FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 0-28740
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MIM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 05-0489664
- ------------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Clearbrook Road, Elmsford, NY 10523
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(Address of principal executive offices)
(914) 460-1600
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(Registrant's telephone number, including area code)
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Former name, former address and former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
On August 3, 1999, there were outstanding 18,729,189 shares of the
Company's common stock, $.0001 par value per share ("Common Stock").
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INDEX
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Page Number
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets at
June 30, 1999 (unaudited) and December 31, 1998 3
Unaudited Consolidated Statements of Operations for the
three months and six months ended June 30, 1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 5
Notes to the Consolidated Financial Statements 6-8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-18
Item 3 Quantitative and Qualitative Disclosures about Market Risk 19
PART II OTHER INFORMATION
Item 1 Legal Proceedings 20-21
Item 2 Changes in Securities and Use of Proceeds 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-K 21
SIGNATURES 22
Exhibit Index 23
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2
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PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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June 30, December 31,
1999 1998
------------------- -------------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 6,316 $ 4,495
Investment securities 5,373 11,694
Receivables, less allowance for doubtful accounts of $2,123 and $2,239
at June 30, 1999 and December 31, 1998, respectively 60,759 64,747
Inventory 860 1,187
Prepaid expenses and other current assets 877 857
------------------- -------------------
Total current assets 74,185 82,980
Other investments 2,317 2,311
Property and equipment, net 6,608 4,823
Due from affiliate and officer, less allowance for doubtful accounts of $403
at June 30, 1999 and December 31, 1998, respectively 1,804 34
Other assets, net 161 293
Deferred income taxes 274 270
Intangible assets, net 18,950 19,395
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Total assets $ 104,299 $ 110,106
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligations $ 494 $ 277
Current portion of long-term debt 362 208
Accounts payable 5,769 6,926
Claims payable 33,296 32,855
Payables to plan sponsors and others 15,832 16,490
Accrued expenses 5,435 6,401
------------------- -------------------
Total current liabilities 61,188 63,157
Capital lease obligations, net of current portion 986 598
Long-term debt, net of current portion 723 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,
18,729,198 and 18,090,748 shares issued and outstanding
at June 30, 1999 and December 31, 1998, respectively 2 2
Treasury stock at cost (338) -
Additional paid-in capital 91,614 91,603
Accumulated deficit (49,449) (50,790)
Stockholder notes receivable (1,539) (1,761)
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Total stockholders' equity 40,290 39,054
------------------- -------------------
Total liabilities and stockholders' equity $ 104,299 $ 110,106
=================== ===================
The accompanying notes are an integral part of these consolidated financial statements.
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3
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MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three months ended Six months ended
June 30, June 30,
------------------------- ----------------------------
1999 1998 1999 1998
------------------------- ----------------------------
(Unaudited) (Unaudited)
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Revenue $ 88,894 $ 109,878 $ 163,809 $ 207,841
Cost of revenue 81,077 103,660 147,810 196,044
----------- ----------- ----------- ----------
Gross profit 7,817 6,218 15,999 11,797
Selling, general and administrative expenses 7,074 4,811 14,586 9,261
Amortization of goodwill and other intangibles 194 -- 444 --
----------- ----------- ----------- ----------
Income from operations 549 1,407 969 2,536
Interest income, net 188 483 384 990
Other -- (1) (12) (1)
----------- ----------- ----------- ----------
Net income $ 737 $ 1,889 $ 1,341 $ 3,525
=========== =========== =========== ==========
Basic income per common share $ 0.04 $ 0.14 $ 0.07 $ 0.26
=========== =========== =========== ==========
Diluted income per common share $ 0.04 $ 0.12 $ 0.07 $ 0.23
=========== =========== =========== ==========
Weighted average common shares used
in computing basic income per share 18,777 13,594 18,639 13,471
=========== =========== =========== ==========
Weighted average common shares used
in computing diluted income per share 18,953 15,489 18,883 15,467
=========== =========== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
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MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
---------------------------
1999 1998
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Cash flows from operating activities: (Unaudited)
Net income $ 1,341 $ 3,525
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation, amortization and other 1,181 722
Stock option charges 6 14
Provision for losses on receivables -- --
Provision for losses on receivables and due from affiliates -- 53
Changes in assets and liabilities:
Receivables 3,988 (17,392)
Inventory 327 --
Prepaid expenses and other current assets (20) (334)
Accounts payable (1,157) 111
Deferred revenue -- (2,799)
Claims payable 441 4,850
Payables to plan sponsors and others (658) 2,234
Accrued expenses (970) 1,826
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Net cash provided by (used in) operating activities 4,479 (7,190)
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Cash flows from investing activities:
Purchase of property and equipment (1,592) (1,051)
Loans to affiliate and officer, net (1,770) --
Stockholder loans, net 222 (23)
Purchase of investment securities (1,013) (16,855)
Maturities of investment securities 7,334 18,425
Investment in preferred stock -- --
Decrease (increase) in other assets 130 (211)
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Net cash provided by investing activities 3,311 285
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Cash flows from financing activities:
Principal payments on capital lease obligations (328) (108)
Net payments on debt (5,308) --
Proceeds from exercise of stock options 5 3
Purchase of treasury stock (338) --
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Net cash used in financing activities (5,969) (105)
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Net decrease in cash and cash equivalents 1,821 (7,010)
Cash and cash equivalents--beginning of period $ 4,495 $ 9,593
------------ -----------
Cash and cash equivalents--end of period $ 6,316 $ 2,583
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 86 $ 37
============ ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Equipment acquired under capital lease obligations $ 933 $-
============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
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5
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MIM CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated interim financial statements of MIM
Corporation and subsidiaries (the "Company") have been prepared pursuant to the
rules and regulations of the U.S. Securities and Exchange Commission (the
"Commission"). Pursuant to such rules and regulations, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. In the opinion of management, all adjustments considered necessary for
a fair presentation of the financial statements, primarily consisting of normal
recurring adjustments, have been included. The results of operations and cash
flows for the six months ended June 30, 1999 are not necessarily indicative of
the results of operations or cash flows which may be reported for the remainder
of 1999.
