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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File No. 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, New York 10523
(914) 460-1600
(Address and telephone number of Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ______
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of March 10, 2000, was approximately $120.8
million. (Reference is made to a final paragraph of Part II, Item 5 herein for a
statement of the assumptions upon which this calculation is based.)
On March 10, 2000, there were outstanding 18,931,706 shares of the
registrant's Common Stock.
Documents Incorporated by Reference
None.
PART I
Item 1. Business
Overview
MIM Corporation (the "Company") is an independent pharmacy benefit
management, e-commerce and specialty pharmacy organization that partners with
managed care organizations ("MCO's") and other healthcare providers to control
prescription drug costs. The Company provides its customers with innovative
pharmacy benefit products and services utilizing clinically sound guidelines to
ensure cost control and quality care. The Company, through its MIMRx.com
subsidiary, also develops and supports customized websites for customers for the
sale of mail order pharmacy goods and services. The Company also develops and
implements specialized clinical management programs utilizing the Company's
clinical and fulfillment expertise to serve specific groups afflicted with
diseases typically requiring long-term maintenance therapies.
The Company was incorporated in Delaware in March 1996 for the purpose of
combining the businesses and operations of Pro-Mark Holdings, Inc. ("Pro-Mark")
and MIM Strategic Marketing, LLC, which became 100% and 90% owned subsidiaries
of the Company, respectively, in May 1996. The Company completed its initial
public offering in August 1996.
PBM Services
The Company offers plan sponsors a broad range of services designed to
ensure the cost-effective delivery of clinically appropriate pharmacy benefits.
The Company's pharmacy benefit management ("PBM") programs include a number of
design features and fee structures that are tailored to suit a customer's
particular need and cost requirements. In addition to traditional
fee-for-service arrangements, the Company offers alternative pricing
methodologies for its various PBM packages, including a fixed fee per member (a
"capitated" program), as well as sharing costs exceeding pre-established per
member amounts or sharing savings where costs are less than pre-established per
member amounts. Under certain circumstances, the Company will also enter into
profit sharing arrangements with plan sponsors, thereby incentivizing the
sponsors to support fully the Company's cost containment efforts of such plan
sponsors' pharmacy program. 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. The Company's organization and programs are
clinically oriented, with many staff members having pharmacological
certification, training and experience. The Company markets its services to
large public health plans (primarily in states with large Medicaid populations),
medium to smaller MCOs emphasizing those operating in states with an active
Medicaid waiver program, self-funded groups and small employer groups. The
Company relies on its own employees to solicit business from plan sponsors, as
well as third party administrators and commissioned independent agents and
brokers.
Benefit management services available to the Company's customers include the
following:
Formulary Design and Compliance. The Company offers to its health
maintenance organization ("HMO") and other MCO clients flexible formulary
designs to meet their specific requirements. Many of these 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, the Company believes that both
public and private health plans have become increasingly receptive to
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
determination has been made by a plan sponsor to utilize a "restricted" or
"closed" formulary, the Company actively involves its clinical staff with a plan
sponsor's Pharmacy and Therapeutics Committees (consisting of local plan
sponsors, prescribers, pharmacists and other health care professionals) to
design clinically appropriate formularies in order to control costs. The
composition of the formulary is the responsibility of, and subject to the final
approval of, the plan sponsor.
2
Controlling program costs through formulary design focuses primarily on two
areas to the extent consistent with accepted medical and pharmacy practice and
applicable law: (i) generic substitution, which involves the selection of
generic drugs as a cost-effective alternative to bio-equivalent brand name
drugs, and (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. Generic substitution may also take place in combination
with therapeutic interchange where a bio-equivalent generic alternative for a
selected lower cost brand drug exists after a therapeutic interchange has
occurred. Increased usage of generic drugs by Company-managed programs also
enables the Company to obtain purchasing concessions and other financial
incentives on generic drugs, which may be shared with plan sponsors. Rebates on
brand name drugs are also negotiated with drug manufacturers and are often
shared with plan sponsors.
The primary method for assuring formulary compliance is non-reimbursement of
pharmacists for dispensing non-formulary drugs, subject to certain limited
exceptions. Formulary compliance is managed with the active assistance of
participating network pharmacists, primarily through prior authorization
procedures, and on-line POS edits as to particular subscribers and other network
communications. Overutilization 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
before less favored therapies are covered, are also established by the Company
in conjunction with the plan sponsors' Pharmacy and Therapeutics Committees to
control improper utilization of certain high-risk or high-cost medications.
Clinical Services. The clients' formularies typically provide a selection of
covered drugs within each major therapeutic class to appropriately treat most
medical conditions. However, a provision is made for covering non-formulary
drugs (other than excluded products) when shown to be clinically appropriate.
Since non-formulary drugs ordinarily are automatically rejected for coverage by
the real-time POS system, procedures are employed to override restrictions on
non-formulary medications for a particular patient and period of treatment.
Restrictions on the use of certain high-risk or high-cost formulary drugs may be
similarly overridden through prior authorization procedures. Non-formulary
overrides and prior authorizations are processed on the basis of documented,
clinically-supported medical necessity and typically are granted or denied
within 48 hours after request. Requests for, and appeals of denials of coverage
in these cases are handled by the Company through its staff of trained
pharmacists, nationally certified pharmacy technicians and board certified
pharmacotherapy specialists, subject to the plan sponsor's ultimate authority
over all such 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 antibiotics and certain other
medications.
Mail Order Pharmacy. Another way in which the Company believes that program
costs may be reduced is through the distribution of pharmaceutical products
directly to plan sponsors' members via mail order pharmacy services. The Company
provides mail order pharmacy services from its facility in Ohio. This facility
was acquired in the Company's purchase of Continental Managed Pharmacy Services,
Inc. ("Continental") on August 24, 1998. The Company's mail order facility
provides services to the members of the Company's PBM customers and other
individuals and, as discussed below, is a key component of the Company's
specialty pharmacy programs.
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 an on-going drug
utilization review program in which select medication therapies are reviewed and
data collected, analyzed and reported for management applications.
Pharmacy Data Services. The Company utilizes claims data to generate reports
for management and plan sponsor use, including drug utilization review, quality
assurance, 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. 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 health disciplines, monitoring of patient compliance,
measurement of care process and quality, and providing feedback for continuous
improvement in achieving therapy goals.
3
Behavioral Health Pharmacy Services. In recent years, MCOs have recognized
the particular and specialized behavioral health needs of certain individuals
within an MCO's membership. As a result, many MCO's have separated the
behavioral health population into a separate management area. The Company
provides services which encourage the proper and cost-effective utilization of
behavioral health medication to enrollees of behavioral health organizations,
which are traditionally (but not always) affiliated with MCOs. 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 suboptimal
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.
At December 31, 1999, the Company provided PBM services to 107 plan sponsors
with approximately 3.1 million plan members, including seven plan sponsors with
approximately 1.2 million members receiving mandated health care benefits to
formerly Medicaid-eligible and certain uninsured state residents under
Tennessee's TennCare Medicaid waiver program. See "The TennCare Program" below.
e-Commerce Services
On December 1, 1999, the Company launched MIMRx.com, Inc., its wholly-owned
subsidiary ("MIMRx.com"), as the Company's e-commerce, business-to-business and
proprietary on-line pharmacy business. MIMRx.com designs and administers custom
private label pharmacies for its affinity partners and other businesses (each, a
"Partner") desiring a retail e-commerce pharmacy capability. MIMRx.com handles
all aspects of the fulfillment, distribution of, and in some cases billing and
collection for, products (including prescriptions, vitamins, OTC's and health
and beauty aids) purchased through each Partner's online pharmacy from the
Company's Ohio facility. MIMRx.com currently has signed agreements with eight
Partners having access to over 30 million members. MIMRx.com's strategic goal is
to become a leader in developing and providing innovative customized health
information services and products through the Internet.
Specialty Pharmacy Programs
The Company provides specialty pharmacy services to MCOs currently utilizing
the Company's PBM services and to plan sponsors who do not utilize such
services. These programs utilize the Company's clinical and design management
expertise to manage chronically ill patients requiring long-term maintenance
therapies. The goal of these programs is to, among other things, manage the
pharmaceutical utilization of those patients to ensure compliance with
prescribed therapies, thereby avoiding costly follow-up therapies including
hospital admission.
The TennCare Program
A majority of the Company's revenues have been derived from providing PBM
services in the State of Tennessee to MCOs participating in the State of
Tennessee's TennCare program and behavioral health organizations ("BHOs")
participating in the State of Tennessee's TennCare Partners program. From
January 1994 through December 31, 1998, the Company provided its PBM services as
a subcontractor to RxCare of Tennessee, Inc. ("RxCare"). RxCare is a pharmacy
services administrative organization owned by the Tennessee Pharmacists
Association. Under the agreement with RxCare ("RxCare Contract"), the Company
performed essentially all of RxCare's obligations under its PBM agreements plan
sponsors and paid RxCare certain amounts, including a share of the profit from
the contracts, if any.
The Company and RxCare did not renew the RxCare Contract which expired on
December 31, 1998. The negotiated termination of its relationship with RxCare,
among other things, allowed the Company to directly market its services to
Tennessee customers (including those under contract with RxCare at such time)
prior to the expiration of the RxCare Contract. The RxCare Contract had
previously prohibited the Company from soliciting and/or marketing its PBM
services in Tennessee other than on behalf of, and for the benefit of, RxCare.
The Company's marketing efforts resulted in the Company executing agreements
with all of the MCO's for the TennCare lives previously managed under the RxCare
Contract, as well as substantially all third party administrators ("TPA's") and
employer groups previously managed under the RxCare Contract.
4
Other Matters
As a result of providing capitated PBM services to certain TennCare MCO's,
the Company's pharmaceutical claims costs historically have been subject to
significant increases from October through March, which the Company believes is
due to the need for increased medical attention to, and intervention with, MCO's
members during the colder months. The resulting increase in pharmaceutical costs
impacts the profitability of capitated contracts and other risk-based
arrangements. Risk-based business represented approximately 32% of the Company's
revenues while non-risk business (including mail order services) represented
approximately 68% of the Company's revenues for the years ended December 31,
1999 and 1998. Non-risk arrangements mitigate the adverse effect on
profitability of higher pharmaceutical costs incurred under risk-based
contracts, as higher utilization positively impacts profitability under
fee-for-service (or non risk-based) arrangements. The Company presently
anticipates that approximately 20% of its revenues in fiscal 2000 will be
derived from risk-based arrangements.
Changes in prices charged by manufacturers and wholesalers or distributors
for pharmaceuticals, a component of pharmaceutical claims costs, directly
affects the Company's cost of revenue. The Company believes that it is likely
that prices will continue to increase, which could have an adverse effect on the
Company's gross profit on risk-based arrangements. Because plan sponsors are
responsible for the payment of prescription costs in non risk-based
arrangements, the Company's gross profit is not adversely affected by changes in
pharmaceutical prices. To the extent such cost increases adversely effect the
Company's gross profit, the Company may be required to increase risk-based
contract rates on new contracts and upon renewal of existing risk-based
contracts. However, there can be no assurance that the Company will be
successful in obtaining these rate increases. The greater proportion of non-risk
contracts with the Company's customers in 1999 compared to prior years reduced
the potential adverse effects of price increases, although no assurance can be
given that the recent trend towards non-risk arrangements will continue or that
a substantial increase in drug costs or utilization would not negatively affect
the Company's overall profitability in any period.
Competition
The PBM business is highly competitive, and many of the Company's current
and potential competitors have considerably greater financial, technical,
marketing and other resources than the Company. The pharmacy benefit management
business includes a number of large, well capitalized companies with nationwide
operations and many smaller organizations typically operating on a local or
regional basis. One of the larger organizations are owned by or otherwise
related to a brand name drug manufacturer and may have significant influence on
the distribution of pharmaceuticals. Among larger companies offering pharmacy
benefit management services are Medco Containment Services, Inc. (a subsidiary
of Merck & Co., Inc.), Caremark International Inc., PCS, Inc. (a subsidiary of
Rite-Aid Corporation), Express Scripts, Inc., Advance ParadigM, Inc., and
National Prescription Administrators, Inc. Numerous health insurance and Blue
Cross and Blue Shield plans, MCOs and retail drug chains also have their own PBM
capabilities.
Competition in the PBM business to a large extent is based upon price,
although other factors, including quality and breadth of services and products,
are also important. The Company believes that its ability and willingness, where
appropriate, to assume or share its customers' financial risks, its independence
from brand name drug manufacturers and its proprietary suite of technology
products represent distinct competitive advantages in the PBM business.
Government Regulation
The Company believes that it is in substantial compliance with all legal
requirements material to its operations. Among the various Federal and state
laws and regulations which may govern or impact the Company's current and
planned operations are the following:
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
5
Medicare or state health care programs (including Medicaid programs or Medicaid
waiver programs, such as TennCare). Certain state laws may extend the
prohibition to items or services that are paid for by private insurance and
self-pay patients. The Company's arrangements with RxCare and other pharmacy
network administrators, drug manufacturers, marketing agents, brokers, health
plan sponsors, pharmacies and others parties routinely involve payments to or
from persons who provide or purchase, or recommend or arrange for the purchase
of, items or services paid in part by the TennCare program or by other programs
covered by such laws. Management carefully considers the importance of such
"anti-kickback" laws when structuring its operations, and believes the Company
is in compliance therewith. However, the laws in this area and the courts'
interpretations thereof are in flux and uncertain in their application, and
there can be no assurance that one or more of such arrangements will not be
challenged or found to violate such laws. Violation of the Federal anti-kickback
statute could subject the Company to criminal and/or civil penalties, including
exclusion from Medicare and Medicaid (including TennCare) programs or
state-funded programs in the case of state enforcement. There are a number of
states in which the Company does business which have laws analogous to Federal
anti-kickback laws and regulations which likewise govern or impact the Company's
current and planned operations. The Company believes that it is in substantial
compliance with these laws and regulations as well.
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
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. For
example, RxCare, which was investigated and found by the Federal Trade
Commission to have potential market power in Tennessee, entered into a consent
decree in June 1996 agreeing not to enforce a policy which had required
participating network pharmacies to accept reimbursement rates from RxCare as
low as rates accepted by them from other pharmacy benefits payors. To date,
enforcement of antitrust laws have not had any material affect on the Company's
business.
Other State Laws. Many states have statutes and regulations that do or may
impact the Company's business operations. In some states, pharmacy benefit
managers may be subject to regulation under insurance laws or laws licensing
HMOs and other MCOs, in which event requirements could include satisfying
statutorily imposed performance obligations, the posting of bonds, maintenance
of reserves, required filings with regulatory agencies, and compliance with
disclosure requirements and other regulation of the Company's operations. State
insurance laws also may affect the structuring of certain risk-sharing programs
offered by the Company. A number of states have laws designed to restrict the
ability of PBM's to impose limitations on the consumer's choice of pharmacies,
or requiring that the benefits of discounts negotiated by MCOs be passed along
to consumers in proportionate reductions of co-payments. Some states require
that pharmacies be permitted to participate in provider networks if they are
willing to comply with network requirements, while other states require pharmacy
benefit managers to follow certain prescribed procedures in establishing a
network and admitting and terminating its members. Many states require that
Medicaid obtain the lowest prices from a pharmacy, which may limit the Company's
ability to reduce the prices it pays for drugs below Medicaid prices. States
have a variety of laws regulating pharmacists' ability to switch prescribed
drugs or to split fees, which could impede the Company's business strategy, and
certain state laws have been the basis for investigations and multi-state
settlements requiring the discontinuance of certain financial incentives
provided by manufacturers to retail pharmacies to promote the sale of the
manufacturers' drugs.
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 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 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 business and results of operations. 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 business and results of
operations.
6
Employees
At March 3, 2000, the Company employed a total of 243 people including 31
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.
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; Nashville,
Tennessee; Cleveland, Ohio and Columbus, Ohio.
Item 3. Legal Proceedings
On March 31, 1999, the State of Tennessee, (the "State"), and Xantus
Healthplans of Tennessee, Inc. ("Xantus"), entered into a consent decree under
which Xantus was placed in receivership under the laws of the State of
Tennessee. On September 2, 1999, the Commissioner of the Tennessee Department of
Commerce and Insurance (the "Commissioner"), acting as receiver of Xantus, filed
a proposed plan of rehabilitation (the "Plan"), as opposed to a liquidation of
Xantus. A rehabilitation under receivership, similar to a reorganization under
federal bankruptcy laws, was approved by the Chancery Court (the "Court") of the
State of Tennessee, and would allow Xantus to remain operating as a TennCare
MCO, providing full health care related services to its enrollees. Under the
Plan, the State, among other things, agreed to loan to Xantus approximately $30
million to be used solely to repay pre-petition claims of providers, which
claims aggregate approximately $80 million. Under the Plan, the Company received
$4.2 million, including $0.6 million of unpaid rebates to Xantus which the
Company was allowed to retain under the terms of the preliminary rehabilitation
plan for Xantus. A plan for the payment of the remaining amounts has not been
finalized and the recovery of any additional amounts is uncertain. The Company
recorded a special charge of $2.7 million for the estimated loss on the
remaining amounts owed, net of the unpaid amounts to network pharmacies.
As part of the Company's normal review process, the Company determined that
each of the Company's agreements (collectively, the "Agreements") with Tennessee
Health Partnership ("THP") and Preferred Health Partnership of Tennessee, Inc.
("PHP"), were not achieving profitability projections. As a result thereof, in
the first quarter of 1999, and in accordance with the terms of the Agreements,
the Company exercised its right to terminate the Agreements effective on
September 28, 1999. Through a negotiated extension with THP and PHP, the Company
continued to provide PBM services to their respective members through December
31, 1999.
Despite this negotiated extension, there exist disputes with respect to
unpaid fees and other amounts between the Company and each of THP and PHP. On
October 20, 1999, the Company demanded arbitration against THP with respect to
approximately $2.3 million arbitrarily withheld from the Company by THP during
1998. On February 15, 2000, THP responded by filing a motion to dismiss the
arbitration on the grounds that the Company does not have standing under its
agreement with THP to bring an arbitration proceeding. The Company opposed THP's
motion on March 16, 2000. On March 21, 2000, the arbitration panel denied THP's
motion to dismiss and scheduled the arbitration to take place in late August,
2000. While the Company intends to vigorously pursue this claim, at this time,
the Company is unable to assess the likelihood that it will prevail in its
claim.
On February 22, 2000, THP and PHP jointly demanded arbitration against the
Company alleging that the Company overbilled THP and PHP, and THP and PHP
overpaid the Company, in the approximate amounts of $1.3 million and $1 million,
respectively. On March 20, 2000, the Company filed its answer and counterclaim
and asserted that all amounts billed to, and paid by, THP and PHP were proper
under the Agreements and that THP and PHP have improperly withheld payment in
the approximate amount of $500,000 and $480,000, respectively. While the Company
believes that it is owed these amounts from each of THP and PHP and intends to
pursue vigorously its counterclaims, at this time, the Company is unable to
assess the likelihood that it will prevail.
