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, 2000
-----------------------------------------------
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
------------------------------
(Registrant's telephone number, including area code)
-------------------------------------------------------------------------------
Former name, former address and former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
On August 10, 2000 there were outstanding 21,953,653 shares of the
Company's common stock, $.0001 par value per share ("Common Stock").
<PAGE>
INDEX
<TABLE>
PART I FINANCIAL INFORMATION PAGE NUMBER
----------------------------------------------------------------------------------------------------------------
<S> <C>
Item 1 Financial Statements
Consolidated Balance Sheets at 1
June 30, 2000 (unaudited) and December 31, 1999
Unaudited Consolidated Statements of Income for the three and 2
six months ended June 30, 2000 and 1999
Unaudited Consolidated Statements of Cash Flows for the 3
six months ended June 30, 2000 and 1999
Notes to the Consolidated Financial Statements 4
Item 2 Management's Discussion and Analysis of Financial Condition 6
and Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk 11
PART II OTHER INFORMATION
Item 1 Legal Proceedings 12
Item 2 Changes in Securities and Use of Proceeds 12
Item 4 Submission of Matters to a Vote of Security Holders 12
Item 5 Other Information 13
Item 6 Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15
</TABLE>
ii
<PAGE>
1
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
JUNE 30, DECEMBER 31,
2000 1999
---------------- ----------------
ASSETS (UNAUDITED)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 20,586 $ 15,306
Investment securities 5,000 5,033
Receivables, less allowance for doubtful accounts of $8,684 and $8,576
at June 30, 2000 and December 31, 1999, respectively 55,289 62,919
Inventory 1,357 777
Prepaid expenses and other current assets 1,430 1,347
------------------ ------------------
Total current assets 83,662 85,382
Other investments 2,347 2,347
Property and equipment, net 8,792 5,942
Due from affiliate and officer, less allowance for doubtful accounts of $403
at June 30, 2000 and December 31, 1999, respectively 1,909 1,849
Other assets, net 1,006 202
Intangible assets, net 19,447 19,961
------------------ ------------------
------------------ ------------------
TOTAL ASSETS $ 117,163 $ 115,683
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital lease obligations $ 507 $ 514
Current portion of long-term debt 279 493
Accounts payable 6,384 5,039
Claims payable 35,273 39,702
Payables to plan sponsors and others 26,894 24,171
Accrued expenses 4,374 6,468
------------------ ------------------
Total current liabilities 73,711 76,387
Capital lease obligations, net of current portion 437 718
Long-term debt, net of current portion 2,833 2,279
Other non current liabilities 985
Minority interest 1,112 1,112
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value; 5,000,000 shares authorized,
250,000 Series A junior participating shares issued and outstanding 0 0
Common stock, $.0001 par value; 40,000,000 shares authorized,
19,255,706 and 18,829,198 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively 2 2
Treasury stock at cost (338) (338)
Additional paid-in-capital 91,948 91,614
Accumulated deficit (52,768) (54,575)
Stockholder notes receivable (759) (1,516)
------------------ ------------------
Total stockholders' equity 38,085 35,187
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 117,163 $ 115,683
================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ----------------------------
2000 1999 2000 1999
------------------------- ----------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue $ 95,691 $ 88,894 $ 184,795 $ 163,809
Cost of revenue 87,366 81,077 169,659 147,810
--------- --------- --------- ---------
Gross profit 8,325 7,817 15,136 15,999
Selling, general and administrative expenses 7,310 7,074 13,529 14,586
Amortization of goodwill and other intangible assets 256 194 514 444
--------- --------- --------- ---------
Income from operations 759 549 1,093 969
Interest income, net 323 188 714 384
Other - - - (12)
--------- --------- --------- ---------
Net income 1,082 737 1,807 1,341
Basic income per common share $ 0.06 $ 0.04 $ 0.10 $ 0.07
========= ========= ========= =========
Diluted income per common share $ 0.06 $ 0.04 $ 0.09 $ 0.07
========= ========= ========= =========
Weighted average common shares used
in computing basic income per share 18,832 18,777 18,821 18,639
========= ========= ========= =========
Weighted average common shares used
in computing diluted income per share 18,957 18,953 19,218 18,833
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
2
<PAGE>
MIM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
2000 1999
----------------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,807 $ 1,341
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and other 2,020 1,181