These unaudited consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements, notes
and information included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 filed with the Commission (the "Form 10-K").
The accounting policies followed for interim financial reporting are the
same as those disclosed in Note 2 to the consolidated financial statements
included in the Form 10-K.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic earnings per share
and diluted earnings per share:
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Three Months Six Months
Ended June 30, Ended June 30,
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1999 1998 1999 1998
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Numerator:
- ---------
Net income $ 737 $ 1,889 $ 1,341 $ 3,525
======= ======= ======= =======
Denominator:
- ------------
Weighted average number of
common shares outstanding 18,777 13,594 18,639 13,471
------- ------- ------- -------
Basic Earnings per Share $ .04 $ .14 $ .07 $ .26
======= ======= ======= =======
Denominator:
- ------------
Weighted average number of
common shares outstanding 18,777 13,594 18,639 13,471
Common share equivalents
of outstanding stock options 176 1,895 194 1,996
------- ------- ------- -------
Total shares outstanding 18,953 15,489 18,833 15,467
------- ------- ------- -------
Diluted Earnings per Share $ .04 $ .12 $ .07 $ .23
======= ======= ======= =======
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NOTE 3 - ACQUISITION
On August 24, 1998, the Company completed its acquisition of Continental
Managed Pharmacy Services, Inc. and its subsidiaries (collectively,
"Continental"), a company which provides pharmacy benefit management services
and mail order pharmacy services. The acquisition was treated as a purchase for
financial reporting purposes. The Company issued 3,912 shares of Common Stock as
consideration for the purchase. The aggregate purchase price, including costs of
acquisition of $1,100, approximated
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$19,100. The fair value of assets acquired approximated $11,100 and liabilities
assumed approximated $11,800, resulting in approximately $18,300 of goodwill and
$1,200 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 of the Company for the
three and six month periods ended June 30, 1999 include the results of
Continental.
The following unaudited consolidated pro forma information has been
prepared assuming Continental was acquired as of January 1, 1998, with pro forma
adjustments for amortization of goodwill and other intangible assets and income
taxes. The pro forma information is presented for informational purposes only
and is not indicative of what would have occurred if the acquisition had been
made on January 1, 1998. In addition, this pro forma information is not intended
to be a projection of future operating results.
Six months ended June 30,
1999 1998
---- ----
Revenue $ 163,809 $ 238,605
============= ===========
Net income $ 1,341 $ 4,400
============= ===========
Basic earnings per share $ .07 $ .25
============= ===========
Diluted earnings per share $ .07 $ .23
============= ===========
The amounts above include $29,770 of revenue from the operations of Continental
for the six months ended June 30, 1999 and $30,764 for the six months ended June
30, 1998.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
On March 31, 1999, the State of Tennessee and Xantus Healthplan of
Tennessee, Inc. ("Xantus") entered into a consent decree under which Xantus was
placed in receivership under the laws of the State of Tennessee. The
Commissioner of the Tennessee Department of Commerce and Insurance, as receiver
of Xantus, is currently preparing a report to determine whether a plan of
rehabilitation or liquidation is advisable, based on, among other things, the
ability of Xantus to pay its post-petition obligations to providers, plan
members and other creditors. At this time, the Company is unable to predict
whether the receiver will recommend rehabilitation or liquidation or the effects
of these actions or the implementation of either plan on the Company's ability
to collect monies owed to it by Xantus. As of July 1, 1999, Xantus owed the
Company $10,800 for pharmacy benefit management ("PBM") services rendered by the
Company from January 1, 1999 through April 1, 1999, approximately $4,600 of
which the Company has withheld from its pharmacy providers as permitted by the
Company's agreements with these pharmacy providers. State of Tennessee officials
have publicly indicated that the State will ensure that all TennCare providers
negatively impacted by the appointment of the receiver for Xantus will
eventually receive from Xantus or the State at least 50% of all outstanding
amounts owed by Xantus to such providers as of April 1, 1999, although the
Company can give no assurance that Xantus or the State will eventually pay any
or all of these amounts. The failure of the Company to collect from Xantus or
the State all or a substantial portion of the monies owed to it by Xantus would
have a material adverse effect on the Company's financial condition and results
of operations.
NOTE 5 - LOAN TO OFFICER
In April 1999, the Company loaned to the Chairman and Chief Executive
Officer of the Company $1,700, evidenced by a promissory note secured by a
pledge of 1,500 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 the
Chairman could pay the Federal and state tax liability
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associated with the exercise of stock options representing 1,500 shares of the
Company's Common Stock in January 1998.
NOTE 6 - CONTRACTS
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. Accordingly, in the first
quarter of 1999, in accordance with the terms of the Agreements, the Company
exercised its right to terminate the Agreements effective on September 28, 1999.
On June 25, 1999, the Company notified both THP and PHP that it would cease
providing PBM services to them and their members if past due amounts of
approximately $500 and $540 were not paid within 30 days as required by the
Agreements. On July 23, 1999, THP and PHP filed complaints in the United States
District Court for the Eastern District of Tennessee alleging that the Company
did not have the right to cease providing services under the Agreements. The
complaints also alleged that THP and PHP disputed the outstanding amounts
invoiced by the Company under the Agreements and demanded that such disputes be
arbitrated as required under the Agreements. Additionally, THP and PHP applied
for a temporary restraining order as well as a preliminary and permanent
injunction to prevent the Company from ceasing to provide PBM services until the
conclusion of such arbitration proceedings.