7
In 1999, the Company recorded a special charge of $3.3 million for estimated
future losses related to these disputes.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of fiscal year 1999.
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock began trading on The NASDAQ National Market tier
of The NASDAQ Stock Market on August 15, 1996 under the symbol MIMS. The
following table represents the high and low sales prices for the Company's
Common Stock for the thirteen full calendar quarters since its initial trading
date. Such prices are interdealer prices, without retail markup, markdown or
commissions, and may not necessarily represent actual transactions.
MIM Common Stock
High Low
---- ---
1996: Fourth Quarter $ 16.25 $ 4.00
1997: First Quarter $ 10.38 $ 4.75
Second Quarter $ 16.75 $ 5.75
Third Quarter $ 17.38 $ 9.06
Fourth Quarter $ 9.88 $ 3.63
1998: First Quarter $ 6.50 $ 3.69
Second Quarter $ 6.44 $ 4.00
Third Quarter $ 6.44 $ 2.50
Fourth Quarter $ 5.00 $ 2.28
1999: First Quarter $ 4.44 $ 2.13
Second Quarter $ 3.13 $ 2.00
Third Quarter $ 3.00 $ 1.69
Fourth Quarter $ 4.63 $ 1.50
The Company has never paid cash dividends on its Common Stock and does not
anticipate doing so in the foreseeable future.
As of March 10, 2000, there were 112 stockholders of record in addition to
approximately 3,140 stockholders whose shares were held in nominee name.
For purposes of calculating the aggregate market value of the shares of
Common Stock held by non-affiliates, as shown on the cover page of this report,
it has been assumed that all outstanding shares were held by non-affiliates
except for shares held by directors and executive officers of the Company and
any persons disclosed as beneficial owners of greater than 10% of the Company's
outstanding securities. However, this should not be deemed to constitute an
admission that all directors and executive officers of the Company are, in fact,
affiliates of the Company, or that there are not other persons who may be deemed
to be affiliates of the Company.
During the three months ended December 31, 1999, the Company did not sell
any securities without registration under the Securities Act of 1933, as amended
(the "Securities Act").
From August 14, 1996 through December 31, 1999, the $46.8 million net
proceeds from the Company's underwritten initial public offering of its Common
Stock (the "Offering"), affected pursuant to a Registration Statement assigned
file number 333-05327 by the Securities and Exchange Commission (the
"Commission") and declared effective by the Commission on August 14, 1996, have
been applied in the following approximate amounts (in thousands):
8
Construction of plant, building and facilities ..........................$ -
Purchase and installation of machinery and equipment ....................$ 6,518
Purchases of real estate ................................................$ -
Acquisition of other businesses .........................................$ 2,325
Repayment of indebtedness ...............................................$ -
Working capital .........................................................$17,606
Temporary investments:
Marketable securities ...........................................$ 5,033
Overnight cash deposits .........................................$15,306
To date, the Company has expended a relatively insignificant portion of the
Offering proceeds on expansion of the Company's "preferred generics" business
which was described more fully in the Offering prospectus and the Company's
Annual Report on Form 10-K for the year ended December 31, 1996. At the time of
the Offering however, as disclosed in the prospectus, the Company intended to
apply approximately $18.6 million of Offering proceeds to fund such expansion.
The Company has determined not to apply any material portion of the Offering
proceeds to fund the expansion of this business.
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data presented below should be read in
conjunction with Item 7 of this report and with the Company's Consolidated
Financial Statements and notes thereto appearing elsewhere in this report.
Year Ended December 31,
(in thousands, except per share amounts)
------------------------------------------------------------------------------------------
Statement of Operations Data 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue $377,420 $451,070 $242,291 $283,159 $213,929
Special charges 6,029 (1) 3,700 (2) 26,640 (3)
- -
Net (loss) income (3,785) 4,271 (13,497) (31,754) (6,772)
Net (loss) income per basic share (0.20) 0.28 (1.07) (3.32) (1.43)
Net (loss) income per diluted share (4) (0.20) 0.26 (1.07) (3.32) (1.43)
Weighted average shares outstanding
used in computing net income per
basic share 18,660 15,115 12,620 9,557 4,732
Weighted average shares outstanding
used in computing net income per
diluted share 18,660 16,324 12,620 9,557 4,732
9
December 31,
(in thousands, except per share amounts)
-----------------------------------------------------------------------------------
Balance Sheet Data 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 15,306 $ 4,495 $ 9,593 $ 1,834 $ 1,804
Investment securities 5,033 11,694 22,636 37,038 -
Working capital (deficit) 8,995 19,823 9,333 19,569 (12,080)
Total assets 115,683 110,106 62,727 61,800 18,924
Capital lease obligations,
net of current portion 718 598 756 375 110
Long-term debt, net of current portion 2,279 6,185 (5) - - -
Stockholders' equity (deficit) 35,187 39,054 16,810 30,143 (11,524)
- ----------------------------
(1) In 1999, the Company recorded $6,029 of special charges for estimated
losses on contract receivables (see Note 7 to the Consolidated Financial
Statements).
(2) In 1998, the Company recorded $1.5 million and $2.2 million non-recurring
charges, respectively, against earnings in connection with the negotiated
termination of the RxCare relationship and amounts paid in settlement of
the Federal and State of Tennessee investigation relating to the conduct of
two former officers of the Company prior to the Offering, respectively.
Excluding these items, net income for 1998 would have been $8.0 million, or
$0.48 per share.
(3) In 1996, the Company recorded a $26.6 million non-recurring, non-cash stock
option charge in connection with the grant by the Company's then majority
stockholder of certain options to then unaffiliated third parties, who
later became officers of the Company.
(4) The historical diluted loss per common share for the years 1999, and 1997
through 1995 excludes the effect of common stock equivalents, as their
inclusion would be antidilutive.
(5) This amount represents long-term debt assumed by the Company in connection
with its acquisition of Continental.
* * * * * * * * * * * * * * *
10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Report contains statements not purely historical and which may be
considered forward looking statements within the meaning of Section 27A of the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), including statements regarding the Company's
expectations, hopes, beliefs, intentions or strategies regarding the future.
Forward looking statements may include statements relating to the Company's
business development activities, sales and marketing efforts, the status of
material contractual arrangements 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, the benefits and risks associated with integration of
acquired companies, the effect of year 2000 problems on the Company's
operations, the likely outcome of, and the effect of legal proceedings or
investigations on the Company and its business and operations and/or the
resolution or settlement thereof. Investors are cautioned that any such forward
looking statements are not guarantees of future performance and involve risks
and uncertainties, that actual results may differ materially from those in the
forward looking statements as a result of various factors. These factors
include, among other things, risks associated with risk-based or "capitated"
contracts, increased government regulation related to the health care and
insurance industries in general and more specifically, pharmacy benefit
management organizations, increased competition from the Company's competitors,
including competitors with greater financial, technical, marketing and other
resources, and the existence of complex laws and regulations relating to the
Company's business. This Report contains information regarding important factors
that could cause such differences. The Company does not undertake any obligation
to publicly release the results of any revisions to these forward looking
statements that may be made to reflect any future events and circumstances.
Overview
The Company is an independent pharmacy benefit management, e-commerce and
specialty pharmacy organization that partners with MCOs and healthcare providers
to control prescription drug costs. The Company provides its customers with
innovative pharmacy benefit products and services utilizing clinically sound
guidelines to ensure cost control and quality care. The Company, through its
MIMRx.com subsidiary, also designs and administers custom private label
pharmacies and/or fulfillment services for its affinity partners and other
businesses, desiring a retail e-commerce pharmacy capability. The Company
develops and implements specialized clinical management programs that utilize
the Company's clinical and fulfillment expertise to serve groups of individuals
afflicted with diseases requiring long-term maintenance therapies. A majority of
the Company's revenues have been derived from providing PBM services in the
State of Tennessee to MCOs participating in the State of Tennessee's TennCare
program. At December 31, 1999, the Company provided PBM services to 107 health
plan sponsors with an aggregate of approximately 3.1 million plan members, of
which TennCare represented seven MCO's with approximately 1.2 million plan
members. The TennCare Contracts accounted for 54.0% of the Company's revenues at
December 31, 1999, and 72.2% of the Company's revenues at December 31, 1998.
Results of Operations
Year ended December 31, 1999 compared to year ended December 31, 1998
For the year ended December 31, 1999, the Company recorded revenues of
$377.4 million compared with 1998 revenues of $451.0 million, a decrease of
$73.6 million. Contracts with TennCare sponsors accounted for decreased revenues
of $122.0 million as the Company did not retain contracts as of January 1, 1999
with the two TennCare BHO's previously managed under the RxCare Contract. In
addition, PBM services to another TennCare MCO previously managed under the
RxCare Contract did not begin until May 1, 1999. The loss of these contracts
represents $71.3 million and $47.6 million, respectively, of the decrease in
revenue with additional decreases in other contracts with TennCare sponsors of
approximately $3.1 million. Commercial revenue increased $69.8 million, offset
by a decrease of $21.4 million due to the loss of a contract with a Nevada-based
managed care organization, representing a net increase of $48.4 million in
commercial revenue. The overall decrease in revenues was partially offset by an
increase in revenues of $22.9 million as a result of the Company's acquisition
of Continental.
Cost of revenue for 1999 decreased to $347.1 million from $421.4 million for
1998, a decrease of $74.3 million. Cost of revenue with respect to contracts
with TennCare sponsors decreased $108.6, million as the Company did not retain
11
contracts as of January 1, 1999 with the two TennCare BHO's previously managed
under the RxCare Contract and did not begin providing PBM services to another
TennCare MCO previously managed under the RxCare Contract until May 1, 1999. The
loss of these contracts represents $68.5 million and $46.0 million,
respectively, of the decrease, with additional increases in other contracts with
TennCare sponsors of approximately $5.9 million. Cost of revenue from commercial
business increased $60.2 million which included a decrease in cost of revenue of
$25.9 million due to the loss of a contract with a Nevada-based MCO,
representing a net increase of $34.3 million. Such decreases in cost of revenue
were partially offset by increases of $17.1 million as a result of the Company's
acquisition of Continental. As a percentage of revenue, cost of revenue
decreased to 92.0% for the twelve months ended December 31, 1999 from 93.4% for
the twelve months ended December 31, 1998, a decrease of 1.4%. This decrease is
primarily due to the contribution of Continental's mail service drug
distribution business which experienced higher profit margins than historically
experienced by the Company's PBM business.
For the years ended December 31, 1999 and 1998 approximately 32% of the
company's revenues were generated from capitated or other risk-based contracts.
Effective January 1, 1999, the Company began providing PBM services directly to
five of the six TennCare MCO's previously managed under the RxCare Contract. The
Company is compensated on a capitated basis under three of the five TennCare
contracts, thereby increasing the Company's financial risk in 1999 as compared
to 1998. Based upon its present contracted arrangements, the Company anticipates
that approximately 20% of its revenues in 2000 will be derived from capitated or
other risk-based contracts.
For the year ended December 31, 1999, gross profit increased $0.6 million to
$30.3 million, from $29.7 million at December 31, 1998. Gross profit decreases
of $13.4 million in TennCare business resulted primarily from the termination of
the two TennCare BHO contracts, as well as increases in costs on some of the
capitated contracts. Gross profit decreases in TennCare business were offset by
increases in gross profit of $8.3 million in commercial business, and increases
of $5.7 million contributed by the Company's acquisition of Continental.
General and administrative expenses increased $4.9 million to $28.0 million
in 1999 from $23.1 million in 1998, an increase of 21.3%. The acquisition of
Continental comprised $4.5 million of the increase and the remaining $0.4
million increase was attributable to expenses associated with an expanded
national sales effort and additional operations support needed to service new
business. As a percentage of revenue, general and administrative expenses
increased to 7.4% in 1999 from 5.1% in 1998.
On March 31, 1999, the State of Tennessee, (the "State"), and Xantus
Healthplans of Tennessee, Inc. ("Xantus"), entered into a consent decree under
which Xantus was placed in receivership under the laws of the State of
Tennessee. On September 2, 1999, the Commissioner of the Tennessee Department of
Commerce and Insurance (the "Commissioner"), acting as receiver of Xantus, filed
a proposed plan of rehabilitation (the "Plan"), as opposed to a liquidation of
Xantus. A rehabilitation under receivership, similar to a reorganization under
federal bankruptcy laws, was approved by the Chancery Court (the "Court") of the
State of Tennessee, would allow Xantus to remain operating as a TennCare MCO,
providing full health care related services to its enrollees. Under the Plan,
the State, among other things, agreed to loan to Xantus approximately $30
million to be used solely to repay pre-petition claims of providers, which
claims aggregate approximately $80 million. Under the Plan, the Company received
$4.2 million, including $0.6 million of unpaid rebates to Xantus which the
Company was allowed to retain under the terms of the preliminary rehabilitation
plan for Xantus. A plan for the payment of the remaining amounts has not been
finalized and the recovery of any additional amounts is uncertain. The Company
recorded a special charge of $2.7 million for the estimated loss on the
remaining amounts owed, net of the unpaid amounts to network pharmacies. The
Company does not believe that the failure to collect such amounts will have a
material adverse effect on the Company's business or operations.
The Company has been disputing several improper reductions of payments by
THP and PHP. These reductions relate to a supposed coordination of benefits
issue raised by THP related to services provided in prior years and a dispute
over items allowed to be billed in addition to the Company's capitated rate
under the contracts with THP and PHP. The contracts with these organizations
require the disputes be arbitrated. While the Company believes that it is owed
these amounts from each of THP and PHP and intends to pursue vigorously its
counterclaims, at this time, the Company is unable to assess the likelihood that
it will prevail. In 1999, the Company recorded a special charge of $3.3 million
for estimated future losses related to these disputes.
12
For the year ended December 31, 1999, the Company recorded amortization of
goodwill and other intangibles of $1.1 million in connection with its
acquisition of Continental, compared to $0.3 million in 1998. This increase
reflects an entire year of amortization in 1999.
For the year ended December 31, 1999, the Company recorded interest income
of $1.0 million compared to $1.7 million for the year ended December 31, 1998, a
decrease of $0.7 million.
For the year ended December 31, 1999, the Company recorded a net loss of
$3.8 million or $0.20 per share. This compares with net income of $4.3 million,
or $0.28 per share for the year ended December 31, 1998.
Year ended December 31, 1998 compared to year ended December 31, 1997
For the year ended December 31, 1998, the Company recorded revenue of $451.1
million, an increase of $208.8 million over the prior year. Approximately $62.6
million of the increase in revenues resulted from increased commercial business,
including $19.4 million from a Nevada-based managed care organization (the
"Nevada Plans"). The acquisition of Continental resulted in increased revenues
of $23.1 million, including $13.6 million attributable to mail order pharmacy
services. The increase in commercial revenues resulted from managing an
additional 91 plans covering an additional 207,000 lives under new and existing
commercial plans. Revenue from TennCare contracts increased approximately $123.1
million as a result of two contracts entered into in the fourth quarter of 1997
($85.1 million), contract renewals on more favorable terms and increased
enrollment in the TennCare plans ($63.0 million) which was partially offset by a
decrease in revenues of $25.0 million resulting from the restructuring of a
major TennCare contract in April 1997.
For the year ended December 31, 1998, approximately 32% of the company's
revenues were generated from capitated or other risk-based contracts, compared
to 53% for the year ended December 31, 1997. Effective January 1, 1999, the
Company began providing PBM services directly to five of the six TennCare MCO's
previously managed under the RxCare Contract. The Company will be compensated on
a capitated basis under three of the five TennCare contracts, thereby increasing
the Company's financial risk in 1999 as compared to 1998.
Cost of revenue for the year ended December 31, 1998, increased $182.4
million to $421.4 million compared to the prior year. New commercial contracts
together with increased enrollment in existing commercial plans accounted for
$54.0 million of the increase in cost of revenue, including $20.2 million
relating to the Nevada Plans. Costs attributable to the acquisition of
Continental accounted for $18.4 million of the increase in cost of revenue.
Costs related to TennCare contracts increased cost of revenue $110.0 million.
Costs relating to the two new TennCare contracts accounted for $80.3 million of
such increase, while increased enrollment in existing TennCare plans increased
cost of revenue $58.7 million. These cost increases were offset by the
restructuring of a major TennCare contract in April 1997, which resulted in a
decrease in cost of revenue of $25.5 million. As a percentage of revenue, cost
of revenue decreased to 93.4% for the year ended December 31, 1998, from 98.6%
for the year ended December 31, 1997, primarily as a result of contract renewals
on more favorable terms.
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 to
restrict formularies to the extent contemplated by the Company at the time a
contract is entered into, 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. After analyzing those factors described above, the Company recorded a
$4.1 million reserve in December 1997 with respect to the Nevada Plans. The
arrangements with the Nevada Plans were terminated in August 1998. The reserve
established was adequate to absorb the actual losses.
Selling, general and administrative expenses were $23.1 for the year ended
December 31, 1998, an increase of $4.0 million as compared to $19.1 million for
the year ended December 31, 1997. The acquisition of Continental accounted for
$3.8 million of the increase. The remaining $0.2 million increase in expenses
reflects expenditures incurred in connection with the Company's continuing
commitment to enhance its ability to manage efficiently pharmacy benefits by
investing in additional operational and clinical personnel and information
systems to support new and existing customers, partially offset by lower legal
costs. As a percentage of revenue, selling, general and administrative expenses
decreased 5.1% for the year ended December 31, 1998, from 7.9% for the year
ended December 31, 1997, as revenue increases did not result in proportional
increases in expenditures.
13
The Company recorded a non-recurring charge against earnings of $1.5 million
in connection with its negotiated termination of its relationship with RxCare
("RxCare Settlement"). In addition, the Company recorded a non-recurring charge
against earnings of $2.2 million in connection with the conclusion of an
agreement in principle with respect to a civil settlement of the Federal and
State of Tennessee investigation ("Tennessee Settlement") relating to the
conduct of two former officers (one of which is a former director and still
principal stockholder of the Company) of a subsidiary prior to the Company's
Offering. The Tennessee Settlement is subject to several conditions, including
the execution of a definitive agreement.
For the year ended December 31, 1998, the Company recorded amortization of
goodwill and other intangibles of $0.3 million in connection with its
acquisition of Continental. The Continental acquisition resulted in the
recording of approximately $18.4 million of goodwill and $1.3 million of other
intangible assets, which will be amortized over their estimated useful lives (25
years and 6.5 years, respectively).