Provision for losses on receivables 108 -
Changes in assets and liabilities:
Receivables 7,522 3,988
Inventory (580) 327
Prepaid expenses and other current assets (83) (20)
Accounts payable 1,345 (1,157)
Claims payable (4,429) 441
Payables to plan sponsors and others 2,723 (658)
Accrued expenses (2,094) (970)
Non current liabilities 985 -
-------- --------
Net cash provided by operating activities 9,324 4,473
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,356) (1,592)
Loans to affiliate and officer, net (60) (1,770)
Stockholder loans, net 757 222
Purchase of investment securities (4,000) (1,013)
Maturities of investment securities 7,334
4,033
Decrease (increase) in other assets (804) 130
-------- --------
Net cash (used in) provided by investing activities $ (4,430) $ 3,311
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (288) (328)
(Decrease) increase in debt 340 (5,308)
Exercise of stock options 334 11
Purchase of treasury stock - (338)
-------- --------
Net cash (used in) provided by financing activities 386 (5,963)
-------- --------
Net increase in cash and cash equivalents 5,280 1,821
CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD $ 15,306 $ 4,495
======== ========
CASH AND CASH EQUIVALENTS--END OF PERIOD $ 20,586 $ 6,316
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 209 $ 86
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Equipment acquired under capital lease obligations $ - $ 933
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
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 its subsidiaries collectively, (the "Company" or "MIM") 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, 2000, are
not necessarily indicative of the results of operations or cash flows which may
be reported for the remainder of 2000.
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, 1999, 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
Numerator:
<S> <C> <C> <C> <C>
Net (loss) income ..................... $ 1,082 $ 737 $ 1,807 $ 1,341
======= ======= ======= =======
Denominator - Basic:
Weighted average number of common
shares outstanding .................... 18,832 18,777 18,821 18,639
======= ======= ======= =======
Basic income per share ................ $ 0.06 $ 0.04 $ 0.10 $ 0.07
======= ======= ======= =======
Denominator - Diluted:
Weighted average number of common
shares outstanding ................. 18,832 18,777 18,821 18,639
Common share equivalents of outstanding
stock options ...................... 125 176 397 194
------- ------- ------- -------
Total shares outstanding .............. 18,957 18,953 19,218 18,833
======= ======= ======= =======
Diluted income per share .............. $ 0.06 $ 0.04 $ 0.09 $ 0.07
======= ======= ======= =======
</TABLE>
NOTE 3--COMMITMENTS AND CONTINGENCIES
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 in the fourth
quarter of 1999, $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 in the fourth quarter of 1999 of $2,700 for the
estimated loss on the remaining amounts owed, net of the unpaid amounts to
network pharmacies.
4
<PAGE>
The Company has been disputing several improper reductions of payments by
Tennessee Health Partnership ("THP"). These reductions relate to an alleged
coordination of benefits issue raised by THP related to services provided in
prior years for which the Company was not the claims processor. In addition,
there exists a dispute over items billed in addition to the Company's capitated
rate under the contracts with THP and Preferred Health Plans ("PHP"). There is
also a dispute over certain overpayments made by the Company resulting from
overbilling due to what the Company believes are errors contained in the pricing
files of THP's claims processor. The contracts with these organizations require
that the disputes be arbitrated. While the Company believes that it is owed
these amounts from THP and intends to pursue vigorously its claims, at this
time, the Company is unable to assess the likelihood that it will prevail. In
the fourth quarter of 1999, the Company recorded a special charge of $3,300 for
estimated losses related to these disputes.
On May 4, 2000, the Company reached a negotiated settlement with PHP, under
which, among other things, the Company retained rebates that would have
otherwise been due and owing PHP, PHP paid the Company an additional $850 and
the respective parties released each other from any and all liability with
respect to past or future claims.
In 1998, the Company recorded a $2,200 non-recurring charge against
earnings in connection with an agreement in principle with respect to a civil
settlement of the Federal and State of Tennessee investigation in connection
with the conduct of two former officers of a subsidiary prior to the Company's
initial public offering. The definitive agreement covering this settlement was
executed on June 15, 2000 and, among other things, provides for the execution
and delivery by the Company of a $1,800 promissory note secured by certain
tangible assets.
