and Richard H. Friedman (8) (Exh.10.60)
10.25 Form of Performance Shares Agreement (8) (Exh.10.61)
10.26 Form of Performance Units Agreement (8) (Exh.10.62)
10.27 Form of Non-Qualified Stock Option Agreement* (8) (Exh.10.63)
10.28 Corporate Integrity Agreement between the Office of
the Inspector General of the Department of Health and
Human Services and MIM Corporation, dated as of
June 15, 2000 (9) (Exh. 10.2)
10.29 Loan and Security Agreement, dated November 1, 2000,
between MIM Funding LLC and HFG Healthco-4 LLC. (11) (Exh. 10.1)
10.30 Receivables Purchase and Transfer Agreement, dated as of
November 1, 2000, among MIM Health Plans, Inc.,
Continental Pharmacy, Inc., American Disease Management
Associates LLC and MIM Funding LLC. (11) (Exh. 10.2)
10.31 Lease Agreement, dated as of February 24, 2000, by and
between American Duke-Weeks Realty Limited Partnership
and Continental Managed Pharmacy Services, Inc. (12) (Exh. 10.68)
10.32 First Lease Amendment, dated as of February 24, 2000,
by and between Duke-Weeks Realty Limited Partnership
and Continental Managed Pharmacy Services, Inc. (12) (Exh. 10.69)
10.33 Lease Agreement, dated as of July 22, 1996, by and between
American Disease Management Associates, LLC ("ADIMA")
and Regent Park Associates. (12) (Exh. 10.70)
10.34 First Amendment of Agreement of Lease, dated as of June 15,
1999, by and between ADIMA and Five Regent Park Associates. (12) (Exh. 10.71)
10.35 Second Amendment of Agreement of Lease, dated as of February
11, 2000, by and between ADIMA and Five Regent Park
Associates. (12) (Exh. 10.72)
10.36 Employment Letter, dated as of February 8, 1999, between
the Company and Recie Bomar (12) (Exh. 10.73)
10.37 Asset Purchase Agreement, dated April 4, 2001 among
Continental Managed Pharmacy Services Inc., Community
Prescription Service, Inc., and its Stockholders (13) (Exh. 10.74)
10.38 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1, File No. 333-05327). (14) (Exh. 3.1)
10.39 Amended and Restated Rights Agreement, dated as of May 20,
1999, between the Registrant and American Stock Transfer and
Trust Company (incorporated by reference to Exhibit 4.1 to
Post-Effective Amendment No. 2 to the Registrant's Form 8-A/A
dated May 20, 1999). (14) (Exh. 4.1)
53
10.40 Purchase Agreement among American Disease Management Associates,
L.L.C., its Members and Certain Related Partners, MIM Health Plans,
Inc. and the Registrant, dated as of August 3, 2000 (incorporated by
reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K
filed August 10, 2000). (14) (Exh. 4.2)
10.41 Registration Rights Agreement between the Registrant and
Livingston Group LLC dated as of August 3, 2000 (incorporated by
reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K
filed August 10, 2000). (14) (Exh. 4.3)
10.42 Employment letter, dated as of June 21, 2001, between MIM
Corporation and Donald Foscato (15) (Exh. 10.75)
10.43 Employment letter, dated as of June 18, 2001, between MIM
Health Plans, Inc. and Donald Dindak (15) (Exh. 10.76)
10.44 Employment letter, dated as of June 19, 2001, between MIM
Health Plans, Inc and Michael Sicilian (15) (Exh. 10.77)
10.45 Purchase Agreement, dated as of January 9, 2002, among Vitality
Home Infusion Services, Inc., Marc Wiener, Barbara Kammerer
and MIM Corporation (16) (Exh. 2.1)
10.46 Lease Agreement, dated as of January 31, 2002, between Bar-Marc
Realty, LLC, as landlord, and Vitality Home Infusion Services, Inc.,
as Tenant (17) (Exh. 10.49)
10.47 Guaranty of Lease Agreement, dated January 31, 2002, made by
the Company in favor of Bar-Marc Realty, LLC (17) (Exh. 10.50)
10.48 Employment Letter, dated October 15, 2001, between the Company
and Russel J. Corvese (17) (Exh. 10.51)
10.49 Amendment, dated October 15, 2001, to Employment Letter, dated as of
February 8, 1999, between the Company and Recie Bomar (17) (Exh. 10.52)
10.50 Amendment to Employment Agreement entered into as of September
18, 2002 by and between the Company and Barry A. Posner.
10.51 Amendment to Employment Agreement effective as of December 31, 2001
by and between the Company and Richard H. Friedman.
10.52 Employment Letter, dated October 1, 2002, between the Company and
James S. Lusk.
10.53 Third Amendment of Agreement of Lease, dated June 24, 2002, between
Five Regent Park Associates and American Disease Management Associates.
10.54 Second Amendment and Consent, dated as of January 31, 2002, to the
Receivable Purchase and Transfer Agreement, dated as of November 1, 2000
10.55 Amendment No. 3, dated as of November 25, 2002, to the Receivables Purchase
and Transfer Agreement, dated as of November 1, 2000, each of the
parties named on Schedule I thereto, MIM Funding LLC and HFG Healthco-4 LLC
54
10.56 Amended and Restated 1996 Non-Employee Director's Stock Incentive (18)
Plan (effective April 17, 2002)
10.57 Amended and Restated 2001 Stock Incentive Plan (effective April 17, 2002) (18)
21 List of Subsidiaries
23.1 Consent of Ernst and Young, LLP
23.2 Notice Regarding Consent of Arthur Andersen LLP
99.1 Section 302 Certification of Richard H. Friedman
99.2 Section 302 Certification of James S. Lusk
99.3 Section 906 Certification of Richard H. Friedman (19)
99.4 Section 906 Certification of James S. Lusk (19)
- -------------------------------
(1) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-1 (File No. 333-05327), as amended, which
became effective on August 14, 1996.
(2) Incorporated by reference to the indicated exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
(3) Incorporated by reference to the indicated exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.
(4) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-4 (File No. 333-60647), as amended, which
became effective on August 21, 1998.
(5) Incorporated by reference to the indicated exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998,
as amended.
(6) Incorporated by reference to the indicated exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
(7) Incorporated by reference to the indicated exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1999.
(8) Incorporated by reference to the indicated exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,
1999.
(9) Incorporated by reference to the indicated exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000.
(10) Incorporated by reference to the indicated exhibit to the Company's Current
Report on Form 8-K filed on August 10, 2000.
(11) Incorporated by reference to the indicated exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,
2000.
(12) Incorporated by reference to the indicated exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.
(13) Incorporated by reference to the indicated exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001.
(14) Incorporated by reference to the indicated exhibit to the Company's Form
S-3 filed on July 12, 2001.
(15) Incorporated by reference to the indicated exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2001.
(16) Incorporated by reference to the indicated exhibit to the Company's Form
8-K filed on February 5, 2002.
(17) Incorporated by reference to the indicated exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2001.
(18) Incorporated by reference from the Company's definitive proxy statement for
its 2002 annual meeting of stockholders filed with the Commission on April
30, 2003.
(19) This document is being furnished in accordance with SEC Release Nos.
33-8212 and 34-47551.
(B) Reports on Form 8-K
None.
55
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 March 31, 2003.
MIM CORPORATION
/s/ James S. Lusk
-----------------
James S. Lusk
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title(s) Date
-------- ----
Chairman and Chief Executive Officer March 31, 2003
/s/ Richard H. Friedman (principal executive officer)
- -------------------------------------
Richard H. Friedman
/s/ James S. Lusk Executive Vice President and
- ------------------------------------- Chief Financial Officer March 31, 2003
James S. Lusk (principal financial officer)
/s/ Louis DiFazio, Ph.D. Director March 31, 2003
- -------------------------------------
Louis DiFazio, Ph.D.