For the year ended December 31, 1998, the Company recorded interest income,
net of interest expense, of $1.7 million. Interest income was $1.8 million, a
decrease of $0.5 million from a year ago, resulting from a reduced level of
invested capital due to the additional working capital needs of the Company.
For the year ended December 31, 1998, the Company recorded net income of
$8.0 million, or $0.48 per diluted share, before recording the $1.5 million and
$2.2 million non-recurring charges for the RxCare Settlement and Tennessee
Settlement, respectively. Net income for the year ended December 31, 1998, after
recording the non-recurring charges, was $4.3 million, or $0.26 per diluted
share. For the year ended December 31, 1997, the Company recorded a net loss of
$13.5 million or ($1.07) per diluted share.
Liquidity and Capital Resources
The Company utilizes both funds generated from operations, if any, and funds
raised in the Offering for capital expenditures and working capital needs. For
the year ended December 31, 1999, net cash provided to the Company by operating
activities totaled $12.9 million primarily due to an increase in claims payable
of $6.8 million and an increase of payables to plan sponsors of $7.7 million.
The increase in claims payable reflects an increase in the PBM business. The
increase in payables to plan sponsors and others is primarily a result of
increased manufacturer's rebates, which are shared with certain clients under
rebate sharing agreements. Receivables increased by $4.7 million due to a higher
percentage of fee-for-service contracts in 1999.
Investing activities generated $2.6 million in cash from proceeds of
maturities of investment securities of $13.7 million, offset by the purchases of
$7.0 million. This was further offset by the purchase of $2.2 million in
equipment. A portion of these purchases was for upgrading computer software and
hardware. The increase in amounts due from affiliates of the Company consists of
the loan in April 1999 to its Chairman and Chief Executive Officer, in the
amount of $1.7 million.
In 1999, $4.7 million was used for financing activities. Debt acquired with
the Continental acquisition decreased by $3.9 million. Treasury stock was
purchased for $0.3 million in March 1999.
At December 31, 1999, the Company had working capital of $9.0 million
compared to $19.8 million at December 31, 1998. Cash and cash equivalents
increased to $15.3 million at December 31, 1999, compared with $4.5 million at
December 31, 1998. The Company had investment securities held to maturity of
$5.0 million and $11.7 million at December 31, 1999 and 1998, respectively.
On February 4, 2000, the Company, through its principal pharmacy benefit
management operating subsidiary, MIM Health Plans, Inc. ("Health Plans"),
secured a $30.0 million revolving credit facility (the "Facility"). The Facility
will be used by the Company for general working capital purposes, capital
expenditures and for future acquisitions. In addition, a portion of the Facility
is available to the Company for the further development of the Company's
e-commerce and operations. The Facility has a three year term and provides for
borrowing of up to $30.0 million at a rate of interest selected by the Company
equal to the Index Rate (defined as the base rate on corporate loans at large
U.S. money center commercial banks, as quoted in the Wall Street Journal), plus
a margin or a London InterBank Offered Rate plus a margin. Health Plans'
obligations under the Facility are secured by a first priority security interest
in all of Health Plans' receivables as well as other related collateral. Health
Plans' obligations under the Facility are guaranteed by the Company.
14
As the Company continues to grow, it anticipates that its working capital
needs will also continue to increase. The Company believes that it has
sufficient cash on hand or available to fund the Company's anticipated working
capital and other cash needs for at least the next 12 months.
From time to time, the Company may be a party to legal proceedings or
involved in related investigations, inquiries or discussions, in each case,
arising in the ordinary course of the Company's business. Although no assurance
can be given, management does not presently believe that any current matters
would have a material adverse effect on the liquidity, financial position or
results of operations of the Company.
At December 31, 1999, the Company had, for tax purposes, unused net
operating loss carry forwards of approximately $43.0 million which will begin
expiring in 2009. As it is uncertain whether the Company will realize the full
benefit from these carryforwards, the Company has recorded a valuation allowance
equal to the deferred tax asset generated by the carryforwards. The Company
assesses the need for a valuation allowance at each balance sheet date. The
Company has undergone a "change in control" as defined by the Internal Revenue
Code of 1986, as amended ("Code"), and the rules and regulations promulgated
thereunder. The amount of net operating loss carryforwards that may be utilized
in any given year will be subject to a limitation as a result of this change.
The annual limitation is approximately $2.7 million. Actual utilization in any
year will vary based on the Company's tax position in that year.
The Company also may pursue joint venture arrangements, business
acquisitions and other transactions designed to expand its PBM, e-commerce or
specialty pharmacy businesses, which the Company would expect to fund from cash
on hand, the Facility, other future indebtedness or, if appropriate, the sale or
exchange of equity securities of the Company.
Other Matters
From January 1994 through December 31, 1998, the Company provided a broad
range of PBM services on behalf of RxCare, to the TennCare, TennCare Partners
and other commercial PBM clients under the RxCare Contract. A majority of the
Company's revenues have been derived from providing PBM services in the State of
Tennessee to MCO's participating in the State of Tennessee's TennCare program
and BHO's participating in the State of Tennessee's TennCare Partners program.
From January 1994 through December 31, 1998, the Company provided its PBM
services to the TennCare MCO's as a subcontractor to RxCare.
The Company and RxCare did not renew the RxCare Contract which expired on
December 31, 1998. The negotiated termination of its relationship with RxCare,
among other things, allowed the Company to directly market its services to
Tennessee customers (including those then under contract with RxCare) prior to
the expiration of the RxCare Contract. The RxCare Contract had previously
prohibited the Company from soliciting and/or marketing its PBM services in
Tennessee other than on behalf of, and for the benefit of, RxCare. The Company's
marketing efforts resulted in the Company executing agreements with all of the
MCO's for the TennCare lives previously managed under the RxCare Contract as
well as substantially all TPAs and employer groups previously managed under the
RxCare Contract.
On November 30, 1999, the Governor of the State of Tennessee announced a
series of proposed reforms for the TennCare program (the "TennCare reforms"),
one of which was to have the State of Tennessee assume responsibility for the
provision of pharmacy benefits for TennCare recipients, effective July 1, 2000.
In connection with that proposal, on December 15, 1999, the State of Tennessee
issued a Request for Proposal (the "RFP") for the provision of such benefits.
The Company was a recipient of the RFP and is in the process of responding to
it.
The implementation of all or a portion of these proposed TennCare reforms
requires both legislative and regulatory approval. Which reforms will actually
be implemented and the timing thereof has not been determined. The
implementation of all or a portion of these reforms could have a material
adverse effect on the Company's business, operations and financial performance.
The failure of the Company to be awarded the RFP would have a material adverse
impact on the Company's business and financial performance.
15
As a result of providing capitated PBM services to certain TennCare MCO's,
the Company's pharmaceutical claims costs historically have been subject to
significant increases from October through February, which the Company believes
is due to the need for increased medical attention to, and intervention with,
MCO's members during the colder months. The resulting increase in pharmaceutical
costs impacts the profitability of capitated contracts and other risk-based
arrangements. Risk-based business represented approximately 32% of the Company's
revenues while non-risk business (including mail order services) represented
approximately 68% of the Company's revenues for the years ended December 31,
1999 and 1998. Non-risk arrangements mitigate the adverse effect on
profitability of higher pharmaceutical costs incurred under risk-based
contracts, as higher utilization positively impacts profitability under
fee-for-service (or non-risk-based) arrangements. The Company presently
anticipates that approximately 20% of its revenues in fiscal 2000 will be
derived from risk-based arrangements.
Changes in prices charged by manufacturers and wholesalers or distributors
for pharmaceuticals, a component of pharmaceutical claims costs, directly
affects the Company's cost of revenue. The Company believes that it is likely
that prices will continue to increase, which could have an adverse effect on the
Company's gross profit on risk-based arrangements. Because plan sponsors are
responsible for the payment of prescription costs in non risk-based
arrangements, the Company's gross profit is not adversely affected by changes in
pharmaceutical prices. To the extent such cost increases adversely effect the
Company's gross profit, the Company may be required to increase risk-based
contract rates on new contracts and upon renewal of existing risk-based
contracts. However, there can be no assurance that the Company will be
successful in obtaining these rate increases. The potential greater proportion
of non-risk contracts with the Company's customers in 1999 compared to prior
years mitigates the potential adverse effects of price increases, although no
assurance can be given that the recent trend towards non-risk arrangements will
continue or that a substantial increase in drug costs or utilization would not
negatively affect the Company's overall profitability in any period.
Generally, loss contracts arise only on capitated or other risk-based
contracts and primarily result from higher than expected pharmacy utilization
rates, higher than expected inflation in drug costs and the inability of the
Company to restrict its MCO clients' formularies to the extent anticipated by
the Company at the time contracted PBM services are implemented, thereby
resulting in higher than expected drug costs. At such time as management
estimates that a contract will sustain losses over its remaining contractual
life, a reserve is established for these estimated losses. There are currently
no loss contracts and management does not believe that there is an overall trend
towards losses on its existing capitated contracts.
Year 2000 Disclosure
The so-called "year 2000 problem" concerns the inability of information
systems, primarily computer software programs, to recognize properly and process
date sensitive information following December 31, 1999. The Company committed
substantial resources (approximately $2.4 million) over the past three years to
improve its information systems ("IS project"). The Company has used this IS
project as an opportunity to evaluate its state of readiness and identify and
quantify risks associated with any potential year 2000 issues. The Company did
not experience any material year 2000 problems and was not required to incur
additional expenses.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk represents the only market risk exposure applicable to
the Company. The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investments in marketable securities. All of
these instruments are classified as held-to-maturity on the Company's
consolidated balance sheet and were entered into by the Company solely for
investment purposes and not for trading purposes. The Company does not invest in
or otherwise use derivative financial instruments. The Company's investments
consist primarily of corporate debt securities, corporate preferred stock and
State and local governmental obligations, each rated AA or higher. The table
below presents principal cash flow amounts and related weighted average
effective interest rates by expected (contractual) maturity dates for the
Company's financial instruments subject to interest rate risk:
16
2000 2001 2002 2003 2004 Thereafter
-----------------------------------------------------------------------------------------
Short-term investments:
Fixed rate investments 5,000 - - - - -
Weighted average rate 7.45% - - - - -
Long-term investments:
Fixed rate investments - - - - - -
Weighted average rate - - - - - -
Long-term debt:
Variable rate instruments 493 2,279 - - - -
Weighted average rate 8.62% 8.41% - - - -
In the table above, the weighted average interest rate for fixed and
variable rate financial instruments in each year was computed utilizing the
effective interest rate for that instrument at December 31, 1999, and
multiplying by the percentage obtained by dividing the principal payments
expected in that year with respect to that instrument by the aggregate expected
principal payments with respect to all financial instruments within the same
class of instrument.
At December 31, 1999, the carrying values of cash and cash equivalents,
accounts receivable, accounts payable, claims payable and payables to plan
sponsors and others 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 though 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.
17
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MIM Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of MIM
Corporation (a Delaware corporation) and Subsidiaries as of December 31, 1999
and 1998 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MIM
Corporation and Subsidiaries as of December 31, 1999 and 1998 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, 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 18, 2000 (except with respect
to the matter described in Note 7, as
to which the date is March 21, 2000)
18
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(In thousands, except for share amounts)
1999 1998
------------------ ------------------
ASSETS
Current assets
Cash and cash equivalents $ 15,306 $ 4,495
Investment securities 5,033 11,694
Receivables, less allowance for doubtful accounts of $8,576 and $2,039
at December 31, 1999 and December 31, 1998, respectively 62,919 64,747
Inventory 777 1,187
Prepaid expenses and other current assets 1,347 857
------------------ ------------------
Total current assets 85,382 82,980
Other investments 2,347 2,311
Property and equipment, net 5,942 4,823
Due from affiliate and officer, less allowance for doubtful accounts of $403
at December 31, 1999 and December 31, 1998, respectively 1,849 34
Other assets, net 202 563
Intangible assets, net 19,961 19,395
------------------ ------------------
Total assets $ 115,683 $ 110,106
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligations $ 514 $ 277
Current portion of long-term debt 493 208
Accounts payable 5,039 6,926
Claims payable 39,702 32,855
Payables to plan sponsors 24,171 16,490
Accrued expenses 6,468 6,401
------------------ ------------------
Total current liabilities 76,387 63,157
Capital lease obligations, net of current portion 718 598
Long-term debt, net of current portion 2,279 6,185
Commitments and contingencies
Minority interest 1,112 1,112
Stockholders' equity
Preferred stock, $.0001 par value; 5,000,000 shares authorized,
no shares issued or outstanding - -
Common stock, $.0001 par value; 40,000,000 shares authorized,
18,829,198 and 18,090,748 shares issued and outstanding
at December 31, 1999 and December 31, 1998, respectively 2 2
Treasury stock, 100,000 shares at cost (338) -
Additional Paid in Capital 91,614 91,603
Accumulated deficit (54,575) (50,790)
Stockholder notes receivable (1,516) (1,761)
------------------ ------------------
------------------ ------------------
Total stockholders' equity 35,187 39,054
------------------ ------------------
Total liabilities and stockholders' equity $ 115,683 $ 110,106
================== ==================
The accompanying notes are an integral part of these
consolidated financial statements.
19
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
(In thousands, except for share amounts)
1999 1998 1997
------------------ -------------------- ---------------------
Revenue $ 377,420 $ 451,070 $ 242,291
Cost of revenue 347,115 421,374 239,002
------------------ -------------------- ---------------------
Gross profit 30,305 29,696 3,289
General and administrative expenses 28,009 23,092 19,098
Amortization of goodwill and other intangibles 1,064 330
Special charges 6,029 3,700 -
------------------ -------------------- ---------------------
(Loss) income from operations (4,797) 2,574 (15,809)
Interest income, net 1,012 1,712 2,295
Other - (15) 17
------------------ -------------------- ---------------------
Net (loss) income (3,785) 4,271 (13,497)
================== ==================== =====================
Basic (loss) income per common share (0.20) 0.28 (1.07)
================== ==================== =====================
Diluted (loss) income per common share (0.20) 0.26 (1.07)
================== ==================== =====================
Weighted average common shares used
in computing basic (loss) income per share 18,660 15,115 12,620
================== ==================== =====================
Weighted average common shares used
in computing diluted (loss) income per share 18,660 16,324 12,620
================== ==================== =====================
The accompanying notes are an integral part of these
consolidated financial statements.
20
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Common Stock Treasury Stock Additional Paid-In Capital Accumulated Deficit
--------------------------------------------------------------------------------------------
Balance December 31, 1996 $ 1 $ - $ 73,443 $ (41,564)
================== ================= ========================= ===================
Stockholder loans, net - - - -
Exercise of stock options - - 113 -
Non-employee stock option
compensation expense - - 29 -
Net loss - - - (13,497)
------------------ ----------------- ------------------------- -------------------
Balance December 31, 1997 1 - 73,585 (55,061)
================== ================= ========================= ===================
Stockholder loans, net - - - -
Shares issued in connection with
Continental acquisition 1 - 17,997 -
Exercise of stock options - - 5 -
Non-employee stock option
compensation expense - - 16 -
Net income - - - 4,271
------------------ ----------------- ------------------------- -------------------
Balance December 31, 1998 2 - 91,603 (50,790)
================== ================= ========================= ===================
Payments of stockholder loans - - - -
Exercise of stock options - - 5 -
Non-employee stock option
compensation expense - - 6 -
Purchase of treasury stock - (338) - -
Net loss - - - (3,785)
------------------ ----------------- ------------------------- -------------------
Balance December 31, 1999 $ 2 $ (338) $ 91,614 $ (54,575)
================== ================= ========================= ===================
Stockholder Notes Receivable Total Stockholders' Equity
---------------------------------------------------------------
Balance December 31, 1996 $ (1,737) $ 30,143
======================= ================================
Stockholder loans, net 22 22
Exercise of stock options - 113
Non-employee stock option
compensation expense - 29
Net loss - (13,497)
----------------------- --------------------------------
Balance December 31, 1997 (1,715) 16,810
======================= ================================
Stockholder loans, net (46) (46)
Shares issued in connection with
Continental acquisition - 17,998
Exercise of stock options - 5
Non-employee stock option
compensation expense - 16
Net income - 4,271
----------------------- --------------------------------
Balance December 31, 1998 (1,761) 39,054
======================= ================================
Payments of stockholder loans 245 245
Exercise of stock options - 5
Non-employee stock option
compensation expense - 6
Purchase of treasury stock - (338)
Net loss - (3,785)
----------------------- --------------------------------
Balance December 31, 1999 $ (1,516) $ 35,187
======================= ================================
The accompanying notes are an integral part of these
consolidated financial statements.
21
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(In thousands)
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net (loss) income $ (3,785) $ 4,271 $ (13,497)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation, amortization and other 3,220 1,693 1,074
Stock option charges 6 16 29
Provision for losses on receivables and due from affiliates 6,537 58 501
Changes in assets and liabilities, net of effect from purchase of
Continental:
Receivables (4,709) (31,864) (5,318)
Inventory 410 (365) -
Prepaid expenses and other current assets (490) 142 241
Accounts payable (1,887) (339) (631)
Deferred revenue - (2,799) 2,799
Claims payable 6,847 5,274 9,701
Payables to plan sponsors and others 7,681 5,651 665
Accrued expenses (934) 1,885 1,353
------------- ------------ -------------
Net cash provided by (used in) operating activities 12,896 (16,377) (3,083)
------------- ------------ -------------
Cash flows from investing activities:
Purchases of property and equipment (2,180) (2,173) (1,575)
Purchases of investment securities (7,070) (28,871) (27,507)
Maturities of investment securities 13,731 39,814 41,909
Costs of acquisition, net of cash acquired (669) (750) -
Purchases of other investments (36) (25) (2,300)
Stockholder notes receivable, net 245 (46) 22
Due from affiliates, net (1,815) (34) 425
Decrease (increase) in other assets 361 (121) (48)
------------- ------------ -------------
Net cash provided by investing activities 2,567 7,794 10,926
------------- ------------ -------------
Cash flows from financing activities:
Principal payments on capital lease obligations (699) (132) (197)
(Decrease) increase in debt (3,620) 3,612 -
Proceeds from exercise of stock options 5 5 113
Purchase of treasury stock (338) - -
------------- ------------ -------------
Net cash (used in) provided by financing activities (4,652) 3,485 (84)
------------- ------------ -------------
Net decrease in cash and cash equivalents 10,811 (5,098) 7,759
Cash and cash equivalents--beginning of period 4,495 9,593 1,834
------------- ------------ -------------
Cash and cash equivalents--end of period $ 15,306 $ 4,495 $ 9,593
============= ============ =============
(continued)
22
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(In thousands)
Supplemental Disclosures:
The Company paid $277, $186, and $41 for interest for each of the years ended
December 31, 1999, 1998, and 1997, respectively.
Capital lease obligations of $807, $40, and $587 were incurred for each of the
years ended December 31, 1999, 1998, and 1997, respectively.