NOTE 4--SUBSEQUENT EVENT
On August 4, 2000, the Company, through its principal pharmacy benefit
management operating subsidiary, MIM Health Plans, Inc., acquired all of the
issued and outstanding membership interests of American Disease Management
Associates, L.L.C., a Delaware limited liability company ("ADIMA"), from Radix
Capital Investment Group, LLC, a Delaware limited liability company, Elizabeth
Williams, Bruce Blake and Sal Rafanelli, pursuant to a Purchase Agreement dated
as of August 3, 2000. ADIMA, located in Livingston, New Jersey, provides
intravenous and injectible specialty pharmaceutical products to chronically ill
patients receiving healthcare services from home by IV certified registered
nurses, typically after a hospital discharge.
The aggregate purchase price for ADIMA was approximately $24 million
consisting of $19 million in cash and the balance in Company common stock, a
portion of which is being held in escrow to secure potential indemnification
claims for breaches of seller's representations and warranties. The cash portion
of the purchase price was partially funded with cash on hand and the remainder
with funds from its primary lender under its existing $30 million revolving
credit facility. The transaction will be accounted for as a purchase.
* * * *
5
<PAGE>
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, 1999 (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, 2000 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, 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 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
MIM is an independent pharmacy benefit management ("PBM"), specialty
pharmaceutical and fulfillment/ e-commerce organization that partners with
healthcare providers and sponsors to control prescription drug costs. MIM's
innovative pharmacy benefit products and services use clinically sound
guidelines to ensure cost control and quality care. MIM's specialty
pharmaceutical division specializes in serving the chronically ill affected by
life threatening diseases. MIM's fulfillment and e-commerce pharmacy specializes
in serving individuals that require long-term maintenance medications. MIM's
online pharmacy, www.MIMRx.com, develops private label websites to offer
affinity groups innovative, customized, health information services and products
on the Internet for their members. A majority of the Company's revenues to date
have been derived from providing PBM services in the State of Tennessee to MCOs
participating in the State of Tennessee's TennCare program. At June 30, 2000,
the Company provided PBM services to 112 health plan sponsors with an aggregate
of approximately 3.1 million plan members, of which TennCare represented five
MCO's with approximately 1.1 million plan members. Revenues derived from the
Company's contracts with those TennCare MCO's accounted for 50.6% of the
Company's revenues at June 30, 2000, compared to 51.1% of the Company's revenues
at June 30, 1999.
Business
The Company operates a single segment business with several components and
derives its revenues primarily from agreements to provide 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. Net sales and
operating contribution for these components for the three months and six months
ended June 30, 2000 and 1999, respectively, are presented below:
6
<PAGE>
<TABLE>
<CAPTION>
NET REVENUE BY COMPONENT
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------------------ -------------------------------------------------------
2000 1999 2000 1999
----------------------- ----------------------- ---------------------------- ------------------------
Component REVENUE % REVENUE % REVENUE % REVENUE %
------------------------------------------------------------------------- -------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PBM $86,244 90% $78,787 89% $ 165,321 89% $ 143,867 88%
Mail Order and E-Commerce 9,439 10% 9,904 11% 19,336 11% 19,527 12%
Corporate and All Others 8 0% 203 0% 138 0% 415 0%
----------------------- ----------------------- ---------------------------- ------------------------
Total Revenue 95,691 100% $88,894 100% $ 184,795 100% $ 163,809 100%
======================= ======================= ============================ ========================
</TABLE>
<TABLE>
<CAPTION>
OPERATING CONTRIBUTION BY COMPONENT
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------------------------------------------------
Component 2000 1999 2000 1999
---------------------------------------------------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
PBM $ 3,874 $ 2,158 $ 5,853 $ 4,284
Mail Order and E-Commerce (1,192) 322 (933) 519
Corporate and All Others (1,923) (1,931) (3,827) (3,834)
----------------- ---------------- ---------------- -----------------
Total Operating Profit $ 759 $ 549 $ 1,093 $ 969
================= ================ ================ =================
</TABLE>
RESULTS OF OPERATIONS
Three months ended June 30, 2000 compared to three months ended June 30, 1999
For the three months ended June 30, 2000, the Company recorded revenues of
$95.7 million compared with $88.9 million for the same period in 1999, an
increase of $6.8 million. Contracts with TennCare MCO's accounted for increased
revenues of $1.1 million, while commercial revenue increased $5.7 million. The
increase in TennCare related revenue includes $1.4 million related to a fee
settlement for the administration of a behavioral health program during 1998.