/s/ Louis A. Luzzi, Ph.D. Director March 31, 2003
- -------------------------------------
Louis A. Luzzi, Ph.D.
/s/ Richard A. Cirillo Director March 31, 2003
- -------------------------------------
Richard A. Cirillo
/s/ Michael Kooper Director March 31, 2003
- -------------------------------------
Michael Kooper
/s/ Ronald Shelp Director March 31, 2003
- -------------------------------------
Ronald Shelp
/s/ Harold Ford Director March 31, 2003
- -------------------------------------
Harold Ford
/s/ Jack Salzman Director March 31, 2003
- -------------------------------------
Jack Salzman
- --------------------------------------------------------------------------------
56
EXHIBIT INDEX
- --------------------------------------------------------------------------------
(Exhibits being filed with this Annual Report on Form 10-K)
3.2 Amended and Restated By-Laws of the Company
10.50 Amendment to Employment Agreement entered into as of September 18, 2002
by and between the Company and Barry A. Posner
10.51 Amendment to Employment Agreement effective as of December 31, 2001 by
and between the Company and Richard H. Friedman
10.52 Employment Letter dated October 1, 2002, between the Company and James
S. Lusk
10.53 Third Amendment of Agreement of Lease, dated June 24, 2002, between Five
Regent Park Associates and American Disease Management Associates
10.54 Second Amendment and Consent, dated as of January 31, 2002, to the
Receivables Purchase and Transfer Agreement, dated as of November 1,
2000, among each of the parties named on Schedule I thereto, MIM
Funding, LLC and HFG Healthco-4 LLC
10.55 Amendment No. 3, dated as of November 25, 2002, to the Receivables
Purchase and Transfer Agreement, dated as of November 1, 2000, among
each of the parties named on Schedule I thereto, MIM Funding, LLC and
HFG Healthco-4 LLC
21 List of Subsidiaries
23.1 Consent of Ernst and Young, LLP
23.2 Notice Regarding Consent of Arthur Andersen LLP
99.1 Section 302 Certification of Richard H. Friedman
99.2 Section 302 Certification of James S. Lusk
99.3 Section 906 Certification of Richard H. Friedman (1)
99.4 Section 906 Certification of James S. Lusk (1)
(1) This document is being furnished in accordance with SEC Release Nos.
33-8812 and 34-47551.
56
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (this "Amendment") is entered
into as of September, 18, 2002, by and between MIM Corporation, a Delaware
corporation (the "Company"), and Barry A. Posner ("Executive").
WHEREAS, the Company and Executive entered into an Employment Agreement
dated as of March 1, 1999 (the "Employment Agreement"); and
WHEREAS, the Company and Executive desire to clarify that the Company,
in its discretion, may grant stock options to Executive in addition to the grant
specified in Section 3.4 of the Employment Agreement;
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein and other valuable consideration, the sufficiency of which is hereby
acknowledged, the parties hereto, intending to be legally bound, hereby agree as
follows:
1. Section 3.4 of the Employment Agreement is hereby amended to add the
following sentence to the end thereof: "After such grant, the Executive
shall be eligible for additional grants of options, if any, as recommended
by the Company's Compensation Committee."
2. Section 7.4(i) of the Employment Agreement is hereby amended to delete the
address block for Rogers & Wells under the heading "with a copy to" and to
replace it with the following:
King & Spalding
1185 Avenue of the Americas
New York, New York 10036-4003
Attention: Richard A. Cirillo
3. Except as modified hereby, the Employment Agreement shall remain unmodified
and in full force and effect.
4. This Amendment shall be construed in accordance with, and its
interpretation shall otherwise be governed by, the laws of the State of New
York, without giving effect to otherwise applicable principles of conflicts
of law.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
effective as of the date set forth above.
MIM CORPORATION
By: /s/ Richard H. Friedman
-------------------------------------
Richard H. Friedman, Chairman and CEO
/s/ Barry A. Posner
- -------------------------------------
Barry A. Posner
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (this "Amendment") is effective
as of December 31, 2001, by and between MIM Corporation, a Delaware corporation
(the "Company"), and Richard H. Friedman ("Executive").
WHEREAS, the Company and Executive entered into an Employment Agreement
dated as of December 1, 1998, which the Company and Executive previously amended
on October 11, 1999 (the "Employment Agreement");
WHEREAS, the Company and Executive have agreed to extend the term of
Executive's employment pursuant to the Employment Agreement through November 30,
2006 and desire to amend the Employment Agreement to reflect this extension; and
WHEREAS, the Company and Executive desire to clarify that the Company,
in its discretion, may grant stock options to Executive in addition to the grant
specified in Section 3.4 of the Employment Agreement;
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein and other valuable consideration, the sufficiency of which is hereby
acknowledged, the parties hereto, intending to be legally bound, hereby agree as
follows:
1. Section 1 of the Employment Agreement is hereby amended to provide as
follows: "The Company hereby employs the Executive, and the Executive
hereby accepts such employment, commencing as of December 1, 1998 and
ending November 30, 2006, as Chief Executive Officer and Chairman of the
Board of Directors of the Company (the "Board") unless sooner terminated in
accordance with the provisions of Section 4 or Section 5 (the period during
which the Executive is employed hereunder, including any extensions or
renewals thereof, being hereinafter referred to as the "Term")."
2. Section 3.4 of the Employment Agreement is hereby amended to add the
following sentence to the end thereof: "After such grant, the Executive
shall be eligible for additional grants of options, if any, as recommended
by the Company's Compensation Committee."
3. Except as modified hereby, the Employment Agreement shall remain unmodified
and in full force and effect.
4. This Amendment shall be construed in accordance with, and its
interpretation shall otherwise be governed by, the laws of the State of New
York, without giving effect to otherwise applicable principles of conflicts
of law.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
effective as of the date set forth above.
MIM CORPORATION
By: /s/ Barry A. Posner
------------------------------------------
Barry A. Posner, Executive Vice President
/s/ Richard H. Friedman
- --------------------------------------
Richard H. Friedman
- 2 -
[Letterhead of MIM Corporation]
October 1, 2002
Mr. James S. Lusk
42 Colts Glen Lane
Basking Ridge, NJ 07920
Re: MIM Corporation and Subsidiaries
--------------------------------
Dear Jim:
MIM Corporation, a Delaware corporation (the "Company"), is pleased to
offer you employment as the Company's Chief Financial Officer, on the terms and
subject to the conditions set forth below. The terms and conditions of your
employment would be as follows:
1. POSITION AND DUTIES:
Executive Vice President and Chief Financial Officer.
In such capacity, you shall be the principal financial and accounting officer of
the Company and shall be responsible for all financial reporting and other
matters typical of a Chief Financial Officer. In such capacity, you will
faithfully perform the duties of said office and position and such other duties
of an executive, managerial and administrative nature as are specified and
designated from time to time by the Company's Board of Directors.
You will report primarily to, and shall have such further duties as shall be
assigned to you by the Chief Executive Officer of the Company, subject to the
authority of the Board of Directors. Subject to the terms and conditions of this
Agreement, you acknowledge and understand that you are an employee at will.
2. BASE COMPENSATION:
Your base salary will be at an annual rate of $300,000.00 per year, payable
bi-weekly, or at such other times as other employees of the Company are paid.