The accompanying notes are an integral part of these
consolidated financial statements.
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") is an independent pharmacy benefit
management, e-commerce and specialty pharmacy organization that partners with
managed care organizations and healthcare providers to control prescription drug
costs. MIM provides its customers with innovative pharmacy benefit products and
services utilizing clinically sound guidelines to ensure cost control and
quality care. The Company, through its MIMRx.com subsidiary, develops and
supports customized websites that customers use to access mail order pharmacy
services. The Company develops and implements specialized clinical management
programs that utilize the Company's clinical and fulfillment expertise to serve
groups of individuals afflicted with diseases requiring long-term maintenance
medications.
Business
The Company operates a single segment business with several components and
derives its revenues primarily from agreements to provide pharmacy benefit
management ("PBM") services to various health plan sponsors in the United
States. As part of its operations, the Company has mail order and e-commerce
business components. These components were a part of the Continental acquisition
and as such the Company had no mail order revenue until 1998. Net sales and
operating contribution for these components for the two years ended December 31,
1999 and 1998, respectively, are presented below:
Net Sales by Component
1999 1998
---- ----
Percent Percent
Component Sales of Total Sales of Total
- ----------------------------------------------------------------------------------------
PBM $ 342,679 91% $ 440,193 98%
Mail Order and E-Commerce 33,779 9% 10,391 2%
Corporate and All Others 962 0% 486 0%
------------------------- ------------------------------
Total Sales $ 377,420 100% $ 451,070 100%
========================= ==============================
Operating Contribution by Component
Operating Profit
-----------------------------------------
Component 1999 1998
- -------------------------------------------------------------------------------
PBM $ 1,652 $ 6,849
Mail Order and E-Commerce 1,011 359
Corporate and All Others (7,460) (4,634)
------------------- -------------------
Total Operating (Loss) Profit $ (4,797) $ 2,574
=================== ===================
A majority of the Company's revenues have been derived from providing PBM
services in the State of Tennessee to managed care organizations ("MCO's")
participating in the State of Tennessee's TennCare program and behavioral health
organizations ("BHO's") participating in the State of Tennessee's TennCare
24
Partners program. From January 1994 through December 31, 1998, the Company
provided its PBM services to the TennCare MCO's as a subcontractor to RxCare of
Tennessee, Inc. ("RxCare"). RxCare is a pharmacy services administrative
organization owned by the Tennessee Pharmacists Association. Under the agreement
with RxCare, the Company performed essentially all of RxCare's obligations under
its PBM agreements plan sponsors and paid RxCare certain amounts including a
share of the profit from the contracts, if any.
The Company and RxCare did not renew the RxCare Contract which expired on
December 31, 1998 (see Note 4). The negotiated termination of its relationship
with RxCare, among other things, allowed the Company to directly market its
services to Tennessee customers (including those then under contract with
RxCare) prior to the expiration of the RxCare Contract. The RxCare Contract had
previously prohibited the Company from soliciting and/or marketing its PBM
services in Tennessee other than on behalf of, and for the benefit of, RxCare.
The Company's marketing efforts resulted in the Company executing agreements
with all of the MCO's for the TennCare lives previously managed, under the
RxCare Contract, as well as substantially all third party administrators
("TPA's") and employer groups previously managed under the RxCare Contract.
On August 24, 1998, the Company completed its acquisition of Continental
Managed Pharmacy Services, Inc. and its subsidiaries (collectively,
"Continental"), a company which provides PBM services and mail order pharmacy
services. The acquisition was treated as a purchase for financial reporting
purposes. The Company issued 3,912,448 shares of Common Stock as consideration
for the purchase. The aggregate purchase price, including costs of acquisition
of $2,681, approximated $21,081. The fair value of assets acquired approximated
$11,100 and liabilities assumed approximated $11,800, resulting in approximately
$20,129 of goodwill and $1,224 of other intangible assets which will be
amortized over their estimated useful lives (25 years for goodwill and six and
four years, respectively, for other intangibles). The consolidated financial
statements include the results of Continental from the date of acquisition.
The following unaudited consolidated pro forma financial information has been
prepared assuming Continental was acquired as of January 1, 1997, with pro forma
adjustments for amortization of goodwill and other intangible assets and income
taxes. The pro forma financial information is presented for informational
purposes only and is not indicative of the results that would have been realized
had the acquisition been made on January 1, 1997. In addition, this pro forma
financial information is not intended to be a projection of future operating
results.
Year ended December 31,
-----------------------
1998 1997
---- ----
Revenues............................ $ 491,716 $ 289,571
Net income (loss)................... $ 4,836 $ (12,896)
Basic earnings (loss) per share..... $ 0.27 $ (0.78)
Diluted earnings (loss) per share... $ 0.26 $ (0.78)
The pro forma amounts above include $65,958 and $47,280 of revenues from the
operations of Continental for the years ended December 31, 1998, and December
31, 1997, respectively.
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 generally
accepted accounting principles 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 of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
25
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits, overnight investments
and money market accounts.
Receivables
Receivables include amounts due from plan sponsors under the Company's PBM
contracts, amounts due from pharmaceutical manufacturers for rebates and 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. The cost of the
inventory is determined using the first-in, first-out (FIFO) method.
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 is 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 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.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets represent the cost in excess of the
fair market value of the tangible net assets acquired in connection with the
acquisition of Continental. Amortization expense for the years ending December
31, 1999 and 1998, were $1,064 and $330, respectively. Goodwill is amortized
over twenty five years and other intangible assets are amortized over four to
six years.
Long-Lived Assets
The Company periodically reviews its long-lived assets and certain related
intangibles for impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. The Company does not
believe that any such change has occurred.
Deferred Revenue
Deferred revenues represent fees received in advance from certain plan
sponsors and are recognized as revenue in the month these fees are earned.
Claims Payable
The Company is responsible for all covered prescriptions provided to plan
members during the contract period. At December 31, 1999 and 1998, certain
prescriptions were dispensed to members for which the related claims had not yet
been presented to the Company for payment. Estimates of $1,270 and $2,523 at
December 31, 1999 and 1998, respectively, for these claims are included in
claims payable.
26
Payables to Plan Sponsors
Payables to plan sponsors represent the sharing of pharmaceutical
manufacturers' rebates with the plan sponsors.
Revenue Recognition
Capitated Agreements. 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 agreements generally have a one-year term or, if longer, provide for
adjustment of the capitated rate each year. These contracts are subject to rate
adjustment or termination upon the occurrence of certain events.
Capitation payments under risk-based contracts are based upon the latest
eligible member data provided to the Company by the plan sponsor. On a monthly
basis, the Company recognizes revenue for those members eligible for the current
month, plus or minus capitation amounts for those members determined to be
retroactively eligible or ineligible for prior months under the contract. The
amount accrued for net retroactive eligibility capitation payments are based
upon management's estimates. Revenue for the years ended December 31, 1999, 1998
and 1997 was $121,617, $142,960 and $127,477, respectively.
Generally, loss contracts arise only on risk-based capitated contracts and
primarily result from higher than expected pharmacy utilization rates, higher
than expected inflation in drug costs and the inability to restrict formularies,
resulting in higher than expected drug costs. At such time as management
estimates that a contract will sustain losses over its remaining contractual
life, a reserve is established for these estimated losses.
Fee-for-Service Agreements. Under its fee-for-service PBM contracts, the
Company provides covered pharmacy services to plan sponsor members and is
reimbursed by the plan sponsor for the actual ingredient cost and pharmacist's
dispensing fee of a prescription plus certain administrative fees. Revenue on
these contracts is recognized when pharmacy services are reported to the Company
by dispensing pharmacists through an on-line claims processing system.
Fee-for-service revenue for the years ended December 31, 1999, 1998 and 1997 was
$221,062, $297,233 and $114,814, respectively.
Mail Order and e-Commerce Services. The Company's mail order and e-commerce
services are available to any plan sponsor's members, as well as the general
public. The Company's mail order and e-commerce facility dispenses the
prescribed medication and bills the sponsor, the patient and/or the patient's
health insurance company. Revenue is recorded when the prescription is shipped.
The Company did not provide any mail order and e-commerce services prior to
1998.
Cost of Revenue
Cost of revenue includes pharmacy claims, fees paid to pharmacists and other
direct costs associated with pharmacy management, claims processing operations
and mail order services, offset by volume rebates received from pharmaceutical
manufacturers. For the years ended December 31, 1999, 1998, and 1997, rebates
earned net of rebate sharing arrangements on pharmacy benefit management
contracts were $16,883, $21,996, and $13,290, respectively.
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.
27
Earnings per Share
Basic earnings (loss) per share is based on the average number of shares
outstanding and diluted earnings per share is based on the average number of
shares outstanding including common stock equivalents. For the years ended
December 31, 1999 and 1997, diluted loss per share is the same as basic loss per
share because the inclusion of common stock equivalents would be anti-dilutive.
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Numerator:
Net (loss) income......................... ($3,785) $4,271 ($13,497)
=============== =============== ===============
Denominator - Basic:
Weighted average number of common
shares outstanding..................... 18,660 15,115 12,620
=============== =============== ===============
Basic (loss) income per share............. ($0.20) $0.28 ($1.07)
=============== =============== ===============
Denominator - Diluted:
Weighted average number of common
shares outstanding..................... 18,660 15,115 12,620
Common share equivalents of outstanding
stock options.......................... 0 1,209 0
--------------- --------------- ---------------
Total shares outstanding.................. 18,660 16,324 12,620
=============== =============== ===============
Diluted (loss) income per share........... ($0.20) $0.26 ($1.07)
=============== =============== ===============
Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, investment securities (see Note 3), accounts receivable, accounts
payable and long-term debt. The carrying amounts of cash and cash equivalents,
accounts receivable and accounts payable 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 in accordance with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") (See Note 9).
Reclassifications
Certain amounts in the 1998 financial statements have been reclassified to
conform to current year presentation.
NOTE 3--INVESTMENT SECURITIES AND OTHER INVESTMENTS
Investment Securities
The Company's marketable investment securities are classified as
held-to-maturity and are carried at amortized cost on the accompanying balance
sheet as of December 31, 1999 and 1998. Management believes that it has the
intent and ability to hold such securities to maturity. Amortized cost (which
approximates fair value) of these securities as of December 31, 1999 and 1998 is
as follows:
28
1999 1998
---- ----
Held-to-maturity securities:
States and political subdivision................ $ 1,000 $ 1,353
Corporate securities............................ 4,033 10,341
------- -------
Total investment securities..................... $ 5,033 $11,694
======= =======
The contractual maturities of all held-to-maturity securities at December
31, 1999 were one year or less.
Other Investments
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,
par value $0.01 per share, for an aggregate purchase price equal to $2,300. Due
to WHIS issuing additional Convertible Preferred Stock (Series C), the Company's
current interest in WHIS is 5%.
NOTE 4--RELATED PARTY TRANSACTIONS
On October 1, 1998, the Company and RxCare amended the RxCare Contract. The
amendment reflected the parties' mutual decision to terminate their relationship
effective December 31, 1998 and permitted both parties to independently pursue
business opportunities with current RxCare plan sponsors to become effective
from and after January 1, 1999. The Company agreed to pay RxCare $1,500, and
waive RxCare's payment obligations with respect to cumulative losses, including
the outstanding advances of $800 which were previously reserved. The $1,500 was
paid in November 1998 and is included in the statement of operations as a
non-recurring charge. No amount was due RxCare for the years ended December 31,
1998 or 1997.
Other Activities
The Company leases one of its facilities from Alchemie Properties, LLC
("Alchemie") pursuant to a ten-year agreement. Alchemie is controlled by a
former officer and director of the Company. Rent expense was approximately $56
for each of the years ended December 31, 1999, 1998, and 1997, respectively. The
Company has spent an aggregate of approximately $513 for alterations and
improvements to this space through December 31, 1999, which upon termination of
the lease will revert to the lessor. The future minimum rental payments under
this agreement are included in Note 7.
Stockholder Notes Receivable
In April 1999, the Company loaned to its Chairman and Chief Executive
Officer $1,700 evidenced by a promissory note secured by a pledge of 1,500,000
shares of the Company's Common Stock. The note requires repayment of principal
and interest by March 31, 2004. Interest accrues monthly at the "Prime Rate" (as
defined in the note) then in effect. The loan was approved by the Company's
Board of Directors in order to provide funds with which such executive officer
could pay Federal and state tax liabilities associated with the purchase of
1,500,000 shares of the Company's Common Stock, through the exercise of stock
options, which were granted directly to such officer by the then majority
stockholder of the Company.
In June 1994, the Company advanced to a former executive officer, director
and majority stockholder approximately $979 for purposes of acquiring a
principal residence, $975 of which is secured by a first mortgage on the
personal residence. In exchange for the funds, the Company received a promissory
note, the aggregate outstanding principal balance of which was $780 at December
31, 1999 and $979 at December 31, 1998. The original note required repayment by
June 15, 1997 with interest of 5.42% per annum payable monthly. The note was
amended making the principal balance due and payable on June 15, 2000 together
with 7.125% interest. Interest income on the notes for each of the years ended
December 31, 1999, 1998, and 1997 was $56, $70, and $60, respectively.
29
In August 1994, the Company advanced Alchemie $299 for the purposes of
acquiring a building leased by the Company. The balance remaining on the advance
was approximately $280 at December 31, 1999 and 1998. The note bears interest at
a rate of 10% per annum with principal due and payable on December 1, 2004.
Interest income was $29 for each the years ended December 31,1999, 1998, and
1997, respectively. The note is secured by a lien on Alchemie's rental income.
During 1995, the Company advanced to MIM Holdings $800 for certain
consulting services to be performed for the Company in 1996 and paid $278 for
certain expenses on behalf of MIM Holdings including $150 for consulting
services to MIM Holdings by an officer of RxCare. These amounts, totaling
$1,078, were recorded as a stockholder note receivable. $622 of such amount was
recorded as a stockholder distribution during the first quarter of 1996 and the
remaining balance of $456 bears interest at 10% per annum, payable quarterly in
arrears, with principal due on March 31, 2001. The note is guaranteed by a
former officer and director of the Company and further secured by the assignment
to the Company of a note due to MIM Holdings in the aggregate principal amount
of $100. The outstanding balance for each of the years ended December 31, 1999
and 1998 was $456. Interest income on the note for each of years ended December
31, 1999, 1998 and 1997, respectively was $46.
Indemnification
Under certain circumstances, the Company may be obligated to indemnify and
advance defense costs to two former officers (one of which is a former director
and still principal stockholder of the Company) of a subsidiary of the Company
in connection with their involvement in the Federal and State of Tennessee
investigation of which they are the subject. During 1999, the Company advanced
and expensed $1,120 for Messrs. Corvese and Ryan's legal costs in this matter
such amounts are included in selling, general and administrative expenses. The
Company is not presently in a position to assess the likelihood that either or
both of these former officers will be entitled to such indemnification and
future advancement of defense costs or to estimate the total amount that it may
have to pay in connection with such obligations or the time period over which
such amounts may have to be advanced.
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following at December 31:
1999 1998
---- ----
Computer and office equipment, including equipment under capital leases 9,494 6,603
Furniture and fixtures 758 546
Leasehold improvements 756 613
---------------------
11,008 7,762
Less: Accumulated depreciation (5,066) (2,939)
---------------------
Property and equipment, net 5,942 4,823
=====================
NOTE 6--LONG TERM DEBT
The Company's long term debt consists of a Revolving Note Agreement (the
"Agreement") through May 2001 and installment note ("Installment Note I ") with
a bank (the "Bank"), which were assumed by the Company in connection with the
Continental acquisition. The Company may borrow up to $6,500 under the
Agreement. Advances under the Agreement are limited to 85% of eligible
receivables of Continental (as defined in the Agreement), and outstanding
amounts bear interest at the Bank's prime rate (8.5% at December 31, 1999). At
December 31, 1999, $4,403 was available for borrowing under the Agreement.
Installment Note I bears interest at the Bank's prime rate plus 1.25% (9.75% at
December 31, 1999) with payments due in monthly installments of $9 plus interest
and with final payment due February 1, 2000, which was paid.
The Agreement and Installment Note I is secured by all of the accounts
receivable and furniture and equipment of Continental and Continental's
obligations thereunder guaranteed are by the Company. Continental has also
granted a security interest in its inventory, accounts receivable and furniture
and equipment to a pharmaceutical vendor.
30
Under the terms of the Agreement and Installment Note I, Continental is
required to comply with certain financial covenants which, among other things,
require Continental to maintain a specified level of net worth.
The Company has a note payable to a former employee, assumed in connection
with the Continental acquisition. The note bears interest at the greater of 9%
or prime plus 1% (9.5% at December 31, 1999) and is payable in monthly
installments of principal plus interest of $7 through June 30, 2001.
Long-term debt consists of the following at December 31:
1999 1998
-------- --------
Revolving Note $ 2,097 $ 5,830
Installment Note I 232 367
Notes payable -- former employee 123 196
Other 320 -
-------- --------
2,772 6,393
Less: Current portion 493 208
-------- --------
$ 2,279 $ 6,185
======== ========
Future maturities of long-term debt are as follows:
2000 $ 493
2001 2,279
--------
Total $ 2,772
========
On February 4, 2000, the Company, through its principal pharmacy benefit
management operating subsidiary, MIM Health Plans, Inc. ("Health Plans"),
secured a $30,000 revolving credit facility (the "Facility"). The Facility will
be used by the Company for general working capital purposes, capital
expenditures and for future acquisitions. In addition, a portion of the Facility
is available to the Company for the further development of the Company's
e-commerce operations under its MIMRx and Continental Pharmacy subsidiaries. The
Facility has a three year term and provides for borrowing of up to $30,000 at a
rate of interest selected by the Company equal to the Index Rate (defined as the
base rate on corporate loans at large U.S. money center commercial banks, as
quoted in the Wall Street Journal), plus a margin or a London InterBank Offered
Rate plus a margin. Health Plans' obligations under the Facility are secured by
a first priority security interest in all of Health Plans' receivables as well
as other related collateral. Health Plans' obligations under the Facility are
guaranteed by the Company.