Cost of revenue for the three months ended June 30, 2000, increased to
$87.4 million from $81.1 million for the same period in 1999, an increase of
$6.3 million. Cost of revenue with respect to contracts with TennCare MCO's
decreased $1.5 million, while the commercial costs increased $7.8 million. As a
percentage of revenue, cost of revenue increased to 91.3% for the three months
ended June 30, 2000, from 91.2% for the three months ended June 30, 1999, an
increase of 0.1%.
For the three months ended June 30, 2000 and 1999, 31.0% of the Company's
revenues were generated from capitated contracts.
General and administrative expenses were $7.3 million for the three month
period ended June 30, 2000, as compared to $7.1 million for the three months
ended June 30, 1999, an increase of $0.2 million due in part to higher costs
related to the relocation of our fulfillment facility. Although the Company
experienced increased costs associated with the sales force as well as in the
legal area due to the Company's obligation to advance legal fees on behalf of
certain former employees as required under Delaware law and the Company's
By-laws, were offsetting operational efficiencies. As a percentage of revenue,
general and administrative expenses decreased to 7.7% for the three months ended
June 30, 2000, from 8.0% for the same period for 1999.
For the three months ended June 30, 2000 and 1999, the Company recorded
amortization of goodwill and other intangibles of $0.3 million.and $0.2 million
respectively, in connection with the acquisition of Continental.
7
<PAGE>
For the three months ended June 30, 2000, the Company recorded interest
income of $0.3 million compared to $0.2 million for the three months ended June
30, 1999, an increase of $0.1 million, primarily due to additional interest
earned on monies derived from the Company's increased collection efforts,
resulting in higher cash balances.
For the three months ended June 30, 2000, the Company recorded net income
of $1.1 million or $0.06 per share. This compares with net income of $0.7
million, or $0.04 per share for the three months ended June 30, 1999.
Six months ended June 30, 2000 compared to six months ended June 30, 1999
For the six months ended June 30, 2000, the Company recorded revenues of
$184.8 million compared with $163.8 million for the same period in 1999, an
increase of $21.0 million. Contracts with TennCare MCO's accounted for increased
revenues of $9.7 million, while commercial revenue increased $11.3 million. The
increase in TennCare revenue included $1.4 million related to a fee settlement
for the administration of a behavioral health program during 1998.
Cost of revenue for the six months ended June 30, 2000, increased to $169.7
million from $147.8 million for the same period in 1999, an increase of $21.9
million. Cost of revenue with respect to contracts with TennCare MCO's increased
$7.6 million, while the commercial costs increased $14.3 million. As a
percentage of revenue, cost of revenue increased to 91.8% for the six months
ended June 30, 2000, from 90.2% for the six months ended June 30, 1999, an
increase of 1.6%, due in part to greater pharmaceutical utilization by plan
members receiving PBM services under the Company's capitated contracts.
For the six months ended June 30, 2000, 32.7% of the Company's revenues
were generated from capitated contracts, compared to 37.9% for the same period a
year ago, a decrease of 5.2%. Based upon its present contracted arrangements,
the Company anticipates that approximately 25% of its revenues for the remainder
of 2000 will be derived from capitated or other risk-based contracts.
General and administrative expenses were $13.5 million for the six months
ended June 30, 2000, as compared to $14.6 million for the six months ended June
30, 1999, a decrease of $1.1 million. This decrease was primarily a result of a
restructuring of the Company's operations during 1999. However the savings
resulting from the restructuring were offset by greater than usual costs
associated with the sales force and legal expenditures. Legal costs increased
primarily due to the Company's obligations to advance legal fees on behalf of
certain former officers and employees as required under Delaware law and the
Company's by laws. As a percentage of revenue, general and administrative
expenses decreased to 7.3% for the six months ended June 30, 2000, from 8.9% for
the same period for 1999.
For the six months ended June 30, 2000, the Company recorded amortization
of goodwill and other intangibles of $0.5 million in connection with its
acquisition of Continental, an increase of $0.1 million compared to $0.4 million
for the same period last year.
For the six months ended June 30, 2000, the Company recorded interest
income of $0.7 million compared to $0.4 million for the six months ended June
30, 1999, an increase of $0.3 million, primarily due to additional interest
earned on monies derived from the Company's increased collection efforts.