The hearing on the motion for the temporary restraining order was
scheduled to be heard on Wednesday, August 4, 1999. However, on Tuesday, August
3, 1999, the Company, THP and PHP agreed that (i) the Company would withdraw its
termination notices which were to become effective September 28, 1999; (ii) the
Agreements would be extended until December 31, 1999 under a fee-for-service
(rather a than capitated) arrangement effective October 1, 1999 through December
31, 1999; (iii) the parties would negotiate diligently and in good faith towards
the execution by October 1, 1999 of a new two-year arrangement for the period
January 1, 2000 through December 31, 2001 (collectively, "New Agreements"); (iv)
THP and PHP would dismiss the complaints without prejudice, subject to sharing
or arbitration as described below; and (v) in the event that the parties
successfully negotiate the New Agreements by October 1, 1999, the parties would
share equally all disputed amounts; in the event that the parties cannot
successfully negotiate New Agreements by October 1, 1999, the parties would
submit all disputed amounts and issues to arbitration in accordance with the
arbitration provisions of the Agreements. While the parties have agreed to
negotiate the terms of a new two-year arrangement, no assurance can be given
that the Company will be able to successfully renegotiate contracts with either
or both of THP and PHP. The Company does not believe that its inability to
renegotiate successfully contracts with either or both of THP and PHP would have
a material adverse effect on its results of operations or financial condition.
* * * *
8
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements, the related notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 (the "Form 10-K"), as well as the unaudited
consolidated interim financial statements and the related notes thereto included
in Part I, Item 1 of this Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1999 filed with the Commission (this "Report").
This Report contains statements not purely historical and which may be
considered forward looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including
statements regarding the Company's expectations, hopes, 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 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, and that actual results may differ materially from those in
the forward looking statements as a result of various factors. These factors
include, among other things, risks associated with 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 along with the Company's Form 10-K contain
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 ("PBM") and
prescription mail service organization that partners with managed care
organizations and healthcare providers to endeavor to control prescription drug
costs. 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
Partners program. At June 30, 1999, the Company provided PBM services to 157
health plan sponsors with an aggregate of approximately 2.0 million plan
members, of which TennCare represented 7 health plans with approximately 1.2
million plan members. The TennCare contracts accounted for 51.1% of the
Company's revenues for the six months ended June 30, 1999 and 74.2% of the
Company's revenues for the six months ended June 30, 1998. With the addition of
another TennCare MCO as of May 1, 1999, the Company anticipates that
approximately 48% of its revenues for fiscal 1999 will be derived from providing
PBM services to the TennCare MCO's.
9
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Results of Operations
Three months ended June 30, 1999 compared to three months ended June 30, 1998
For the three months ended June 30, 1999, the Company recorded revenue of
$88.9 million compared with revenue of $109.9 million for the three months ended
June 30, 1998, a decrease of $21.0 million. Contracts with TennCare sponsors
accounted for decreased revenues of $31.6 million as the Company did not retain
contracts as of January 1, 1999 with the two TennCare BHO's it previously
managed under a contract (the "RxCare Contract") with RxCare of Tennessee, Inc.
("RxCare"), which expired on December 31, 1998, and did not begin providing
services to another TennCare MCO previously managed under the RxCare Contract
until May 1, 1999. See "Other Matters" below for a more detailed discussion of
the Company's past relationship with RxCare and the expiration of the RxCare
Contract. The loss of these contracts represents $29.1 million and $5.7 million,
respectively, of the decrease in revenue, partially offset by increases in other
contracts with TennCare sponsors of approximately $3.2 million. Commercial
revenue increased $6.1 million, offset by a decrease of $9.8 million due to the
loss of a contract with a Nevada-based managed care organization, representing a
net decrease of $3.7 million in commercial revenue. This overall decrease in
revenues was partially offset by an increase in revenues of $14.3 million as a
result of the Company's acquisition in August 1998 of the operations of
Continental Managed Pharmacy Services Inc. ("Continental").
For the three months ended June 30, 1999, approximately 31% of the Company's
revenues were generated from capitated contracts compared to 35% for the three
months ended June 30, 1998, a decrease of 4%. This decrease resulted from the
Company not providing PBM services until May 1, 1999 to a major TennCare MCO
previously managed on a capitated basis throughout 1998 under the RxCare
Contract, as well as the addition of new fee-for-service PBM business together
with the Company's acquisition of Continental.
Cost of revenue for the three months ended June 30, 1999 decreased to $81.1
million from $103.7 million for the three months ended June 30, 1998, a decrease
of $22.6 million. Contracts with TennCare sponsors accounted for $26.9 million
of such decrease as the Company did not retain contracts as of January 1, 1999
with the two TennCare BHO's it previously managed under the RxCare Contract and
did not begin providing services to another TennCare MCO previously managed
under the RxCare Contract until May 1, 1999. The loss of these contracts
represents $27.1 million and $5.0 million, respectively, of the decrease,
partially offset by increases in other contracts with TennCare sponsors of
approximately $5.2 million. Cost of revenue increases of $3.2 million from
commercial business were offset by a decrease in cost of revenue of $10.4
million due to the loss of a contract with a Nevada-based managed care
organization, representing a net decrease of $7.2 million. Such decreases in
cost of revenue were partially offset by increases in cost of revenue of $11.5
million resulting from the Company's acquisition of Continental. As a percentage
of revenue, cost of revenue decreased to 91.2% for the three months ended June
30, 1999 from 94.3% for the three months ended June 30, 1998, a decrease of
3.1%. This decrease resulted primarily due to the contribution of Continental's
mail service drug distribution business which has experienced better profit
margins than historically experienced by the Company's PBM business.
Selling, general and administrative expenses were $7.1 million for the
three months ended June 30, 1999 compared to $4.8 million for the three months
ended June 30, 1998, an increase of $2.3 million. The acquisition of Continental
accounted for the entire $2.3 million of the increase. As a percentage of
revenue, selling, general and administrative expenses increased to 8.0% for the
three months ended June 30, 1999 from 4.4% for the three months ended June 30,
1998, an increase of 3.6%, primarily attributable to revenue decreases
experienced from the loss of certain contracts with TennCare sponsors as
discussed above.
For the three months ended June 30, 1999, the Company recorded amortization
of goodwill and other intangibles of $0.2 million compared with no amortization
expense for the three months ended June 30, 1998, an increase of $0.2 million.