3. LONG-TERM INCENTIVE
COMPENSATION:
As further compensation hereunder, effective upon the later to occur of the date
you commence your employment with the Company and the date you execute
definitive agreements with respect to each such grant, the Company would grant
to you 150,000 non-qualified stock options ("Options") to purchase the Company's
common stock, par value $0.0001 per share ("Common Stock"). The Options shall
vest in equal installments on the first, second and third anniversary dates of
your employment. The grant and vesting of your options would be subject to the
terms and conditions set forth in the form of a definitive non-qualified stock
Mr. James S. Lusk
October 1, 2002
Page 2
option agreement. Such options shall be priced at the closing stock price on the
trading day immediately preceding your first day of employment with the Company.
Six months after the commencement of your employment, you will be reviewed and a
determination will be made, in the Company's sole and absolute discretion, as to
the granting of additional Options.
4. TRANSPORTATION
ALLOWANCE:
During your employment, the Company will provide you with a monthly allowance of
$1000 for the use of an automobile.
5. PARTICIPATION IN HEALTH
AND OTHER BENEFIT PLANS:
During your employment with the Company, you shall be permitted, if and to the
extent eligible, to participate in all employee health and other related benefit
plans, policies and practices now or hereafter available to members of senior
management generally and maintained by or on behalf of the Company, including
the Company's medical expense reimbursement plan (the "MERP") and a life
insurance policy equal to three times your then annual salary. Nothing in this
agreement shall preclude the Company from terminating or amending any such plans
or coverage so as to eliminate, reduce or otherwise change any benefit payable
thereunder.
You shall be eligible to participate in the Company's 1998 Cash Bonus Program
For Key Employees. During the first calendar year of your employment, you would
participate pro rata based on the number of days during calendar year 2002 that
you were employed by the Company.
6. EXPENSES:
Subject to such policies as may from time to time be established by the
Company's Board of Directors, the Company would pay or reimburse you for all
reasonable and necessary expenses (which shall include professional fees and
dues reasonably necessary to the performance of your duties hereunder) actually
incurred or paid by you during the term of your employment in the performance of
your duties, upon submission and approval of expense statements, vouchers or
other supporting information in accordance with the then customary practices of
the Company.
Mr. James S. Lusk
October 1, 2002
Page 3
7. VACATION:
You would be entitled to four weeks (20 business days) vacation during the term
of your employment.
8. TERMINATION; SEVERANCE
CHANGE OF CONTROL:
If your employment with the Company is terminated for any reason whatsoever,
whether by you or the Company, the Company would not be liable for, or obligated
to pay you any bonus compensation or any other compensation contemplated hereby
not already paid or not already accrued at the date of such termination, and no
other benefits shall accrue or vest subsequent to such date. If you are
terminated by the Company (or any successor) other than for "Cause" (as defined
below), (i) you will be entitled to receive severance payments equal to one year
of salary at your then current salary level, payable in accordance with the
Company's then applicable payroll practices and subject to all applicable
federal, state and local withholding; and (ii) all outstanding unvested Options
granted to you (or hereafter under the Bonus Program) and held by you shall vest
and become immediately exercisable and shall otherwise be exercisable in
accordance with their terms and you shall become vested in any pension or other
deferred compensation other than pension or deferred compensation under a plan
intended to be qualified under Section 401(a) or 403(a) of the Internal Revenue
Code of 1986, as amended (the "Code"); and (iii) you shall have no further
rights to any other compensation or benefits hereunder on or after the
termination of employment or any other rights hereunder. For purposes of this
Agreement, "Cause" shall mean any of the following: (1) commission by you of
criminal conduct which involves moral turpitude; (2) acts which constitute fraud
or self-dealing by or on the part of you against the Company, including, without
limitation, misappropriation or embezzlement; (3) your willful engagement in
conduct which is materially injurious to the Company; or (4) your gross
misconduct in the performance of duties as an employee of the Company,
including, without limitation, failure to obey lawful written instructions of
the Board of Directors of the Company, any committee thereof or any executive
officer of the Company or failure to correct any conduct which constitutes a
breach of any written agreement between you and the Company or of any written
policy promulgated by the Board of Directors of either the Company, any
committee thereof or any executive officer of the Company, in either case after
not less than ten days' notice in writing to you of the Company's intention to
terminate you if such failure is not corrected within the specified period (or
after such shorter notice period if the Company in good faith deems such shorter
notice period to be necessary due to the possibility of material injury to the
Company). In addition, if you are terminated by the Company (or any successor)
Mr. James S. Lusk
October 1, 2002
Page 4
within one year of a "Change of Control" (as defined below) or, within such one
(1) year period, you elect to terminate your employment after the Company or a
successor entity materially reduces your authority, duties and responsibilities,
or assigns you duties materially inconsistent with your position or positions
with the Company or a successor entity immediately prior to such Change of
Control, (I) you shall receive severance payments equal to one year of your then
current salary (and reimbursement for expenses incurred prior to the effective
date of the termination of employment; (II) all outstanding unvested Options
granted to you (or hereafter under the Bonus Program) and held by you shall vest
and become immediately exercisable and shall otherwise be exercisable in
accordance with their terms and you shall become vested in any pension or other
deferred compensation other than pension or deferred compensation under a plan
intended to be qualified under Section 401(a) or 403(a) of the Code; ; and (III)
you shall have no further rights to any other compensation or benefits hereunder
on or after the termination of employment or any other rights hereunder.
For purposes of this Agreement, "Change of Control" means the occurrence of one
or more of the following: (i) a "person" or "group" within the means the meaning
of sections 13(d) and 14(d) of the Securities and Exchange Act of 1934 (the
"Exchange Act") becomes the "beneficial owner" (within the meaning of Rule l3d-3
under the Exchange Act) of securities of the Company (including options,
warrants, rights and convertible and exchangeable securities) representing 50.1%
or more of the combined voting power of the Company's then outstanding
securities in any one or more transactions unless approved by at least
two-thirds of the Board of Directors then serving at that time; provided,
however, that purchases by employee benefit plans of the Company and by the
Company or its affiliates shall be disregarded; or (ii) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the operating assets of the
Company; or (iii) a merger or consolidation, or a transaction having a similar
effect, where (A) the Company is not the surviving corporation, (B) the majority
of the Common Stock of the Company is no longer held by the stockholders of the
Company immediately prior to the transaction, or (C) the Company's Common Stock
is converted into cash, securities or other property (other than the common
stock of a company into which the Company is merged), unless such merger,
consolidation or similar transaction is with a subsidiary of the Company or with
another company, a majority of whose outstanding capital stock is owned by the
same persons or entities who own a majority of the Company's Common Stock at
such time; or (iv) at any annual or special meeting of stockholders of the
Company at which a quorum is present (or any adjournments or postponements
thereof), or by written consent in lieu thereof, directors (each a "New
Director" and collectively the "New Directors") then constituting a majority of
the Company's Board of Directors shall be duly elected to serve as New Directors
and such New Directors shall have been elected by stockholders of the Company
who shall be an (I) "Adverse Person(s)"; (II) "Acquiring Person(s)"; or (III)
"40% Person(s)" (as each of the terms set forth in (I), (II), and (III) hereof
are defined in that certain Amended and Restated Rights Agreement, dated May 20,
1999, between the Company and American Stock Transfer & Trust Company, as Rights
Agent.