NOTE 7--COMMITMENTS AND CONTINGENCIES
Legal Proceedings
On March 31, 1999, the State of Tennessee, (the "State"), and Xantus
Healthplans of Tennessee, Inc. ("Xantus"), entered into a consent decree under
which Xantus was placed in receivership under the laws of the State of
Tennessee. On September 2, 1999, the Commissioner of the Tennessee Department of
Commerce and Insurance (the "Commissioner"), acting as receiver of Xantus, filed
a proposed plan of rehabilitation (the "Plan"), as opposed to a liquidation of
Xantus. A rehabilitation under receivership, similar to a reorganization under
federal bankruptcy laws, was approved by the Chancery Court (the "Court") of the
State of Tennessee, would allow Xantus to remain operating as a TennCare MCO,
providing full health care related services to its enrollees. Under the Plan,
the State, among other things, agreed to loan to Xantus approximately $30,000 to
be used solely to repay pre-petition claims of providers, which claims aggregate
approximately $80,000. Under the Plan, the Company received $4,200, including
$600 of unpaid rebates to Xantus which the Company was allowed to retain under
the terms of the preliminary rehabilitation plan for Xantus. A plan for the
payment of the remaining amounts has not been finalized and the recovery of any
additional amounts is uncertain. The Company recorded a special charge of $2,700
for the estimated loss on the remaining amounts owed, net of the unpaid amounts
to network pharmacies.
31
As part of the Company's normal review process, the Company determined that
each of the Company's agreements (collectively, the "Agreements") with Tennessee
Health Partnership ("THP") and Preferred Health Partnership of Tennessee, Inc.
("PHP"), were not achieving profitability projections. As a result thereof, in
the first quarter of 1999, and in accordance with the terms of the Agreements,
the Company exercised its right to terminate the Agreements effective on
September 28, 1999. Through a negotiated extension with THP and PHP, the Company
continued to provide PBM services to their respective members through December
31, 1999.
Despite this negotiated extension, there still exist disputes with respect
to unpaid fees and other amounts between the Company and each of THP and PHP. On
October 20, 1999, the Company demanded arbitration against THP with respect to
approximately $2,300 arbitrarily withheld from the Company by THP during 1998.
On February 15, 2000, THP responded by filing a motion to dismiss the
arbitration on the grounds that the Company does not have standing under its
agreement with THP to bring an arbitration proceeding. The Company opposed THP's
motion on March 16, 2000. On March 21, 2000, the arbitration panel denied THP's
motion to dismiss and scheduled the arbitration to take place in late August,
2000. While the Company intends to vigorously pursue this claim, at this time,
the Company is unable to assess the likelihood that it will prevail in its
claim.
On February 22, 2000, THP and PHP jointly demanded arbitration against the
Company alleging that the Company overbilled THP and PHP, and THP and PHP
overpaid the Company, in the approximate amounts of $1,300 and $1,000,
respectively. On March 20, 2000, the Company filed its answer and counterclaim
and asserted that all amounts billed to, and paid by, THP and PHP were proper
under the Agreements and that THP and PHP have improperly withheld payment in
the approximate amount of $500 and $480, respectively. While the Company
believes that it is owed these amounts from each of THP and PHP and intends to
pursue vigorously its counterclaims, at this time, the Company is unable to
assess the likelihood that it will prevail.
In 1999, the Company recorded a special charge of $3,300 for estimated
future losses related to these disputes.
In 1998, the Company recorded a $2,200 non-recurring charge against earnings
in connection with the conclusion of 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 a subsidiary prior to the
Company's initial public offering. This settlement is subject to several
conditions, including the execution of a definitive agreement. The Company
anticipates that the investigation will be fully resolved with this settlement.
Government Regulation
Various Federal and state laws and regulations affecting the healthcare
industry do or may impact the Company's current and planned operations,
including, without limitation, Federal and state laws prohibiting kickbacks in
government health programs (including TennCare), Federal and state antitrust and
drug distribution laws, and a wide variety of consumer protection, insurance and
other state laws and regulations. While management believes that the Company is
in substantial compliance with all existing laws and regulations material to the
operation of its business, such laws and regulations are subject to rapid change
and often are uncertain in their application. As controversies continue to arise
in the healthcare industry (for example, regarding the efforts of plan sponsors
and pharmacy benefit managers to limit formularies, alter drug choice and
establish limited networks of participating pharmacies), Federal and state
regulation and enforcement priorities in this area can be expected to increase,
the impact of which on the Company cannot be predicted. There can be no
assurance that the Company will not be subject to scrutiny or challenge under
one or more of these laws or that any such challenge would not be successful.
Any such challenge, whether or not successful, could have a material adverse
effect upon the Company's financial position and results of operations.
Violation of the Federal anti-kickback statute, for example, may result in
substantial criminal penalties, as well as exclusion from the Medicare and
Medicaid (including TennCare) programs. Further, there can be no assurance that
the Company will be able to obtain or maintain any of the regulatory approvals
that may be required to operate its business, and the failure to do so could
have a material adverse effect on the Company's financial position and results
of operations.
Employment Agreements
The Company has entered into employment agreements with certain key
employees which expire at various dates through February 2004. Total minimum
commitments under these agreements are approximately as follows:
32
2000........................... $ 1,540
2001........................... 1,076
2002........................... 936
2003........................... 897
2004........................... 78
--------------
Total $ 4,527
==============
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:
2000........................... 1,165
2001........................... 1,124
2002........................... 1,117
2003........................... 1,056
2004........................... 926
Thereafter..................... 3,807
------------
Total $ 9,195
============
Rent expense for non-related party leased facilities and equipment was
approximately $995, $809 and $477 for the years ended December 31, 1999, 1998
and 1997, 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:
2000............................................... $ 595
2001............................................... 551
2002............................................... 212
--------------
Total minimum lease payments....................... 1,358
Less: Amount representing interest................ 126
--------------
Obligations under leases........................... 1,232
Less: Current portion of lease obligations........ 514
--------------
$ 718
==============
NOTE 8--INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 109. Under
SFAS 109, deferred tax assets or liabilities are computed based on the
differences between the financial statement and income tax bases of assets and
liabilities as measured by currently enacted tax laws and rates. Deferred income
tax expenses and benefits are based on changes in the deferred assets and
liabilities from period to period.
33
The effect of temporary differences which give rise to a significant portion
of deferred taxes is as follows as of December 31:
1999 1998
-------------------------
Deferred tax assets (liabilities):
Reserves and accruals not yet deductible for tax purposes............ $ 3,023 $ 2,415
Net operating loss carryforward...................................... 17,492 16,882
Property Basis differences (48) 82
-------------------------
Subtotal............................................................. 20,467 19,379
Less:evaluation allowance............................................ (20,467) (19,109)
-------------------------
Net deferred taxes......................................................... $ - $ 270
=========================
It is uncertain whether the Company will realize the full benefit from its
deferred tax assets, and it has therefore recorded a valuation allowance
covering its net deferred tax asset. The Company will assess the need for the
valuation allowance at each balance sheet date.
There is no (benefit) provision for income taxes for the years ended
December 31, 1999, 1998, and 1997. A reconciliation to the tax (benefit)
provision at the Federal statutory rate is presented below:
1999 1998 1997
------------------------------------------
Tax (benefit) provision at statutory rate...................... $ (1,286) $ 1,452 $ (4,589)
State tax (benefit) provision, net of federal taxes............ (250) 282 (891)
Change in valuation allowance.................................. 1,088 (1,886) 5,460
Amortization of goodwill and other intangibles................. 431 134 0
Other.......................................................... 17 18 20
-------------------------------------------
Recorded income taxes.......................................... $ - $ - $ -
============================================
At December 31, 1999, the Company had, for tax purposes, unused net
operating loss carry forwards of approximately $43,000 which will begin expiring
in 2009. As it is uncertain whether the Company will realize the full benefit
from these carryforwards, the Company has recorded a valuation allowance equal
to the deferred tax asset generated by the carryforwards. The Company assesses
the need for a valuation allowance at each balance sheet date. The Company has
undergone a "change in control" as defined by the Internal Revenue Code of 1986,
as amended, and the rules and regulations promulgated thereunder. The amount of
net operating loss carryforwards that may be utilized in any given year will be
subject to a limitation as a result of this change. The annual limitation
approximates $2,700. Actual utilization in any year will vary based on the
Company's tax position in that year.
NOTE 9--STOCKHOLDERS' EQUITY
Stock Option Plans
In May 1996, the Company adopted the MIM Corporation Amended and Restated
1996 Stock Incentive Plan, as amended in 1999, (the "Plan"). The Plan provides
for the granting of incentive stock options (ISOs) and non-qualified stock
options to employees and key contractors of the Company. Options granted under
the Plan generally vest over a three-year period, but vest in full upon a change
in control of the Company or at the discretion of the Company's compensation
committee, and generally are exercisable for 10 to 15 years after the date of
grant subject, in some cases, to earlier termination in certain circumstances.
The exercise price of ISOs granted under the Plan will not be less than 100% of
the fair market value on the date of grant (110% for ISOs granted to more than a
10% shareholder). If non-qualified stock options are granted at an exercise
price less than fair market value on the grant date, the amount by which fair
market value exceeds the exercise price will be charged to compensation expense
over the period the options vest. 5,200,450 shares are authorized for issuance
under The Plan. At December 31, 1999, 629,143 shares remained available for
grant under the Plan.
34
As of December 31, 1999 and 1998, the exercisable portion of outstanding
options was 660,609 and 1,351,601 respectively. Stock option activity under the
amended Plan through December 31, 1999 is as follows:
Average
Options Price
---------------------------
Balance, December 31, 1996................... 4,083,581 $2.99
Granted................................. 85,000 $9.49
Canceled................................ (178,750)
Exercised............................... (1,294,550)
---------------------------
Balance, December 31, 1997................... 2,695,281 $4.21
Granted................................. 935,110 $4.28
Canceled................................ (683,229)
Exercised............................... (843,150)
---------------------------
Balance, December 31, 1998................... 2,104,012 $4.73
Granted................................. 605,000 $2.59
Canceled................................ (292,202)
Exercised............................... (738,450)
---------------------------
Balance, December 31, 1999................... 1,678,360 $4.28
===========================
On April 17, 1998, the Company granted an 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. Under this agreement, options with respect to 500,000 shares
vested immediately upon his commencement of employment with the Company and the
options covering the remaining 500,000 shares vest in two equal installments on
the first two anniversary dates of the date of grant. These options expire 10
years from the date of grant. As of December 31, 1999, the exercisable portion
of outstanding options was 750,000 shares.
Effective July 6, 1998, each then current employee of the Company holding
options under the Plan was offered an opportunity to reprice the exercise price
of not less than all options granted at a particular exercise price to an
exercise price of $6.50 per share. The average of the high and low sales price
of the Common Stock on July 6, 1998 was $4.75 per share. In consideration of
receiving repriced options, each employee agreed that all such repriced options,
including those already vested, would become unvested and exercisable in three
equal installments on the first three anniversaries of the date of the
repricing. In connection with the repricing, an aggregate of approximately
473,000 shares was repriced to $6.50 per share.
In July 1996, the Company adopted the MIM Corporation 1996 Non-Employee
Directors Stock Incentive Plan, as amended in 1999, (the "Directors Plan"). The
purpose of the Directors Plan is to attract and retain qualified individuals to
serve as non-employee directors of the Company ("Outside Directors"), to provide
incentives and rewards to such directors and to associate more closely the
interests of such directors with those of the Company's stockholders. The
Directors Plan provides for the automatic granting of non-qualified stock
options to Outside Directors joining the Company since the adoption of the
Directors Plan. Each such Outside Director receives an option to purchase 20,000
shares of Common Stock upon his or her initial appointment or election to the
Board of Directors. The exercise price of such options is equal to the fair
market value of the Common Stock on the date of grant. Options granted under the
Directors Plan generally vest over three years. In March 1999, the Board of
Directors amended the Directors Plan increasing the shares authorized from
100,000 to 300,000 shares which was approved at the August 1999 Annual
Stockholders Meeting. At December 31, 1999, options to purchase 40,000 shares
are outstanding at an exercise price of $13.00 and options to purchase 60,000
shares are outstanding at an exercise price of $4.6875. At December 31, 1999,
60,000 shares under the Directors Plan were exercisable.
Accounting for Stock-Based Compensation
35
The fair value of the Company's compensation cost for their 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:
1999 1998 1997
------------------------- ----------------------- -----------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
------------------------- ----------------------- -----------------------
Net (loss) income....... ($3,785) ($6,209) $4,271 $2,742 ($13,497) ($14,416)
Basic (loss) income
per common share.... ($0.20) ($0.33) $0.28 $0.18 ($1.07) ($1.14)
Diluted (loss) income
per common share.... ($0.20) ($0.33) $0.26 $0.17 ($1.07) ($1.14)
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.
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:
1999 1998 1997
Volatility 96% 98% 60%
Risk-free interest rate 6% 5% 5%
Expected life of options 4 years 4 years 4 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
NOTE 10--CONCENTRATION OF CREDIT RISK
The majority of the Company's revenues have been derived from TennCare
contracts managed by the Company. The following table outlines contracts with
plan sponsors having revenues and/or accounts receivable which individually
exceeded 10% of the Company's total revenues and/or accounts receivables during
the applicable time period:
Plan Sponsor
-------------------------------------------------------------------------
A B C D E F G
-------------------------------------------------------------------------
Year ended December 31, 1997
% of total revenue 21% 10% 13% 10% - - -
% of total accounts receivable at period end * * * * - - -
Year ended December 31, 1998
% of total revenue 16% - - 11% 16% 12% -
% of total accounts receivable at period end * - - * * 12% -
Year ended December 31, 1999
% of total revenue 13% - 12% - - 14% 12%
% of total accounts receivable at period end * - * - - * *
- --------------------------------------------------------
* Less than 10%.
36
NOTE 11--PROFIT SHARING PLAN
The Company maintains a deferred compensation plan under Section 401(k) of
the Internal Revenue Code. Under the plan, employees may elect to defer up to
15% of their salary, subject to Internal Revenue Service limits. The Company may
make a discretionary matching contribution. The Company recorded a $50 matching
contribution for 1999 and 1998, and had no matching contributions for the year
ended December 31, 1997.
37
MIM Corporation and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the years ended December 31, 1999, 1998 and 1997
(In thousands)
Balance at Charged to
Beginning Charges to Costs and Other Balance at End
of Period Receivables Expenses Charges of Period
-----------------------------------------------------------------------
Year ended December 31, 1997
Accounts receivable, . . . . . . . . . .. . $ 1,088 $ (1,755) $ 1,348 $ 705 $ 1,386
Accounts receivable, other . . . . . . .. . $ 2,157 $ - $ 203 $ - $ 2,360
=======================================================================
Year ended December 31, 1998
Accounts receivable, . . . . . . . . . .. . $ 1,386 $ 595 $ 58 $ - $ 2,039
Accounts receivable, other . . . . . . .. . $ 2,360 $ (1,957) $ - $ - $ 403
=======================================================================
Year ended December 31, 1999
Accounts receivable, . . . . . . . . . .. . $ 2,039 $ - $ 6,537 $ - $ 8,576
Accounts receivable, other . . . . . . .. . $ 403 $ - $ - $ - $ 403
=======================================================================
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
38
PART III
Item 10. Directors and Executive Officers of Registrant
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
Name Age Position
- ---- --- --------
Richard H. Friedman 49 Chairman of the Board and Chief Executive Officer
Scott R. Yablon 48 President, Chief Operating Officer and Director
Louis A. Luzzi, Ph.D. 67 Director
Richard A. Cirillo. 49 Director
Louis DiFazio, Ph.D. 62 Director
Micheal Kooper 64 Director
Barry A. Posner 36 Vice President, Secretary and General Counsel
Edward J. Sitar 39 Vice President, Chief Financial Officer and Treasurer
Recie Bomar 52 Vice President - Sales & Marketing
Rita M. Marcoux 39 Senior Vice President - Pharmacy Benefit Operations
Russel J. Corvese 39 Chief Information Officer, Senior Vice President of MIMRx.com, Inc.
Amy Andres 32 Senior Vice President of MIMRx.com, Inc.
Richard H. Friedman is currently the Chairman and Chief Executive Officer of
the Company. He joined the Company in April 1996 and was elected a director of
the Company and appointed Chief Financial Officer and Chief Operating Officer in
May 1996. He relinquished the positions of Chief Operating Officer and Chief
Financial Officer upon the hiring of Scott R. Yablon. Mr. Friedman also served
as the Company's Treasurer from April 1996 until February 1998. From February
1992 to December 1994, Mr. Friedman served as Chief Financial Officer and Vice
President of Finance of Zenith Laboratories Inc. (`Zenith"). From January 1995
to January 1996, he was Vice President of Administration of IVAX Corporation's
North American Multi-Source Pharmaceutical Group and each of its operating
companies, including Zenith and Zenith Goldline.
Scott R. Yablon joined the Company on May 1, 1998 as an employee and,
effective May 15, 1998, served as its President, Chief Financial Officer, Chief
Operating Officer and Treasurer. He relinquished the positions of Chief
Financial Officer and Treasurer on March 22, 1999, upon the promotion of Mr.
Edward J. Sitar to those positions at that time. Mr. Yablon has served as a
director of the Company since July 1996. Prior to joining the Company, he held
the position of Vice President - Finance and Administration for Forbes Inc. He
also served as a member of the Investment Committee of Forbes Inc., Vice
President, Treasurer and Secretary of Forbes Investors Advisory Institute and
Vice President and Treasurer of Forbes Trinchera, Sangre de Cristo Ranches, Fiji
Forbes and Forbes Europe.
Louis A. Luzzi, Ph.D. has served as a director of the Company since July
1996. Dr. Luzzi is the Dean of Pharmacy and Provost for Health Science Affairs
of the University of Rhode Island College of Pharmacy. He has been a Professor
of Pharmacy at the University of Rhode Island since 1981.
39
Richard A. Cirillo has served as a director of the Company since April 1998.
Since June 21, 1999, Mr. Cirillo has been a partner of the law firm of King &
Spalding. From 1975 until June 1999, Mr. Cirillo was a member of the law firm
Rogers and Wells LLP, with which he had been associated with since 1975. Since
Mr. Cirillo joined King & Spalding, that firm has served as the Company's
outside general counsel. Prior to that time, Rogers and Wells LLP had served in
such capacity.
Louis DiFazio, Ph. D. has served as a director of the Company since May
1998. From 1990 through March 1997, Dr. DiFazio served as President of Technical
Operations for the Pharmaceutical Group of Bristol-Myers Squibb and from March
1997 until his retirement in June 1998 served as Group Senior Vice President.
Dr. DiFazio also serves as a member of the Board of Trustees of Rutgers
University and the University of Rhode Island. Dr. DiFazio received his B.S. in
Pharmacy at Rutgers University and his Ph.D. in Pharmaceutical Chemistry from
the University of Rhode Island.
Martin ("Michael") Kooper has served as a director of the Company since
April 1998. Mr. Kooper has served as the President of the Kooper Group since
December 1997, a successor to Michael Kooper Enterprises, an insurance and risk
management consultant firm. From 1980 through December 1997, Mr. Kooper served
as President of Michael Kooper Enterprises.