This amortization expense relates soley to the Company's acquisition of
Continental. The Continental acquisition resulted in the recording of
approximately $18.6 million of goodwill and $1.2 million of other intangible
assets, which will be amortized over their estimated useful lives (25 years for
goodwill and six years and four years for other intangible assets).
For the three months ended June 30, 1999, the Company recorded interest income,
net of interest expense, of $.2 million compared to interest income of $.5
million for the three months ended June 30, 1998, a decrease of $.3 million.
This decrease in interest income resulted from a reduced level of investment
opportunities due to the additional working capital needs of the Company. See
"Liquidity and Capital Resources."
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For the three months ended June 30, 1999, the Company recorded net income
of $.7 million, or $.04 per diluted share as compared to net income of $1.9
million, or $.12 per diluted share, for the three months ended June 30, 1998.
Six months ended June 30, 1999 compared to six months ended June 30, 1998
For the six months ended June 30, 1999, the Company recorded revenue of
$163.8 million compared with revenue of $207.8 million for the six months ended
June 30, 1998, a decrease of $44.0 million. Contracts with TennCare sponsors
accounted for decreased revenues of $70.5 million as the Company did not retain
contracts as of January 1, 1999 with the two TennCare BHO's it 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 $52.7 million and $23.3 million,
respectively, of the decrease in revenue, partially offset by increases in other
contracts with TennCare sponsors of approximately $5.5 million. Commercial
revenue increased $15.0 million, offset by a decrease of $18.3 million due to
the loss of a contract with a Nevada- based managed care organization,
representing a net decrease of $3.3 million in commercial revenue. The overall
decrease in revenues was partially offset by an increase in revenues of $29.8
million as a result of the Company's acquisition of Continental.
For the six months ended June 30, 1999, approximately 38% of the Company's
revenues were generated from capitated contracts compared to 37% for the six
months ended June 30, 1998, an increase of 1%. This increase resulted from
changes in arrangements with the TennCare MCO's in 1999 as compared to 1998. As
of January 1, 1999, the Company began providing capitated PBM services to two
major MCO's previously managed on a fee-for-service basis throughout 1998 under
the RxCare Contract. In addition, the Company did not begin providing capitated
PBM services to another MCO until May 1, 1999, which MCO was previously managed
on a capitated basis throughout 1998 under the RxCare Contract. The Company also
acquired other non-risk PBM business through the Company's acquisition of
Continental.
Cost of revenue for the six months ended June 30, 1999 decreased to $147.8
million from $196.0 million for the six months ended June 30, 1998, a decrease
of $48.2 million. Contracts with TennCare sponsors accounted for $63.3 million
of such decrease as the Company did not retain contracts as of January 1, 1999
with the two TennCare BHO's it 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 $49.3 million and $21.2 million, respectively, of the decrease,
partially offset by increases in other contracts with TennCare sponsors of
approximately $7.2 million. Cost of revenue increases of $12.9 million from
commercial business were offset by a decrease in cost of revenue of $21.8
million due to the loss of a contract with a Nevada-based managed care
organization, representing a net decrease of $8.9 million. Such decreases in
cost of revenue were partially offset by increases of $24.0 million as a result
of the Company's acquisition of Continental. As a percentage of revenue, cost of
revenue decreased to 90.2% for the six months ended June 30, 1999 from 94.3% for
the six months ended June 30, 1998, a decrease of 4.1%. This decrease resulted
primarily due to the contribution of Continental's mail service drug
distribution business which has experienced better profit margins than
historically experienced by the Company's PBM business.
Selling, general and administrative expenses were $14.6 million for the six
months ended June 30, 1999 compared to $9.3 million for the six months ended
June 30, 1998, an increase of $5.3 million. The acquisition of Continental
accounted for $4.7 million of the increase. The remaining $.6 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 information systems to support new and existing
customers. As a percentage of revenue, selling, general and administrative
expenses increased to 8.9% for the six months ended June 30, 1999 from 4.5% for
the six months ended June 30, 1998, an increase of 4.4%, primarily attributable
to revenue decreases experienced from the loss of certain contracts with
TennCare sponsors as discussed above.
11
<PAGE>
For the six months ended June 30, 1999, the Company recorded amortization
of goodwill and other intangibles of $0.4 million compared with no amortization
expense for the six months ended June 30, 1998, an increase of $0.4 million.
This amortization expense relates solely to the Company's acquisition of
Continental. The Continental acquisition resulted in the recording of
approximately $18.6 million of goodwill and $1.2 million of other intangible
assets, which will be amortized over their estimated useful lives (25 years for
goodwill and six years and four years for other intangible assets).
For the six months ended June 30, 1999, the Company recorded interest
income, net of interest expense, of $0.4 million compared to interest income of
$1.0 million for the six months ended June 30, 1998, a decrease of $0.6 million.
This decrease in interest income resulted from a reduced level of invested
capital due to the additional working capital needs of the Company. See
"Liquidity and Capital Resources."
For the six months ended June 30, 1999, the Company recorded net income of
$1.3 million, or $.07 per diluted share compared to net income of $3.5 million,
or $.23 per diluted share, for the six months ended June 30, 1998.
Liquidity and Capital Resources
The Company utilizes both funds generated from operations, if any, and funds
raised in its initial public offering (the "Offering") for capital expenditures
and working capital needs. For the six months ended June 30, 1999, net cash
provided from operating activities totaled $4.5 million, due mainly to a
decrease in accounts receivable of $3.9 million resulting primarily from
improved collections of accounts receivable and a proportionate decrease in PBM
business.
Investing activities generated $3.3 million primarily from proceeds of
maturities of investment securities of $7.3 million. This cash provided was
partially offset by purchases of $1.6 million of equipment and a loan to an
officer of $1.7 million. The equipment purchases are primarily to upgrade and
enhance information systems necessary to strengthen and support the Company's
ability to manage its customer's PBM programs and to be competitive in the PBM
industry. The loan to an officer enabled the Chairman to pay Federal and state
tax liabilities associated with the exercise of stock options. Financing
activities used $6.0 million of cash primarily to decrease the Company's
revolving debt by $5.3 million.