Mr. James S. Lusk
October 1, 2002
Page 5
9. Termination Upon Disability
If by virtue of ill health or other disability you are unable to perform
substantially and continuously the duties assigned to you for more than 180
consecutive or non-consecutive days out of any consecutive twelve-month period,
the Company shall have the right, to the extent permitted by law, to terminate
your employment upon written notice; provided that the Company will have no
right to terminate your employment if, in the opinion of a qualified physician
reasonably acceptable to the Company, it is reasonably certain that you will be
able to resume your duties on a regular full-time basis within 30 days of the
date you receive notice of such termination. Upon a termination of your
employment by virtue of disability, (i) you shall receive severance payments
equal to one year of your then current salary (and reimbursement for expenses
incurred prior to the effective date of the termination of employment and other
benefits (including bonuses awarded but not yet paid) earned and accrued under
this agreement prior to the effective date of the termination of your
employment; (ii) you shall receive for a period of one year after termination of
employment continuing coverage under the health benefit plans and programs you
would have received under this agreement as would have applied in the absence of
such termination, it being expressly understood and agreed that nothing in this
clause (ii) shall restrict the ability of the Company to amend or terminate such
plans and programs from time to time in its sole discretion; provided, however,
that the Company shall in no event be required to provide any coverage after
such time as you become entitled to coverage under the benefit plans and
programs of another employer or recipient of your services (and provided,
further, that such entitlement shall be determined without regard to any
individual waivers or other arrangements); (iii) all fully vested and
exercisable Options granted to and held by you may be exercised by you or your
estate or beneficiaries for a period of one (1) year from and after the date of
your disability; and (iv) you shall have no further rights to any other
compensation or benefits hereunder on or after the termination of employment, or
any other rights hereunder.
Mr. James S. Lusk
October 1, 2002
Page 6
10. TERMINATION UPON DEATH:
If you die during the term of your employment, the obligations of the Company
with respect to you shall terminate in their entirety, except as follows: Upon
death, (i) you or your estate or beneficiaries shall be entitled to receive
accrued and unpaid salary (including bonuses awarded or declared and not paid)
and reimbursement for expenses incurred prior to the date of your termination;
(ii) all vested and exercisable Options granted to you may be exercised by your
estate for a period of one (1) year from and after the date of your death; and
(iii) neither you or your estate or beneficiaries shall have any further rights
to any other compensation or benefits hereunder on or after the termination of
employment, or any other rights hereunder.
11. RESTRICTIVE COVENANT:
As a condition to your employment with the Company, you will be obligated to
enter into a restrictive covenant agreement between you and the Company,
covering, among other things, non-competition provisions, non-solicitation
provisions, and the protection of the Company's trade secrets. That agreement is
attached hereto as Exhibit A.
12. OTHER TERMS:
Your employment, restrictive covenants and option agreements will include other
customary and usual terms, provisions, conditions and representations as are
found in the Company's similar arrangements with its employees.
Mr. James S. Lusk
October 1, 2002
Page 7
13. CONDITION TO EMPLOYMENT:
Your employment is conditioned on the approval of your employment and this
letter agreement by the Board of Directors of the Company.
14. ARBITRATION:
If any dispute arises with respect to the rights and obligations hereunder and
is not resolved by us, such dispute will be submitted to binding arbitration,
which shall be conducted in accordance with the commercial arbitration rules
(the "Rules") of the American Arbitration Association ("AAA") in effect at the
time arbitration is commenced. Arbitration may be commenced by either party by
service and filing of a demand for arbitration in accordance with the Rules of
the AAA then in effect. There shall be one arbitrator in any arbitration
pursuant to this agreement. The selection of arbitrator shall be made in
accordance with the Rules of the AAA then in effect. The venue of arbitration
shall be the State of New York, City of New York. The arbitrators in any
arbitration pursuant to this agreement shall apply the substantive laws of the
State of New York. Any arbitral award obtained pursuant to this agreement may be
confirmed pursuant to Article 75 of the New York Civil Practice Law and Rules in
New York State Supreme Court or in any other court of competent jurisdiction
within or without the State of New York.
Mr. James S. Lusk
October 1, 2002
Page 8
Please call me to discuss any questions or comments that you may have
regarding these terms. After I receive your agreement to the foregoing,
definitive documentation will be prepared. I look forward to hearing from you
and working with you. Best regards.
Sincerely yours,
MIM CORPORATON
By: /s/ Richard H. Friedman
--------------------------------
Name: Richard H. Friedman
Title: Chairman and CEO
Agreed to and Accepted By:
/s/ James S. Lusk
- ------------------------
James S. Lusk
Exhibit A
RESTRICTIVE COVENANTS
Covenant Against Competition; Other Covenants. You acknowledge that (i)
the principal business of the Company (for purposes of these restrictive
covenants, the "Company" shall include all subsidiaries and affiliates of MIM
Corporation) is the provision of a broad range of services designed to promote
the cost-effective delivery of pharmacy benefits, including pharmacy benefit
management services, claims processing, the purchasing of pharmaceutical
products on behalf of pharmacy networks and long term care facilities (including
assisted living facilities and nursing homes) and specialty pharmaceutical
programs and mail order pharmacy services, including the dispensing of
prescription pharmaceutical products, and the sale and distribution, on a retail
and wholesale basis, of OTC's, vitamins, supplements, herbals and other goods
typically offered for sale through a retail, mail order or internet on-line
pharmacy (such business, and any and all other businesses that after the date
hereof, and from time to time during the Term, become material with respect to
the Company's then-overall business, herein being collectively referred to as
the "Business"); (ii) the Company is dependent on the efforts of a certain
limited number of persons who have developed, or will be responsible for
developing the Company's Business; (iii) is national in scope; (iv) your work
for the Company will give you access to the confidential affairs and proprietary
information of the Company; (v) your covenants and agreements contained in these
Restrictive Covenants are essential to the business and goodwill of the Company;
and (vi) the Company would not have offered you employment but for the covenants
and agreements set forth herein. Accordingly, you covenant and agree that:
(a) At any time during your employment with the Company and
ending nine months following (i) termination of your employment with the Company
(irrespective of the reason for such termination) or (ii) payment of any
severance, whichever occurs last, you shall not engage, directly or indirectly,
in sales or marketing or otherwise assisting any company or other business
entity (which includes, without limitation, owning, managing, operating,
controlling, being employed by, giving financial assistance to, participating in
or being connected in any material way with any person or entity other than the
Company), engaged in (i) the Business or (ii) any material component of the
Business; provided, however, that the Executive's ownership as a passive
investor of less than two percent (2%) of the issued and outstanding stock of a
publicly held corporation shall not be deemed to constitute competition.
(b) During and after the period during which you are employed,
you shall keep secret and retain in strictest confidence, and shall not use for
his benefit or the benefit of others, except in connection with the Business and
affairs of the Company and its affiliates, all confidential matters relating to
the Company's Business and the business of any of its affiliates and to the
Company and any of its affiliates, learned by you heretofore or hereafter
directly or indirectly from the Company or any of its affiliates (the
"Confidential Company Information"), including, without limitation, information
with respect to (i) the strategic plans, budgets, forecasts, intended expansions
Mr. James S. Lusk
October 1, 2002
Page 10
of product, service, or geographic markets of the Company and its affiliates,
(ii) sales figures, contracts, agreements, and undertakings with or with respect
to customers, (iii) profit or loss figures, and (iv) customers, clients,
suppliers, sources of supply and customer lists, and shall not disclose such
Confidential Company Information to anyone outside of the Company except with
the Company's express written consent and except for Confidential Company
Information which is at the time of receipt or thereafter becomes publicly known
through no wrongful act of you or is received from a third party not under an
obligation to keep such information confidential and without breach of these
Restrictive Covenants or the Agreement. Notwithstanding the foregoing, this
section (b) shall not apply to the extent that you are acting to the extent
necessary to comply with legal process; provided that in the event that you are
subpoenaed to testify or to produce any information or documents before any
court, administrative agency or other tribunal relating to any aspect pertaining
to the Company, you shall immediately notify the Company thereof.