Barry A. Posner joined the Company in March 1997 as General Counsel and was
appointed as the Company's Secretary at that time. On April 16, 1998, Mr. Posner
was appointed Vice President of the Company. From September 1990 through March
1997, Mr. Posner was associated with the Stamford, Connecticut law firm of Finn
Dixon & Herling LLP, where he practiced corporate law, specializing in the areas
of mergers and acquisitions and securities law, and commercial real estate law.
Edward J. Sitar joined the Company in August 1998 as Vice President of
Finance. On March 22, 1999, Mr. Sitar was appointed Chief Financial Officer and
Treasurer, relinquishing the position of Vice President of Finance. From May
1996 to August 1998, Mr. Sitar was the Vice President of Finance for Vital
Signs, Inc., a publicly traded manufacturer and distributor of single use
medical products. From June 1993 to April 1996, Mr. Sitar was the Controller of
Zenith.
Recie Bomar joined the Company in March 1999 as Vice President of Sales and
Marketing. From 1997 through 1999, Mr. Bomar was a Vice President for
PharmaCare, a subsidiary of CVS Corporation. Mr. Bomar was a National Director
of Sales & Services for RX Connections from 1996 to 1997. Prior to that, Mr.
Bomar held several positions with Revco Managed Care, a division of Revco D.S.,
Inc., a national retail pharmacy chain.
Rita M. Marcoux has served the company in various capacities since 1994. On
February 1, 2000, Ms. Marcoux was promoted to Senior Vice President - Pharmacy
Benefits Operations. Prior to the promotion, Ms. Marcoux served as Vice
President - Clinical Operations since 1997. From 1996 to 1997, she served as
Executive Director - Business Operations and, from 1994 to 1996, as Director of
Contracting. Prior to joining the Company, Ms. Marcoux held various positions
with the University of Rhode Island, College of Pharmacy, from 1988 to 1994,
including the Director of Continuing Education Programs.
Russell J. Corvese had served the Company in various capacities since May
1994. On February 1, 2000, Mr. Corvese was appointed Senior Vice President of
MIMRx.com, Inc., the Company's wholly owned subsidiary, and is responsible for
MIS, Merchandising and Business Development. Mr. Corvese served as Vice
President of Operations and Chief Information Officer from November 27, 1997 to
February 1, 2000. From November 1996 through November 1997, Mr. Corvese held the
position of Executive Director - MIS. Prior to joining the Company, Mr. Corvese
was employed by Blue Cross/Blue Shield of Rhode Island from May 1985 to May
1994.
Amy Andres joined MIMRx.com, Inc., the Company's wholly owned subsidiary, as
a Senior Vice President in December 1999. Prior to joining MIMRx.com, Inc., Ms.
Andres served as a general manager and vice president for ProCare, Inc., a
specialty pharmacy subsidiary of CVS Corporation, from April 1999 to December
1999. From March 1994 to March 1999, Ms. Andres served as general manager and
vice president for Allscripts, Inc., a physician prescribing and software
developer.
40
Executive officers are appointed by, and serve at the pleasure of, the Board
of Directors, subject to the terms of their respective employment agreements
with the Company which among other things provide for, each of them, serving in
the executive position(s) listed above.
Section 16 (a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires directors and officers of the
Company and persons, or "groups" of persons, who own more than 10% of a
registered class of the Company's equity securities (collectively, "Covered
Persons") to file with the Commission and NASDAQ within specified time periods,
initial reports of beneficial ownership, and subsequent reports of changes in
ownership, of certain equity securities of the Company. Based solely on its
review of copies of such reports furnished to it and upon written
representations of Covered Persons that no other reports were required, other
than as described below, the Company believes that all such filing requirements
applicable to Covered Persons with respect to all reporting periods through the
end of fiscal 1999 have been complied with on a timely basis except for the
following: Mr. E. David Corvese, a former 10% beneficial owner, failed to file
timely one Statement of Changes in Beneficial Ownership on Form 4 reporting one
transaction. Richard Friedman failed to timely file one Annual Statement of
Changes in Beneficial Ownership on Form 5 covering fiscal 1998 reporting one
transaction which occurred in 1998. Each of Barry Posner and Edward J. Sitar,
failed to timely file one Annual Statement of Changes in Beneficial Ownership on
Form 5 covering fiscal 1998 reporting two transactions which occurred in
December 1998. Recie Bomar failed to timely file one Initial Statement of
Beneficial Ownership on Form 3 reporting his initial beneficial ownership upon
becoming an executive officer.
Item 11. Executive Compensation
The following table sets forth certain information concerning the annual,
long-term and other compensation of the Chief Executive Officers and the four
other most highly compensated executive officers of the Company (the "Named
Executive Officers") for services rendered in all capacities to the Company and
its subsidiaries during each of the years ended December 31, 1999, 1998 and
1997, respectively:
41
Summary Compensation Table
Long-term
Annual Compensation Compensation
-------------------------------------------------------------------------------------------------
Securities
Name and Principal Position Year Salary (1) Bonus(2) Other Annual Underlying All Other
Compensation(3) Options Compensation
- ------------------------------------------------------------------------------------------------------------------------------------
Richard H. Friedman 1999 $425,097 - $36,930 250,000 $5,710 (4) (5)
Chief Executive Officer 1998 $333,462 $212,500 $33,134 - (6) $5,217 (4)
1997 $275,000 - $12,000 - $4,710 (4)
Scott R. Yablon (7) 1999 $354,828 - $28,494 - $4,710 (4)
President & Chief Operating 1998 $207,500 $162,500 $6,678 1,000,000 (8) $4,605 (4)
Officer 1997 - - - - -
Barry A. Posner 1999 $223,128 - $13,619 - $4,710 (4)
Vice President, General Counsel 1998 $191,346 $100,000 $10,828 50,000 (9) $5,890 (4)
& Secretary 1997 $127,366 - $4,166 150,000 (8) $4,710 (4)
Edward J. Sitar (10) 1999 $176,867 - $12,000 - $30,217 (4) (11)
Chief Financial Officer 1998 $54,083 $15,000 $3,000 100,000 (8) -
& Treasurer 1997 - - - - -
Recie Bomar (12) 1999 $150,198 $0 $5,000 75,000 (8) $50,000 (11) (13)
Vice President of Sales 1998 - - - - -
1997 - - - - -
- -------------------------------
(1) The annualized base salaries of the Named Executive Officers for 1999 were
as follows: Mr. Friedman ($425,000), Mr. Yablon ($375,000), Mr. Posner
($230,000), Mr. Sitar ($180,000) and Mr. Bomar ($180,000).
(2) Please refer to the Long-Term Incentive Plan - Awards in the Last Fiscal
Year Table below for information on certain grants of Performance Units and
Performance Shares made during 1999.
(3) Represents automobile allowances, and for Messrs. Friedman, Yablon and
Posner reimbursement for club membership and related fees and expenses of
$18,930, $10,494 and 1,619, respectively in 1999.
(4) Represents life insurance premiums paid by the Named Executive Officer and
reimbursed by the Company.
(5) Represents tax return preparation expense paid by the Named Executive
Officer and reimbursed by the Company.
(6) The annual report for fiscal 1998 reflected a grant of 800,000 options to
Mr. Friedman. Such grant was subject to shareholder approval, which was not
obtained at the 1999 Annual Meeting. As such, the grant of 800,000 options
was cancelled.
(7) Mr. Yablon joined the Company as President and Chief Operating Officer in
May 1998.
(8) Represents options to purchase shares of the Company Common Stock from the
Company at market price on the date of grant.
(9) Represents options with respect to which the exercise price was repriced to
$6.50 per share on July 6, 1998.
(10) Mr. Sitar joined the Company as Vice President - Finance in June 1998.
(11) Represents relocation reimbursement expense received by Messrs. Sitar and
Bomar of $25,000 each.
(12) Mr. Bomar joined the Company as Director of Sales and Marketing in March
1999.
(13) Represents signing bonus received by Mr. Bomar for $25,000.
The following table sets forth information concerning stock option grants
made during fiscal 1999 to the Named Executive Officers. These grants are also
reflected in the Summary Compensation Table. In accordance with the rules and
regulations of the Commission, the hypothetical gains or "option spreads" for
each option grant are shown assuming compound annual rates of stock price
appreciation of 5% and 10% from the grant date to the expiration date. The
assumed rates of growth are prescribed by the Commission and are for
illustrative purposes only; they are not intended to predict the future stock
prices, which will depend upon market conditions and the Company's future
performance, among other things.
42
Option Grants in Last Fiscal Year
Individual Grants
----------------- Potential Realizable
Number of % of Total Gain Assuming
Securities Options Annual Rates of Stock
Underlying Granted to Exercise Price Appreciation
Options Employees in Price Expiration for Option Term
--------------------------
Name Granted 1999 ($/share) Date 5% 10%
- ------------------------------------------------------------------------------------------------------------------------------------
Richard H. Friedman 42,194 (1) 6.75% $ 2.37 10/8/09 $ 46,051 $ 132,561
207,806 (1) 33.25% $ 2.16 10/8/09 $ 270,439 $ 696,504
Recie Bomar 75,000 (1) 12.00% $ 2.59 3/8/09 $ 122,342 $ 310,039
- ----------------------------------
(1) Such options become exercisable on the first three anniversaries of the
date of grant (10/11/99 for Mr. Friedman and 3/8/99 for Mr. Bomar).
The following table sets forth for each Named Executive Officer the number
of shares covered by both exercisable and unexercisable stock options held as of
December 31, 1999. Also reported are the values for "in-the-money" options,
which represent the difference between the respective exercise prices of such
stock options and $2.4380, the per share closing price of the MIM Common Stock
on December 31, 1999.
Aggregated Option Exercises In Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options at
Acquired on Options at Fiscal Year-End Fiscal Year-End (1)
Value ------------------------------------------------------------------------
Name Exercise # Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------------
Richard H. Friedman (2) - - - 250,000 - $60,514.27
Scott R. Yablon (2) - - 770,000 250,000 - -
Barry Posner (2) - - 66,667 133,333 - -
Edward J. Sitar (2) - - 33,334 66,666 - -
Recie Bomar (2) - - - 75,000 - -
- -----------------------------
(1) Except as indicated, none of the options were "in the money".
(2) Indicated options are to purchase shares of Common Stock from the Company.
The following table sets forth for each Named Executive Officer the number
of performance units and restricted shares of Common Stock granted by the
Company during the year ended December 31, 1999. In addition, for each award,
the table also sets forth the related maturation period and future payments
expected to be made under varying circumstances.
43
Long-Term Incentive Plan -- Awards in Last Fiscal Year
Number of Performance Estimated Future Payments Under
Number of or Period Non-Stock Price-Based Plans
Shares, Units Until Maturation --------------------------------------------------
Name or Rights or Payment Threshold Target Maximum
- -------------------------------------------------------------------------------------------------------------------
Richard Friedman 200,000 (1) 12/31/01 $ 2,000,000 $ 5,000,000 $ 8,000,000
Scott R. Yablon 150,000 (2) 12/31/01 $ 1,500,000 $ 3,750,000 $ 6,000,000
200,000 (3) 12/31/06 $ 512,500 $ 512,500 $ 512,500
Barry A. Posner 10,000 (4) 12/31/01 $ 100,000 $ 250,000 $ 400,000
60,000 (5) 12/31/06 $ 172,500 $ 172,500 $ 172,500
Edward J. Sitar 2,500 (4) 12/31/01 $ 25,000 $ 62,500 $ 100,000
15,000 (5) 12/31/06 $ 43,125 $ 43,125 $ 43,125
Recie Bomar 5,000 (2) 12/31/01 $ 50,000 $ 125,000 $ 200,000
25,000 (3) 12/31/06 $ 64,027 $ 64,027 $ 64,027
- -----------------------------
(1) Represents performance units granted to the indicated individual on
October 11, 1999. The performance units vest and become payable upon the
achievement by the Company of certain specified levels of after-tax net
income in fiscal 2001. Upon vesting, the performance units are payable
in two equal installments after the earliest occurs (I) the individual's
Date of Termination and (II) a Change of Control (each as defined in his
Performance Units Agreement) as follows: (a) $10 per unit upon the
Company's achievement of a threshold level of after-tax net income in
fiscal 2001; (b) $25 per unit upon the Company's achievement of a target
level of after-tax net income in fiscal 2001; and (c) $40 per unit upon
the Company's achievement of a maximum level of after-tax net income in
fiscal 2001.
(2) Represents performance units granted to the indicated individual on June
1, 1999. The performance units vest and become payable upon the
achievement by the Company of certain specified levels of after-tax net
income in fiscal 2001. Upon vesting, the performance units are payable
in two equal installments after the earliest occurs (I) the individual's
Date of Termination and (II) a Change of Control (each as defined in his
Performance Units Agreement) as follows: (a) $10 per unit upon the
Company's achievement of a threshold level of after-tax net income in
fiscal 2001; (b) $25 per unit upon the Company's achievement of a target
level of after-tax net income in fiscal 2001; and (c) $40 per unit upon
the Company's achievement of a maximum level of after-tax net income in
fiscal 2001.
(3) Represents restricted shares of Common Stock issued by the Company to
the indicated individuals on June 1, 1999. The restricted shares are
subject to restrictions on transfer and encumbrance through December 31,
2006 and are automatically forfeited to the Company upon termination of
the grantee's employment with the Company prior to December 31, 2006.
The restrictions to which the restricted shares are subject may lapse
prior to December 31, 2006 in the event that the Company achieves
certain specified levels of earnings per share in fiscal 2001 or 2002.
The indicated individual possesses voting rights with respect to the
restricted shares, but is not entitled to receive dividend or other
distributions, if any, paid with respect to the restricted shares. The
values shown in the table reflect the value of shares based on the last
sale price of the Common Stock on the date of grant ($2.5625). The last
sale price of the Common Stock on December 31, 1999 was $2.4375 per
share.
(4) Represents performance units granted to the indicated individual on
March 1, 1999. The performance units vest and become payable upon the
achievement by the Company of certain specified levels of after-tax net
income in fiscal 2001. Upon vesting, the performance units are payable
in two equal installments after the earliest occurs (I) the individual's
Date of Termination and (II) a Change of Control (each as defined in his
Performance Units Agreement) as follows: (a) $10 per unit upon the
Company's achievement of a threshold level of after-tax net income in
fiscal 2001; (b) $25 per unit upon the Company's achievement of a target
level of after-tax net income in fiscal 2001; and (c) $40 per unit upon
the Company's achievement of a maximum level of after-tax net income in
fiscal 2001.
(5) Represents restricted shares of Common Stock issued by the Company to
the indicated individuals on March 1, 1999. The restricted shares are
subject to restrictions on transfer and encumbrance through December 31,
2006 and are automatically forfeited to the Company upon termination of
the grantee's employment with the Company prior to December 31, 2006.
The restrictions to which the restricted shares are subject may lapse
prior to December 31, 2006 in the event that the Company achieves
certain specified levels of earnings per share in fiscal 2001 or 2002.
The indicated individual possesses voting rights with respect to the
restricted shares, but is not entitled to receive dividend or other
distributions, if any, paid with respect to the restricted shares. The
values shown in the table reflect the value of shares based on the last
sale price of the Common Stock on the date of grant ($2.8750). The last
sale price of the Common Stock on December 31, 1999 was $2.4375 per
share.
44
Compensation of Directors
Directors who are not officers of the Company ("Outside Directors") receive
fees of $1,500 per month and $500 per in person meeting of the Company's Board
and any committee thereof and are reimbursed for expenses incurred in connection
with attending such meetings. In addition, each Outside Director joining the
Company since the adoption of the Company's 1996 Non-Employee Directors Stock
Incentive Plan as amended (the "Directors Plan") receives options to purchase
20,000 shares of the Company Common Stock under that Plan. Directors who are
also officers of the Company are not paid any director fees.
The Directors Plan was adopted in July 1996 to attract and retain qualified
individuals to serve as non-employee directors of the Company, 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 grant of non-qualified stock options
to purchase 20,000 shares of Common Stock to non-employee directors joining the
Company since the adoption of the Directors Plan. The exercise price of such
options is equal to the fair market value of Common Stock on the date of grant.
Options granted under the Directors Plan generally vest over three years. A
reserve of 300,000 shares of the Company Common Stock has been established for
issuance under the Directors Plan, which includes the original 100,000 shares
plus 200,000 that were approved at the Company's 1999 Annual Meeting of
Stockholders.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Company's Board administers the Company's
stock incentive plans and makes recommendations to the Company's Board regarding
executive officer compensation matters, including policies regarding the
relationship of corporate performance and other factors to executive
compensation. During 1999, the following persons served as members of the
Committee: Messrs. Cirillo, Luzzi and DiFazio, none of whom is or ever has been
an officer or employee of the Company. Until June 1999, Mr. Cirillo was a
partner with the law firm of Rogers & Wells, LLP, which served as the Company's
outside counsel. Mr. Cirillo became a partner with the law firm of King &
Spalding in June 1999 and King & Spalding began to serve as the Company's
outside general counsel at that time.
Compensation Committee Report On Executive Compensation
The Company believes that a strong link should exist between executive
compensation and management's success in maximizing shareholder value. This
belief was adhered to in 1999 by implementing both short-term and long-term
incentive executive compensation programs in order to provide competitive
compensation, strong incentives for the executives to stay with the Company and
deliver superior financial results, and significant potential rewards if the
Company achieves aggressive financial goals. The Compensation Committee's role
and responsibilities involve the development and administration of executive
compensation policies and programs that are consistent with, linked to, and
supportive of the basic strategic objective of maximizing shareholder value,
while taking into consideration the activities and responsibilities of
management.
Early in 1998, management of the Company dramatically changed with the
departure of the Company's then Vice-Chairman and of the then Chairman and Chief
Executive Officer, the appointment of Mr. Friedman as the new Chairman and Chief
Executive Officer, the recruitment of a new President, and the necessary
restructuring of the business to position the Company for the future. It became
a high priority of the entire Board to pursue two major objectives
simultaneously: (1) to secure a long-term agreement with the new Chief Executive
Officer, and (2) to develop an aggressive executive and key employee
compensation program for the remainder of the senior management.
The Board engaged the professional services of an outside consultant to
review the existing compensation programs and to assist in developing the
desired program. The consultant found that while some of the executive salaries
were within a competitive range, the executive bonus opportunities were below
the level that would be considered appropriate. The consultant further reported
45
that the long-term compensation portion of the program should have been a more
balanced combination of performance units, performance shares and stock options
instead of relying solely on stock options for long-term incentive as the
Company had done in the past.
The Board directed its Compensation Committee, consisting of Messrs.
Cirillo, DiFazio and Luzzi (none of whom is an officer or employee of the
Company), to work with that consultant and to develop and adopt a total
compensation program focused on maximizing shareholder value. At its meeting in
December 1998, the Compensation Committee adopted the substantive compensation
provisions of a new five-year employment agreement to be entered into with Mr.