At June 30, 1999, the Company had working capital of $13.0 million compared
to $19.8 million at December 31, 1998, a decrease of $6.8 million. Cash and cash
equivalents increased to $6.3 million at June 30, 1999 compared with $4.5
million at December 31, 1998, an increase of $1.8 million. The Company had
investment securities held to maturity of $5.4 million at June 30, 1999 compared
with $11.7 million at December 31, 1998, a decrease of $6.3 million. The
decrease in investment securities was due to the Company's increased working
capital requirements. With the exception of the Company's $2.3 million preferred
stock investment in Wang Healthcare Information Systems, Inc., the Company's
investments are primarily corporate debt securities rated AA or higher and
government securities.
On March 31, 1999, the State of Tennessee and Xantus Healthplan of
Tennessee, Inc. ("Xantus") entered into a consent decree under which Xantus was
placed in receivership under the laws of the State of Tennessee. The
Commissioner of the Tennessee Department of Commerce and Insurance, as receiver
of Xantus, is currently preparing a report to determine whether a plan of
rehabilitation or liquidation is advisable, based on, among other things, the
ability of Xantus to pay its post-petition obligations to providers, plan
members and other creditors. At this time, the Company is unable to predict
whether the receiver will recommend rehabilitation or liquidation or the effects
of these actions or the implementation of either plan on the Company's ability
to collect monies owed to it by Xantus. As of July 1, 1999, Xantus owed the
Company $10.8 million for PBM services rendered by the Company from January 1,
1999 through April 1, 1999, approximately $4.6 million of which the Company has
withheld from its pharmacy providers as permitted by the Company's agreements
with these pharmacy providers. State of Tennessee officials have publicly
indicated that the State will ensure that all TennCare providers negatively
impacted by the appointment of the receiver for Xantus will eventually receive
from Xantus or the State at least 50% of all outstanding amounts owed by Xantus
to such providers as of April 1, 1999, although the Company can give no
assurance that Xantus or the State will eventually pay any or all of these
amounts. The failure of the Company to collect from Xantus or the State all or a
substantial portion of the monies owed to it by Xantus would have a material
adverse effect on the Company's financial condition and results of operations.
12
<PAGE>
In April 1999, the Company loaned to the Chairman and Chief Executive
Officer of the Company $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 the
Chairman 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.
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. Accordingly, in the first
quarter of 1999, in accordance with the terms of the Agreements, the Company
exercised its right to terminate the Agreements effective on September 28, 1999.
On June 25, 1999, the Company notified both THP and PHP that it would cease
providing PBM services to them and their members if past due amounts of
approximately $500,000 and $540,000 were not paid within 30 days as required by
the Agreements. On July 23, 1999, THP and PHP filed complaints in the United
States District Court for the Eastern District of Tennessee alleging that the
Company did not have the right to cease providing services under the Agreements.
The complaints also alleged that THP and PHP disputed the outstanding amounts
invoiced by the Company under the Agreements and demanded that such disputes be
arbitrated as required under the Agreements. Additionally, THP and PHP applied
for a temporary restraining order as well as a preliminary and permanent
injunction to prevent the Company from ceasing to provide PBM services until the
conclusion of such arbitration proceedings.
The hearing on the motion for the temporary restraining order was
scheduled to be heard on Wednesday, August 4, 1999. However, on Tuesday, August
3, 1999, the Company, THP and PHP agreed that (i) the Company would withdraw its
termination notices which were to become effective September 28, 1999; (ii) the
Agreements would be extended until December 31, 1999 under a fee-for-service
(rather a than capitated) arrangement effective October 1, 1999 through December
31, 1999; (iii) the parties would negotiate diligently and in good faith towards
the execution by October 1, 1999 of a new two-year arrangement for the period
January 1, 2000 through December 31, 2001 (collectively, "New Agreements"); (iv)
THP and PHP would dismiss the complaints without prejudice, subject to sharing
or arbitration as described below; and (v) in the event that the parties
successfully negotiate the New Agreements by October 1, 1999, the parties would
share equally all disputed amounts; in the event that the parties cannot
successfully negotiate New Agreements by October 1, 1999, the parties would
submit all disputed amounts and issues to arbitration in accordance with the
arbitration provisions of the Agreements. While the parties have agreed to
negotiate the terms of a new two-year arrangement, no assurance can be given
that the Company will be able to renegotiate successfully contracts with either
or both of THP and PHP. The Company does not believe that its inability to
renegotiate successfully contracts with either or both of THP and PHP would have
a material adverse effect on its results of operations or financial condition.
Under Section 145 of the Delaware General Corporation Law ("Section 145")
and the Company's Amended and Restated By-Laws ("By-Laws"), the Company is
obligated to indemnify two former officers of the Company (one of which is also
a former director and still a principal stockholder of the Company) who are the
subject of the indictments brought in the United States District Court for the
Western District of Tennessee (as more fully described in the Form 10-K), unless
it is ultimately determined by the Company's Board of Directors that these
former officers failed to act in good faith and in a manner they reasonably
believed to be in the best interests of the Company, that they had reason to
believe that their conduct was unlawful of for any other reason under which
indemnification would not be required Section 145 or the By-Laws. In addition,
until the Board makes such a determination, the Company is also 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. 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 continued 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 will
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.
13
<PAGE>
At December 31, 1998, the Company had, for tax purposes, unused net
operating loss ("NOL") carryforwards of approximately $47 million which will
begin expiring in 2008. As it is uncertain whether the Company will realize the
full benefit from these NOL 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 in the Internal
Revenue Code of 1986, as amended ("Code"), and the rules and regulations
promulgated thereunder. The amount of NOL 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 $2.7 million. Actual utilization in any year will
vary based on the Company's tax position in that year.