For the six months ended June 30, 2000, the Company recorded net income of
$1.8 million or $0.09 per diluted share. This compares with net income of $1.3
million, or $0.07 per diluted share for the six months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company utilizes both funds generated from operations, if any, and
funds raised in the Company's public offering for capital expenditures and other
working capital needs. For the six months ended June 30, 2000, net cash provided
to the Company by operating activities totaled $9.3 million as compared to $4.4
million for the same period a year ago. This increase was primarily due to an
increase in payables to plan sponsors and others of $2.7 million, and a decrease
in accounts receivable of $7.5 million. The increase in payables to plan
sponsors and others reflects increased manufacturer's rebates, which are shared
with certain clients. The decrease in accounts receivable is a result of the
Company's success in its collection efforts.
8
<PAGE>
Net cash used in investing activities was $4.4 million, of which the
purchase of property and equipment represents $4.3 million. The majority of
these purchases were for the relocation and upgrade of the fulfillment center in
Columbus, Ohio.
For the six months ended June 30, 2000, net cash of $0.4 million was
provided by financing activities. The exercise of stock options provided $0.3
million.
At June 30, 2000, the Company had working capital of $10.0 million compared
to $9.0 million at December 31, 1999. Cash and cash equivalents increased to
$20.6 million at June 30, 2000, compared with $15.3 million at December 31,
1999.
On February 4, 2000, the Company, through its principal PBM 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 business 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 and certain other
affiliated entities. In connection with the ADIMA acquisition described in Part
II, Item 5 below, the Facility was modified to, among other things, add ADIMA as
a guarantor of Health Plan's obligations under the Facility.
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.
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.
The Company also may pursue joint venture arrangements, business
acquisitions and other transactions designed to expand its PBM,
e-commerce/fulfillment 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
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 33% of
the Company's revenues while non-risk business (including mail order services)
represented approximately 67% of the Company's revenues for the three months
ended June 30, 2000, compared to the same period in 1999, which had
approximately 38% of risk-based generated revenue and approximately 62% non-risk
(including mail order services) generated revenue. 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 25% of its revenues in fiscal
2000 will be derived from risk-based arrangements.
9
<PAGE>
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.
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.
* * * *
10
<PAGE>
ITEM 3. 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
relate 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:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 THEREAFTER
--------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS:
<S> <C> <C> <C> <C> <C> <C>
Fixed rate investments $ 5,000 $ - $ - $ - $ - $ -
Weighted average rate 5.25% - - - - -
LONG-TERM INVESTMENTS:
Fixed rate investments $ - $ - $ - $ - $ - $ -
Weighted average rate - - - - - -
LONG-TERM DEBT:
Variable rate instruments $ 279 $ 2,833 $ - $ - $ - $ -
Weighted average rate 7.64% 9.49% 0.00% 0.00% 0.00% 0.00%
</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 for that instrument at June 30, 2000, 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 June 30, 2000, 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.
* * * *
11
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been disputing several improper reductions of payments by
Tennessee Health Partnership ("THP"). These reductions relate to an alleged
coordination of benefits issue raised by THP related to services provided in
prior years for which the Company was not the claims processor. In addition,
there exists a dispute over items billed in addition to the Company's capitated
rate under the contracts with THP and Preferred Health Plans ("PHP"). There is
also a dispute over certain overpayments made by the Company resulting from
overbilling due to what the Company believes are errors contained in the pricing
files of THP's claims processor. The contracts with these organizations require
that the disputes be arbitrated. While the Company believes that it is owed
these amounts from THP and intends to pursue vigorously its claims, 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 losses
related to these disputes.
On February 22, 2000, THP demanded arbitration against the Company alleging
that the Company overbilled THP, and THP overpaid the Company, in the
approximate amount of $1.3 million. On March 20, 2000, the Company filed its
answer and counterclaim and asserted that all amounts billed to, and paid by,
THP were proper under the Agreements and that THP improperly withheld payments
in the approximate amount of $0.5 million. The Company believes that it is owed
these amounts from THP and intends to pursue vigorously its counterclaims.
However, at this time, the Company is unable to assess the likelihood that it
will prevail.
In 1998, the Company recorded a $2,200 non-recurring charge against
earnings in connection with an agreement in principle with respect to a civil
settlement of the Federal and State of Tennessee investigation in connection
with the conduct of two former officers of a subsidiary prior to the Company's
initial public offering. The definitive agreement covering this settlement was
executed on June 15, 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
From August 14, 1996 through June 30, 2000, 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):
Construction of plant, building and facilities...................... $ -
Purchase and installation of machinery and equipment................ $ 6,821
Purchases of real estate............................................ $ -
Acquisition of other businesses..................................... $ 2,325
Repayment of indebtedness........................................... $ -
Working capital..................................................... $ 12,056
Temporary investments:
Marketable securities....................................... $ 5,000
Overnight cash deposits..................................... $ 20,586
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.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders (the "Annual Meeting") was
held on July 13, 2000. The following proposal for the election of six (6)
directors to the Board of Directors, each to serve for a one (1) year term, was
submitted to a vote of the stockholders. The Company's nominated and elected
directors are Richard H. Friedman, Scott R. Yablon, Richard A. Cirillo, Esq.,
Louis DiFazio, Ph.D., Michael Kooper and Louis a. Luzzi, Ph.D., the votes in
favor of and against the election of each director were as follows:
NAME FOR WITHHELD
--------------------------------------------------------------------------------
Richard H. Friedman 15,266,199 209,416
Scott R. Yablon 15,266,199 209,416
Richard A. Cirillo 15,266,199 209,416
Dr. Louis DiFazio 15,266,199 209,416
Michael Kooper 15,266,199 209,416
Dr. Louis A. Luzzi 15,266,199 209,416
There were no other proposals submitted for stockholder approval at the Annual
Meeting.
ITEM 5. OTHER INFORMATION
On August 4, 2000, the Company, through its principal pharmacy benefit
management operating subsidiary, MIM Health Plans, Inc., acquired all of the
issued and outstanding membership interests of American Disease Management
Associates, L.L.C., a Delaware limited liability company ("ADIMA"), from Radix
Capital Investment Group, LLC, a Delaware limited liability company, Elizabeth
Williams, Bruce Blake and Sal Rafanelli, pursuant to a Purchase Agreement dated
as of August 3, 2000. ADIMA, located in Livingston, New Jersey, provides
intravenous and injectible specialty pharmaceutical products to chronically ill
patients receiving healthcare services from home by IV certified registered
nurses, typically after a hospital discharge.
The aggregate purchase price for ADIMA was approximately $24 million
consisting of $19 million in cash and the balance in Company common stock, a
portion of which is being held in escrow to secure potential indemnification
claims for breaches of seller's representations and warranties. The cash portion
of the purchase price was partially funded with cash on hand and the remainder
with funds from its primary lender under its existing $30 million revolving
credit facility. The transaction will be accounted for as a purchase.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
10.1 Amendment to Credit Agreement, dated May 24, 2000, among MIM Health
Plans, Inc., MIM Corporation, the Credit Parties signatories thereto and General
Electric Credit Corporation, for itself and as agent for other lenders from time to
time a party to the Credit Agreement, dated February 4, 2000.
10.2 Corporate Integrity Agreement between the Office of the Inspector General of
the Department of Health and Human Services and MIM Corporation dated as
of June 15, 2000.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
13
<PAGE>
One Current Report on Form 8-K was filed with the Commission during the
second quarter of 2000 and one Current Report on Form 8-K was filed in the third
quarter of 2000. The first was filed on May 1, 2000, regarding the Company's
press release on first quarter earnings. The second was filed on August 10,
2000, regarding the Company's acquisition of American Disease Management
Associates, L.L.C., a Delaware limited liability company which provides
intravenous and injectible specialty pharmaceutical products to chronically ill
patients receiving healthcare services from home by IV certified registered
nurses.
* * * *
14
<PAGE>
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 August 14, 2000.
MIM CORPORATION
Date: August 14, 2000 /s/ Edward J. Sitar
--------------------
Edward J. Sitar
Chief Financial Officer and Treasurer
(Principal Financial Officer)
15
<PAGE>
EXHIBIT INDEX
(Exhibits being filed with this Quarterly Report on Form 10-Q)
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
10.1 Amendment to Credit Agreement, dated May 24, 2000, among MIM Health
Plans, Inc., MIM Corporation, the Credit Parties signatories thereto and General
Electric Credit Corporation, for itself and as agent for other lenders from time to
time a party to the Credit Agreement, dated February 4, 2000.
10.2 Corporate Integrity Agreement between the Office of the Inspector General of
the Department of Health and Human Services and MIM Corporation dated as
of June 15, 2000.
27 Financial Data Schedule
</TABLE>
16