(c) During the period commencing on the date hereof and ending
one year following the date upon which you shall cease to be an employee of the
Company or its affiliates, you shall not, without the Company's prior written
consent, directly or indirectly, (i) solicit or encourage to leave the
employment or other service of the Company or any of its affiliates, any
employee or independent contractor thereof or hire (on your behalf or any other
person or entity) any employee or independent contractor who has left the
employment or other service of the Company or any of its affiliates within one
year of the termination of such employee's or independent contractor's
employment or other service with the Company and its affiliates, or (ii)
solicit, contact, market to, work for, or assist others in soliciting any
customer or client of the Company with whom the Company was in contact with or
was providing goods and services to at the time of your termination of
employment with the Company. During such period, you will not, whether for your
own account or for the account of any other person, firm, corporation or other
business organization, intentionally interfere with the Company's or any of its
affiliates' relationship with, or endeavor to entice away from the Company or
any of its affiliates, any person who during the Term is or was a customer or
client of the Company or any of its affiliates.
(d) All memoranda, notes, lists, records, property and any
other tangible product and documents (and all copies thereof) made, produced or
compiled by you or made available to you concerning the Business of the Company
and its affiliates shall be the Company's property and shall be delivered to the
Company at any time on request.
Mr. James S. Lusk
October 1, 2002
Page 11
Rights and Remedies upon Breach of Restrictive Covenants.
--------------------------------------------------------
(a) You acknowledge and agree that any breach by him of any of
the provisions of sections (a) through (d) above (the "Restrictive Covenants")
would result in irreparable injury and damage for which money damages would not
provide an adequate remedy. Therefore, if you breach, or threaten to commit a
breach of, any of the Restrictive Covenants, the Company and its affiliates
shall have the following rights and remedies, each of which rights and remedies
shall be independent of the other and severally enforceable, and all of which
rights and remedies shall be in addition to, and not in lieu of, any other
rights and remedies available to the Company and its affiliates under law or in
equity (including, without limitation, the recovery of damages):
(b) The right and remedy to have the Restrictive Covenants
specifically enforced (without posting bond and without the need to prove
damages) by any court having equity jurisdiction, including, without limitation,
the right to an entry against you of restraining orders and injunctions
(preliminary, mandatory, temporary and permanent) against violations, threatened
or actual, and whether or not then continuing, of such covenants.
(c) The right and remedy to require you to account for and pay
over to the Company and its affiliates all compensation, profits, monies,
accruals, increments or other benefits (collectively, "Benefits") derived or
received by you as the result of any transactions constituting a breach of the
Restrictive Covenants, and you shall account for and pay over such Benefits to
the Company and, if applicable, its affected affiliates.
(d) You agree that in any action seeking specific performance
or other equitable relief, you will not assert or contend that any of the
provisions of these Restrictive Covenants are unreasonable or otherwise
unenforceable. The existence of any claim or cause of action by you, whether
predicated on the Agreement or otherwise, shall not constitute a defense to the
enforcement of the Restrictive Covenants.
`
Agreed to and accepted by:
- -----------------------------
James S. Lusk
THIRD AMENDMENT OF
AGREEMENT OF LEASE
JUNE 24, 2002
Between: FIVE REGENT PARK ASSOCIATES (Landlord)
a New Jersey Partnership
c/o Eastman Management Corporation
651 West Mount Pleasant Avenue
Livingston, New Jersey 07039
And: AMERICAN DISEASE MANAGEMENT ASSOCIATES (Tenant)
#5N Regent Street
Livingston, New Jersey 07039
RE: Lease Dated July 22, 1996
First Amendment Dated June 15, 1999
Second Amendment Dated February 11, 2000
WITNESSETH
WHEREAS, the parties entered into a Lease Agreement dated July 22, 1996 for
office space in the building known as #5N Regent Street, Livingston, New Jersey
(the "Original Agreement"); First Amendment of Agreement of Lease dated June 15,
1999 (the "First Amendment"); and a Second Amendment of Agreement of Lease dated
February 11, 2000 (the "Second Amendment"). The Original Agreement, the First
Amendment and the Second Amendment are referred to collectively as the "Lease";
WHEREAS, the parties now desire to further amend the Lease to add additional
space in the building in Suite 512 (currently occupied by World Wide Packaging
Company) as shown on the sketch attached hereto as Exhibit "A" (the "Expansion
Area"), to extend the Term of the Lease and to modify certain other terms of the
Lease.
NOW THEREFORE, for and in consideration of the mutual covenants set forth
herein, the receipt and sufficiency of which are mutually acknowledged, the
parties hereto agree to amend the Lease as follows:
1. Capitalized terms used herein and not otherwise defined shall have the
meaning ascribed thereto in the Original Agreement.
2. Beginning on the date Landlord substantially completes the work set forth in
paragraph 3 below (the "Expansion Area Commencement Date"), the Basic Rent shall
be increased by the amount of $37,328.00 per annum, or $3,110.00 per month.
Tenant shall also pay, as Additional Rent for the Expansion Area, the initial
amount of $997.27 per month. Beginning on April 1, 2003, the Basic Rent shall
increase to $130,125.00 per annum, or $10,843.75 per month. In addition,
beginning on the Expansion Area Commencement Date, Tenant shall pay an
additional amount of $776.00 per month for additional renovation work requested
by the Tenant as per attached floor plan.
American Disease Management Associates
Third Amendment of Agreement of Lease
Page 2
3. Beginning on the Expansion Area Commencement Date, the Premises shall be
expanded by 2,488 square feet and shall include the premises set forth in the
Original Lease, the expansion area set forth in the Second Amendment and the
Expansion Area. The total Rentable Area of the Premises shall be 8,675 square
feet and the Tenant's Proportionate Share shall be 12.61%.
4. Landlord shall perform the renovation work in the Expansion Area as outlined
on the floor plan attached hereto as Exhibit A as soon as practical upon the
execution of this Amendment.
5. The Term of the Lease for the entire Premises as hereinabove defined, shall
be extended for a period ending on the last day of the calendar month in which
the twenty fourth (24) month anniversary of the Expansion Area Commencement Date
shall occur.
6. Tenant shall not disclose any facts or terms of this Agreement to any third
party including former, current or future tenants of the Building.
7. If Landlord is unable to deliver the Expansion Area, including the renovation
work to be completed as set forth in Exhibit A, to Tenant by September 1, 2002
than Tenant shall have the option to terminate this Amendment for the Expansion
Area without liability upon 10 days written notice.
8. In all other respects, except as expressly modified herein, the Lease are
hereby ratified and confirmed.
IN WITNESS WHEREOF, the parties have hereunto set their hands on the
date first written above.
WITNESS: (Landlord)
FIVE REGENT PARK ASSOCIATES
By: Janfel-JBS Corp., a General Partner
/s/ William Kanter By: /s/ Peter Schofel
- -------------------------- -------------------------------
ATTEST: (Tenant)
AMERICAN DISEASE MANAGEMENT
ASSOCIATES, LLC
/s/ Barry Posner By: /s/ Michael Sicilian
- -------------------------- -------------------------------
SECOND AMENDMENT AND CONSENT, dated as of January 9, 2002 ("Second
Amendment"), to the RECEIVABLES PURCHASE AND TRANSFER AGREEMENT, dated as of
November 1, 2000 (as amended prior to the date hereof, the "Original RPTA", and
as it may be amended, modified or supplemented on and after the date hereof,
including by this Second Amendment, the "RPTA"), among SCRIP SOLUTIONS, INC. (as
successor by merger to MIM Health Plans, Inc.), a Delaware corporation (together
with its corporate successors and assigns, "Scrip", and in its capacity as
primary servicer thereunder, the "Primary Servicer"), each of the parties named
on Schedule I thereto (each, including Scrip, a "Provider" and collectively, the
"Providers"), and MIM FUNDING LLC, a Delaware limited liability company
(together with its successors and assigns, the "Purchaser") and consented to by
HFG HEALTHCO-4 LLC (the "Lender"), as assignee of the Purchaser. Unless
otherwise defined herein, terms in the RPTA are used herein as therein defined.
MIM Health Plans, Inc. has merged (the "Merger") with and into its
wholly owned subsidiary Pro-Mark Holdings, Inc., and Pro-Mark Holdings, Inc., as
the surviving corporation, has changed its name to Scrip Solutions, Inc.
MIM Corporation ("Parent") is entering into that certain Stock Purchase
Agreement, dated as of January 9, 2002, by and among Vitality Home Infusion
Services, Inc. ("Vitality"), Marc Wiener, Barbara Kammerer and the Parent (the
"Vitality Purchase Agreement") attached hereto as Exhibit A, pursuant to which
the Parent has agreed to purchase all of the outstanding stock of Vitality
pursuant to the terms set forth therein (the "Vitality Acquisition").
The Primary Servicer and the Providers have requested that the Lender
consent to the Parent entering into the Vitality Purchase Agreement. In
connection with such consent, the Merger and the Vitality Purchase Agreement,
the parties to the hereto have agreed to amend certain provisions of the RPTA
pursuant to this Second Amendment.
Accordingly, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, and subject to the fulfillment of the conditions set forth below,
the parties hereto agree as follows:
SECTION 1. CONSENT
The Purchaser hereby consents to, and waives any breach under the RPTA
as the sole result of (i) the Merger, (ii) the name change of Pro-Mark Holdings,
Inc. to Scrip Solutions, Inc., and (iii) the name change of Continental Pharmacy
to Scrip Pharmacy, Inc. The Lender hereby acknowledges and consents to such
consent and waiver.
The Lender agrees to deliver to the Parent a consent (in substantially
the form of Exhibit B) to the execution and delivery by the Parent of the
Vitality Purchase Agreement.
SECTION 2. AMENDMENTS TO RPTA
The Original RPTA is hereby amended, effective as of the effective date
of the consummation of the Vitality Acquisition, as follows:
SECTION 2.1 Exhibit I to the Original RPTA is hereby amended by adding the
following definition in its proper alphabetical order:
"Total Liabilities" means, at any date of determination, the
total liabilities of the Parent and its Subsidiaries on a consolidated
basis which would be classified as liabilities at such date
(including, without limitation, Current Liabilities and long-term
liabilities), computed and calculated in accordance with GAAP,
excluding, however, borrowings under the Loan Agreement.
SECTION 2.2 Exhibit I to the Original RPTA is hereby amended by deleting the
defined term "Equity" and substituting therefor the following new definition:
"Equity" means the amount set forth on the consolidated balance
sheets of the Parent as equity.
SECTION 2.3 Clause (s) of Exhibit V to the Originator RPTA (Consolidated Net
Worth) is hereby amended by removing the table appearing in such clause and
substituting therefor the following new table:
Fiscal Quarter Ending Amount
--------------------- ------
March 31, 2002 $60,000,000
June 30, 2002 $62,500,000
September 30, 2002 $65,000,000
December 31, 2002 $67,500,000
March 31, 2003 and $70,000,000
each fiscal quarter thereafter
SECTION 2.4 Clause (v) of Exhibit V to the Originator RPTA (Consolidated EBITDA)
is hereby amended by removing the table appearing in such clause and
substituting therefor the following new table:
Fiscal Quarter Ending Amount
--------------------- ------
March 31, 2002 and $3,000,000
each fiscal quarter thereafter
SECTION 2.5 Clause (x) of Exhibit V to the Originator RPTA is hereby amended by
removing such clause in its entirety and substituting therefor the following:
2
(x) The Providers' Total Liabilities to Equity Ratio. The ratio
of Total Liabilities of the Parent to Equity exceeds the ratio set
forth below as of the end of the corresponding fiscal quarter
indicated below:
Fiscal Quarter Ending Ratio
--------------------- -----
March 31, 2002 and 1.50:1.00
each fiscal quarter thereafter
SECTION 2.6 Clause (y) of Exhibit V to the Originator RPTA (Debt to Consolidated
Tangible Net Worth) is hereby amended by removing such clause in its entirety
and substituting therefor the following:
(y) [Intentionally Omitted]
SECTION 2.7 Clause (z) of Exhibit V to the Originator RPTA (Current Ratio) is
hereby amended by removing the table appearing in such clause and substituting
therefor the following new table:
Fiscal Quarter Ending Ratio
--------------------- -----
March 31, 2002 and 1.00:1.00
each fiscal quarter thereafter
SECTION 2.8 Clause (aa) of Exhibit V to the Originator RPTA (Consolidated
Working Capital) is hereby amended by removing the table appearing in such
clause and substituting therefor the following new table:
Fiscal Quarter Ending Ratio
--------------------- -----
March 31, 2002 and $5,000,000
each fiscal quarter thereafter
SECTION 2.9 Clause (bb) of Exhibit V to the Originator RPTA (Consolidated
Tangible Net Worth) is hereby amended by removing the table appearing in such
clause and substituting therefor the following new table:
Fiscal Quarter Ending Ratio
--------------------- -----
March 31, 2002 $(8,500,000)
June 30, 2002 $(6,500,000)
September 30, 2002 $(3,500,000)
December 31, 2002 $ 0
March 31, 2003 and $ 2,500,000
each fiscal quarter thereafter
3
SECTION 3. ACKNOWLEDGMENT BY SCRIP
SECTION 3.1 Scrip hereby acknowledges that, following the Merger, it is the
successor to all of the duties, responsibilities and obligations of MIM Health
Plans, Inc. as a Provider and Primary Servicer under the RPTA and related
Documents (as such term is defined in the Loan Agreement) and hereby undertakes,
agrees and assumes all of such duties, responsibilities and obligations.
SECTION 3.2 The Primary Servicer agrees and undertakes to cause Vitality to
enter into the Subscription Agreement substantially in the form of Exhibit C
hereto substantially simultaneously with the consummation of Vitality
Acquisition.
SECTION 3.3 The Primary Servicer agrees and undertakes to cause MIM Corporation
to enter into the Guaranty substantially in the form of Exhibit D and the
Assignment of Guaranty as Collateral Security substantially in the form of
Exhibit E substantially simultaneously with the consummation of Vitality
Acquisition.
SECTION 3.4 The Primary Servicer agrees and undertakes to cause the chief
financial officer of MIM Corporation to deliver a Solvency Certificate
substantially in the form of Exhibit F substantially simultaneously with the
consummation of Vitality Acquisition.
SECTION 4. CONDITIONS PRECEDENT
This Second Amendment shall not become effective until the following
conditions have been satisfied in full or waived in writing by the Purchaser and
the Lender as its assignee:
(a) All required corporate and limited liability company
actions in connection with the execution and delivery of this Second
Amendment, the Merger, the Stock Purchase Agreement and the Vitality
Acquisition shall have been taken, and each shall be satisfactory in
form and substance to the Lender, and the Lender shall have received
all information and copies of all documents, including, without
limitation, records of requisite corporate and limited liability
company action that the Lender may reasonably request, to be certified
by the appropriate corporate or limited liability company person or
government authorities;
(b) Each document (including, without limitation, any UCC-1
Financing Statements) required by law or requested by the Lender to be
filed, registered or recorded in order to create in favor of the Lender
a first priority perfected security interest in the Collateral (as
defined in the Loan Agreement) shall have been properly filed,
registered or recorded in each jurisdiction in which the filing,
registrations or recordation thereof is so required or requested. The
Lenders shall have received evidence satisfactory to it, of each such
filing, registration or recordation.
4
(c) Fully executed counterparts of this Second Amendment
and the Stock Purchase Agreement.
SECTION 5. MISCELLANEOUS
SECTION 5.1 The Providers each hereby certify, represent and warrant that (i)
the representations and warranties in the RPTA are true and correct (and after
having given effect to the Merger), with the same force and effect as if made on
such date, except as they may specifically refer to an earlier date, in which
case they were true and correct as of such date,(ii) no unwaived Event of
Termination, a Group-Wide Event of Termination, a Servicer Termination Event or
a Group-Wide Servicer Event of Termination or would constitute such an Event of
Termination, Group-Wide Event of Termination, Servicer Termination Event or
Group-Wide Servicer Event of Termination has occurred or is continuing (nor any
event that but for notice or lapse of time or both would constitute an Event of
Termination, a Group-Wide Event of Termination, a Servicer Termination Event or
a Group-Wide Servicer Event of Termination or would constitute such an Event of
Termination, Group-Wide Event of Termination, Servicer Termination Event or
Group-Wide Servicer Event), (iii) each of the Providers and the Primary
Servicer, as applicable has the corporate power and authority to execute and
deliver this Second Amendment, the agreements and documents related to the
Merger, the Stock Purchase Agreement and to consummate the Vitality Acquisition,
and (iv) no consent of any other person (including, without limitation,
shareholders or creditors of any Provider or Vitality), and no action of, or
filing with any governmental or public body or authority is required to
authorize, or is otherwise required in connection with the the execution and
performance of this Second Amendment, the Merger or the Vitality Acquisition,
other than, in each case, such that have been obtained.
SECTION 5.2 The terms "Agreement", "hereof", "herein" and similar terms as used
in the RPTA shall mean and refer to, from and after the effectiveness of this
Second Amendment, the RPTA as amended by this Second Amendment, and as it may in
the future be amended, restated, modified or supplemented from time to time in
accordance with its terms. Except as specifically agreed herein, the RPTA is
hereby ratified and confirmed and shall remain in full force and effect in
accordance with its terms.
SECTION 5.3 THIS SECOND AMENDMENT SHALL, IN ACCORDANCE WITH SECTION 5-1401 OF
THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK, BE GOVERNED BY THE LAWS OF
THE STATE OF NEW YORK, WITHOUT REGARD TO ANY CONFLICT OF LAWS PRINCIPLES THEREOF
THAT WOULD CALL FOR THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION.
SECTION 5.4 This Second Amendment may be executed in counterparts, each of which
when so executed shall be deemed to be an original and all of which when taken
together shall constitute one and the same agreement.
5
SECTION 5.5 Delivery of an executed counterpart of a signature page by
telecopier shall be effective as delivery of a manually executed counterpart.
6
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
PROVIDERS: SCRIP SOLUTIONS, INC.
(as successor by merger to MIM Health Plans, Inc.)
By: /s/ Richard Friedman
--------------------------------
Name: Richard Friedman
Title: Chairman & Chief Executive Officer
AMERICAN DISEASE MANAGEMENT ASSOCIATES, LLC
By: /s/ Richard Friedman
--------------------------------
Name: Richard Friedman
Title: Chairman & Chief Executive Officer
SCRIP PHARMACY, INC. (f/k/a Continental Pharmacy, Inc.)
By: /s/ Richard Friedman
--------------------------------
Name: Richard Friedman
Title: Chairman & Chief Executive Officer
PURCHASER: MIM FUNDING LLC
By: /s/ Richard Friedman
--------------------------------
Name: Richard Friedman
Title: Chief Executive Officer
7
PRIMARY SERVICER: SCRIP SOLUTIONS, INC.
(as successor by merger to MIM Health Plans, Inc.)
By: /s/ Richard Friedman
--------------------------------
Name: Richard Friedman
Title: Chairman & Chief Executive Officer
CONSENTED TO:
MIM CORPORATION
By: /s/ Richard Friedman
--------------------------------
Name: Richard Friedman
Title: Chairman & Chief Executive Officer
HFG HEALTHCO-4 LLC
By: HFG Healthco-4, Inc., a member
By: /s/ Dean A. Christiansen
--------------------------------
Name: Dean A. Christiansen
Title: President
8
SCHEDULE I
LIST OF PROVIDERS
Name Jurisdiction of Organization
American Disease Management Associates, LLC Delaware
Scrip Pharmacy, Inc. Ohio
Scrip Solutions, Inc. Delaware
9
AMENDMENT NO. 3, dated as of November 25, 2002 ("Amendment No. 3") to
the Receivables Purchase and Transfer Agreement, dated as of November 1, 2000
(as amended, restated, supplemented, or otherwise modified from time to time,
the "RPTA"), among SCRIP SOLUTIONS, INC. (as successor by merger to MIM Health
Plans, Inc.), a Delaware corporation (together with its corporate successors and
assigns, "Scrip Solutions", and in its capacity as primary servicer thereunder,
the "Primary Servicer"), each of the parties named on Schedule I thereto (each,
including Scrip Solutions, a "Provider" and collectively, the "Providers"), and
MIM FUNDING LLC, a Delaware limited liability company (together with its
successors and assigns, the "Purchaser") and HFG HEALTHCO-4 LLC (the "Lender"),
as assignee of the Purchaser. Unless otherwise defined herein, terms in the RPTA
are used herein as therein defined.
WHEREAS, the Primary Servicer and the Providers have requested that the
Purchaser agree to amend certain provisions of the RPTA and that the Lender
consent to such amendments.
WHEREAS, the Purchaser is willing to agree to the amendments requested
by the Primary Servicer and the Providers subject to the terms and conditions
set forth herein.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, and subject to the fulfillment of the conditions set forth below,
the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO RPTA
SECTION 1.1 Exhibit I to the RPTA is hereby amended to add the following
definition thereto in the appropriate alphabetical order:
"Availability" means, at any date of determination, the
amount of the difference between (i) the Borrowing Limit (as
defined in the Loan Agreement) and (ii) the Lender Debt (as
defined in the Loan Agreement).
SECTION 1.2 Paragraph (z) of Exhibit V to the RPTA is hereby amended in its
entirety and the following shall be substituted therefor:
(z) Current Ratio. The ratio of (i) Current Assets plus
Availability to (ii) Current Liabilities is less than
1.20:1.00 as of the end of the fiscal quarter ending
September 30, 2002 and each fiscal quarter ending
thereafter.
SECTION 1.3 Paragraph (aa) of Exhibit V to the RPTA is hereby amended in its
entirety and the following shall be substituted therefor:
(aa) Consolidated Working Capital. The Consolidated Working
Capital is less than zero as of the end of the fiscal
quarter ending September 30, 2002 and each fiscal quarter
ending thereafter.
SECTION 2. CONDITIONS PRECEDENT
This Amendment No. 3 shall be deemed to be effective as of September
30, 2002 subject to receipt by the Lender, as assignee of the Purchaser, of a
copy of this Amendment No. 3 duly executed by the Primary Servicer, the
Providers and the Purchaser.
SECTION 3. MISCELLANEOUS
SECTION 3.1 After giving effect to the amendments set forth herein, each of the
Providers represents and warrants that no unwaived event has occurred and is
continuing which constitutes an Event of Termination, a Group-Wide Event of
Termination, a Servicer Termination Event or a Group-Wide Servicer Event of
Termination or would constitute such an Event of Termination, Group-Wide Event
of Termination, Servicer Termination Event or Group-Wide Servicer Event of
Termination but for the requirement that notice be given or time elapse or both.
SECTION 3.2 The terms "Agreement", "hereof", "herein" and similar terms as used
in the RPTA shall mean and refer to, from and after the effectiveness of this
Amendment No. 3, the RPTA as amended by this Amendment No. 3, and as it may in
the future be amended, restated, modified or supplemented from time to time in
accordance with its terms. Except as specifically agreed herein, the RPTA is
hereby ratified and confirmed and shall remain in full force and effect in
accordance with its terms.
SECTION 3.3 THIS AMENDMENT NO. 3 SHALL, IN ACCORDANCE WITH SECTION 5-1401 OF THE
GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK, BE GOVERNED BY THE LAWS OF THE
STATE OF NEW YORK, WITHOUT REGARD TO ANY CONFLICT OF LAWS PRINCIPLES THEREOF
THAT WOULD CALL FOR THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION.
SECTION 3.4 This Amendment No. 3 may be executed in counterparts, each of which
when so executed shall be deemed to be an original and all of which when taken
together shall constitute one and the same agreement.
SECTION 3.5 Delivery of an executed counterpart of a signature page by
telecopier shall be effective as delivery of a manually executed counterpart.
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 3
to be executed by their respective officers thereunto duly authorized, as of the
date first above written.
PRIMARY SERVICER: SCRIP SOLUTIONS, INC.
By: /s/ Barry A. Posner
--------------------------------
Name: Barry A. Posner
Title: Executive Vice President & Secretary
PROVIDERS: SCRIP SOLUTIONS, INC.
By: /s/ Barry A. Posner
--------------------------------
Name: Barry A. Posner
Title: Executive Vice President & Secretary
AMERICAN DISEASE MANAGEMENT ASSOCIATES, LLC
By: /s/ Barry A. Posner
--------------------------------
Name: Barry A. Posner
Title: Vice President & Secretary
SCRIP PHARMACY, INC.
By: /s/ Barry A. Posner
--------------------------------
Name: Barry A. Posner
Title: Vice President & Secretary
VITALITY HOME INFUSION SERVICES, INC.
By: /s/ Barry A. Posner
--------------------------------
Name: Barry A. Posner
Title: Vice President & Secretary
PURCHASER: MIM FUNDING LLC
By: /s/ Barry A. Posner
--------------------------------
Name: Barry A. Posner
Title: Executive Vice President & Secretary
CONSENTED TO:
HFG HEALTHCO-4 LLC
By: HFG Healthco-4, Inc., a member
By: /s/ Orlando Figueroa
--------------------------------
Name: Orlando Figueroa
Title: Vice President
Exhibit 21
List of Subsidiaries
Scrip Solutions, Inc., a Delaware corporation
Vitality Home Infusion Services, Inc., a New York corporation
Scrip Pharmacy, Inc., an Ohio corporation
American Disease Management Associates, LLC., a Delaware limited liability
company
MIM Health Plans of Puerto Rico, Inc., a Puerto Rican corporation
MIM Investment Corporation, a Delaware corporation
MIM IPA, Inc., a New York corporation
New York ADIMA, LLC., a New York corporation
MIM Funding LLC., a Delaware limited liability company
CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-79395 and 333-33905) of our report dated February 14, 2003, with respect to the consolidated financial statements and schedule of MIM Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 2002. /s/ Ernst & Young, LLP MetroPark, New Jersey March 26, 2003
Exhibit 23.2
NOTICE REGARDING CONSENT OF ARTHUR ANDERSEN LLP
Section 11(a) of the Securities Act of 1933, as amended (the "Securities
Act"), provides that if any part of a registration statement at the time such
part becomes effective contains an untrue statement of a material fact or an
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, any person acquiring a security
pursuant to such registration statement (unless it is proved that at the time of
such acquisition such person knew of such untruth or omission) may sue, among
others, every accountant who has consented to be named as having prepared or
certified any part of the registration statement, or as having prepared or
certified any report or valuation which is used in connection with the
registration statement, with respect to the statement in such registration
statement, report or valuation which purports to have been prepared or certified
by the accountant.
Following approval of MIM Corporation's Board of Directors and its Audit
Committee, MIM Corporation dismissed Arthur Andersen LLP, ("Andersen") as MIM
Corporation's independent accountants effective May 24, 2002. See MIM
Corporation's Current Report on Form 8-K filed May 29, 2002 for more
information. After reasonable efforts, MIM Corporation has been unable to obtain
Andersen's written consent to the incorporation by reference into the
Registration Statements of its audit report with respect to MIM Corporation's
financial statements as of and for the fiscal years ended December 31, 2001 and
2000.
Under these circumstances, Rule 437a under the Securities Act permits MIM
Corporation to file this Form 10-K without a written consent from Andersen.
However, as a result, with respect to transactions in MIM Corporation securities
pursuant to the Registration Statements that occur subsequent to the date this
Annual Report on Form 10-K is filed with the Securities and Exchange Commission,
Andersen will not have any liability under Section 11(a) of the Securities Act
for any untrue statements of a material fact contained in the financial
statements audited by Andersen or any omissions of a material fact required to
be stated therein. Accordingly, you would be unable to assert a claim against
Andersen under Section 11(a) of the Securities Act because it has not consented
to the incorporation by reference of its previously issued reports into the
Registration Statements. To the extent provided in Section 11(b)(3)(C) of the
Securities Act, however, other persons who are liable under Section 11(a) of the
Securities Act, including MIM Corporation's officers and directors, may still
rely on Andersen's original audit reports as being made by an expert for
purposes of establishing a due diligence defense under Section 11(b) of the
Securities Act.
Exhibit 99.1
CERTIFICATION
The undersigned, Richard H. Friedman, Chairman and Chief Executive Officer
of MIM Corporation (the "Company"), hereby certifies that the Annual Report of
the Company on Form 10-K for the fiscal year ended December 31, 2002 fully
complies with the requirements of Section 13(a) of the Securities Exchange Act
of 1934 and that the information contained in such report fairly presents, in
all material respects, the financial condition and results of operations of the
Company.
Dated: March 31, 2003
/s/ Richard H. Friedman
------------------------------
Richard H. Friedman
Chairman and Chief Executive Officer
Exhibit 99.2
CERTIFICATION
The undersigned, James S. Lusk, Chief Financial Officer of MIM Corporation
(the "Company"), hereby certifies that the Annual Report of the Company on Form
10-K for the fiscal year ended December 31, 2002 fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934 and that
the information contained in such report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: March 31, 2003
/s/ James S. Lusk
------------------------------
James S. Lusk
Executive Vice President and
Chief Financial Officer
Exhibit 99.3
CERTIFICATION
I, Richard H. Friedman, certify that:
1. I have reviewed this Annual Report on Form 10-K of MIM Corporation;
2. Based upon my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Annual Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Annual Report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Annual Report (the "Evaluation Date"); and
(c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Richard H. Friedman
--------------------------
Richard H. Friedman
Chairman and Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to MIM Corporation and will be retained by MIM Corporation and
furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 99.4
CERTIFICATION
I, James S. Lusk, certify that:
1. I have reviewed this Annual Report on Form 10-K of MIM Corporation;
2. Based upon my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Annual Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Annual Report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Annual Report (the "Evaluation Date"); and
(c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 31, 2003
/s/ James S. Lusk
--------------------------
James S. Lusk
Executive Vice President and
Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to MIM Corporation and will be retained by MIM Corporation and
furnished to the Securities and Exchange Commission or its staff upon request.