As the Company continues to grow, it anticipates that its working capital
needs will also continue to increase. The Company expects to spend approximately
$1.7 million on capital expenditures during fiscal 1999 ($0.7 million of which
was expended through the second quarter of 1999) primarily for expansion and
continued upgrading of information systems. 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 twelve months.
The Company may also pursue joint venture arrangements, business
acquisitions and other strategic transactions and arrangements designed to
expand its business, which the Company would expect to fund from cash on hand or
future indebtedness or, if appropriate, the sale or exchange of equity
securities of the Company.
Other Matters
From January 1994 through December 31, 1998, the Company provided a broad
range of PBM services with respect to RxCare's TennCare, TennCare Partners and
commercial PBM business under the RxCare Contract. Under the terms of the RxCare
Contract, the Company performed essentially all of RxCare's obligations under
its PBM contracts with plan sponsors, including designing and marketing PBM
programs and services. Under the RxCare Contract, the Company paid certain
amounts to RxCare and shared with RxCare the profit, if any, derived from
services performed under RxCare's contracts with the plan sponsors.
The Company and RxCare did not renew the RxCare Contract which expired on
December 31, 1998. The negotiated termination of the Company's relationship with
RxCare, among other things, allowed the Company to market directly its services
to Tennessee customers, including those MCO's and commercial customers then
serviced by the Company through the RxCare Contract, prior to its expiration.
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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview" in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998 for a more detailed
discussion of the Company's past relationship with RxCare and the expiration of
the RxCare Contract.
14
<PAGE>
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 or other risk-based
arrangements. Risk-based business represented approximately 38% of the Company's
revenues while non-risk business (including the provision of mail order
services) represented approximately 62% of the Company's revenues for the six
months ended June 30, 1999. Non-risk arrangements mitigate the adverse effect on
profitability of higher pharmaceutical costs incurred under risk-based
contracts. The Company presently anticipates that approximately 31% of its
revenues in fiscal 1999 will be derived from risk-based arrangements.
Changes in prices charged by manufacturers and wholesalers or distributors
for pharmaceuticals, a component of pharmaceutical claims, have historically
affected 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. To the extent such cost increases adversely effect the
Company's gross profit, the Company may be required to increase contract rates
on new contracts and upon renewal of existing contracts. However, there can be
no assurance that the Company will be successful in obtaining these rate
increases. The higher level of non-risk contracts with the Company's customers
in 1999 compared to prior years mitigates the adverse effects of price
increases, although no assurance can be given that the recent trend towards
non-risk arrangements will continue.
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. 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," which is common to many companies,
concerns the inability of information systems, primarily computer hardware and
software programs, to recognize properly and process date sensitive information
following December 31, 1999. The Company committed substantial resources
(approximately $2.6 million) during 1997 and 1998 and anticipates spending an
additional $1.7 million during 1999 to improve its information systems ("IS
project"). The Company has used this IS project as an opportunity to evaluate
its state of readiness, estimate expected costs and identify and quantify risks
associated with any potential year 2000 issues.
15
<PAGE>
State of Readiness:
- ------------------
In evaluating the Company's potential exposure to the year 2000 problem,
management first identified those systems that were critical to the ongoing
business of the Company and that would require significant manual intervention
should those systems be unable to process dates correctly following December 31,
1999. Those systems were the Company's claims adjudication and processing system
and the internal accounting system (which includes pharmacy reimbursement). Once
those systems were identified, the following steps were identified as those that
would be required to be taken to ascertain the Company's state of readiness:
I. Obtaining letters from software and hardware vendors concerning the
ability of their products to properly process dates after December 31,
1999;
II. Testing the operating systems of all hardware used in the identified
information systems to determine if dates after December 31, 1999 can
be processed correctly;
III. Surveying other parties who provide or process information in
electronic format to the Company as to their state of readiness and
ability to process dates after December 31, 1999; and
IV. Testing the identified information systems to confirm that they will
properly recognize and process dates after December 31, 1999.
The Company (excluding for purposes of this year 2000 discussion only,
Continental) has completed Step I. The Company will continue to obtain letters
from new hardware and software vendors. The Company has completed the
implementation of Step II. All server/host operating systems have been upgraded
to manufacturer specifications to be year 2000 compliant. The Company will
continue to monitor software manufacturer patch releases for additional
enhancements.
With respect to Step III above, the Company has engaged in discussions with
the third party vendors that transmit data from member pharmacies and based upon
such discussions it believes that such third party vendors' systems will be able
to properly recognize and process dates after December 31, 1999. The Company
continues surveying member pharmacies in its network as to their ability to
transmit data correctly to such third party vendors. Questionnaires have been
distributed to all member pharmacies. Follow-up letters recently have been sent
to all pharmacies that have not responded. With respect to the pharmacies which
have responded, based upon such responses, the Company does not anticipate that
any additional steps will be required to allow such pharmacies to process claims
transactions through the third party vendors after December 31, 1999. For the
remaining pharmacies, once this survey is complete, the Company will evaluate
any additional steps required to allow member pharmacies to transmit data after
December 31, 1999 and will disclose such additional steps, if any, and their
related costs in future periodic reports.
With respect to Step IV above, the Company successfully completed a year
2000 compliance test of the claims adjudication and processing systems during
our regularly scheduled disaster recovery drill, which took place on June 28,
1999. As a result of this compliance test, the Company believes its claims
adjudication and processing system will be able to properly accept and transmit
data after December 31, 1999 with no significant disruption. The Company's
internal accounting and other administrative systems generally have been
internally developed during the last few years or are presently being developed.
Accordingly, in light of the fact that such systems were developed with a view
to year 2000 compliance, the Company fully expects that these systems will be
able to properly recognize and process dates after December 31, 1999.
Continental's computer systems related to the delivery of pharmaceutical
products through mail order were upgraded in the fourth quarter of 1998 to
become year 2000 compliant. Continental's internal accounting systems were
upgraded during the second quarter of 1999, and are now year 2000 compliant. All
remaining systems at Continental are on schedule to be compliant by the end of
the third quarter of 1999.
16
<PAGE>
Costs:
- -----
As noted above, the Company spent approximately $2.6 million during 1997
and 1998 to improve its information systems. In addition, the Company
anticipates that it will spend approximately $1.7 million (of which $0.7 million
was expended in the first six months of 1999) during 1999 to further improve its
information systems. These improvements were not, and are not intended to
specifically address the year 2000 issue, but rather to address other business
needs and issues. Nonetheless, the IS project has provided the Company with a
platform from which to address any year 2000 issues. Management does not believe
that the amount of funds expended in connection with the IS project would have
differed materially in the absence of the year 2000 problem. The Company's cash
on hand as a result of the Offering has provided all of the funds expended to
date on the IS project and is expected to provide substantially all of the funds
expected to be spent during 1999 on the IS project.
Risks:
- -----
On July 29, 1998, the Commission issued Release No. 33-7558 (the "Release")
in an effort to provide further guidance to reporting companies concerning
disclosure of the year 2000 problem. In this Release the Commission required
that registrants include in its year 2000 disclosure a description of its "most
reasonably likely worst case scenario." Based on the Company's assessment and
the results of remediation performed to date as described above, the Company
believes that all problems related to the year 2000 will be addressed in a
timely manner so that the Company will experience little or no disruption in its
business immediately following December 31, 1999. However, if unforeseen
difficulties arise, if the Company's further assessment of Continental uncovers
significant problems (which is not presently expected to occur) or if further
compliance testing is delayed or necessary remediation efforts are not
accomplished in accordance with the Company's plans described above, the Company
anticipates that its "most reasonably likely worst case scenario" (as required
to be described by the Release) is that some percentage of the Company's claims
would need to be processed manually for some limited period of time, because
member pharmacies would not be able to transmit data electronically. At this
point in time, the Company cannot reasonably estimate the number of pharmacies
or the level of claims involved or the costs that would be incurred if the
Company were required to hire temporary staff and incur other expenses to
manually process such claims. The Company expects to be better able to quantify
the number of pharmacies and level of claims involved as well as the related
costs following its completion of the survey of member pharmacies in the third
quarter of 1999 and presently intends to disclose such estimates in future
periodic reports. In addition, the Company anticipates that all businesses
(regardless of their state of readiness), including the Company, will encounter
some minimal level of disruption in its business (e.g., phone and fax systems,
alarm systems, etc.) as a result of the year 2000 problem. However, the Company
does not believe that it will incur any material expenses or suffer any material
loss of revenues in connection with such minimal disruptions.
Contingency Plans:
- -----------------
As discussed above, in the event of the occurrence of the "most reasonably
likely worst case scenario" the Company would hire an appropriate level of
temporary staff to manually process the pharmacy claims submitted on paper. As
discussed above, at this time the Company cannot reasonably estimate the number
of pharmacies or level of claims involved or the costs that would be incurred if
the Company were required to hire temporary staff and incur other expenses to
manually process such claims. While some level of manual processing is common in
the industry and while manual processing increases the time it takes the Company
to pay the member pharmacies and invoice the related payers, the Company does
not foresee any material lost revenues or other material expenses in connection
with this scenario. However, an extended delay in processing claims, making
payments to pharmacies and billing the Company's customers could materially
adversely impact the Company's liquidity.
In addition, while not part of the "most reasonably likely worst case
scenario," the delay in paying such pharmacies for their claims could result in
adverse relations between the Company and the pharmacies. Such adverse relations
could cause certain pharmacies to drop out of the Company's networks which in
turn could cause the Company to be in breach under service area provisions under
certain of its services
17
<PAGE>
agreements with its customers. The Company does not believe that any material
relationship with any pharmacy will be so affected or that any material number
of pharmacies would withdraw from the Company's networks or that it will breach
any such service area provision of any contract with its customers.
Notwithstanding the foregoing, based upon past experience, the Company believes
that it could quickly replace any such withdrawing pharmacy so as to prevent any
breach of any such provision. The Company cannot presently reasonably estimate
the possible impact in terms of lost revenues, additional expenses or litigation
damages or expenses that could result from such events.
Forward Looking Statements:
- --------------------------
Certain information set forth above regarding the year 2000 problem and the
Company's plans to address those problems are forward looking statements under
the Securities Act and the Exchange Act. See the first paragraph in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of forward looking statements and related risks and
uncertainties. In addition, certain factors particular to the year 2000 problem
could cause actual results to differ materially from those contained in the
forward looking statements, including, without limitation: failure to identify
critical information systems which experience failures, delays and errors in the
compliance and remediation efforts described above, unexpected failures by key
vendors, member pharmacies, software providers or business partners to be year
2000 compliant or the inability to repair critical information systems in the
time frames described above. In any such event, the Company's results of
operations and financial condition could be materially adversely affected. In
addition, the failure to be year 2000 compliant of third parties outside of the
Company's control such as electric utilities or financial institutions could
adversely effect the Company's results of operations and financial condition.
* * * *
18
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company believes that interest rate risk represents the only market
risk exposure applicable to the Company. The Company's exposure to market risks
associated with changes in interest rates relates primarily to the Company's
investments in marketable securities in accordance with the Company's corporate
investment policies and guidelines. All of these instruments are classified as
"held-to-maturity" on the Company's consolidated balance sheets 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:
<TABLE>
1999 2000 2001 2002 2003 Thereafter
---- ---- ---- ---- ---- ----------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Short-term investments
Fixed rate investments 5,350 -- -- - - --
Weighted average rate 6.68% -- -- - - --
Long-term investments:
Fixed rate investments -- -- -- - - --
Weighted average rate -- -- -- - - --
Long-term debt:
Variable rate instruments 91 312 682 - - --
Weighted average rate 9.00% 9.00% 7.83% - - --
</TABLE>
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 at June 30, 1999 for that instrument multiplied 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 June 30, 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 through the use of derivative
financial instruments or otherwise. The Company will assess the significance of
interest rate market risk from time to time and will develop and implement
strategies to manage that risk as appropriate.
* * * *
19
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On March 31, 1999, the State of Tennessee and Xantus entered into a consent
decree under which Xantus was placed in receivership under the laws of the State
of Tennessee. The Commissioner of the Tennessee Department of Commerce and
Insurance, as receiver of Xantus, is currently preparing a report to determine
whether a plan of rehabilitation or liquidation is advisable, based on, among
other things, the ability of Xantus to pay its post-petition obligations to
providers, plan members and other creditors. At this time, the Company is unable
to predict whether the receiver will recommend rehabilitation or liquidation or
the effects of these actions or the implementation of either plan on the
Company's ability to collect monies owed to it by Xantus. As of July 1, 1999,
Xantus owed the Company $10.8 million for PBM services rendered by the Company
from January 1, 1999 through April 1, 1999, approximately $4.6 million of which
the Company has withheld from its pharmacy providers as permitted by the
Company's agreements with these pharmacy providers. State of Tennessee officials
have publicly indicated that the State will ensure that all TennCare providers
negatively impacted by the appointment of the receiver for Xantus will
eventually receive from Xantus or the State at least 50% of all outstanding
amounts owed by Xantus to such providers as of April 1, 1999, although the
Company can give no assurance that Xantus or the State will eventually pay any
or all of these amounts. The failure of the Company to collect from Xantus or
the State all or a substantial portion of the monies owed to it by Xantus would
have a material adverse effect on the Company's financial condition and results
of operations.
As part of the Company's normal review process, the Company determined that
its Agreements with THP and PHP were not achieving profitability projections.
Accordingly, in the first quarter of 1999, in accordance with the terms of the
Agreements, the Company exercised its right to terminate the Agreements
effective on September 28, 1999.
On June 25, 199, the Company notified both THP and PHP that it would cease
providing PBM services to them and their members if past due amounts of
approximately $500,000 and $540,000 were not paid within 30 days as required by
the Agreements with those organizations. On July 23, 1999, THP and PHP filed
complaints in the United States District Court for the Eastern District of
Tennessee alleging that the Company did not have the right to cease providing
services under the Agreements. The complaints also alleged that THP and PHP
disputed the outstanding amounts invoiced by the Company under the Agreements
and demanded that such disputes be arbitrated as required under the Agreements.
Additionally, THP and PHP applied for a temporary restraining order as well as a
preliminary and permanent injunction to prevent the Company from ceasing to
provide PBM services until the conclusion of such arbitration proceedings.
The hearing on the motion for the temporary restraining order was
scheduled to be heard on Wednesday, August 4, 1999. However, on Tuesday, August
3, 1999, the Company, THP and PHP agreed that (i) the Company would withdraw its
termination notices which were to become effective September 28, 1999; (ii) the
Agreements would be extended until December 31, 1999 under a fee-for-service
(rather a than capitated) arrangement effective October 1, 1999 through December
31, 1999; (iii) the parties would negotiate diligently and in good faith towards
the execution by October 1, 1999 of a new two-year arrangement for the period
January 1, 2000 through December 31, 2001 (collectively, "New Agreements"); (iv)
THP and PHP would dismiss the complaints without prejudice, subject to sharing
or arbitration as described below; and (v) in the event that the parties
successfully negotiate the New Agreements by October 1, 1999, the parties would
share equally all disputed amounts; in the event that the parties cannot
successfully negotiate New Agreements by October 1, 1999, the parties would
submit all disputed amounts and issues to arbitration in accordance with the
arbitration provisions of the Agreements. While the parties have agreed to
negotiate the terms of a new two-year arrangement, no assurance can be given
that the Company will be able to renegotiate successfully contracts with either
or both of THP and PHP. The
20
<PAGE>
Company does not believe that its inability to renegotiate successfully
contracts with either or both of THP and PHP would have a material adverse
effect on its results of operations or financial condition.
Item 2. Changes in Securities and Use of Proceeds
From August 14, 1996 through March 31, 1999, the $46,788,000 net proceeds
from the initial public offering (the "Offering"), pursuant to a Registration
Statement assigned file number 333-05327 by the Securities and Exchange
Commission and declared effective by the Commission on August 14, 1996, have
been applied in the following approximate amounts:
Construction of plant, building and facilities..............$ -
Purchase and installation of machinery and equipment........$ 5,860,000
Purchases of real estate....................................$ -
Acquisition of other business...............................$ 2,341,000
Repayment of indebtedness...................................$ -
Working capital.............................................$26,898,000
Temporary investments:
Marketable securities..................................$ 5,373,000
Overnight cash deposits................................$ 6,316,000
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 Offering prospectus and subsequent
Forms SR, the Company intended to apply approximately $18.6 million of Offering
proceeds to fund an expansion of the "preferred generics" program. The Company
has determined not to apply any material portion of the Offering proceeds to
fund any expansion of this program. The Company presently intends to use the
remaining Offering proceeds to support the continued growth of its PBM and mail
order business.
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 second quarter of fiscal 1999.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the second quarter
of fiscal 1999.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIM CORPORATION
Date: August 13, 1999 /s/ Edward J. Sitar
------------------------------------
Edward J. Sitar
Chief Financial Officer
(Principal Financial Officer)
22
<PAGE>
Exhibit Index
(Exhibits being filed with this Quarterly Report on Form 10-Q)
27 Financial Data Schedule
23
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,316
<SECURITIES> 5,373
<RECEIVABLES> 62,882
<ALLOWANCES> 2,123
<INVENTORY> 860
<CURRENT-ASSETS> 74,185
<PP&E> 10,287
<DEPRECIATION> 3,679
<TOTAL-ASSETS> 104,299
<CURRENT-LIABILITIES> 61,188
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 40,288
<TOTAL-LIABILITY-AND-EQUITY> 104,299
<SALES> 163,809
<TOTAL-REVENUES> 163,809
<CGS> 147,810
<TOTAL-COSTS> 147,810
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,341
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,341
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,341
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