Friedman as well as the 1998 Total Compensation Program for Key Employees for
other senior management. These actions were based on the recommendation of the
outside consultant and an internal review of the Chief Executive Officer's
recommendations regarding participation and appropriate grants of units, shares
and options. Grants effecting the Chief Executive Officer's recommendations, as
adopted by the Compensation Committee were awarded in December 1998, March 1999
and June 1999.
A proposal requiring stockholder approval of the employment agreement with
Mr. Friedman was included in the Company's Proxy Statement with respect to its
1999 Annual Meeting of Stockholders (see "Employment Agreements" below). In
addition, the Total Compensation Program required certain changes to, and
additional authorized shares under, the Company's 1996 Amended and Restated
Stock Incentive Plan ("Plan"). A proposal requesting stockholder approval of a
further Amended and Restated Stock Incentive Plan was approved by the
stockholders at the 1999 Annual Meeting of Stockholders. Such proposal was not
approved.
Compensation Philosophy and Elements
The Compensation Committee adheres to four principles in discharging its
responsibilities, which have been applied through its adoption in December 1998
of the 1998 Total Compensation Program for Key Employees ("Program"). First, the
majority of the annual bonus and long-term compensation for management and key
employees should be in large part at risk, with actual compensation levels
corresponding to the Company's actual financial performance. Second, over time,
incentive compensation of the Company's executives should focus more heavily on
long-term rather than short-term accomplishments and results. Third,
equity-based compensation and equity ownership expectations should be used on an
increasing basis to provide management with clear and distinct links to
shareholder interests. Fourth, the overall compensation programs should be
structured to ensure the Company's ability to attract, retain, motivate, and
reward those individuals who are best suited to achieving the desired
performance results, both long and short-term, while taking into account the
duties and responsibilities of the individual.
The Program provides the Compensation Committee with the discretion to pay
cash bonuses and grant (i) performance unit payable in cash upon achievement of
certain performance criteria established by the Compensation Committee, (ii)
performance shares which are subject to restrictions on transfer and encumbrance
for a specified period of time, but which restrictions may lapse early upon
achievement of certain performance criteria established by the Compensation
Committee and (iii) both non-qualified and incentive stock options.
The Program provides management and employees with the opportunity for
significant cash bonuses and long-term rewards if the corporate, department and
individual objectives are achieved. Specifically, the key executives, may
receive significant bonuses if the Company's aggressive annual financial profit
plan and individual objectives are achieved. The maximum amount payable in any
given year to any one individual under the cash bonus and performance unit
portions of the Program is $1,000,000. Any amounts in excess of such threshold
will be deferred to later years. These outside limits are not expected awards
but are set pursuant to regulations concerning "performance-based" compensation
plans in Code Section 162(m) to enable the Compensation Committee "negative
discretion" in determining the actual bonus or performance unit awards.
Compensation of the Chief Executive Officer
In considering the appropriate salary, bonus opportunity, and long-term
incentive for the current Chief Executive Officer, the Compensation Committee
considered his unique role during 1998 and 1999 and his expected role over the
next four years. The Compensation Committee determined that in a very real
sense, the Company would have faced extreme difficulty in 1998 and 1999, were it
not for the fact that Mr. Friedman accepted the challenge to replace both the
former Vice-Chairman and the former Chairman and Chief Executive Officer and
give the investment community and the Company's stockholders reassurance that
the Company would overcome the problems faced in its primary market. The Board
further determined that Mr. Friedman's demonstrated commitment through the
purchase of a large block of stock, his active and effective involvement in
restructuring the business, and his recruitment and leadership of an aggressive
team were assets that should be protected by the Company. The Committee's
negotiation of a new, performance-driven, five year agreement was based on this
recognition of his key role in maximizing future shareholder value.
46
New employment agreements have also been entered into with the Vice
President and General Counsel and Chief Financial Officer reflecting their
participation in the new Program. The President and Chief Operating Officer was
recruited in May 1998 and his employment agreement was negotiated at that time
and is described, along with his participation in the Program, in "Employment
Agreements" below.
Code Section 162(m)
The Chief Executive Officer's total compensation package under his new
employment agreement is believed to qualify as "performance-based" compensation
with the meaning of Code Section 162(m). The Total Compensation Program was
adopted by a Compensation Committee composed entirely of outside directors and
Mr. Friedman's agreement was approved by the entire Board of Directors. In order
to qualify for favorable treatment under Code Section 162(m), Mr. Friedman's
amended Employment Agreement was structured such that he will not receive cash
compensation in excess of $1,000,000 in any one year under the cash bonus
portion of the Program. The performance units, performance shares and stock
options (other than Mr. Yablon's, as discussed above) for all persons were
granted from shares authorized under the plan, but the form of the awards
required certain amendments to the Plan and authorization of additional shares,
which were approved by the stockholders at the 1999 Annual Meeting of
Stockholders.
MIM CORPORATION COMPENSATION COMMITTEE
Richard A. Cirillo
Louis DiFazio, Ph.D.
Louis A. Luzzi, Ph.D.
47
Employment Agreements
In December 1998, Mr. Friedman entered in to an employment agreement with
the Company (the "1998 Agreement"). The 1998 Agreement did not receive the
required stockholder approval at the Company's 1999 Annual Meeting of
Stockholders. Under the 1998 Agreement, Mr. Friedman was granted options to
purchase 800,000 shares of Common Stock at an exercise price of $4.50 per share
(the market price on December 2, 1998, the date of grant), 200,000 performance
units and 300,000 restricted shares. Such grants were canceled upon the failure
to obtain stockholder approval. Based upon the recommendations of the
Compensation Committee, the 1998 Agreement was amended on October 11, 1999 (the
1998 Agreements as amended, the "Amended Agreement"). The Amended Agreement
provides for Mr. Friedman's employment as the Chairman and Chief Executive
Officer for a term of employment through November 30, 2003 (unless earlier
terminated) at an initial base annual salary of $425,000. Mr. Friedman is
entitled to receive certain fringe benefits, including an automobile allowance,
and is also eligible to participate in the Company's executive bonus program.
Under the Amended Agreement, Mr. Friedman was granted incentive stock options to
purchase 42,194 shares of Common Stock at an exercise price of $2.37 per share
and non-qualified stock options to purchase 207,806 shares of Common Stock at an
exercise price of $2.16 (the market price on October 8, 1999, the date of grant)
and 200,000 performance units. See "Long Term Incentive Plan - Awards in Last
Fiscal Year" above for a description of the terms and conditions applicable to
the performance units.
If Mr. Friedman's employment is terminated early due to his death or
disability, (i) all vested options may be exercised by his estate for one year
following termination, (ii) all performance units shall vest and become
immediately payable at the accrued value measured at the end of the fiscal year
following his termination; provided, however, that should Mr. Friedman remain
disabled for six months following his termination for disability, he shall also
be entitled to receive for a period of two years following termination, his
annual salary at the time of termination and continuing coverage under all
benefit plans and programs to which he was previously entitled. If Mr.
Friedman's employment is terminated early by the Company without cause, (i) Mr.
Friedman shall be entitled to receive, for the longer of two years following
termination or the period remaining in his term of employment under the
agreement, his annual salary at the time of termination (less the net proceeds
of any long term disability or workers' compensation benefits) and continuing
coverage under all benefit plans and programs to which he was previously
entitled, (ii) all unvested options shall become vested in any other pension or
deferred compensation plans, and (iii) any performance units to which he would
have been entitled at the time of his termination shall become vested and
immediately payable at the then applicable target rate. If the Company
terminates Mr. Friedman for cause, he shall be entitled to receive only salary,
bonus and other benefits earned and accrued through the date of termination. If
Mr. Friedman terminates his employment for good reason, (i) Mr. Friedman shall
be entitled to receive, for a period of two years following termination, his
annual salary at the time of termination and continuing coverage under all
benefit plans and programs to which he was previously entitled, (ii) all
unvested options shall become vested and immediately exercisable in accordance
with the terms of the options and Mr. Friedman shall become vested in any other
pension or deferred compensation plans, and (iii) all performance units granted
to Mr. Friedman shall become vested and immediately payable at the then
applicable maximum rate. Upon the company undergoing certain specified changes
of control which result in his termination by the Company or a material
reduction in his duties, (i) Mr. Friedman shall be entitled to receive, for the
longer of three years following termination or the period remaining in his term
of employment under the agreement, his annual salary at the time of termination
and continuing coverage under all benefits plans and programs to which he was
previously entitled, (ii) all unvested options shall become vested and
immediately exercisable in accordance with the terms of the options and Mr.
Friedman shall become vested in any other pension or deferred compensation
plans, and (iii) all performance units granted to Mr. Friedman shall become
vested and immediately payable at the then applicable maximum rate; provided
that if the change of control is approved by two-thirds of the Board of
Directors, the performance units shall become vested and payable at the accrued
value measured at the prior fiscal year end.
During the term of employment and for one year following the later of his
termination or his receipt of severance payments, Mr. Friedman may not directly
or indirectly (other than with the Company) participate in the United States in
any pharmacy benefit management business or other business which is at any time
a material part of the Company's overall business. Similarly, for a period of
two years following termination, Mr. Friedman may not solicit or otherwise
interfere with the Company's relationship with any present or former employee or
customer of the Company.
48
In April 1998, Mr. Yablon entered into an employment agreement with the
Company which provides for his employment as the Company's President and Chief
Operating Officer for a term of employment through April 30, 2001 (unless
earlier terminated) at an initial base annual salary of $325,000. Under the
agreement, Mr. Yablon is entitled to receive certain fringe benefits, including
automobile and life insurance allowances and is also eligible to participate in
the Company's executive bonus program. Under the agreement, Mr. Yablon was
granted options to purchase 1,000,000 shares of Common Stock at an exercise
price of $4.50 (the market price on the date of grant). Options with respect to
500,000 shares vested immediately and the remaining options vest in two equal
installments on the first two anniversary dates of the date of grant. See "Long
Term Incentive Plan - Awards in Last Fiscal Year" above for a description of
certain grants of performance units and restricted shares to Mr. Yablon in June
1999 and a summary of the terms and conditions applicable to the performance
units and restricted shares. If Mr. Yablon's employment is terminated early due
to disability, or by the Company without cause, or by Mr. Yablon with cause, the
Company is obligated to continue to pay his salary and fringe benefits for one
year following such termination. Upon termination, Mr. Yablon is entitled to
substantially the same entitlements as described above with respect to
performance units as Mr. Friedman. In addition, Mr. Yablon's restricted shares
shall vest and become immediately transferable without restriction upon the
occurrence of the following termination events: (i) Mr. Yablon is terminated
early by the Company without cause, (ii) Mr. Yablon terminates his employment
for good reason, or (iii) after certain changes of control of the Company which
results in Mr. Yablon's termination by the Company or a material reduction of
his duties with the Company. During the term of employment and for one year
after the later of the termination of employment or severance payments, Mr.
Yablon is subject to substantially the same restrictions on competition as
described above with respect to Mr. Friedman.
In March 1999, Mr. Posner entered into an employment agreement with the
Company which provides for his employment as the Company's Vice President and
General Counsel for a term of employment through February 28, 2004 (unless
earlier terminated) at an initial base annual salary of $230,000. Under the
agreement, Mr. Posner is entitled to receive certain fringe benefits, including
an automobile allowance, and is also eligible to participate in the Company's
executive bonus program. Under the agreement, Mr. Posner was granted options to
purchase 100,000 shares of Common Stock at an exercise price of $4.50 (the
market price on December 2, 1998, the date of grant). The options vest in three
equal installments on the first three anniversaries of the date of grant. See
"Long Term Incentive Plan - Awards in Last Fiscal Year" above for a description
of certain grants of performance units and restricted shares to Mr. Posner in
March 1999 and a summary of the terms and conditions applicable to the
performance units and restricted shares. Upon termination, Mr. Posner is
entitled to substantially the same entitlements as described above as Mr.
Friedman. In addition, Mr. Posner's restricted shares shall vest and become
immediately transferable without restriction upon the occurrence of the
following termination events: (i) Mr. Posner is terminated early by the Company
without cause, (ii) Mr. Posner terminates his employment for good reason, or
(iii) after certain changes of control of the Company which results in Mr.
Posner's termination by the Company or a material reduction of his duties with
the Company. In addition, Mr. Posner is subject to the same restrictions on
competition and non-interference as described above with respect to Mr.
Friedman.
In March 1999, Mr. Sitar entered into an employment agreement with the
Company, which provides for his employment as Chief Financial Officer for a term
of employment through February 28, 2004 (unless earlier terminated) at an
initial base annual salary of $180,000. Under the agreement, Mr. Sitar is
entitled to receive certain fringe benefits, including an automobile allowance,
and is also eligible to participate in the Company's executive bonus program.
Under the agreement, Mr. Sitar was granted options to purchase 50,000 shares of
Common Stock at an exercise price of $4.50 (the market price on the date of
grant). The options vest in three equal installments on the first three
anniversaries of the date of grant. See "Long Term Incentive Plan - Awards in
Last Fiscal Year" above for a description of certain grants of performance units
and restricted shares to Mr. Sitar in March 1999 and a summary of the terms and
conditions applicable to the performance units and restricted shares. Under the
agreement, upon termination, Mr. Sitar is entitled to substantially the same
entitlements as described above with respect to Messrs. Friedman and Posner. In
addition, Mr. Sitar is subject to the same restrictions on competition and
non-interference as described above with respect to Mr. Friedman.
In February 1999, Mr. Bomar entered in to an employment letter agreement
with the Company which provides for his employment as Vice President - Sales and
Marketing until terminated by the Company or Mr. Bomar at an initial base annual
salary of $180,000. Under the agreement, Mr. Bomar is entitled to receive
certain fringe benefits, including automobile and life insurance allowances and
is also eligible to participate in the Company's executive bonus program. Under
the agreement, Mr. Bomar was granted options to purchase 75,000 shares of Common
Stock at an exercise price of $2.59 per share (the market price on the date of
grant). The options vest in three equal installments on the first three
49
anniversaries of the date of grant. See "Long Term Incentive Plan - Awards in
Last Fiscal Year" above for a description of certain grants of performance units
and restricted shares to Mr. Bomar in June 1999 and a summary of the terms and
conditions applicable to the performance units and restricted shares. Under the
agreement, if, within three months following certain changes of control, Mr.
Bomar is terminated by the Company or Mr. Bomar elects to terminate his
employment due to a material reduction in his duties with the Company, he is
entitled to receive an amount equal to six months salary and all outstanding
unvested options held by Mr. Bomar shall become immediately exercisable. In
addition, in the event that Mr. Bomar is terminated without cause or terminates
his employment for good reason following a change of control of the Company, (i)
all performance units granted to Mr. Bomar shall become vested and immediately
payable at the then applicable maximum rate and (ii) all restricted shares
issued to Mr. Bomar shall vest and become immediately payable. In addition. Mr.
Bomar is subject to the same restrictions on competition and non-interference as
described above with respect to Mr. Friedman.
Stockholder Return Performance Graph
The Company's Common Stock first commenced trading on the Nasdaq on August
15, 1996, in connection with the Company's Offering. The graph set forth below
compares, for the period of August 15, 1996 through March 3, 2000, the total
cumulative return to holders of the Company's Common Stock with the cumulative
total return of the Nasdaq Stock Market (U.S.) Index.
[GRAPHIC OMITTED]
*$100 invested on 8/15/96 in stock or index-including reinvestment of dividends,
fiscal year ending December 31.
Item 12. Common Stock Ownership by Certain Beneficial Owners and Management
Except as otherwise set forth below, the following table lists, to the
Company's knowledge, as of March 15, 2000, the beneficial ownership of the
Company's Common Stock by (1) each person or entity known to the Company to own
beneficially five percent (5%) or more of the Company's Common Stock; (2) each
of the Company's directors; (3) each of the Named Executive Officers of the
Company; and (4) all directors and executive officers of the Company as a group.
Such information is based upon information provided to the Company by such
persons.
50
Name and/or Address of Beneficial Owner Number of Shares Percent of
Beneficially Owned (1)(2) Class
Richard H. Friedman 1,500,000 (3) 7.9%
100 Clearbrook Road
Elmsford, NY 10523
Scott R. Yablon 1,220,000 (4) 6.1%
100 Clearbrook Road
Elmsford, NY 10523
Barry A. Posner 128,267 (5) *
100 Clearbrook Road
Elmsford, NY 10523
Edward J. Sitar 48,334 (6) *
100 Clearbrook Road
Elmsford, NY 10523
Recie Bomar 50,000 (7) *
100 Clearbrook Road
Elmsford, NY 10523
Richard A. Cirillo 6,667 (8) *
c/o King & Spalding
1185 Avenue of the Americas
New York, NY 10036
E. David Corvese 1,762,106 9.3%
25 North Road
Peace Dale, RI 02883
Louis DiFazio, Ph.D. 9,167 (9) *
Route 206
Princeton, NJ 08542
Michael R. Erlenbach 1,135,699 (10) 6.0%
6438 Huntington
Solon, OH 44139
Michael Kooper 6,667 (11) *
770 Lexington Avenue
New York, NY 10021
Louis A. Luzzi, Ph.D. 21,800 (12) *
University of Rhode Island
College of Pharmacy
Forgerty Hall
Kingston, RI 02881
51
Name and/or Address of Beneficial Owner Number of Shares Percent of
Beneficially Owned (1)(2) Class
All directors and executive officers as a group 3,042,636 (13) 14.9%
(12 persons)
- ---------------------
* Less than 1%.
(1) The inclusion herein of any shares as beneficially owned does not
constitute an admission of beneficial ownership of those shares. Except
as otherwise indicated, each person has sole voting power and sole
investment power with respect to all shares beneficially owned by such
person.
(2) Shares deemed beneficially owned by virtue of the right of an individual
to acquire them within 60 days after March 1, 1999, upon the exercise of
an option and shares with restrictions on transfer and encumbrance, with
respect to which the owner has voting power, are treated as outstanding
for purposes of determining beneficial ownership and the percentage
beneficially owned by such individual.
(3) Excludes 250,000 shares subject to the unvested portion of options held
by Mr. Friedman.
(4) Includes 970,000 shares issuable upon exercise of the vested portion of
options, 250,000 shares issuable upon exercise of options scheduled to
vest on April 17, 2000, and 200,000 shares of Common Stock subject to
restrictions on transfer and encumbrance through December 31, 2006, with
respect to which Mr. Yablon possesses voting rights. See "Long Term
Incentive Plan - Awards in Last Fiscal Year" in Item 11 of this Annual
Report for a description of terms and conditions relating to these
restricted shares.
(5) Includes 66,667 shares issuable upon exercise of the vested portion of
options and 60,000 shares of Common Stock subject to restrictions on
transfer and encumbrance through December 31, 2006, with respect to which
Mr. Posner possesses voting rights. See "Long Term Incentive Plan -
Awards in Last Fiscal Year" in Item 11 of this Annual Report for a
description of terms and conditions relating to these restricted shares.
Excludes 133,333 shares subject to the unvested portion of options held
by Mr. Posner.
(6) Includes 33,334 shares issuable upon exercise of the vested portion of
options and 15,000 shares of Common Stock subject to restrictions on
transfer and encumbrance through December 31, 2006, with respect to which
Mr. Sitar possesses voting rights. See "Long Term Incentive Plan - Awards
in Last Fiscal Year" in Item 11 of this Annual Report for a description
of terms and conditions relating to these restricted shares. Excludes
66,666 shares subject to the unvested portion of options held by Mr.
Sitar.
(7) Includes 25,000 shares issuable upon exercise of the vested portion of
options and 25,000 shares of Common Stock subject to restrictions on
transfer and encumbrance through December 31, 2006, with respect to which
Mr. Bomar possesses voting rights. See "Long Term Incentive Plan - Awards
in Last Fiscal Year" in Item 11 of this Annual Report for a description
of terms and conditions relating to these restricted shares. Excludes
50,000 shares subject to the unvested portion of options held by Mr.
Bomar.
(8) Consists of 6,667 shares issuable upon exercise of the vested portion of
options. Excludes 13,333 shares subject to the unvested portion of
options.
(9) Consists of 6,667 shares issuable upon exercise of the vested portion of
options and 2,500 shares owned directly by Dr. DiFazio. Excludes 13,333
shares subject to the unvested portion of options.
(10) The Michael R. Erlenbach Flint Trust holds 810,730 shares of Common
Stock. Mr. Erlenbach and John M. Slivka, as trustee, share voting and
dispositive power with respect to these shares. In addition, Mr.
Erlenbach beneficially owns 324,969 shares of Common Stock.
(11) Consists of 6,667 shares issuable upon exercise of the vested portion of
options. Excludes 13,333 shares subject to the unvested portion of
options.
(12) Includes 20,000 shares issuable upon the exercise of the vested portion
of options. Dr. Luzzi and his wife share voting and investment power over
1,800 shares of Common Stock.
(13) Includes 1,228,736 shares issuable upon exercise of the vested portion of
options and 301,600 shares of Common Stock subject to restrictions on
transfer and encumbrance. See footnotes 2 through 12 above.
Item 13. Certain Relationships and Related Transactions
In April 1999, the Company loaned to Mr. Friedman, its Chairman and Chief
Executive Officer, $1.7 million evidenced by a promissory note secured by a
pledge of 1.5 million shares of the Company's Common Stock. The note requires
repayment of principal and interest by March 31, 2004. Interest accrues monthly
at the "Prime Rate" (as defined in the note) then in effect. The loan was
approved by the Company's Board of Directors in order to provide funds with
which such executive officer could pay the Federal and state tax liability
associated with the exercise of stock options representing 1.5 million shares of
the Company's Common Stock in January 1998.
52
At December 31, 1999, Alchemie Properties, LLC, a Rhode Island limited
liability company of which Mr. E. David Corvese, the brother of Russel J.
Corvese, is the manager and principal owner ("Alchemie"), was indebted to the
Company in the amount of $280,629 represented a loan received from the Company
in 1994 in the original principal amount of $299,000. The loan bear interest at
a 10% per annum, with interest payable monthly and principal payable in full on
or before December 1, 2004, and secured by a lien on Alchemie's rental income
from the Company at one of its facilities.
During 1999, the Company paid $55,500 in rent to Alchemie pursuant to a
ten-year lease entered into in December 1994 for approximately 7,200 square feet
of office space in Peace Dale, Rhode Island.
At December 31, 1999, MIM Holdings was indebted to the company in the amount
of $456,000 respecting loans received from the company during 1995 in the
aggregate principal amount of $1,078,000. The Company holds a $456,000
promissory note from MIM Holdings due March 31, 2001 that bears interest at 10%
per annum. Interest generally is payable quarterly, although in December 1996
the note was amended to extend the due date to September 30, 1997, for all
interest accruing from January 1, 1996, to said date. This note is guaranteed by
Mr. E. David Corvese. The remaining $622,000 of indebtedness will not be repaid
and was recorded as a stockholder distribution during the first half of 1996.
Effective March 31, 1998, Mr. E. David Corvese terminated his employment and
resigned all of his positions with the Company and agreed not to stand for
election to the Board at the 1998 Annual Meeting of Stockholders. Pursuant to a
Separation Agreement dated March 31, 1998, the Company agreed to pay Mr. Corvese
an aggregate of $325,000 in 12 equal monthly installments and to continue to
provide Mr. Corvese and his dependents with medical and dental insurance
coverage for those 12 months. Under the Separation Agreement, Mr. Corvese is
restricted from competing with the company or soliciting its employees or
customers for one year from the last day he received severance payments from the
Company. During 1999, the Company paid Mr. Corvese a total of $91,250 in
severance. These payments and benefits terminated on March 31, 1999.
In connection with the Continental acquisition in August 1998, the three
largest shareholders of Continental ("Continental Shareholders"), including Mr.
Michael Erlenbach (see Item 12), entered into an indemnification agreement with
the Company, whereby the Continental Shareholders, severally and not jointly,
agreed to indemnify and hold the Company harmless from and against certain
claims threatened against Continental. Under the agreement, the Continental
Shareholders are responsible for all amounts payable in connection with the
threatened claims over and above $100,000. The indemnification obligations of
the Continental Shareholders terminated on December 31, 1999, except with
respect to certain indemnifiable claims that the Company previously notified
them. In addition, the Continental Shareholders entered into a pledge agreement
with the Company, whereby they granted the Company security interests in an
aggregate of 487,453 shares (in proportion to their respective ownership
percentages) of Common Stock received by them in connection with the Continental
acquisition in order to secure their respective obligations under the
indemnification agreement. In December 1999, the Company notified the
Continental Shareholders of the existence of certain potential indemnifiable
claims by the Company against the Continental Shareholders.
On February 9, 1999, the Company entered into an agreement with Mr. E. David
Corvese to purchase, in a private transaction not reported on NASDAQ, 100,000
shares of Common Stock from Mr. E. David Corvese at $3.375 per share. The last
sale price per share of the Common Stock on February 9, 1999, was $3.50.
As discussed above, under Section 145 of the Delaware General Corporation
Law and the Company's By-Laws, under certain circumstances the Company may be
obligated to indemnify Mr. E. David Corvese as well as Michael J. Ryan, a former
officer of one of the Company's subsidiaries, in connection with their
respective involvement in the Federal and State of Tennessee investigation of
which they are the subject. In addition, until the Board determines as to
whether or not either or both Messrs. Corvese and Ryan are so entitled to
indemnification, the Company is obligated under Section 145 and its By-Laws to
advance the costs of defense to such persons; however, if the Board determines
that either or both of these former officers are not entitled to
indemnification, such individuals would be obligated to reimburse the Company
for all amounts so advanced. During 1999, the Company advanced $1,120,971 for
Messrs. Corvese and Ryan's and legal costs, in connection with the matter. The
Company is not presently in a position to assess the likelihood that either or
both of these former officers will be entitled to such indemnification and
advancement of defense costs or to estimate the total amount that it may have to
pay in connection with such obligations or the time period over which such
amounts may have to be advanced. No assurance can be given, however, that the
Company's obligations to either or both of these former officers would not have
a material adverse effect on the Company's results of operations or financial
condition.
53
PART IV
Item 14. 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 Public Accountants.............................................................18
Consolidated Balance Sheets as of December 31, 1999 and 1998.........................................19
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1999...........20
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1999, 1998 and 1997..................................................................21
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997...........22
Notes to Consolidated Financial Statements...........................................................24
2. Financial Statement Schedules:
II. Valuation and Qualifying Accounts for the years ended December 31, 1999, 1998 and
1997........................................................................................38
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.
54
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....................................(6)(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..............................(7)(Exh. 3(ii))
4.1 Specimen Common Stock Certificate............................................(6)(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.............................................(10) (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 Promissory Notes of E. David Corvese and Nancy
Corvese in favor of Pro-Mark Holdings, Inc. dated
June 15, 1994................................................................(1)(Exh. 10.9)
10.5 Amendment to Promissory Note among E. David
Corvese, Nancy Corvese and Pro-Mark Holdings, Inc.
dated as of June 15, 1997....................................................(4)(Exh. 10.1)
10.6 Amendment to Promissory Note among E. David
Corvese, Nancy Corvese and Pro-Mark Holdings, Inc.
dated as of June 15, 1997....................................................(4)(Exh. 10.2)
10.7 Promissory Note of Alchemie Properties, LLC in
favor of Pro-Mark Holdings, Inc. dated August 14,
1994.........................................................................(1)(Exh. 10.10)
10.8 Promissory Note of MIM Holdings, LLC in favor of
MIM Strategic, LLC dated December 31, 1996...................................(2)(Exh. 10.12)
10.9 Promissory Note of MIM Holdings, LLC in favor of
MIM Strategic, LLC dated March 31, 1996......................................(1)(Exh. 10.11)
10.10 Promissory Note of MIM Holdings, LLC in favor of
MIM Strategic, LLC dated December 31, 1996,
replacing Promissory Note of MIM Holdings, LLC in
favor of MIM Strategic, LLC dated March 31, 1996.............................(2)(Exh. 10.14)
55
10.11 Indemnity letter from MIM Holdings, LLC dated
August 5, 1996...............................................................(1)(Exh. 10.36)
10.12 Assignment from MIM Holdings, LLC to MIM
Corporation dated as of December 31, 1996....................................(2)(Exh. 10.43)
10.13 Guaranty of E. David Corvese in favor of MIM
Corporation dated as of December 31, 1996....................................(2)(Exh. 10.42)
10.14 Employment Agreement between MIM Corporation and
Richard H. Friedman dated as of December 1, 1998*...........................(10) (Exh.10.14)
10.15 Amendment No. 1 to Employment Agreement dated as
of May 15, 1998 between MIM Corporation and Barry
A. Posner*...................................................................(8)(Exh. 10.50)
10.16 Employment Agreement between MIM Corporation and
Barry A. Posner dated as of March 1, 1999*..................................(10) (Exh.10.17)
10.17 Employment Agreement dated as of April 17, 1998
between MIM Corporation and Scott R. Yablon*.................................(8)(Exh. 10.49)
10.18 Employment Agreement between MIM Corporation and
Edward J. Sitar dated as of March 1, 1999*..................................(10) (Exh.10.21)
10.19 Separation Agreement dated as of March 31, 1998
between MIM Corporation and E. David Corvese *...............................(7)(Exh.10.47)
10.20 Separation Agreement dated as of May 15, 1998
between MIM Corporation and John H. Klein *..................................(6)(Exh. 10.19)
10.21 Stock Option Agreement between E. David Corvese
and Leslie B. Daniels dated as of May 30, 1996*..............................(1)(Exh. 10.26)
10.22 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)
10.23 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)
10.24 Registration Rights Agreement-III between MIM
Corporation and John H. Klein and E. David Corvese
dated July 29, 1996*.........................................................(1)(Exh. 10.32)
10.25 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)
10.26 Registration Rights Agreement-V between MIM
Corporation and Richard H. Friedman and Leslie B.
Daniels dated July 31, 1996*.................................................(1)(Exh. 10.35)
10.27 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)
56
10.28 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*......................................(10) (Exh.10.31)
10.29 MIM Corporation 1996 Stock Incentive Plan, as
amended December 9, 1996*....................................................(2)(Exh. 10.32)
10.30 MIM Corporation 1996 Amended and Restated Stock
Incentive Plan, as amended December 2, 1998*................................(10) (Exh.10.33)
10.31 MIM Corporation 1996 Non-Employee Directors Stock
Incentive Plan*..............................................................(1)(Exh. 10.29)
10.32 Lease between Alchemie Properties, LLC and
Pro-Mark Holdings, Inc. dated as of December 1,
1994.........................................................................(1)(Exh. 10.27)
10.33 Lease Agreement between Mutual Properties
Stonedale L.P. and MIM Corporation dated April 23,
1997.........................................................................(5)(Exh.10.41)
10.34 Agreement between Mutual Properties Stonedale L.P.
and MIM Corporation dated as of April 23, 1997.............................. (5)(Exh.10.42)
10.35 Lease Amendment and Extension Agreement between
Mutual Properties Stonedale L.P. and MIM
Corporation dated December 10, 1997..........................................(5) (Exh.10.43)
10.36 Lease Amendment and Extension Agreement-II between
Mutual Properties Stonedale L.P. and MIM
Corporation dated March 27, 1998.............................................(5) (Exh.10.44)
10.37 Lease Agreement between Mutual Properties
Stonedale L.P. and Pro-Mark Holdings, Inc. dated
December 23, 1997............................................................(5) (Exh.10.45)
10.38 Lease Amendment and Extension Agreement between
Mutual Properties Stonedale L.P. and Pro-Mark
Holdings, Inc. dated March 27, 1998..........................................(5) (Exh.10.46)
10.39 Lease Agreement between Continental Managed
Pharmacy Services, Inc. and Melvin I. Lazerick
dated May 12, 1998..........................................................(10) (Exh.10.42)
10.40 Amendment No. 1 to Lease Agreement between
Continental Managed Pharmacy Services, Inc. and
Melvin I. Lazerick dated January 29, 1999...................................(10) (Exh.10.43)
10.41 Letter Agreement dated August 24, 1998 between
Continental Managed Pharmacy Services, Inc. and
Comerica Bank...............................................................(10) (Exh.10.44)
58
10.42 Letter Agreement dated January 28, 1997 between
Continental Managed Pharmacy Services, Inc. and
Comerica Bank...............................................................(10) (Exh.10.45)
10.43 Letter Agreement dated January 24, 1995 between
Continental Managed Pharmacy Services, Inc. and
Comerica Bank...............................................................(10) (Exh.10.46)
10.44 Additional Credit Agreement dated January 23, 1996
between Continental Managed Pharmacy Services,
Inc. and Comerica Bank......................................................(10) (Exh.10.47)
10.45 Guaranty dated August 24, 1998 between MIM
Corporation and Comerica Bank...............................................(10) (Exh.10.48)
10.46 Third Amended and Restated Master Revolving Note
dated August 24, 1998 by Continental Managed
Pharmacy Services, Inc. in favor of Comerica Bank...........................(10)(Exh.10.49)
10.47 Variable Rate Installment Note dated January 24,
1995 by Continental Managed Pharmacy Services,
Inc. in favor of Comerica Bank..............................................(10) (Exh.10.50)
10.48 Variable Rate Installment Note dated January 26,
1996 by Continental Managed Pharmacy Services,
Inc. in favor of Comerica Bank..............................................(10) (Exh.10.51)
10.49 Security Agreement (Equipment) dated January 24,
1995 by Continental Managed Pharmacy Services,
Inc. in favor of Comerica Bank..............................................(10) (Exh.10.52)
10.50 Security Agreement (Accounts and Chattel Paper)
dated January 24, 1995 by Continental Managed
Pharmacy Services, Inc. in favor of Comerica Bank...........................(10) (Exh.10.53)
10.51 Intercreditor Agreement dated January 24, 1995
between Continental Managed Pharmacy Services,
Inc. and Foxmeyer Drug Company..............................................(10) (Exh.10.54)
10.52 Indemnification Agreement dated August 13, 1998
among MIM Corporation, Roulston Investment Trust
L.P., Roulston Ventures L.P. and Michael R.
Erlenbach...................................................................(10) (Exh.10.55)
10.53 Pledge Agreement dated August 13, 1998 among MIM Corporation,
Roulston Investment Trust L.P.,
Roulston Ventures L.P. and Michael R. Erlenbach.............................(10) (Exh.10.56)
10.54 Stock Purchase Agreement dated February 9, 1999
between MIM Corporation and E. David Corvese................................(10) (Exh.10.57)
10.55 Commercial Term Promissory Note, dated April 14, 1999,
by Richard H. Friedman in favor of MIM Corporation..........................(11) (Exh.10.58)
10.56 Pledge Agreement, dated April 14, 1999, by Richard H.
Friedman in favor of MIM Corporation........................................(11) (Exh.10.59)
58
10.57 Amended and Restated 1996 Non-Employee Directors
Stock Incentive Plan (effective as of March 1, 1999)*.......................(11) (Exh.10.60)
10.58 Amendment No. 1 to Employment Agreement,
dated as of October 11, 1999 between
MIM Corporation an Richard H. Friedman*.....................................(12) (Exh.10.60)
10.59 Form of Performance Shares Agreement*.......................................(12) (Exh.10.61)
10.60 Form of Performance Units Agreement*........................................(12) (Exh.10.62)
10.61 Form of Non-Qualified Stock Option Agreement*...............................(12) (Exh.10.63)
10.62 Credit Agreement, dated as of February 4, 2000,
among MIM Health Plans, Inc., MIM Corporation,
the other Credit Parties signatories thereto,
the other credit parties signatories thereto and General
Electric Capital Corporation, for itself and as agent for
other lenders from time to time a party to the Credit Agreement.............(13) (Exh. 10)
21 Subsidiaries of the Company.................................................(14)
23 Consent of Arthur Andersen LLP..............................................(14)
27 Financial Data Schedule.....................................................(14)
- --------------------------------------------------------------------------------
(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
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1997.
(4) Incorporated by reference to the indicated exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997.
(5) 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.
(6) 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.
(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,
1998.
(8) 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.
(9) Incorporated by reference to the indicated exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,
1998.
59
(10) 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.
(11) 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.
(12) 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.
(13) Incorporated by reference to the indicated exhibit to the Company's
Current Report on Form 8-K filed on February 14, 2000.
(14) Filed herewith.
* Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K
and Regulation SK-601 ss. 10 (iii).
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the last quarter
of the fiscal year covered by this report.
Subsequent to the year-end, a Form 8-K was filed on February 14, 2000,
for period ending February 8, 2000, regarding the securance of a line of
credit with General Electric Capital Corporation.
61
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 30, 2000.
MIM CORPORATION
--------------------------
Edward J. Sitar
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 30, 2000
(principal executive officer)
- -----------------------------------------
Richard H. Friedman
President, Chief Operating Officer March 30, 2000
and Director
- -----------------------------------------
Scott R. Yablon
Chief Financial Officer and Treasurer March 30, 2000
(principal financial officer)
- -----------------------------------------
Edward J. Sitar
Director March 30, 2000
- -----------------------------------------
Louis DiFazio, Ph.D
Director March 30, 2000
- -----------------------------------------
Louis A. Luzzi, Ph.D.
Director March 30, 2000
- -----------------------------------------
Richard A. Cirillo
Director March 30, 2000
- -----------------------------------------
Michael Kooper
61
EXHIBIT INDEX
(Exhibits being filed with this Annual Report on Form 10-K)
21 Subsidiaries of the Company
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule